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 September 30, 2020 and December 31, 2019
4
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019
5
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2020 and 2019
6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019
7
Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 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)
September 30,
December 31,
2020
2019
Assets
Cash and cash equivalents
$
305,197
$
109,484
Accounts receivable, net of allowance for credit losses
59,674
99,513
Financing receivables, net of allowance for credit losses
126,740
128,038
Variable consideration receivable, net of allowance for credit losses
39,394
40,040
Inventories
53,021
42,989
Prepaid expenses
10,812
10,237
Film assets
7,468
17,921
Property, plant and equipment
282,854
306,849
Investment in equity securities
14,803
15,685
Other assets
23,796
25,034
Deferred income tax assets
17,737
23,905
Other intangible assets
27,019
30,347
Goodwill
39,027
39,027
Total assets
$
1,007,542
$
889,069
Liabilities
Bank indebtedness
$
297,985
$
18,229
Accounts payable
12,011
20,414
Accrued and other liabilities
103,970
112,779
Deferred revenue
99,770
94,552
Deferred income tax liabilities
18,661
—
Total liabilities
532,397
245,974
Commitments and contingencies
Non-controlling interests
776
5,908
Shareholders' equity
Capital stock common shares — no par value. Authorized — unlimited number.
58,878,749 issued and 58,861,171 outstanding (December 31, 2019 — 61,362,872 issued and 61,175,852 outstanding)
405,583
423,386
Less: Treasury stock, 17,578 shares at cost (December 31, 2019 — 187,020 )
( 271
)
( 4,038
)
Other equity
177,110
171,789
Accumulated deficit
( 181,604
)
( 40,253
)
Accumulated other comprehensive loss
( 1,984
)
( 3,190
)
Total shareholders' equity attributable to common shareholders
398,834
547,694
Non-controlling interests
75,535
89,493
Total shareholders' equity
474,369
637,187
Total liabilities and shareholders' equity
$
1,007,542
$
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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Revenues
Technology sales
$
15,753
$
21,735
$
24,102
$
56,629
Image enhancement and maintenance services
14,589
44,168
39,109
144,977
Technology rentals
4,473
17,642
10,307
61,675
Finance income
2,441
2,845
7,495
8,104
37,256
86,390
81,013
271,385
Costs and expenses applicable to revenues
Technology sales
9,222
11,740
15,637
33,114
Image enhancement and maintenance services
16,989
20,181
42,049
66,205
Technology rentals
7,216
7,349
22,100
20,253
33,427
39,270
79,786
119,572
Gross margin
3,829
47,120
1,227
151,813
Selling, general and administrative expenses
24,815
29,482
83,247
89,267
Research and development
1,130
1,359
4,562
3,717
Amortization of intangibles
1,349
1,271
4,014
3,564
Credit loss expense
3,925
599
15,582
1,957
Asset impairments
—
—
1,151
—
Exit costs, restructuring charges and associated impairments
—
—
—
850
(Loss) income from operations
( 27,390
)
14,409
( 107,329
)
52,458
Gain (loss) in fair value of investments
1,575
( 490
)
( 939
)
( 2,543
)
Retirement benefits non-service expense
( 186
)
( 160
)
( 432
)
( 480
)
Interest income
586
490
1,842
1,632
Interest expense
( 2,391
)
( 489
)
( 4,620
)
( 1,806
)
(Loss) income before taxes
( 27,806
)
13,760
( 111,478
)
49,261
Income tax expense
( 19,349
)
( 3,030
)
( 24,606
)
( 11,986
)
Equity in (losses) gains of investees, net of tax
( 1,329
)
166
( 1,858
)
( 56
)
Net (loss) income
( 48,484
)
10,896
( 137,942
)
37,219
Less: Net loss (income) attributable to non-controlling interests
1,275
( 1,863
)
15,412
( 8,524
)
Net (loss) income attributable to common shareholders
$
( 47,209
)
$
9,033
$
( 122,530
)
$
28,695
Net (loss) income per share attributable to common shareholders - basic and diluted:
Net (loss) income per share — basic and diluted
$
( 0.80
)
$
0.15
$
( 2.06
)
$
0.47
(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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net (loss) income
$
( 48,484
)
$
10,896
$
( 137,942
)
$
37,219
Unrealized net gain (loss) from cash flow hedging instruments
591
( 527
)
( 935
)
( 162
)
Realized net loss from cash flow hedging instruments
110
322
805
1,015
Foreign currency translation adjustments
2,387
( 1,498
)
1,772
( 1,670
)
Defined benefit and postretirement benefit plans
19
—
36
—
Other comprehensive income (loss), before tax
3,107
( 1,703
)
1,678
( 817
)
Income tax (expense) benefit related to other comprehensive income (loss)
( 189
)
54
64
( 224
)
Other comprehensive income (loss), net of tax
2,918
( 1,649
)
1,742
( 1,041
)
Comprehensive (loss) income
( 45,566
)
9,247
( 136,200
)
36,178
Less: Comprehensive loss (income) attributable to non-controlling interests
553
( 1,410
)
14,876
( 8,017
)
Comprehensive (loss) income attributable to common shareholders
$
( 45,013
)
$
7,837
$
( 121,324
)
$
28,161
(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)
Nine Months Ended
September 30,
2020
2019
Cash (used in) provided by:
Operating Activities
Net (loss) income
$
( 137,942
)
$
37,219
Adjustments to reconcile net (loss) income to cash from operating activities:
Depreciation and amortization
41,294
45,500
Credit loss expense
15,582
1,957
Write-downs
13,339
1,027
Deferred income tax expense
23,142
1,035
Share-based and other non-cash compensation
16,345
17,397
Unrealized foreign currency exchange (gain) loss
( 394
)
214
Loss in fair value of investments
939
2,543
Equity in losses of investees
1,858
56
Changes in assets and liabilities:
Accounts receivable
30,350
9,613
Inventories
( 10,278
)
( 13,422
)
Film assets
( 6,177
)
( 15,405
)
Deferred revenue
5,233
( 2,599
)
Changes in other operating assets and liabilities
( 24,109
)
( 17,878
)
Net cash (used in) provided by operating activities
( 30,818
)
67,257
Investing Activities
Purchase of property, plant and equipment
( 658
)
( 5,528
)
Investment in equipment for joint revenue sharing arrangements
( 5,289
)
( 31,099
)
Acquisition of other intangible assets
( 1,661
)
( 1,874
)
Investment in equity securities
—
( 15,153
)
Net cash used in investing activities
( 7,608
)
( 53,654
)
Financing Activities
Increase in revolving credit facility borrowings
280,244
35,000
Repayment of revolving credit facility borrowings
—
( 55,000
)
Credit facility amendment fees paid
( 1,026
)
—
Settlement of restricted share units and options
( 2,815
)
( 8,589
)
Treasury stock repurchased for future settlement of restricted share units
( 271
)
( 1,572
)
Repurchase of common shares, IMAX China
( 1,534
)
( 19,157
)
Taxes withheld and paid on employee stock awards vested
( 251
)
( 508
)
Common shares issued - stock options exercised
—
2,391
Repurchase of common shares
( 36,624
)
( 2,659
)
Issuance of subsidiary shares to non-controlling interests (net of return on capital)
—
1,106
Dividends paid to non-controlling interests
( 4,214
)
( 4,384
)
Net cash provided by (used in) financing activities
233,509
( 53,372
)
Effects of exchange rate changes on cash
630
727
Increase (decrease) in cash and cash equivalents during period
195,713
( 39,042
)
Cash and cash equivalents, beginning of period
109,484
141,590
Cash and cash equivalents, end of period
$
305,197
$
102,548
(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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Adjustments to capital stock:
Balance, beginning of period
$
405,254
$
422,101
$
419,348
$
421,539
Change in shares held in treasury
58
3
3,767
( 656
)
Employee stock options exercised
—
12
—
1,740
Fair value of stock options exercised at the grant date
—
3
—
100
Average carrying value of repurchased and retired common shares
—
( 321
)
( 17,803
)
( 925
)
Balance, end of period
405,312
421,798
405,312
421,798
Adjustments to other equity:
Balance, beginning of period
172,690
166,232
171,789
179,595
Amortization of share-based payment expense - stock options
1,034
2,231
2,137
6,719
Amortization of share-based payment expense - restricted share units
3,337
3,517
11,099
10,770
Amortization of share-based payment expense - performance stock units
514
—
1,307
—
Restricted share units vested
( 463
)
( 1,419
)
( 7,688
)
( 8,713
)
Cash received from the issuance of common shares in excess of par value
—
—
—
651
Fair value of stock options exercised at the grant date
—
( 3
)
—
( 100
)
Common shares repurchased, IMAX China
( 2
)
( 2,344
)
( 1,534
)
( 19,157
)
Stock options exercised from treasury shares purchased on open market
—
( 10
)
—
( 1,561
)
Balance, end of period
177,110
168,204
177,110
168,204
Adjustments to accumulated deficit:
Balance, beginning of period
( 134,395
)
( 66,828
)
( 40,253
)
( 85,385
)
Net (loss) income attributable to common shareholders
( 47,209
)
9,033
( 122,530
)
28,695
Common shares repurchased and retired
—
( 629
)
( 18,821
)
( 1,734
)
Balance, end of period
( 181,604
)
( 58,424
)
( 181,604
)
( 58,424
)
Adjustments to accumulated other comprehensive loss:
Balance, beginning of period
( 4,180
)
( 2,926
)
( 3,190
)
( 3,588
)
Other comprehensive income (loss), net of tax
2,196
( 1,196
)
1,206
( 534
)
Balance, end of period
( 1,984
)
( 4,122
)
( 1,984
)
( 4,122
)
Adjustments to non-controlling interests:
Balance, beginning of period
74,723
85,472
89,493
80,757
Net income (loss) attributable to non-controlling interests
2,186
2,274
( 10,280
)
9,309
Other comprehensive income (loss), net of tax
722
( 453
)
536
( 507
)
Dividends paid to non-controlling shareholders
( 2,096
)
( 2,118
)
( 4,214
)
( 4,384
)
Balance, end of period
75,535
85,175
75,535
85,175
Total Shareholders' Equity
$
474,369
$
612,631
$
474,369
$
612,631
(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).
These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s 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 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 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 it does not have the obligation to absorb the majority of the expected losses or the right to receive expected residual returns. The Company uses the equity 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 in the Condensed Consolidated Statements of Operations.
Total assets and liabilities of the Company’s consolidated VIEs are as follows:
September 30,
December 31,
2020
2019
Total assets
$
1,571
$
9,677
Total liabilities (1)
$
245
$
308
(1) Prior year comparative has been reclassified to conform with current period presentation.
9
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 Note 2(b) in the 2019 Form 10-K, with the exception of the estimates used by the Company in applying ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which was adopted on January 1, 2020 and also involves significant judgment and estimation (see Note 4). 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 Note 2(b) in the 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 the theater system equipment supporting the Company’s 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 global 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 continue to 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 estimates of 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 cash flow estimates used to test the recoverability of certain of the Company’s long-lived assets are based on a longer time horizon due to the long-term nature of the 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 and extent of the reopening of theaters in the IMAX network, and on the release of new films by movie 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 and into 2021.
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 postponed the theatrical release of multiple films, including many scheduled to be shown in IMAX theaters, while certain other films have been released directly to streaming platforms. More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures. During the third quarter of 2020, a significant number of the theaters in the IMAX commercial multiplex network reopened, including substantially all of the theaters in Greater China and the majority of the theaters in Domestic (i.e., United States and Canada) locations and Rest of World markets. In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance. However, ticket sales have been significantly lower than normal levels in theaters outside of Asia and, in recent weeks, Hollywood movie studios further delayed a number of films due to be released in the fourth quarter of 2020. As a result, certain theater chains have recently closed again or have reduced their operating hours. In addition, theaters in major markets such as New York City and Los Angeles continue to remain temporarily closed.
10
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 nine months ended September 30, 2020 as gross box office (“ GBO ”) results declined significantly, the installation s of certain theater systems w ere delayed, and maintenance services were generally suspended for theaters that were closed. During time periods in which there is a lack of new films released by movie studios and a significant number of theaters in the IMAX network are closed, the Company 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 is likely to 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. In response, the Company has provided temporary relief to exhibitor partners by waiving maintenance fees during periods when theaters are closed and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding extension of the term of the underlying sale or lease arrangement. A s discussed in Note 4, for the three and nine months ended September 30, 2020, the Company increased its provision for current expected credit losses by $ 3.9 million and $ 15.6 million , respectively, principally reflecting a reduction in the credit quality of its theater related accounts receivable , financing receivables and variable consideration receivables .
T he Company may continue to be significantly impacted by the COVID-19 global pandemic even after a significant portion or all theaters are reopened. The global economic impact of COVID-19 has led to record levels of unemployment in certain countries, which has led to, and may continue to result in lower consumer spending. The timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s ability to generate significant GBO-based revenue until such time as consumer behavior normalizes and consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough for at least the remainder of the current fiscal year, reducing the working hours of other employees 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 remaining available borrowing capacity under its credit facility, which was then amended in June 2020 to, among other things, suspend the senior secured net leverage ratio financial covenant in the underlying credit agreement through the first quarter of 2021 and substitute quarterly EBITDA from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020 to meet the original senior secured net leverage ratio financial covenant (see Note 7). Furthermore, the Company has applied for wage subsidies, tax credits and other financial support under the enacted COVID-19 relief legislation in the countries in which it operates. During 2020, the Company recognized $ 4.5 million under the Canada Emergency Wage Subsidy (“CEWS”) program and $ 0.7 million under the U.S. CARES Act, as reductions to Selling, General and Administrative Expenses ($ 4.5 million), Costs and Expenses Applicable to Revenues ($ 0.6 million) and Research and Development ($ 0.1 million) in the Condensed Consolidated Statements of Operations. The CEWS program has been extended to June 2021. The Company will continue to review and apply for additional subsidies and credits for the remaining terms of these programs, where applicable.
Consistent with the first and second quarters of 2020, the Company performed a quantitative goodwill impairment test considering the latest available information and determined that its goodwill was not impaired as of September 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 third 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 September 30, 2020. The cash flow estimates used in these tests are consistent with management’s estimated long-term projections, against which various sensitivity analyses were performed. These estimates are highly uncertain due to the COVID-19 global pandemic; therefore, management’s estimated cash flows factor in a number of underlying variables and ranges of possible cash flow scenarios. Actual results may materially differ from management’s estimates, especially due to the uncertainties associated with the COVID-19 pandemic (see Note 1).
11
In the third quarter of 2020, the Company also assessed the recoverability of its deferred tax assets due to losses recognized in the period associated with the COVID-19 global pandemic. The utilization of the Company’s deferred tax assets is dependent on having sufficient future tax benefits, such as taxable income in each of the jurisdictions to which the deferred tax assets relate. In the third quarter of 2020, the Company recorded a $ 23.7 million valuation allowance to reduce the value of deferred tax assets in certain jurisdictions where the Company incurs corporate leadership and administrative costs and where management could not reliably estimate future taxable income in th ose jurisdiction s due to uncertainties associated with the COVID-19 global pandemic. At the point in time when the uncertainties of COVID-19 resolve and the Company is able to reliably forecast sufficient future taxable income in the impacted jurisdictions, the $ 23.7 million valuation allowance recorded in the third quarter of 2020 may be reversed. Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied (see Note 11).
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. In addition, estimates related to future expected credit losses (Note 4) and the recoverability of deferred tax assets (Note 11) could also be further 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 are effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively 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 September 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.
Accounts Receivable
Accounts receivable principally includes amounts currently due to the Company under theater sale and sales-type lease arrangements, contingent fees owed by theater operators as a result of box office performance and fees for theater maintenance services. Accounts receivable also includes amounts due from movie studios and other content creators for digitally remastering films into IMAX formats, as well as for film distribution and post-production services.
12
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, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
The following table summarizes the activity in the allowance for credit losses related to accounts receivable for the three and nine months ended September 30, 2020:
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Theater
Operators
Studios
Other
Total
Theater
Operators
Studios
Other
Total
Beginning balance
$
6,317
$
5,455
$
838
$
12,610
$
3,302
$
893
$
942
$
5,137
Current period provision
1,623
( 262
)
468
1,829
4,718
4,424
364
9,506
Write-offs
( 614
)
—
—
( 614
)
( 614
)
—
—
( 614
)
Recoveries
—
—
—
—
—
—
—
—
Foreign exchange
133
184
( 9
)
308
53
60
( 9
)
104
Ending balance
$
7,459
$
5,377
$
1,297
$
14,133
$
7,459
$
5,377
$
1,297
$
14,133
For the three and nine months ended September 30, 2020, the Company recorded provisions for current expected credit losses of $ 1.8 million and $ 9.5 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 September 30, 2020, the reduction to the provision for Studios is principally due to improved collection experience with a particular customer. 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).
13
Financing Receivables
Financing receivables are due from theater operators and consist of the Company’s net investment in sales-type leases and receivables associated with financed sales of IMAX Theater Systems. Similar to accounts receivable, management performs an initial credit evaluation prior to entering into an arrangement with a customer and then regularly monitors the credit quality of each customer through an analysis of collections history and aging. This monitoring process includes meetings on at least a monthly basis to identify credit concerns and potential changes in credit quality classification. A customer may improve their credit quality classification once a substantial payment is made on an overdue balance or when the customer has agreed to a payment plan and payments have commenced in accordance with that plan. Changes in credit quality classification are dependent upon management approval. The internal credit quality classifications utilized by the Company for accounts receivable, as described above, are also used for financing receivables.
The ability of the Company to collect its financing receivable balances is heavily dependent on the viability and solvency of individual theater operators which is significantly influenced by consumer behavior and general economic conditions. Theater operators may experience financial difficulties, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors.
As at September 30, 2020 and December 31, 2019, financing receivables consist of the following:
September 30,
December 31,
2020
2019
Net investment in leases
Gross minimum payments due under sales-type leases
$
18,476
$
16,766
Unearned finance income
( 877
)
( 1,005
)
Present value of minimum payments due under sales-type leases
17,599
15,761
Allowance for credit losses
( 504
)
( 155
)
Net investment in leases
17,095
15,606
Financed sales receivables
Gross minimum payments due under financed sales
144,394
146,660
Unearned finance income
( 30,106
)
( 33,313
)
Present value of minimum payments due under financed sales
114,288
113,347
Allowance for credit losses
( 4,643
)
( 915
)
Net financed sales receivables
109,645
112,432
Total financing receivables
$
126,740
$
128,038
Net financed sales receivables due within one year
$
34,197
$
27,595
Net financed sales receivables due after one year
$
75,448
$
84,837
Total financed sales receivables
$
109,645
$
112,432
As at September 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:
September 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
5.38
%
6.68
%
Financed sales receivables
9.04
%
9.00
%
14
The following tables provide information on the Company’s net investment in leases by credit quality indicator as at September 30, 2020 and December 31, 2019:
By Origination Year
As at September 30, 2020
2020
2019
2018
2017
2016
Prior
Total
Net investment in leases:
Credit quality classification:
In good standing
$
1,861
$
—
$
—
$
958
$
—
$
2,141
$
4,960
Credit Watch
—
8,106
3,087
—
—
707
11,900
Pre-approved transactions
—
—
—
—
—
9
9
Transactions suspended
—
—
—
—
—
730
730
Total net investment in leases
$
1,861
$
8,106
$
3,087
$
958
$
—
$
3,587
$
17,599
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
The following tables provide information on the Company’s financed sale receivables by credit quality indicator as at September 30, 2020 and December 31, 2019:
By Origination Year
As at September 30, 2020
2020
2019
2018
2017
2016
Prior
Total
Financed sales receivables:
Credit quality classification:
In good standing
$
3,009
$
3,509
$
1,171
$
262
$
1,876
$
6,397
$
16,224
Credit Watch
701
8,242
13,545
15,584
14,388
41,424
93,884
Pre-approved transactions
—
—
—
—
599
668
1,267
Transactions suspended
—
—
—
924
905
1,084
2,913
Total financed sales receivables
$
3,710
$
11,751
$
14,716
$
16,770
$
17,768
$
49,573
$
114,288
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
15
The following tables provide an aging analysis for the Company’s net investment in leases and financed sale receivables as at September 30, 2020 and December 31, 2019:
As at September 30, 2020
Accrued
and
Current
30-89
Days
90+
Days
Billed
Unbilled
Recorded
Receivable
Allowance
for Credit
Losses
Net
Net investment in leases
$
132
$
161
$
1,053
$
1,346
$
16,253
$
17,599
$
( 504
)
$
17,095
Financed sales receivables
1,686
2,359
13,312
17,357
96,931
114,288
( 4,643
)
109,645
Total
$
1,818
$
2,520
$
14,365
$
18,703
$
113,184
$
131,887
$
( 5,147
)
$
126,740
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
The Company considers financing receivables with an aging between 60-89 days as indications of theaters with potential collection concerns. At this point, the Company will begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once a theater’s aging exceeds 90 days, the Company’s policy is to perform an enhanced review to assess collectibility of the theater’s past due accounts. The over 90 days past due category may be an indicator of potential impairment as up to 90 days outstanding is considered to be a reasonable time to resolve any issues. Given the potential impacts of the COVID-19 global pandemic on the Company’s customers, management is enhancing its monitoring procedures with respect to overdue receivables.
The following 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 September 30, 2020 and December 31, 2019:
As at September 30, 2020
Accrued
and
Current
30-89 Days
90+ Days
Billed
Unbilled
Allowance
for Credit
Losses
Net
Net investment in leases
$
123
$
142
$
746
$
1,011
$
12,181
$
( 290
)
$
12,902
Financed sales receivables
1,384
1,908
12,991
16,283
69,963
( 2,211
)
84,035
Total
$
1,507
$
2,050
$
13,737
$
17,294
$
82,144
$
( 2,501
)
$
96,937
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 September 30, 2020 and December 31, 2019:
As at September 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
$
730
$
( 18
)
$
712
$
—
$
—
$
—
Net financed sales receivables
2,913
( 1,187
)
1,726
788
( 732
)
56
Total
$
3,643
$
( 1,205
)
$
2,438
$
788
$
( 732
)
$
56
16
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 nine months ended September 30, 2020, the Company recognized $ 0.1 million (2019 —$ 0.1 million) in finance income related to the net investment in leases with billed amounts past due. There was no such finance income recognized for the three months ended September 30, 2020 and 2019. For the three and nine months ended September 30, 2020, the Company recognized $ 1.4 million and $ 4.2 million, respectively (2019 —$ 1.5 million and $ 5.1 million, respectively) in finance income related to the financed sale receivables with billed amounts past due.
The following table summarizes the activity in the allowance for credit losses related to the Company’s net investment in leases and financed sale receivables for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Net Investment
Financed
Net Investment
Financed
in Leases
Sales Receivables
in Leases
Sales Receivables
Beginning balance
$
459
$
3,709
$
155
$
915
Current period provision
105
1,201
409
4,014
Write-offs
( 69
)
( 330
)
( 69
)
( 330
)
Recoveries
—
—
—
—
Foreign exchange
9
63
9
44
Ending balance
$
504
$
4,643
$
504
$
4,643
Three Months Ended September 30, 2019
Nine Months Ended September 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
—
76
—
76
Ending balance
$
155
$
915
$
155
$
915
For the three and nine months ended September 30, 2020, the Company recorded a provision for current expected credit losses of $ 1.3 million and $ 4.4 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, such as those imposed by the COVID-19 global pandemic, that could cause them to be unable to fulfill their payment obligations to the Company.
17
The Company develops its estimate of credit losses by class of receivable and customer type through a calculation utiliz ing historic al 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.
The following table summarizes the activity in the allowance for credit losses related to variable consideration receivables for the three and nine months ended September 30, 2020:
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Theater
Operators
Theater
Operators
Beginning balance
$
863
$
—
Current period provision
790
1,653
Write-offs
—
—
Recoveries
—
—
Foreign Exchange
6
6
Ending balance
$
1,659
$
1,659
For the nine months ended September 30, 2020, the Company recorded a provision of $ 1.7 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 nine months ended September 30, 2020 and 2019, the components of lease expense recorded within Selling, General and Administrative expenses are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Operating lease cost (1)
$
133
$
102
$
392
$
565
Amortization of lease assets
706
667
2,155
1,863
Interest on lease liabilities
258
265
765
807
Total lease cost
$
1,097
$
1,034
$
3,312
$
3,235
(1)
Includes short-term leases and variable lease costs, which are not significant for the three and nine months ended September 30, 2020 and 2019.
18
For three and nine months ended September 30, 2020 and 2019, supplemental cash and non-cash information related to leases is as follows:
Nine Months Ended
September 30,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities
$
2,721
$
2,732
Right-of-use assets obtained in exchange for lease obligations
$
297
$
17,879
As at September 30, 2020 and December 31, 2019, supplemental balance sheet information related to leases is as follows:
September 30,
December 31,
2020
2019
Assets
Right-of-Use Assets
Property, plant and equipment
$
14,480
$
16,262
Liabilities
Operating Leases
Accrued and other liabilities
$
17,156
$
18,677
As at September 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:
September 30,
December 31,
2020
2019
Weighted-average remaining lease term (years)
7.7
8.1
Weighted-average discount rate
5.90
%
5.90
%
As at September 30, 2020, the maturities of the Company’s operating lease liabilities are as follows:
Operating Leases
2020 (three months remaining)
$
865
2021
3,372
2022
2,847
2023
2,260
2024
2,212
Thereafter
10,137
Total lease payments
$
21,693
Less: interest expense
( 4,537
)
Present value of operating lease liabilities
$
17,156
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 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.
19
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 Theater System under a long-term lease, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront fee or annual minimum payments. 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 September 30, 2020 and December 31, 2019, inventories consist of the following:
September 30,
December 31,
2020
2019
Raw materials
$
34,181
$
26,538
Work-in-process
4,044
4,608
Finished goods
14,796
11,843
$
53,021
$
42,989
When compared to December 31, 2019, inventories increased by $ 10.0 million due to delays in manufacturing, shipments and installation of IMAX Theater Systems at customer sites due to the COVID-19 global pandemic.
At September 30, 2020, inventories include finished goods of $ 4.8 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 nine months ended September 30, 2020, the Company recognized write-downs of $ 0.6 million and $ 0.7 million, respectively, for excess and obsolete inventory based on current estimates of net realizable value. There were no write-downs recorded during the three and nine months ended September 30, 2019.
20
7. Credit Facility and Other Financing Arrangements
As at September 30, 2020 and December 31, 2019, bank indebtedness includes the following:
September 30,
December 31,
2020
2019
Credit Facility
$
300,000
$
20,000
Working Capital Facility
253
—
Unamortized debt issuance costs
( 2,268
)
( 1,771
)
$
297,985
$
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 September 30, 2020, and based on current projections expects to be in compliance through the next twelve months.
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 nine months ended September 30, 2020 was 2.70 % and 2.24 %, respectively (2019 — 3.34 % and 3.50 %, respectively).
21
In addition, the Credit Facility has standby fees ranging from 0.25 % to 0.38 % per annum, based on the Company’s Total Leverage Ratio with respect to the unused portion of the Credit Facility; provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the standby fee will be 0.50 % per annum.
The Company incurred fees of approximately $ 1.1 million in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.
As at September 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, 2020, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), one of the Company’s majority-owned subsidiaries in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $ 30.0 million) to fund ongoing working capital requirements (the “Working Capital Facility”). As at September 30, 2020, there was 1.7 million Renminbi ($ 0.3 million) in borrowings outstanding under the Working Capital Facility and 198.3 million Renminbi ($ 29.7 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 nine months ended September 30, 2020 was 4.35 %, respectively.
Wells Fargo Foreign Exchange Facility
Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. The net settlement gain on its foreign currency forward contracts was $ 0.5 million at September 30, 2020, as the fair value of the forward contracts exceeded the notional value (December 31, 2019 — $ 0.5 million net settlement gain). As at September 30, 2020, the Company has $ 40.2 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 September 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.
23
Financial Guarantees
Certain subsidiaries of the Company have provided significant financial guarantees to third parties under the Credit Agreement.
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 September 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 September 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 $ 0.6 million and $ 1.0 million for the three and nine months ended September 30, 2020, respectively (2019 — $ 0.6 million and $ 1.5 million, respectively).
Film exploitation costs, including advertising and marketing expense, totaled $ 0.5 million and $ 3.1 million for the three and nine months ended September 30, 2020, respectively (2019 — expense of $ 4.3 million and $ 18.4 million, respectively), and are expensed as incurred in Costs and Expenses Applicable to Revenues – Image Enhancement and Maintenance Services.
Sales commissions related to joint revenue sharing arrangements accounted for operating leases are recognized as Costs and Expenses Applicable to Revenues – Technology Rentals in the month they are earned. These costs totaled $ 0.3 million and $ 0.5 million for the three and nine months ended September 30, 2020, respectively (2019 — expense of $ 0.3 million and recovery of $ 0.3 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 $ 0.4 million and $ 0.8 million for the three and nine months ended September 30, 2020, respectively (2019 — $ 0.5 million and $ 1.4 million, respectively).
24
(b)
Foreign Exchange
Included in Selling, General and Administrative Expenses for the three and nine months ended September 30, 2020 is a gain of $ 0.2 million and a loss of $( 0.8 ) million, respectively (2019 — loss of ($ 0.7 ) million and $( 1.1 ) 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 receipts 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 1,233 IMAX Theater Systems, of which 881 theaters were included in the IMAX network as at September 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 nine months ended September 30, 2020 amounted to $ 4.5 million and $ 11.5 million, respectively (2019 — $ 17.9 million and $ 66.1 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 three and nine months ended September 30, 2020, the majority of IMAX DMR revenue was earned from the exhibition of six and 20 IMAX DMR films, respectively (2019 – 26 and 59 , respectively) and the re-release of classic titles throughout the IMAX theater network. The accounting policy for the Company’s IMAX DMR arrangements is disclosed in Note 2(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 nine months ended September 30, 2020 amounted to $ 6.9 million and $ 18.1 million, respectively (2019 — $ 26.7 million and $ 93.9 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 September 30, 2020, the Company has two co-produced film arrangements which represent the VIE total assets balance of $ 1.6 million and liabilities balance of $ 0.2 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 nine months ended September 30, 2020, expenses totaling $ 0.5 million and $ 1.9 million, respectively (2019 —$ 0.1 million and $ 0.3 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.
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:
Nine Months Ended
September 30,
2020
2019
Decrease (increase) in:
Financing receivables
$
( 3,212
)
$
6,184
Prepaid expenses
( 1,332
)
( 1,163
)
Variable consideration receivable
( 1,007
)
( 1,096
)
Other assets
( 3,712
)
( 4,298
)
Increase (decrease) in:
Accounts payable
( 8,320
)
( 8,001
)
Accrued and other liabilities
( 6,526
)
( 9,504
)
$
( 24,109
)
$
( 17,878
)
(b)
Depreciation and amortization are comprised of the following:
Nine Months Ended
September 30,
2020
2019
Film assets
$
6,159
$
13,015
Property, plant and equipment:
Joint revenue sharing arrangements
19,247
17,179
Other property, plant and equipment
8,478
9,100
Other intangible assets
4,882
4,568
Other assets
1,933
1,262
Deferred financing costs
595
376
$
41,294
$
45,500
26
(c)
Write-downs are comprised of the following:
Nine Months Ended
September 30,
2020
2019
Film assets (1)
$
10,211
$
179
Other assets (2)
1,151
—
Property, plant and equipment
Joint revenue sharing arrangements (3)
1,050
748
Other property, plant and equipment
66
78
Inventories (4)
729
—
Other intangible assets
132
22
$
13,339
$
1,027
(1)
In the nine months ended September 30, 2020, the Company recorded impairment losses of $ 10.2 million (2019 — $ 0.2 million) principally to write-down the carrying value of certain documentary and alternative content film assets due to a decrease in projected box office totals and related revenues based on management’s regular quarterly recoverability assessments. To a much lesser extent, the impairment losses also relate to the write-down of DMR related film assets. As of September 30, 2020 , following the recording of these write-downs, the Company’s film assets totaled $ 7.5 million, which principally consists of DMR and documentary content. There can be no assurances that there will not be additional write-downs to the carrying values of these assets as the Company continues to assess the ongoing impact of the COVID-19 pandemic (see Notes 1 and 2).
(2)
In the nine months ended September 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 nine months ended September 30, 2020, the Company recorded charges of $ 1.1 million in Costs and Expenses Applicable to Technology Rentals principally related to the write-down of leased xenon-based digital systems which were taken out of service in connection with customer upgrades to laser-based digital systems. In the nine months ended September 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 related to the write-down of leased xenon-based digital systems which were taken out of service in connection with customer upgrades to laser-based digital systems.
(4)
In the nine months ended September 30, 2020, the Company recorded write-downs of $ 0.7 million (2019 — $nil) related to excess inventory .
(d)
Significant non-cash investing activities are comprised of the following:
Nine Months Ended
September 30,
2020
2019
Net (decrease) increase in accruals related to:
Investment in joint revenue sharing arrangements
$
( 1,897
)
$
2,040
Acquisition of other intangible assets
69
6
Purchases of property, plant and equipment
158
( 432
)
$
( 1,670
)
$
1,614
11. Income Taxes
(a)
Income Tax Expense
For the three months ended September 30, 2020, the Company recorded income tax expense of $ 19.3 million (2019 — tax expense of $ 3.0 million), which includes a $ 23.7 million valuation allowance to reduce the value of deferred tax assets in certain jurisdictions where the Company incurs corporate leadership and administrative costs and where management could not reliably estimate future taxable income in those jurisdictions due to uncertainties associated with the COVID-19 global pandemic. The Company’s effective tax rate for the three months ended September 30, 2020 of ( 69.6 )% differs from the Canadian statutory tax rate of 26.2 %, primarily due to the recording of this valuation allowance, permanent book to tax differences, jurisdictional tax rate differences, and management’s estimates of contingent liabilities related to the resolution of various tax examinations.
27
For the nine months ended September 30, 2020, the Company recorded income tax expense of $ 24.6 million (2019 — tax expense of $ 12.0 million), which includes the $ 23.7 million valuation allowance recorded in the third quarter of 2020, as discussed above. The Company’s effective tax rate for the nine months ended September 30, 2020 of ( 22.1 )% differs from the Canadian statutory tax rate of 26.2 %, primarily due to the recording of this valuation allowance, withholding taxes associated with the reversal of the indefinite reinvestment assertion for certain subsidiaries as discussed below, permanent book to tax differences, jurisdictional tax rate differences, and management’s estimates of contingent liabilities related to the resolution of various tax examinations.
At the point in time when the uncertainties of COVID-19 resolve and the Company is able to reliably forecast sufficient future taxable income in the impacted jurisdictions, the $ 23.7 million valuation allowance recorded in the third quarter of 2020 may be reversed. Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied .
As at September 30, 2020, the Company’s Condensed Consolidated Balance Sheets include net deferred income tax assets of $ 17.7 million, net of a valuation allowance of $ 23.9 million (December 31, 2019 — $ 23.9 million, net of a valuation allowance of $ 0.2 million). The utilization of the Company’s deferred tax assets is dependent on having a sufficient level of future tax benefits, such as taxable income in each of the jurisdictions to which the deferred tax assets relate. Accordingly, the net amount recorded on the Condensed Consolidated Balance Sheets relies on management’s estimates of future taxable income and is therefore subject to the uncertainties associated with accounting estimates, as discussed in Note 1. Should actual results differ from management’s estimates of future taxable income, an increased valuation allowance may be required. As at September 30, 2020, the Company’s Condensed Consolidated Balance Sheets include a deferred income tax liability of $ 18.7 million (December 31, 2019 — $nil).
In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. As a result, the Company recognized a deferred tax liability of $ 19.7 million in the first quarter of 2020 for the estimated applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings The estimate of the applicable foreign withholding taxes was subsequently reduced by $ 1.0 million, principally in the second quarter of 2020, to $ 18.7 million due to a reduction in the amount of distributable historical earnings. Cash held outside of Canada as at September 30, 2020 was $ 76.4 million (December 31, 2019 — $ 90.1 million), of which $ 62.6 million was held in the People’s Republic of China (“PRC”) (December 31, 2019 — $ 67.6 million).
(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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Unrealized change in cash flow hedging instruments
$
( 160
)
$
( 84
)
$
235
$
( 266
)
Realized change in cash flow hedging instruments upon settlement
( 29
)
138
( 211
)
42
Unrecognized actuarial gain on defined benefit plan
—
—
40
—
$
( 189
)
$
54
$
64
$
( 224
)
28
12. Capital Stock
(a)
Share-Based Compensation
For the three and nine months ended September 30, 2020, share-based compensation expense totaled $ 5.3 million and $ 16.0 million, respectively (2019 — $ 5.5 million and $ 16.9 million, respectively) and is reflected in the following accounts in the Condensed Consolidated Statements of Operations:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Cost and expenses applicable to revenues
$
130
$
448
$
530
$
1,268
Selling, general and administrative expenses
5,151
4,983
15,325
15,371
Research and development
29
96
114
277
$
5,310
$
5,527
$
15,969
$
16,916
For the three and nine months ended September 30, 2020, there was a decrease in share-based compensation expenses allocated to Costs and Expenses Applicable to Revenues and Research and Development, when compared to same period in 2019, due to the lower level of production during the COVID-19 global pandemic.
The following table summarizes the Company’s share-based compensation expense by each award type:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Stock Options
$
433
$
2,145
$
1,449
$
6,228
Restricted Share Units
3,430
2,933
10,866
9,175
Performance Stock Units
483
—
1,229
—
IMAX China Stock Options
600
86
701
230
IMAX China Long Term Incentive Plan Restricted Share Units
332
363
1,645
1,283
IMAX China Long Term Incentive Plan Performance Stock Units
32
—
79
—
$
5,310
$
5,527
$
15,969
$
16,916
Included in the above table is an expense of $nil and $ 0.1 million in the three and nine months ended September 30, 2020, respectively (2019 — less than $ 0.1 million and less than $ 0.1 million, respectively) related to restricted share units granted to a certain advisor of the Company.
In the third quarter of 2020, IMAX China modified the terms of certain fully vested stock options to extend their contractual life by two years and recorded an associated expense of $ 0.6 million.
29
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 (as amended, “IMAX LTIP”) for the nine months ended September 30, 2020 and 2019:
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
—
( 86,337
)
—
20.15
Forfeited
( 23,633
)
( 329,346
)
22.35
23.60
Expired
( 772,665
)
( 299,134
)
27.03
25.82
Cancelled
( 18,483
)
( 26,281
)
27.97
31.08
Stock options outstanding, end of period
4,917,428
5,740,830
26.80
26.82
Stock options exercisable, end of period
4,315,484
4,511,208
27.32
27.76
Stock options are no longer granted under the Company’s previously approved SOP.
Restricted Share Units (“RSU”) Summary
The following table summarizes the activity in respect of RSUs issued under the IMAX LTIP for the nine months ended September 30, 2020 and 2019:
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
1,050,385
649,389
15.35
22.33
Vested and settled
( 386,451
)
( 367,020
)
21.59
26.66
Forfeited
( 54,933
)
( 206,593
)
19.70
23.77
RSUs outstanding, end of period
1,674,348
1,109,647
18.75
23.77
30
Performance S tock 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 grant date 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 grant date fair value of PSUs with stock-price targets is determined on the grant date using a Monte Carlo simulation, which is a valuation model that takes into account the likelihood of achieving the stock-price targets embedded in the award (“Monte Carlo Model”). The compensation expense attributable to each type of PSU is recognized on a straight-line basis over the requisite service period.
The fair value determined by the Monte Carlo Model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, market conditions as of the grant date, the Company’s expected stock price volatility over the term of the awards, and other relevant data. The compensation expense is fixed on the date of grant based on the dollar value granted.
The amount and timing of compensation expense recognized for PSUs with EBITDA-based targets is dependent upon management's assessment of the likelihood and timing of achieving these targets. If, as a result of management’s assessment, it is projected that a greater number of PSUs will vest than previously anticipated, a life-to-date adjustment to increase compensation expense is recorded in the period such determination is made. Conversely, if, as a result of management’s assessment, it is projected that a lower number of PSUs will vest than previously anticipated, a life-to-date adjustment to decrease compensation expense is recorded in the period such determination is made. The Company will complete an assessment of the likelihood of achieving these targets in the fourth quarter of 2020 in connection with its annual budget process for 2021. As a result, no adjustment to compensation expense has been recognized in the three and nine months ended September 30, 2020, respectively, related to the PSUs granted in 2020.
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 nine months ended September 30:
Number of Awards
Weighted Average Grant Date
Fair Value Per Share
2020
2019
2020
2019
Granted
370,265
—
$
15.66
$
—
Forfeited
( 2,526
)
—
14.84
—
PSUs outstanding, end of period
367,739
—
15.67
—
31
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 September 30, 2020. During the nine months ended September 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 nine months ended September 30, 2019, the Company repurchased 46,615 and 134,384 common shares, respectively at an average price of $ 20.35 and $ 19.76 per share, respectively excluding commissions.
The total number of shares purchased during the three and nine months ended September 30, 2020 does not include nil and 200,000 common shares (2019 — 45,000 and 445,000 common shares, respectively) purchased in the administration of employee share-based compensation plans, at an average price of $nil and $ 15.43 per share (2019 — $ 21.52 and $ 22.83 per share, respectively).
As at September 30, 2020, the IMAX LTIP trustee held 17,578 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.
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 nine months ended September 30, 2020, IMAX China repurchased nil and 906,400 shares of its common stock, respectively, at an average price of HKD nil and HKD 13.13 per share, respectively (U.S. $nil and U.S. $ 1.69 , respectively). During the three and nine months ended September 30, 2019, IMAX China repurchased 1,025,800 and 8,051,500 of its common shares, respectively, at an average price of HKD 17.90 and HKD 18.63 per share, respectively (U.S. $ 2.29 and U.S. $ 2.38 , respectively).
(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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period
58,857
61,331
61,176
61,434
Weighted average number of shares repurchased, net of shares
issued during the period
2
( 27
)
( 1,816
)
( 97
)
Weighted average number of shares used in computing basic
income per share
58,859
61,304
59,360
61,337
Assumed exercise of stock options, RSUs and PSUs, net of shares
assumed repurchased, if dilutive
—
175
—
172
Weighted average number of shares used in computing diluted
income per share
58,859
61,479
59,360
61,509
For the three and nine months ended September 30, 2020, the calculation of diluted weighted average shares outstanding excludes 6,959,515 and 6,959,515 shares, respectively (2019 — 5,289,172 and 5,902,208 shares, respectively) of common shares issuable upon the vesting of RSUs and PSUs and the exercise of stock options as the effect would be anti-dilutive.
32
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 nine months ended September 30, 2020:
Three Months Ended September 30, 2020
Revenue from
Contracts with Customers
Revenue from
Fixed
Consideration
Variable
Consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
13,515
$
1,481
$
—
$
—
$
14,996
Joint Revenue Sharing Arrangements, fixed fees
—
—
57
—
57
Other Theater Business
307
—
—
—
307
Other sales (1)
378
15
—
—
393
Sub-total
14,200
1,496
57
—
15,753
Image enhancement and maintenance services
IMAX DMR
—
6,886
—
—
6,886
IMAX Maintenance
5,855
—
—
—
5,855
Film Post-Production
739
—
—
—
739
Film Distribution
750
376
—
—
1,126
Other
—
( 17
)
—
—
( 17
)
Sub-total
7,344
7,245
—
—
14,589
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
4,473
—
4,473
Sub-total
—
—
4,473
—
4,473
Finance income
IMAX Systems
—
—
—
2,441
2,441
Total
$
21,544
$
8,741
$
4,530
$
2,441
$
37,256
33
Nine Months Ended September 30, 2020
Revenue from
Contracts with Customers
Revenue from
Fixed
consideration
Variable
consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
17,036
$
3,143
$
—
$
—
$
20,179
Joint Revenue Sharing Arrangements, fixed fees
—
—
1,196
—
1,196
Other Theater Business
1,261
—
—
—
1,261
Other sales (1)
1,361
105
—
—
1,466
Sub-total
19,658
3,248
1,196
—
24,102
Image enhancement and maintenance services
IMAX DMR
—
18,061
—
—
18,061
IMAX Maintenance
13,225
—
—
—
13,225
Film Post-Production
3,088
—
—
—
3,088
Film Distribution
3,000
1,453
—
—
4,453
Other
—
282
—
—
282
Sub-total
19,313
19,796
—
—
39,109
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
10,307
—
10,307
Sub-total
—
—
10,307
—
10,307
Finance income
IMAX Systems
—
—
—
7,495
7,495
Total
$
38,971
$
23,044
$
11,503
$
7,495
$
81,013
(1) Other sales include revenues associated with New Business Initiatives such as IMAX Enhanced.
34
The following tables summarize the Company’s revenues by type and reportable segment for the three and nine months ended September 30, 2019 :
Three Months Ended September 30, 2019
Revenue from
Contracts with Customers
Revenue from
Fixed
Consideration
Variable
Consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
15,552
$
2,580
$
—
$
—
$
18,132
Joint Revenue Sharing Arrangements, fixed fees
—
—
1,438
—
1,438
Other Theater Business
1,560
—
—
—
1,560
Other sales (1)
575
30
—
—
605
Sub-total
17,687
2,610
1,438
—
21,735
Image enhancement and maintenance services
IMAX DMR
—
26,665
—
—
26,665
IMAX Maintenance
13,657
—
—
—
13,657
Film Post-production
2,185
—
—
—
2,185
Film Distribution
—
1,343
—
—
1,343
Other
318
—
—
318
Sub-total
15,842
28,326
—
—
44,168
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
16,605
—
16,605
Other
—
—
1,037
—
1,037
Sub-total
—
—
17,642
—
17,642
Finance income
IMAX Systems
—
—
—
2,845
2,845
Total
$
33,529
$
30,936
$
19,080
$
2,845
$
86,390
35
Nine Months Ended September 30, 2019
Revenue from
Contracts with Customers
Revenue from
Fixed
consideration
Variable
consideration
Lease
Arrangements
Finance Income
Total
Technology sales
IMAX Systems
$
36,790
$
5,610
$
—
$
—
$
42,400
Joint Revenue Sharing Arrangements, fixed fees
—
—
6,525
—
6,525
Other Theater Business
5,766
—
—
—
5,766
Other sales (1)
1,763
175
—
—
1,938
Sub-total
44,319
5,785
6,525
—
56,629
Image enhancement and maintenance services
IMAX DMR
—
93,908
—
—
93,908
IMAX Maintenance
39,815
—
—
—
39,815
Film Post-production
6,458
—
—
—
6,458
Film Distribution
—
3,333
—
—
3,333
Other
1,463
—
—
1,463
Sub-total
46,273
98,704
—
—
144,977
Technology rentals
Joint Revenue Sharing Arrangements, contingent rent
—
—
60,189
—
60,189
Other
—
26
1,460
—
1,486
Sub-total
—
26
61,649
—
61,675
Finance income
IMAX Systems
—
—
—
8,104
8,104
Total
$
90,592
$
104,515
$
68,174
$
8,104
$
271,385
(1) Other sales include revenues associated with New Business Initiatives, such as IMAX Enhanced.
(See Note 2 for information on the current impacts and uncertainties relating to the COVID-19 global pandemic, which are impacting the Company’s revenues.)
(b) Deferred Revenue
IMAX Theater System sale and lease arrangements include a requirement for the Company 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 September 30, 2020, $ 16.7 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). Maintenance revenue is recognized evenly over the contract term which coincides with the period over which maintenance services are 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 global pandemic which are impacting Company’s revenues .)
36
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.
37
The following table sets forth the breakdown of revenue and gross margin (margin loss) by category for the three months ended September 30, 2020:
Revenue
Gross Margin (Margin Loss) (3)
2020
2019
2020
2019
IMAX Technology Network
IMAX DMR
$
6,886
$
26,665
$
3,079
$
17,866
Joint revenue sharing arrangements, contingent rent
4,473
16,605
( 2,491
)
9,524
11,359
43,270
588
27,390
IMAX Technology Sales and Maintenance
IMAX Systems (1)
17,437
20,977
8,671
11,652
Joint revenue sharing arrangements, fixed fees
57
1,438
( 117
)
136
IMAX Maintenance
5,855
13,657
794
6,125
Other Theater Business (2)
307
1,560
31
505
23,656
37,632
9,379
18,418
New Business Initiatives
378
596
372
541
Film Distribution and Post-production
Film Distribution (4)
1,126
1,343
( 5,597
)
( 760
)
Post-production
739
2,185
( 464
)
810
1,865
3,528
( 6,061
)
50
Sub-total
37,258
85,026
4,278
46,399
Other
( 2
)
1,364
( 449
)
721
Total
$
37,256
$
86,390
$
3,829
$
47,120
The following table sets forth the breakdown of revenue and gross margin (margin loss) by category for nine months ended September 30, 2020:
Revenue
Gross Margin (Margin Loss) (3)
2020
2019
2020
2019
IMAX Technology Network
IMAX DMR
$
18,061
$
93,908
$
7,492
$
61,602
Joint revenue sharing arrangements, contingent rent
10,307
60,189
( 10,610
)
40,777
28,368
154,097
( 3,118
)
102,379
IMAX Technology Sales and Maintenance
IMAX Systems (1)
27,674
50,504
14,497
26,723
Joint revenue sharing arrangements, fixed fees
1,196
6,525
110
1,301
IMAX Maintenance
13,225
39,815
( 355
)
17,046
Other Theater Business (2)
1,261
5,766
77
1,821
43,356
102,610
14,329
46,891
New Business Initiatives
1,488
1,908
1,245
1,441
Film Distribution and Post-production
Film Distribution (4)
4,453
3,333
( 9,296
)
( 1,093
)
Post-production
3,088
6,458
( 96
)
1,576
7,541
9,791
( 9,392
)
483
Sub-total
80,753
268,406
3,064
151,194
Other
260
2,979
( 1,837
)
619
Total
$
81,013
$
271,385
$
1,227
$
151,813
( 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.
38
( 2 )
Principally includes after-market sales of IMAX projection system parts and 3D glasses .
( 3 )
IMAX DMR gross margin includes marketing costs of $ 0.4 million and $ 2.8 million for the three and nine months ended September 30, 2020, respectively (2019 — $ 4.3 million and $ 17.7 million, respectively). JRSA gross margin includes advertising, marketing and commission expense of $ 0.7 million and $ 1.3 million for the three and nine months ended September 30, 2020, respectively (2019 —$ 0.8 million and $ 1.1 million, respectively). IMAX Systems gross margin includes marketing and commission costs of $ 0.6 million and $ 1.0 million for the three and nine months ended September 30, 2020, respectively, (2019 — $ 0.6 million and $ 1.5 million, respectively). Film Distribution segment gross margin includes marketing expense of $ 0.2 million and $ 0.4 million for the three and nine months ended September 30, 2020, respectively (2019 — $ 0.1 million and $ 0.7 million, respectively).
(4)
During the three and nine months ended September 30, 2020, Film Distribution segment results were significantly influenced by impairment losses of $ 5.4 million and $ 9.9 million, respectively, 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 (2019 – $ 0.2 million and $ 0.2 million ).
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
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Revenue
Greater China
$
19,346
$
26,557
$
26,008
$
85,813
Western Europe
5,085
8,433
10,273
28,809
Asia (excluding China)
4,935
13,534
12,663
32,287
United States
4,335
24,316
21,112
84,553
Latin America
1,616
2,912
3,251
7,725
Russia & the CIS
738
2,909
2,962
10,216
Canada
384
1,993
1,327
6,485
Rest of the World
817
5,736
3,417
15,497
Total
$
37,256
$
86,390
$
81,013
$
271,385
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 in the three months ended September 30, 2020 .
39
1 5 . 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.
As at September 30, 2020 and December 31, 2019, the Company’s projected benefit obligation and unfunded status related to the SERP are as follows:
September 30,
December 31,
2020
2019
Projected benefit obligation:
Obligation, beginning of period
$
18,840
$
17,977
Prior Service cost
—
456
Interest cost
284
564
Actuarial gain
—
( 157
)
Obligation, end of period and unfunded status
$
19,124
$
18,840
The accumulated benefit obligation for the SERP was $ 19.1 million at September 30, 2020 (December 31, 2019 —$ 18.8 million). For the three and nine months ended September 30, 2020, the Company recorded interest costs of $ 0.1 million and $ 0.3 million, respectively, (2019 — $ 0.1 million and $ 0.4 million, respectively) related to the SERP. The Company expects to recognize additional interest costs of $ 0.1 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 nine months ended September 30, 2020, the Company contributed and recorded expense of $ 0.3 million and $ 0.8 million, respectively, (2019 — $ 0.3 million and $ 0.9 million, respectively) to its Canadian defined contribution plan and $ 0.1 million and $ 0.5 million, respectively, (2019 — $ 0.1 million and $ 0.5 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 supplemental coverage as selected by Messrs. Gelfond and Wechsler. As at September 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 nine months ended September 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 September 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 nine months ended September 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.
40
(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 the executive incurred a separation from service from the Company (as defined therein). In the fourth quarter of 2018, the executive incurred a separation from service from the Company, and as such, the Retirement Plan benefits became fully vested as at December 31, 2018 and the accelerated costs were recognized and reflected in Executive Transition Costs on the Consolidated Statement of Operations.
As at September 30, 2020, the benefit obligation related to the Retirement Plan was $ 3.6 million (December 31, 2019 — $ 3.6 million) and is recorded on the Company’s Condensed Consolidated Balance Sheets within Accrued and Other Liabilities. As the Retirement Plan is fully vested, the benefit obligation is measured at the present value of the benefits expected to be paid in the future with the accretion of interest recognized in the Condensed Consolidated Statements of Operations within Retirement Benefits Non-service Expenses.
The Retirement Plan is funded by an investment in company-owned life insurance (“COLI”), which is recorded at its fair value on the Company’s Condensed Consolidated Balance Sheets within Prepaid Expenses. As at September 30, 2020, fair value of the COLI asset was $ 3.1 million (December 31, 2019 — $ 3.2 million). Gains and losses resulting from changes in the cash surrender value of the COLI asset are recognized in the Condensed Consolidated Statement of Operations within Gain (Loss) In Fair Value of Investments.
16. 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 their fair values due to the short-term maturity of these instruments. Including these instruments, the Company’s financial instruments consist of the following:
As at September 30, 2020
As at December 31, 2019
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
Cash and cash equivalents (1)
$
305,197
$
305,197
$
109,484
$
109,484
Equity securities (3)
14,803
14,803
15,685
15,685
Level 2
Net financed sales receivables (2)
$
109,645
$
110,443
$
112,432
$
111,441
Net investment in sales-type leases (2)
17,095
16,829
15,606
15,309
Convertible loan receivable (2)
—
—
1,500
1,500
Equity securities (1)
1,000
1,000
1,000
1,000
COLI (4)
3,125
3,125
3,150
3,150
Foreign exchange contracts — designated forwards (3)
380
380
530
530
Foreign exchange contracts — non-designated forwards (3)
102
102
—
—
Bank indebtedness - under the Working Capital Facility (1)
( 253
)
( 253
)
—
—
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.
(4)
Measured at cash surrender value, which approximates fair value.
41
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 nine months ended September 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 82 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 September 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 expenses and inventories. For foreign currency cash flow hedging instruments related to selling, general and administrative expenses, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in Other Comprehensive Income and reclassified to the Condensed Consolidated Statements of Operations when the forecasted transaction occurs. For foreign currency cash flow hedging instruments related to inventories, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in Other Comprehensive Income and reclassified to Inventories in the Condensed Consolidated Balance Sheets when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the Condensed Consolidated Statement of Operations.
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:
September 30,
December 31,
2020
2019
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards
$
36,659
36,052
Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards
3,579
—
$
40,238
$
36,052
42
Fair value of derivatives in foreign exchange contracts:
September 30,
December 31,
Balance Sheet Location
2020
2019
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards
Other assets
$
465
$
602
Accrued and other liabilities
( 85
)
( 72
)
Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards
Other assets
107
—
Accrued and other liabilities
( 5
)
—
$
482
$
530
Derivatives in Foreign Currency Hedging relationships are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Foreign exchange contracts
Derivative Gain (Loss)
— Forwards
Recognized in OCI
(Effective Portion)
$
591
$
( 527
)
$
( 935
)
$
( 162
)
Location of Derivative Loss
Reclassified from AOCI
Three Months Ended September 30,
Nine months ended September 30,
(Effective Portion)
2020
2019
2020
2019
Foreign exchange contracts
Selling, general and
— Forwards
administrative expenses
$
( 110
)
$
( 322
)
$
( 779
)
( 983
)
Property, plant and equipment
—
—
—
( 32
)
Inventory
—
—
$
( 26
)
—
$
( 110
)
$
( 322
)
$
( 805
)
$
( 1,015
)
Three Months Ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Foreign exchange contracts
Derivative Gain (Loss) Recognized In
— Forwards
and Out of OCI
$
—
$
2
$
( 55
)
$
2
Non Designated Derivatives in Foreign Currency relationships are as follows:
Three Months Ended September 30,
Nine months ended September 30,
Location of Derivative Gain
2020
2019
2020
2019
Foreign exchange contracts
Selling, general and
— Forwards
administrative expenses
$
75
$
—
$
102
—
$
75
$
—
$
102
$
—
The Company's estimated net amount of the existing gains as at September 30, 2020 is $ 0.5 million, which is expected to be reclassified to earnings within the next twelve months.
43
(d)
Investments in Equity Securities
As at September 30, 2020, the Condensed Consolidated Balance Sheets includes $ 14.8 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 Investment in the Company’s Condensed Consolidated Statement of Operations. As at September 30, 2020, the value of the Company’s investment in Maoyan was $ 13.7 million (December 31, 2019 — $ 14.6 million). For the three and nine months ended September 30, 2020, the Company has recorded a net unrealized gain of $ 1.6 million and a net unrealized loss of $ 0.9 million, respectively (2019— unrealized losses of $ 0.5 million and $ 2.5 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.
As at September 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 September 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 69.89 % of IMAX China Holding, Inc. (“IMAX China”), whose shares trade on the Hong Kong Stock Exchange. IMAX China is a consolidated subsidiary of the Company. The balance of the non-controlling interest in IMAX China as at September 30, 2020 is $ 75.5 million. For the three months ended September 30, 2020, the net income attributable to the non-controlling interest in IMAX China is $ 2.2 million (2019 — $ 2.3 million). For the nine months ended September 30, 2020, the net loss attributable to the non-controlling interest in IMAX China is $ 10.3 million (2019 — net income of $ 9.3 million).
(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 September 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 nine months ended September 30, 2020:
Balance as at December 31, 2019
$
5,908
Net loss
( 5,132
)
Balance as at September 30, 2020
$
776
44
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 nine months ended September 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.
19. Subsequent Event
In October 2020, the Company furloughed approximately 150 employees for at least two months beginning on October 26, 2020 . This action will enable the Company to temporarily reduce expenses, conserve resources and adjust its operations during the continuing business slowdown associated with the COVID-19 global pandemic.
45
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.