What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 433 added, 472 removed, 378 unchanged (71% of the section changed)

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

Presented below is Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") for IMAX Corporation and its consolidated subsidiaries (“IMAX” or the “Company”) for the three and nine months ended September 30, 2020 and 2019.

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

The Company indirectly owns approximately 69.89% of IMAX China Holding, Inc.

As of March 31, 2021, the Company indirectly owns 69.83% of IMAX China Holding, Inc.

(“IMAX China”), whose shares trade on the Hong Kong Stock Exchange.

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These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances.

However, whether actual results and developments will conform with the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies of the United States and Canada;

risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies of the United States and Canada;

risks related to the Company’s growth and operations in China;

the performance of IMAX DMR ® films;

the signing of IMAX Theater System agreements;

the signing of theater system agreements;

conditions, changes and developments in the commercial exhibition industry;

risks related to currency fluctuations;

the potential impact of increased competition in the markets within which the Company operates;

competitive actions by other companies;

the potential impact of increased competition in the markets within which the Company operates, including competitive actions by other companies;

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

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

risks relating to recent consolidation among commercial exhibitors and studios;

risks related to new business initiatives;

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

risks related to the Company’s indebtedness and compliance with its debt agreement;

general economic, market or business conditions;

the failure to convert IMAX Theater System backlog into revenue;

the failure to convert theater system backlog into revenue;

changes in laws or regulations;

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

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

any statements of belief and any statements of assumptions underlying any of the foregoing;

other factors and risks outlined in the Company’s periodic filings with the Securities and Exchange Commission;

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

Consequently, all of the forward-looking statements made in this quarterly report are qualified by these cautionary statements, and actual results or anticipated developments by the Company may not be realized, and even if substantially realized, may not have the expected consequences to, or effects on, the Company.

The Company undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking statements herein are made only as of the date hereof and the Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The Company makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such filings have been made with the United States Securities and Exchange Commission (the “SEC”).

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Through its proprietary software, theater architecture, patented intellectual property and specialized equipment, IMAX offers a unique end-to-end cinematic solution to create the highest-quality, most immersive motion picture and other entertainment event experiences for which the IMAX ® brand has become known globally.

Top filmmakers and movie studios utilize the cutting-edge visual and sound technology of IMAX to connect with audiences in innovative ways, and, as a result, IMAX’s network is among the most important and successful distribution platforms for major films and other events around the world.

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

Top filmmakers and movie studios utilize the cutting-edge visual and sound technology of IMAX to connect with audiences in innovative ways, and, as a result, the IMAX network is among the most important and successful distribution platforms for major films and other events around the world.

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

IMAX Theater Systems are based on proprietary and patented image, audio and other technology developed over the course of the Company’s 53-year history.

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

The Company generally does not own the theaters in the IMAX network, but licenses the use of its trademarks along with the sale or lease of the IMAX Theater System.

As at September 30, 2020, there were 1,632 IMAX Theater Systems operating in 82 countries and territories, including 1,542 commercial multiplexes, 13 commercial destinations and 77 institutional locations.

This compares to 1,568 IMAX Theater Systems operating in 81 countries and territories as of September 30, 2019 including 1,473 commercial multiplexes, 14 commercial destinations and 81 institutional locations.

(See the table below under “IMAX Network and Backlog” for additional information on the composition of the IMAX network.) In North America, IMAX accounts for approximately 450 screens out of a total of roughly 42,000 screens, and in 2019, about 85% of IMAX’s box office was generated in the top 20% of North American complexes.

In contrast, in 2019, only 5% of IMAX’s North American box office was generated from the bottom 65% of multiplexes as ranked by revenue.

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

The Company generally does not own the theaters in the IMAX network, but sells or leases the IMAX Theater System along with a license to use its trademarks.

As of March 31, 2021, there were 1,652 IMAX Theater Systems operating in 84 countries and territories, including 1,567 commercial multiplexes, 12 commercial destinations and 73 institutional locations.

This compares to 1,616 IMAX Theater Systems operating in 81 countries and territories as of March 31, 2020 including 1,526 commercial multiplexes, 14 commercial destinations and 76 institutional locations.

(See the table below under “IMAX Network and Backlog” for additional information on the composition of the IMAX network.)

The IMAX Theater System provides the Company’s exhibitor customers with a combination of the following benefits:

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The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX network.

The incremental box office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films.

The incremental box office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films and foreign local language movie studios .

As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology.

In 2018, the Company introduced IMAX with Laser, a laser projection system designed for IMAX theaters in commercial multiplexes, which represents a further evolution of IMAX’s proprietary technology.

The Company believes that IMAX with Laser delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today.

The Company further believes that IMAX with Laser is helping facilitate the next major lease renewal and upgrade cycle for the global commercial IMAX network.

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

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

As at September 30, 2020, 150 IMAX with Laser systems have been installed, and the Company’s backlog included 155 new IMAX with Laser systems and 92 upgrades to IMAX with Laser systems.

The Company believes that IMAX with Laser delivers increased resolution, sharper and brighter images, deeper contrast and the widest range of colors available to filmmakers today.

The Company further believes that IMAX with Laser is helping facilitate the next major lease renewal and upgrade cycle for the global IMAX network.

The Company is also experimenting with new technologies and new content as a way to deepen consumer engagement and brand loyalty, which includes curating unique, differentiated alternative content to be exhibited in IMAX theaters, particularly during those periods when Hollywood blockbuster film content is not available.

RECENT DEVELOPMENTS

On April 24, 2021, Patrick McClymont, the Company’s Chief Financial Officer, notified the Company that he would be resigning his position effective May 14, 2021, to pursue other career and personal interests.

Joseph Sparacio, Mr.

McClymont’s immediate predecessor as Chief Financial Officer, has agreed to serve as the Company’s interim Chief Financial Officer, reporting to Richard L.

Gelfond, the Company’s CEO, beginning on June 1, 2021, until the sooner of December 31, 2021 or when a permanent replacement is named.

The terms of Mr.

Sparacio’s compensation have not yet been finalized.

IMPACT OF COVID-19 PANDEMIC

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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.

As a result of the theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms.

More recently, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network gradually reopened in the third quarter of 2020 with reduced capacities, physical distancing requirements, and other safety measures.

During the third quarter of 2020, 85% of the theaters in the IMAX commercial multiplex network spanning 57 countries reopened, including 73% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 78% of the theaters in Rest of World markets.

In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers consistent with pre-pandemic attendance.

The Company believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and they feel safe.

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.

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 period s 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 theater s 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.

F or 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 .

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

As of March 31, 2021, 77 % of the theaters in the global IMAX commercial multiplex network were open, spanning 41 countries.

This included 66% of the theaters in Domestic (i.e., United States and Canada) locations, 97% of the theaters in Greater China and 52% of the theaters in Rest of World markets.

In many parts of Asia, audiences have returned to theaters, particularly IMAX theaters, in numbers approximating pre-pandemic attendance levels despite the continued delay of Hollywood theatrical releases, which typically account for 70% of box office ticket sales in those regions.

Management believes this indicates that moviegoers are eager to return to cinemas where and when theaters are open and they feel safe.

However, ticket sales have been significantly lower than normal levels in theaters outside of Asia due in significant part to continued delays in the Hollywood theatrical release schedule.

As a result, during the first quarter of 2021, certain theater chains have remained closed or operated with capacity restrictions and reduced operating hours.

The impact of the COVID-19 global pandemic ha s resulted in significantly lower levels of revenues , earnings and operating cash flows during 2020 and through the end of the first quarter of 2021 , when compared to periods prior to the onset of the pandemic , as gross box office (“ GBO ”) results from the Company’s theater customers declined significantly, the installation of certain theater systems w as delayed, and maintenance services were generally suspended for theaters that were closed .

Even as the pandemic has receded in many markets around the world, there continues to be few new films released by Hollywood movie studios and a significant number of theaters in the IMAX network remain either closed or operating with capacity restrictions.

T he Company continues to experienc e a significant decline in earnings and operating cash flows as it is generating 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 been , and may continue to be delayed.

However, with approximately 77% of the Company’s global theater network open as of March 31, 2021 (including substantially all of the theaters in Greater China), GBO receipts generated by IMAX DMR films and joint revenue sharing arrangements increased in the current quarter, leading to improvement in the Company’s segment results, when compared to the prior year period.

In addition, as a result of the financial difficulties faced by certain of the Company’s exhibition customers as a result of theater closures during the pandemic, the Company has experienced and may continue to experience delays in collecting payments due under existing theater sale or lease arrangements.

In response, the Company has provided temporary relief to exhibitor customers by waiving or reducing maintenance fees during periods when theaters are closed or operating with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement.

Management is encouraged by recent box office results in markets like China, Japan and South Korea where the virus is better controlled and audiences have demonstrated a willingness to return to cinema.

In addition, vaccine distribution is accelerating in the United States and the pipeline of Hollywood movies scheduled for the second half of 2021 appears strong.

However, the Company may continue to be significantly impacted by the COVID-19 global pandemic even after theaters reopen and resume normal operations.

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 timing and extent of a recovery of consumer behavior and willingness to spend discretionary income on movie-going may delay the Company’s ability to generate significant GBO-based revenue until consumer behavior normalizes and consumer spending recovers.

In response to uncertainties associated with the COVID-19 global pandemic, in the first quarter of 2021, the Company continued to take significant steps to preserve cash by eliminating non-essential costs, keeping certain employees on a temporary furlough, reducing the working hours of other employees and reducing all non-essential capital expenditures to minimum levels.

The Company has also implemented an active cash management process, which, among other things, requires senior management approval of all outgoing payments.

In addition, in the first quarter of 2020, the Company drew down 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 of Notes to Condensed Consolidated Financial Statements).

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 of Notes to Condensed Consolidated Financial Statements).

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.

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 recoverability of these deferred tax assets is subject to certain levels of future taxable income and the uncertainties associated with accounting estimates.

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 those jurisdictions 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 valuation allowance may be reversed.

Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied.

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 and the recoverability of deferred tax assets could also be further materially impacted by changes in management’s estimates (see Notes 1, 4 and 11 of Notes to Condensed Consolidated Financial Statements).

See “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part II, Item 1A of this Form 10-Q.

In the first quarter of 2021, the Company issued $230.0 million of Convertible Notes.

The net proceeds from the issuance of the Convertible Notes were approximately $223.7 million, after deducting the initial purchasers’ discounts and commissions, which were used in part to repay a portion of outstanding borrowings under the Credit Facility provided by the Company’s Credit Agreement with Wells Fargo .

In addition, during the first quarter of 2021, the Company entered into the Second Amendment to the Credit Agreement which, among other things, suspends the Senior Secured Net Leverage Ratio financial covenant in the Credit Agreement through the first quarter of 2022 and, once re-established, permits the Company to use EBITDA from the third and fourth quarters of 2019 in lieu of EBITDA for the corresponding quarters of 2021.

As of March 31, 2021, the Company was in compliance with all of its requirements under the Credit Agreement, as amended.

(Each defined term used, but not defined in this paragraph is defined in “Liquidity and Capital Resources”.) (See “Liquidity and Capital Resources” and Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1.)

The Company has applied for and received $8.6 million to date in wage subsidies, tax credits and other financial support under COVID-19 relief legislation that has been enacted in the countries in which it operates.

During the three months ended March 31, 2021, the Company recognized $1.5 million under the Canada Emergency Wage Subsidy (“CEWS”) program as reductions to Selling, General and Administrative Expenses ($1.2 million) and Costs and Expenses Applicable to Revenues ($0.3 million) in the Condensed Consolidated Statements of Operations.

The CEWS program has been extended to September 2021.

The Company will continue to review for the availability of additional subsidies and credits for the remaining terms of these programs, where applicable, although there are no guarantees that the Company will ultimately apply for or receive any such additional benefits.

(See “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part II, Item 1A in this report .)

SOURCES OF REVENUE

For the purposes of MD&A the Company has organized its reportable segments into the following four categories:

For the presentation of MD&A, the Company has organized its reportable segments into the following four categories:

(i) IMAX Technology Network;

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and (iv) Film Distribution and Post-Production.

Within these categories are the Company’s following reportable segments:

Within these four categories are the Company’s following reportable segments:

(i) IMAX DMR;

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and (viii) Film Post-Production.

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.

For additional details regarding the Company’s sources of revenue, refer to its Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

IMAX Technology Network

The IMAX Technology Network earns revenue based on contingent box office receipts and includes the IMAX DMR segment and contingent rent from the Joint Revenue Sharing Arrangement (“JRSA”) segment, as described in more detail below.

The Company has developed IMAX DMR, a proprietary technology that digitally remasters Hollywood films into IMAX formats.

The IMAX Technology Network category earns revenue based on contingent box office receipts.

Included in the IMAX Technology Network category are the IMAX DMR segment and contingent rent from the Joint Revenue Sharing Arrangement (“JRSA”) segment, each as described in more detail below.

The Company has developed IMAX DMR, a proprietary technology that digitally remasters films into IMAX formats.

In a typical IMAX DMR film arrangement, the Company receives a percentage of the box office receipts from a movie studio in exchange for converting a commercial film into IMAX DMR format and distributing it through the IMAX network.

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IMAX DMR digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known.

In addition, the original soundtrack of a film to be exhibited in IMAX theater s is remastered for IMAX digital sound systems in connection with the IMAX DMR release of the film .

In addition, the original soundtrack of a film to be exhibited in IMAX theaters is remastered for IMAX digital sound systems in connection with the IMAX DMR release of the film.

Unlike the soundtracks played in conventional theaters, IMAX remastered soundtracks are uncompressed and full fidelity.

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

Such enhancements include shooting films with IMAX cameras to increase the audience’s immersion in the film and taking advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a movie screen.

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

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

Pictures’ Tenet , released in the third quarter, was filmed with IMAX cameras.

The Company believes that growth in international box office remains an important driver of growth for the Company.

Such enhancements include shooting films with IMAX cameras to increase the audience’s immersion in the film and to take advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a movie screen.

Detective Chinatown 3 and A Writer’s Odyssey , which were released in China in the first quarter of 2021, were filmed with IMAX cameras.

Management believes that growth in international box office remains an important driver of growth for the Company.

To support continued growth in international markets, the Company has sought to bolster its international film strategy, supplementing the Company’s film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets, particularly in China.

During 2019, 18 local language IMAX DMR films were released to the IMAX network, including 14 in China and one in each of Japan, South Korea, India and Russia.

The blockbuster Ne Zha:

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

During the nine months ended September 30, 2020, six local language IMAX DMR films were released to the IMAX network, including two in Russia, two in China, and one in each of Japan and South Korea.

The Company released additional local language IMAX DMR films in the fourth quarter of 2020 and expects to announce additional local language IMAX DMR films to be released to the IMAX network in 2021.

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

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

Accordingly, there remains uncertainty around the release dates of certain major films.

During 2020, 17 local language IMAX DMR films were released to the IMAX network, including ten in China, three in Russia, three in Japan, and one in South Korea.

During the three months ended March 31, 2021, six local language IMAX DMR films were released to the IMAX network, including four in China and two in Japan.

The Company expects to announce additional local language IMAX DMR films to be released to the IMAX network in the remainder of 2021.

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

However, as a result of the theater closures associated with the COVID-19 global pandemic, Hollywood movie studios have postponed the theatrical release of most films originally scheduled for release in early 2021, including many scheduled to be shown in IMAX theaters, while several other films have been released directly or concurrently to streaming platforms.

Accordingly, as of the filing of this report, there remains uncertainty around the release dates of certain major films.

Joint Revenue Sharing Arrangements – Contingent Rent

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The Company retains title to the IMAX Theater System equipment components throughout the lease term, and the equipment is returned to the Company at the conclusion of the arrangement.

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

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

As with a traditional joint revenue sharing arrangement, the customer also pays the Company a percentage of contingent box office receipts over the term of the arrangement, although this percentage is typically half that of a traditional joint revenue sharing arrangement.

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The contracts are non-cancellable by the customer unless the Company fails to perform its obligations.

The revenue earned from customers under the Company’s joint revenue sharing arrangements can vary from quarter - to - quarter and year - to - year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of these theater systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.

The revenue earned from customers under the Company’s joint revenue sharing arrangements can vary from quarter-to-quarter and year-to-year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of IMAX Theater Systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.

Joint revenue sharing arrangements also require IMAX to provide maintenance and extended warranty services to the customer over the term of the lease in exchange for a separate fixed annual fee.

These fees are reported within IMAX Technology Sales and Maintenance, as discussed below.

The introduction of joint revenue sharing arrangements has been an important factor in the expansion of the Company’s commercial theater network.

Joint revenue sharing arrangements allow commercial theater exhibitors to install IMAX Theater Systems without the significant initial capital investment required in a sale or sales-type lease arrangement.

Joint revenue sharing arrangements drive recurring cash flows and earnings for the Company, as customers under these arrangements pay the Company a portion of their ongoing box office receipts.

The Company funds its joint revenue sharing arrangements through cash flows from operations.

As of March 31, 2021, the Company had 896 theaters in operation under joint revenue sharing arrangements, a 3.3% increase as compared to the 867 theaters in operation under joint revenue sharing arrangements as of March 31, 2020.

The Company also had contracts in backlog for 332 theaters under joint revenue sharing arrangements as of March 31, 2021, including 84 upgrades to existing theater locations and 248 new theater locations.

IMAX Technology Sales and Maintenance

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

The IMAX Technology Sales and Maintenance category earns revenue principally from the sale or sales-type lease of IMAX Theater Systems, as well as from the maintenance of IMAX Theater Systems.

To the lesser extent, the IMAX Technology Sales and Maintenance category earns revenue from certain ancillary theater business activities and revenues from hybrid joint revenue sharing arrangements.

These activities are described in more detail below under each of their respective segments.

The IMAX Systems segment provides IMAX Theater Systems to exhibitors through sale arrangements or long-term lease arrangements that for accounting purposes are classified as sales-type leases.

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The Company has the right to remove the equipment for non-payment or other defaults by the customer.

The revenue earned from customers under the Company’s theater system sales or lease agreements varies from quarter-to-quarter and year-to-year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the theater systems, the nature of the arrangement and other factors specific to individual contracts.

The revenue earned from customers under the Company’s theater system sales or lease agreements varies from quarter-to-quarter and year-to-year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the IMAX Theater Systems, the nature of the arrangement and other factors specific to individual contracts.

Joint Revenue Sharing Arrangements – Fixed Fees

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

New Business Initiatives

New Business Initiatives and Other

The New Business Initiatives segment includes activities related to the exploration of new lines of business and new initiatives outside of the Company’s core business, which seek to leverage its proprietary, innovative technologies, its leadership position in the entertainment technology space and its unique relationship with content creators.

Such new business initiatives currently include IMAX Enhanced and Connected Theaters, as discussed below.

IMAX Enhanced

In September 2018, the Company announced a new home entertainment licensing and certification program called IMAX Enhanced.

This initiative was launched along with audio leader DTS (an Xperi subsidiary), capitalizing on the Company’s decades of combined expertise in image and sound science.

The certification program combines high-end consumer electronics products with IMAX digitally remastered 4K high dynamic range (HDR) content and DTS audio technologies to offer consumers immersive sight and sound experiences for the home.

To be accepted into the program, leading consumer electronics manufacturers must design 4K HDR televisions, A/V receivers, sound systems and other home theater equipment to meet a carefully prescribed set of audio and video performance standards, set by a certification committee of IMAX and DTS engineers and some of Hollywood’s leading technical specialists.

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

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

Connected Theaters

The Company is currently exploring new technologies and forms of content as a way to deepen consumer engagement and brand loyalty, including new technologies to further connect the IMAX network and to facilitate bringing more unique content, including live events, to IMAX theater audiences.

In addition, through its Connected Theaters initiative, the Company is currently exploring new technologies and forms of content as a way to deepen consumer engagement and brand loyalty, including new technologies to further connect the IMAX network and to facilitate bringing more unique content, including live events, to IMAX theater audiences.

The Company believes such additional connectivity can provide more innovative content to the IMAX network and in turn permit the Company to engage audiences in new ways.

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

Film Distribution and Post-production

Film Distribution and Post- P roduction

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

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

The Company receives either a percentage of the theater box office receipts or a fixed amount as a distribution fee.

The Company released the IMAX original production, Asteroid Hunters , in October 2020.

The Company receives as its distribution fee either a fixed amount or fixed percentage of the theater box office receipts and, following the Company’s recoupment of its costs, is typically entitled to receive an additional percentage of gross revenues as participation revenues.

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

IMAX N ETWORK AND BACKLOG

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

September 30, 2020

September 30, 2019

IMAX NETWORK AND BACKLOG

The following table provides detailed information about the IMAX network by type and geographic location as of March 31, 2021 and 2020:

March 31, 2021

March 31, 2020

Institutional

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Latin America includes South America, Central America and Mexico.

The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,542 operating as at September 30, 2020.

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

The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,567 operating as of March 31, 2021.

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

As at September 30, 2020, 72.2% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), an increase from 71.0% as at September 30, 2019.

As of March 31, 2021, 73.2% of IMAX Theater Systems in operation were located within international markets (defined as all countries other than the United States and Canada), compared to 72.0% as of March 31, 2020.

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

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

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

As at September 30, 2020, the Company had 726 theaters operating in Greater China with an additional 258 theaters in backlog that are scheduled to be installed by 2028.

The Company’s backlog in Greater China represents 47.3% of its total current backlog, including upgrades.

Greater China is the Company’s largest market, measured by revenues, with approximately 38% and 31% of overall revenues generated from its Greater China operations in the years ended December 31, 2020 and 2019, respectively.

For the three months ended March 31, 2021, this percentage increased to 66% as the pace and extent of the reopening of IMAX theaters in Greater China has exceeded that of theaters in Domestic and Rest of World markets.

As of March 31, 2021, the Company had 750 theaters operating in Greater China with an additional 248 theaters in backlog that are scheduled to be installed by 2028.

The Company’s backlog in Greater China represents 47.6% of its total current backlog, including upgrades in system type.

The Company’s largest single international partnership is in China with Wanda Film (“Wanda”).

Wanda’s total commitment to the Company is for 361 IMAX Theater Systems in Greater China (of which 355 IMAX Theater Systems are under the parties’ joint revenue sharing arrangement).

See “Risk Factors – The Company faces risks in connection with the continued expansion of its business in China” in Item 1A of the Company’s 2019 Form 10-K.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” in Item 2 of this Form 10-Q and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part II, Item 1A of this Form 10-Q.

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

September 30, 2020

( See “Risk Factors – The Company faces risks in connection with its significant presence in China and the continues expansion of its business there” and “Risk Factors – General political, social and economic conditions can affect the Company’s business by reducing both revenues generated from existing IMAX Theater Systems and the demand for new IMAX Theater Systems” in Part I, Item 1A of the Company’s 2020 Form 10-K .

(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic” and “Risk Factors – The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 global pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods” in Part II, Item 1A of this report.)

The following tables provide detailed information about the Commercial Multiplex theaters in operation within the IMAX network by arrangement type and geographic location as of March 31, 2021 and 2020:

March 31, 2021

Commercial Multiplex Theaters in IMAX Network

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Worldwide Total (1)

September 30, 2019

March 31, 2020

Commercial Multiplex Theaters in IMAX Network

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

As at September 30, 2020, 279 (2019 — 276) of the 742 (2019 — 706) theaters under traditional joint revenue sharing arrangements in operation, or 37.6% (2019 — 39.1%), were located in the United States or Canada, with the remaining 463 (2019 — 430) or 62.4% (2019 — 60.9%) of theaters under traditional joint revenue sharing arrangements located in international markets.

Sales Backlog

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

September 30, 2020

September 30, 2019

The following table provides detailed information about the Company’s backlog as of March 31, 2021 and 2020:

March 31, 2021

March 31, 2020

(in thousands)

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Sales and sales-type lease arrangements

Traditional JRSA

Hybrid joint revenue sharing arrangements

Traditional joint revenue sharing arrangements

Includes 44 IMAX Theater Systems (2020 — 46) where the customer has the option to convert from a joint revenue sharing arrangement to a sales arrangement.

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The dollar value fluctuates depending on the number of new arrangements signed from year-to-year, which adds to backlog and the installation and acceptance of IMAX Theater Systems and the settlement of contracts, both of which reduce backlog.

Sales backlog typically represents the fixed contracted revenue under signed IMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated system, as well as an estimate of variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues.

The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases and long-term conditional theater commitments.

Backlog typically represents the fixed contracted revenue under signed IMAX Theater System sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated system, as well as an estimate of variable consideration in sales arrangements, however it excludes amounts allocated to maintenance and extended warranty revenues.

The value of backlog does not include revenue from theaters in which the Company has an equity interest, operating leases and long-term conditional theater commitments.

Theaters under joint revenue sharing arrangements do not usually have dollar value in backlog, although certain IMAX Theater Systems under joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments.

The Company believes that the contractual obligations for IMAX Theater System installations that are listed in sales backlog are valid and binding commitments.

The Company believes that the contractual obligations for IMAX Theater System installations that are listed in backlog are valid and binding commitments.

From time to time, in the normal course of its business, the Company will have customers who are unable to proceed with an IMAX Theater System installation for a variety of reasons, including the inability to obtain certain consents, approvals or financing.

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Current backlog information reflects all known elections.

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

September 30, 2020

The following table s provide detailed information about the Company’s backlog by arrangement type and geographic location as of March 31, 2021 and 2020 :

March 31, 2021

IMAX Theater System Backlog

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Worldwide Total

September 30, 2019

March 31, 2020

IMAX Theater System Backlog

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Includes 147 new IMAX with Laser projection system configurations and 94 upgrades of existing locations to IMAX with Laser projection system configurations.

Approximately 75.0% of IMAX Theater System arrangements in backlog as at September 30, 2020 are scheduled to be installed in international markets (2019 — 73.1%).

Approximately 74.9% of IMAX Theater System arrangements in backlog as of March 31, 2021 are scheduled to be installed in international markets (2020 — 74.1%).

Signings and Installations

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

The following tables provide detailed information about IMAX Theater System signings and installations for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

September 30,

Theater System Signings:

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For the Three Months Ended

For the Nine Months Ended

September 30,

Theater System Installations:

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Total IMAX Theater System installations

IMAX AI JOINT VENTURE

In March 2021, the Company and Maximus Technologies Limited (“Maximus”), a next-generation visual effects company, established a joint venture, IMAX AI, to deliver A.I.-based solutions for Ultra High Definition (UHD) 4K enhancement across smart devices, new and library content, and real-time enhancement of live entertainment and sports.

IMAX and Maximus each own 50% of IMAX AI.

In connection with the formation of the joint venture, IMAX and Maximus are each contributing $250,000 in cash, as well as certain intellectual property assets.

The intellectual property assets contributed by the Company had a nominal carrying value.

The Company is using the equity method to account this investment as IMAX AI is jointly controlled.

Included in the intellectual property assets contributed by IMAX is IMAX Enhanced, a home entertainment licensing and certification program.

IMAX Enhanced was launched in September 2018, along with audio leader DTS (an Xperi subsidiary) to capitalize on the companies’ decades of combined expertise in image and sound science.

IMAX Enhanced brings IMAX digitally re-mastered 4K high dynamic range (HDR) content and DTS audio technologies to premier streaming platforms and best-in-class consumer electronics devices worldwide, offering consumers high-fidelity sight and sound experiences for the home.

To be certified, leading consumer electronics manufacturers spanning 4K/8K televisions, projectors, A/V receivers, loudspeakers, subwoofers and soundbars must meet a carefully prescribed set of audio and video performance standards, set by a certification committee of IMAX and DTS engineers and some of Hollywood’s leading technical specialists.

IMAX Enhanced global device partners include Sony Electronics, Hisense, TCL, Phillips, Xiaomi, and Sound United , among others.

IMAX Enhanced has an estimated six million certified devices in-market.

IMAX Enhanced content is now available on six streaming platforms worldwide, with partners that include Sony Pictures Entertainment, Paramount Pictures, Huayi Brothers, Bona Film Group, Tencent Video, iQIYI and FandangoNOW, with more on the way.

RESULTS OF OPERATIONS

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

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

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

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

the continuing ability to invest in and improve the Company’s technology to enhance the differentiation of The IMAX Experience versus other cinematic experiences;

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

consolidated earnings from operations, as adjusted for unusual items;

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

the success of new business initiatives;

short- and long-term cash flow projections.

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

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

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

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

(iii) the continuing ability to invest in and improve the Company’s technology to enhance the differentiation of The IMAX Experience versus other cinematic experiences;

(iv) revenues and gross margins earned by the Company’s segments, as discussed below;

(v) consolidated earnings from operations, as adjusted for unusual items;

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

(vii) the success of new business initiatives;

and (viii) short- and long-term cash flow projections.

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

The CODM, along with other members of management, assess segment performance based on segment revenues and gross margins.

Selling, general and administrative expenses, research and development costs, the amortization of intangibles, provisions for (recoveries of) current expected credit losses, certain write-downs, interest income, interest expense and income tax (expense) benefit are not allocated to the Company’s segments.

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

Selling, general and administrative expenses, research and development costs, the amortization of intangible assets, provisions for (recoveries of) current expected credit losses, certain write-downs, interest income, interest expense and income tax (expense) benefit are not allocated to the Company’s segments.

The Company’s reportable segments are organized into the following four categories:

(i) IMAX Technology Network;

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and (viii) Film Post-Production, each of which are described above under “Sources of Revenue.” This categorization is consistent with how the CODM reviews the financial performance of the Company and makes strategic decisions regarding resource allocation and investments to meet long-term business goals.

Management believes that a discussion and analysis based on the four categories listed above is significantly more relevant and useful to readers, as the Company’s consolidated statements of operations captions combine results from several segments.

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

For the three months ended September 30, 2020, the Company reported a net loss attributable to common shareholders of $(47.2) million, or $(0.80) per basic and diluted share, as compared to net income attributable to common shareholders of $9.0 million, or $0.15 per basic and diluted share, for the same period in 2019.

For the three months ended September 30, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(44.6) million, or $(0.75) per basic and diluted share*, as compared to adjusted net income attributable to common shareholders* of $12.8 million, or $0.21 per diluted share*, for the same period in 2019.

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

(In thousands of U.S.

Management believes that a discussion and analysis based on the four categories listed above is significantly more relevant and useful to readers, as the Company’s Condensed Consolidated Statements of Operations captions combine results from several segments.

Results of Operations for the Three Months Ended March 31, 2021 and March 31, 2020

For the three months ended March 31, 2021, the Company reported a net loss attributable to common shareholders of $(14.8) million, or $(0.25) per diluted share, as compared to net loss attributable to common shareholders of $(49.4) million, or $(0.82) per diluted share, for the same period in 2020.

For the three months ended March 31, 2021, the Company reported an adjusted net loss attributable to common shareholders* of $(14.8) million, or $(0.25) per basic and diluted share*, as compared to adjusted net loss attributable to common shareholders* of $(28.7) million, or $(0.48) per diluted share*, for the same period in 2020.

The following table presents the Company’s revenue and gross margin (margin loss) by category and reportable segment for the three months ended March 31, 2021 and 2020:

Gross Margin (Margin Loss)

(In thousands of U.S.

IMAX Technology Network

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Revenues and Gross Margin

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions due to the COVID-19 global pandemic;

however, the availability of new film content was limited, especially in the Domestic and Rest of World markets, and ticket sales were significantly lower than normal levels in theaters outside of Asia.

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

For the three months ended September 30, 2020, revenues and gross margin decreased by $49.1 million (57%) and $43.3 million (92%), respectively, when compared to the same period in 2019.

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

Since that time, stay-at-home orders have been lifted in many countries and movie theaters throughout the IMAX network have gradually reopened with reduced capacities, physical distancing requirements, and other safety measures.

As of March 31, 2021, 77% of the theaters in the global IMAX commercial multiplex network were open, including substantially all of the theaters in Greater China.

As a result, GBO receipts generated by IMAX DMR films and joint revenue sharing arrangements increased during the current quarter, leading to improvement in the Company’s segment results, when compared to the prior year.

See the captioned sections below for a discussion of the Company’s segment results.

IMAX Technology Network

IMAX Technology Network results are influenced by the level of commercial success and box office performance of the films released to the network, as well as other factors including the timing of the films released, the length of the theatrical distribution window, the take rates under the Company’s DMR and joint revenue sharing arrangements and the level of marketing spend associated with the films released in the period.

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

dollar and potential currency devaluations.

For the three months ended September 30, 2020, IMAX Technology Network revenues and gross margin decreased by $31.9 million (74%) and $26.8 million (98%), respectively, when compared to the same period in 2019.

For the three months ended March 31, 2021, IMAX Technology Network revenues and gross margin increased by $3.7 million (22%) and $7.3 million (259%), respectively, when compared to the same period in 2020.

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

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions due to the COVID-19 global pandemic;

As a result, for the three months ended September 30, 2020, IMAX DMR revenues and gross margin decreased by $19.8 million (74%) and $14.8 million (83%), respectively, when compared to the same period in 2019.

These decreases are due to a $175.9 million (72%) reduction in GBO receipts generated by IMAX DMR films in the third quarter of 2020, from $246.1 million to $70.2 million.

In the third quarter of 2020, GBO was generated by the exhibition of six new films and the re-release of classic titles as compared to 26 films (20 new and 6 carryovers) exhibited in the third quarter of 2019.

For the three months ended March 31, 2021, IMAX DMR revenues and gross margin increased by $1.3 million (12%) and $3.8 million (86%), respectively, when compared to the same period in 2020.

These increases are primarily due to a $15.0 million (16%) increase in GBO receipts generated by IMAX DMR films in the first quarter of 2021, from $95.2 million to $110.2 million.

In the first quarter of 2021, GBO was generated by the exhibition of 18 films (12 new and 6 carryovers), including four local language films in China, and the re-release of classic titles.

In the first quarter of 2020, GBO was generated by the exhibition of 13 films (9 new and 4 carryovers).

In addition to the level of revenues, IMAX DMR gross margin is also influenced by the costs associated with the films exhibited in the period, and can vary from period-to-period, particularly with respect to marketing expenses.

For the three months ended September 30, 2020, marketing expenses were $0.4 million, as compared to $4.3 million during the same period of 2019.

For the three months ended March 31, 2021, marketing expenses were $1.1 million, as compared to $2.4 million during the same period of 2020.

The lower level of marketing expenses and other cost of sales in the current period is a reflection of the number and mix of films exhibited in the first quarter of 2021 relative to the same period in the prior year.

Joint Revenue Sharing Arrangements – Contingent Rent

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions due to the COVID-19 global pandemic;

As a result, for the three months ended September 30, 2020, JRSA contingent rent revenue and gross margin decreased by $12.1 million (73%) and $12.0 million (126%), respectively, when compared to the same period in 2019.

These decreases are due to an $85.5 million (70%) reduction in GBO generated by theaters under joint revenue sharing arrangements in the third quarter of 2020, from $121.9 million to $36.4 million.

As at September 30, 2020, 881 theaters were operating under joint revenue sharing arrangements, as compared to 841 theaters as at September 30, 2019, an increase of 5%.

In addition to the level of revenues, JRSA margin is also influenced by the level of costs associated with such arrangements, such as depreciation expense related to the underlying theater systems and costs incurred to upgrade theater systems from digital xenon to IMAX with Laser, as well as advertising, marketing and commission costs primarily for the launch of new theaters.

For the three months ended March 31, 2021, JRSA contingent rent revenue and gross margin increased by $2.4 million (40%) and $3.5 million (216%), respectively, when compared to the same period in 2020.

These increases are largely due to a $21.2 million (48%) increase in GBO generated by theaters under joint revenue sharing arrangements in the first quarter of 2021 when compared to the same period in the prior year, from $44.6 million to $65.8 million.

As of March 31, 2021, 896 theaters were operating under joint revenue sharing arrangements, as compared to 867 theaters as of March 31, 2020, an increase of 3%.

In addition to the level of revenues, JRSA contingent rent margin is also influenced by the level of costs associated with such arrangements, such as depreciation expense related to the underlying theater systems and costs incurred to upgrade theater systems from digital xenon to IMAX with Laser, as well as advertising, marketing and commission costs primarily for the launch of new theaters.

The level of depreciation expense in a period relative to the prior year is a function of the growth of the theater network and the mix of theater system configurations in the network.

For the three months ended September 30, 2020, JRSA gross margin included depreciation expense of $6.1 million, as compared to $5.9 million in the same period of the prior year as a result of the 5% increase in the number of theaters operating under joint revenue sharing arrangements.

For the three months ended September 30, 2020, JRSA gross margin includes advertising, marketing and commission costs of $0.7 million, as compared to $0.8 million in the same period of the prior year.

For the three months ended March 31, 2021, JRSA gross margin included depreciation expense of $5.7 million, which represents a $1.2 million decrease as compared to $6.9 million recorded in the same period of the prior year.

The lower level of depreciation expense in the current period is due, in part, to the effect of lease term extensions entered into with exhibitor customers as a result of the COVID-19 global pandemic, partially offset by the 3% increase in the number of theaters operating under joint revenue sharing arrangements.

For the three months ended March 31, 2021, JRSA gross margin includes advertising, marketing and commission costs of $0.8 million, as compared to $0.5 million in the same period of the prior year.

IMAX Technology Sales and Maintenance

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

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

The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control.

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

For the Three Months Ended September 30,

New IMAX Theater Systems — installed and recognized

Sales and sales-types lease arrangements (1)

Joint revenue sharing arrangements — hybrid (2)

Total new IMAX Theater Systems

IMAX theater system upgrades — installed and recognized

Sales and sales-types lease arrangements

Total IMAX Theater Systems installed and recognized

The arrangement for the sale of an IMAX Theater System includes fixed upfront and ongoing consideration, including indexed annual minimum payment increases over the term of the arrangement, as well as an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded.

Digital theater system relocated from a previous location.

This installation is incremental to the IMAX network but full revenue for the digital system was not received.

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

The average revenue per full (i.e., not hybrid), new IMAX Theater System under sales and sales-type lease arrangements was $1.1 million for the three months ended September 30, 2020, as compared to $1.2 million during the same period of the prior year.

For the three months ended September 30, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased by $14.0 million (37%) and $9.0 million (49%), respectively, when compared to the same period in the prior year as the pace of theater system installations slowed significantly and maintenance revenue was not recognized for theaters that remained closed during the period due to the COVID-19 global pandemic.

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

For the three months ended September 30, 2020, IMAX Systems revenue and gross margin decreased by $3.5 million (17%) and $3.0 million (26%), respectively, when compared to the same period in the prior year.

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

IMAX Maintenance

In the third quarter of 2020, as the theaters in the IMAX network gradually reopened, the Company was able to again provide its normal maintenance services and, accordingly, resumed revenue recognition for those theaters.

For the three months ended September 30, 2020, IMAX Maintenance revenue and gross margin decreased by $7.8 million (57%) and $5.3 million (87%), respectively, due to the pace and extent of theater reopenings during the period.

For the three months ended March 31, 2021, IMAX Technology Sales and Maintenance revenue and gross margin increased by $1.9 million (13%) and $2.3 million (49%), respectively, when compared to the same period in the prior year.

IMAX Maintenance segment revenues and gross margin increased by $1.5 million (21%) and $3.1 million (404%), respectively, when compared to the same period in the prior year, due to the continued reopening of the IMAX network.

Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.

Film Distribution and Post- p roduction

For the three months ended September 30, 2020, Film Distribution and Post-production revenue and gross margin decreased by $1.7 million (47%) and $6.1 million, respectively, when compared to the same period in the prior year.

The results for the third quarter of 2020 are significantly influenced by a $5.4 million impairment loss recorded in the period principally to write-down the carrying value of certain documentary and alternative content film assets due to a decrease in projected box office totals and related revenues based on management’s regular quarterly recoverability assessments.

As of 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 of Notes to Condensed Consolidated Financial Statements).

Selling, General and Administrative Expenses

For the three months ended September 30, 2020, Selling, General and Administrative Expenses decreased by $4.7 million (16%), when compared to the same period in 2019.

For the three months ended September 30, 2020, Selling, General and Administrative Expenses excluding the impact of share-based compensation were $19.7 million, as compared to $24.5 million in the same period in 2019, representing a decrease of $4.8 million (20%).

The comparison to the prior year is significantly influenced by COVID-19 government relief that the Company became entitled to receive during the period, of which $1.7 million was recognized in the third quarter of 2020 as a reduction to Selling, General and Administrative Expenses.

Also impacting the comparison to the prior period are management’s cost control efforts amidst the COVID-19 global pandemic, resulting in lower staff costs, travel, facilities and marketing related expenses, among others.

These factors are partially offset by a $4.5 million (35%) decrease in labor and other costs capitalized to inventory, film assets, and joint venture theater equipment or allocated to costs applicable to revenues, due to the lower level of production during the COVID-19 global pandemic.

In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, placing certain employees on a temporary furlough for at lease the remainder of the current fiscal year, reducing the working hours of other employees and deferring all non-essential capital expenditures to minimum levels.

Credit Loss Expense

For the three months ended September 30, 2020, the Company recorded a provision for current expected credit losses of $3.9 million, reflecting a reduction in the credit quality of its theater and studio related receivable balances, which management believes is primarily related to the COVID-19 pandemic, as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future.

Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict.

As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect.

For the three months ended September 30, 2019, credit loss expense was $0.6 million.

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

Gain (loss) in fair value of investments

In the first quarter of 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) and purchased equity securities for $15.2 million.

These equity securities are traded on the Hong Kong Stock Exchange, and the Company is required to adjust the fair value of the securities each period to reflect the current market value.

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

For the three months ended September 30, 2020, the fair value of the Company’s investment in Maoyan increased by $1.6 million resulting in a corresponding unrealized gain, as compared to an unrealized loss of $0.5 million in the same period of the prior year, which are both recognized in the Condensed Consolidated Statements of Operations.

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.

Despite this valuation allowance, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied .

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.

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 of Notes to Condensed Consolidated Financial Statements.

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).

Equity Method Investments

For the three months ended September 30, 2020, the Company reported a loss of $1.3 million due to the write-off of deferred tax assets related to an equity method investment, as compared to a gain of $0.2 million in the same period in the prior year related to its proportionate share of equity investee results.

Non-Controlling Interests

The Company’s Condensed Consolidated Financial Statements primarily include the non-controlling interest in the net income (loss) of IMAX China, as well as the impact of non-controlling interests in the activity of its Original Film Fund subsidiary.

For the three months ended September 30, 2020, the net loss attributable to non-controlling interests of the Company’s subsidiaries was $1.3 million (2019 ─ net income of $1.9 million).

Results of Operations for the Nine Months Ended S e ptember 30 , 2020 and 2019

For the nine months ended September 30, 2020, the Company reported a net loss attributable to common shareholders of $(122.5) million, or $(2.06) per basic and diluted share, as compared to net income attributable to common shareholders of $28.7 million, or $0.47 per basic and diluted share, for the same period in 2019.

For the nine months ended September 30, 2020, the Company reported an adjusted net loss attributable to common shareholders* of $(99.4) million, or $(1.67) per basic and diluted share*, as compared to adjusted net income attributable to common shareholders* of $43.3 million, or $0.70 per diluted share*, for the same period in 2019.

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

The following table provides detailed information about the mix of IMAX Theater System installed and recognized during the three months ended March 31, 2021 and 2020:

For the Three Months Ended March 31,

(In thousands of U.S.

Gross Margin (Margin Loss)

IMAX Technology Network

Joint revenue sharing arrangements, contingent rent

IMAX Technology Sales and Maintenance

IMAX Systems (1)

Joint revenue sharing arrangements, fixed fees

IMAX Maintenance

Other Theater Business (2)

New Business Initiatives

Film Distribution and Post-production

Includes initial upfront payments and the present value of fixed minimum payments from sale and sales-type lease arrangements of IMAX Theater Systems, and the present value of estimated variable consideration from sales of IMAX Theater Systems.

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

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

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

Revenues and Gross Margin

Due to the COVID-19 global pandemic, substantially all of the theaters in the IMAX network were closed for a significant portion of the six months ended June 30, 2020, with the theaters in Greater China closed beginning in late-January and substantially all of the Company’s remaining theaters closed beginning in mid-to-late March.

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions;

As a result of these factors, the Company’s results of operations for the nine months ended September 30, 2020 materially declined versus the prior year with revenues and gross margin decreasing by $190.4 million (70%) and $150.6 million (99%), respectively, when compared to the same period in 2019.

IMAX Technology Network

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

dollar and potential currency devaluations.

For the nine months ended September 30, 2020, IMAX Technology Network revenues and gross margin decreased by $125.7 million (82%) and $105.5 million (103%), respectively, when compared to the same period in 2019.

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

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions;

As a result of these factors, for the nine months ended September 30, 2020, IMAX DMR revenues and gross margin decreased by $75.8 million (81%) and $54.1 million (88%), respectively, when compared to the same period in 2019.

These decreases are due to a $699.2 million (81%) reduction in GBO generated by IMAX DMR films, from $867.3 million to $168.1 million.

For the nine months ended September 30, 2020, GBO was generated primarily by the exhibition of 20 films (16 new and 4 carryovers) and the re-release of classic titles, as compared to 59 films (47 new and 12 carryovers) exhibited in the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, marketing expenses were $2.8 million, as compared to $17.7 million during the same period of 2019.

Joint Revenue Sharing Arrangements – Contingent Rent

In the third quarter of 2020, approximately 85% of the theaters in the commercial multiplex network gradually reopened subject to capacity restrictions;

As a result of these factors, for the nine months ended September 30, 2020, JRSA contingent rent revenue and gross margin decreased by $49.9 million (83%) and $51.4 million (126%), respectively, when compared to the same period in 2019.

These decreases are due to a $359.5 million (81%) reduction in GBO generated by theaters under joint revenue sharing arrangements during the current period, from $441.6 million to $82.1 million.

As at September 30, 2020, 881 theaters were operating under joint revenue sharing arrangements, as compared to 841 theaters as at September 30, 2019, an increase of 5%.

The level of depreciation expense in a period relative to the prior year is a function of the growth of the theater network and the mix of theater system configurations in the network.

For the nine months ended September 30, 2020 , JRSA gross margin included depreciation expense of $19.2 million , as compared to $17.2 million in the same period of the prior year as a result of the 5 % increase in the number of theaters operating under joint revenue sharing arrangements.

For the nine months ended September 30, 2020 , JRSA gross margin includes certain advertising, marketing and commission costs of $1.3 million , as compared to $1.1 million in the same period of the prior year .

IMAX Technology Sales and Maintenance

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

For the Nine Months Ended September 30,

New IMAX Theater Systems — installed and recognized

Dollars, except number of systems)

New IMAX Theater Systems

Sales and sales-types lease arrangements (1)

1 unchanged sentence

Total new IMAX Theater Systems

IMAX theater system upgrades — installed and recognized

Sales and sales-types lease arrangements

Total IMAX Theater Systems installed and recognized

IMAX theater system upgrades

Joint revenue sharing arrangements — hybrid

Includes a digital theater system relocated from a previous location.

This installation is incremental to the IMAX network but full revenue for the digital system was not received.

The average revenue per full (i.e., not hybrid) IMAX Theater System under sales and sales-type lease arrangements was $1.0 million during the nine months ended September 30, 2020, compared to $1.3 million during the same period of the prior year.

For the nine months ended September 30, 2020, IMAX Technology Sales and Maintenance revenue and gross margin decreased by $59.3 million (58%) and $32.6 million (69%), respectively, when compared to the same period in the prior year as the pace of theater system installations slowed significantly and maintenance revenue was not recognized during the periods of time when theaters were closed due to the COVID-19 global pandemic.

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

For the nine months ended September 30, 2020, IMAX Systems revenue and gross margin decreased by $22.8 million (45%) and $12.2 million (46%), respectively, when compared to the same period in the prior year.

These decreases are the result of 25 fewer IMAX Theater System installations in the current period as the pace of theater system installations slowed significantly due to the COVID-19 global pandemic.

IMAX Maintenance

For the nine months ended September 30, 2020, IMAX Maintenance revenue and gross margin decreased by $26.6 million (67%) and $17.4 million (102.1%), respectively, as maintenance revenue was not recognized during the periods of time when theaters were closed due to the COVID-19 global pandemic.

The average revenue per full (i.e., not hybrid), new IMAX Theater System under sales and sales-type lease arrangements was $1.5 million for the three months ended March 31, 2021, as compared to $1.0 million during the same period of the prior year.

Film Distribution and Post-Production

For the nine months ended September 30, 2020, Film Distribution and Post-production revenue and gross margin decreased by $2.3 million (23%) and $9.9 million, respectively, when compared to the same period in the prior year.

The results for the current nine-month period are significantly influenced by a $9.9 million impairment loss recorded in the period principally to write-down the carrying value of certain documentary and alternative content film assets due to a decrease in projected box office totals and related revenues based on management’s regular quarterly recoverability assessments.

As of 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.

For the three months ended March 31, 2021, Film Distribution and Post-Production revenue and margin loss decreased by $1.7 million (67%) and $1.9 million, respectively, when compared to the same period in the prior year.

The comparison to the prior year period is significantly influenced by $2.3 million of impairment losses recorded in the first quarter of 2020 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.

No such impairment losses were recorded in the first quarter of 2021 .

Selling, General and Administrative Expenses

For the nine months ended September 30, 2020, Selling, General and Administrative Expenses decreased by $6.0 million (7%), when compared to the same period in 2019.

For the nine months ended September 30, 2020, Selling, General and Administrative Expenses excluding the impact of share-based compensation were $67.9 million, as compared to $73.9 million in the same period in 2019, representing a decrease of $6.0 million (8%).

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

CARES Act, of which $4.5 million was recognized in the nine months ended September 30, 2020 as a reduction to Selling, General and Administrative Expenses.

Also impacting the comparison to the prior period are management’s cost control efforts amidst the COVID-19 global pandemic resulting in lower staff costs, travel, facilities and marketing related expenses, among others.

For the three months ended March 31, 2021, total Selling, General and Administrative Expenses decreased by $3.4 million (12%), when compared to the same period in 2020.

For the three months ended March 31, 2021, Selling, General and Administrative Expenses, excluding the impact of share-based compensation of $4.9 million, were $20.3 million, as compared to $24.9 million in the same period in the prior year, excluding share-based compensation expense of $3.7 million, representing a decrease of $4.6 million (18%).

A portion of share-based compensation expense is recognized within Cost and Expenses Applicable to Revenue and Research and Development.

(See Note 12 of Notes to Condensed Consolidated Financial Statements.)

The comparison to the prior year is influenced by COVID-19 government relief that the Company became entitled to receive during the period under the CEWS, of which $1.2 million was recognized as a reduction to Selling, General and Administrative Expenses.

There were no comparable amounts recognized in the prior year.

Also impacting the comparison to the prior year are management’s cost control efforts and lower business activity amidst the COVID-19 global pandemic resulting in lower staff costs, travel, facilities and marketing related expenses, among others.

These factors are partially offset by a $4.0 million (35%) decrease in labor and other costs capitalized to inventory, film assets, and joint venture theater equipment or allocated to costs applicable to revenues, due to the lower level of production during the COVID-19 global pandemic.

In response to uncertainties associated with the COVID-19 global pandemic, the Company has taken and is continuing to take significant steps to preserve the cash by eliminating non-essential costs, placing certain employees on a temporary furlough 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.

In response to uncertainties associated with the COVID-19 global pandemic, in the first quarter of 2021, the Company continued to take significant steps to preserve cash by eliminating non-essential costs, keeping certain employees on a temporary furlough, reducing the working hours of other employees and deferring all non-essential capital expenditures to minimum levels.

Research and Development

A significant portion of the Company’s research and development efforts over the past several years have been focused on IMAX with Laser, the Company’s laser-based projection system, which the Company believes delivers increased resolution, sharper and brighter images, deeper contrast as well as the widest range of colors available to filmmakers today.

For the nine months ended September 30, 2020, Research and Development expenses increased by $0.9 million (23%), when compared to the same period in the prior year, primarily due to costs associated with the Connected Theaters initiative.

The Company also intends to continue research and development in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors, certifying more IMAX cameras, enhancing the Company’s image quality, expanding the applicability of the Company’s digital technology in both theater and home entertainment and improvements to the DMR process.

In addition, the Company has been, and intends to continue, using time and resources during the business slowdown caused by the COVID-19 global pandemic to work on leveraging and developing technologies and systems to help bring additional interactivity to its theater network, better manage certain of the Company’s internal workflows and better organize and codify certain of the Company’s data.

During previous adverse events and downturns in the cinema business, the Company fostered many of the innovations that helped enable its global growth in recent years, including the development of its proprietary DMR process and the creation of its joint-revenue sharing business model.

For the three months ended March 31, 2021, Research and Development expenses decreased by $0.7 million (33%), when compared to the prior year.

The Company intends to continue research and development in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors, certifying more IMAX cameras, enhancing the Company’s image quality, expanding the applicability of the Company’s digital technology in both theater and home entertainment and improvements to the DMR process.

In addition, in the first quarter of 2021, the Company used time and resources to work on leveraging and developing technologies and systems to help bring additional interactivity to its theater network, better manage certain of the Company’s internal workflows and better organize and codify certain of the Company’s data.

Credit Loss Expense

For the nine months ended September 30, 2020, the Company recorded a provision for current expected credit losses of $15.6 million reflecting a reduction in the credit quality of its theater and studio related receivable balances, which management believes is primarily related to the COVID-19 pandemic, as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

Management’s judgments regarding expected credit losses are based on the facts available to management and involve estimates about the future.

For the three months ended March 31, 2021, the Company recorded a provision for current expected credit losses of $0.3 million, as compared to $10.2 million in the same period of the prior year.

The credit losses recorded in the first quarter of 2020 reflect the judgments made by management at the onset of the COVID-19 global pandemic regarding the credit quality of Company’s theater and studio related receivable balances.

Management’s judgments regarding expected credit losses are based on the facts available to management at the time that the Condensed Consolidated Financial Statements are prepared and involve estimates about the future.

Due to the unprecedented nature of the COVID-19 pandemic, its effect on the Company’s customers and their ability to meet their financial obligations to the Company is difficult to predict.

As a result, the Company’s judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect.

For the nine months ended September 30, 2019, credit loss expense was $2.0 million.

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

Asset Impairments

For the nine months ended September 30, 2020, the Company recorded asset impairments of $1.2 million (2019 — $nil) principally related to write-down of content-related assets which became impaired in the period (see Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements).

Gain (loss) in fair value of investments

In the third quarter of 2019, IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China, entered into a cornerstone investment agreement with Maoyan Entertainment (“Maoyan”) and purchased equity securities for $15.2 million.

These equity securities are traded on the Hong Kong Stock Exchange, and the Company is required to adjust the fair value of the securities each period to reflect the current market value.

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

For the nine months ended September 30, 2020, the fair value of the Company’s investment in Maoyan decreased by $0.9 million resulting in a corresponding unrealized loss, as compared to an unrealized loss of $2.5 million in the same period in the prior year, which are both recognized in the Condensed Consolidated Statements of Operations.

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, 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.

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.

T he 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 foreign subsidiaries, as discussed below, permanent book to tax differences, jurisdictional tax rate differences, and management’s estimates of contingent liabilities related to the resolution of various tax examinations.

For the three months ended March 31, 2020, the Company recorded asset impairments of $1.2 million principally related to the write-down of content-related assets which became impaired in the period.

There were no such impairments recorded during the three months ended March 31, 2021.

Realized and Unrealized Investment Gains ( Losses )

In February 2021, IMAX China (Hong Kong), Limited sold all of its 7,949,000 shares of Maoyan for gross proceeds of $17.8 million, which represents a $2.6 million gain relative to the Company’s acquisition cost and a $5.2 million gain compared to the fair value of the investment as of December 31, 2020.

Prior to this sale, the Company accounted for its investment in Maoyan at fair value with any changes in fair value recorded to the Condensed Consolidated Statements of Operations.

For the three months ended March 31, 2020, the fair value of the Company’s investment in Maoyan experienced an unrealized loss of $4.5 million.

Interest Expense

For the three months ended March 31, 2021, interest expense was $2.3 million, as compared to $0.6 million during the same period of the prior year.

The increase in interest expense versus the prior year is due to a higher level of revolving credit facility borrowings coupled with a higher interest rate applicable during the designated amendment period.

(See Note 7 of Notes to Condensed Consolidated Financial Statements.)

For the three months ended March 31, 2021, the Company recorded income tax expense of $3.1 million (2020 — $15.5 million).

The Company’s effective tax rate for the three months ended March 31, 2021 of (41.1)% differs from the Canadian statutory tax rate of 26.2% primarily due to the fact that the Company recorded an additional $7.0 million valuation allowance against deferred tax assets in jurisdictions where management could not reliably forecast that future tax liabilities would arise, primarily due to the uncertainties around the long-term impact of the COVID-19 global pandemic.

Accordingly, the tax benefit associated with the current period losses in these jurisdictions is not ultimately reflected in the Company’s Condensed Consolidated Statements of Operations.

Also impacting the Company’s effective tax rate for the three months ended March 31, 2021 are jurisdictional tax rate differences, including a difference related to the gain on the sale of the Maoyan investment (see “Realized and Unrealized Investment Gains (Losses) ” above ), as well as changes in estimated contingent liabilities related to the resolution of various tax examinations.

In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally.

Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested.

As a result, the Company recognized a deferred tax liability of $19.7 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 ).

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).

Equity Method Investments

For the nine months ended September 30, 2020, the Company reported a loss of $1.9 million due to the write-off of deferred tax assets related to an equity method investment, as compared to $0.1 million in the same period in the prior year related to its proportionate share of equity investee results.

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

As of March 31, 2021, the Company’s Condensed Consolidated Balance Sheets include net deferred income tax assets of $18.3 million, net of a valuation allowance of $38.3 million (December 31, 2020 — $18.0 million, net of a valuation allowance of $ 28.8 million).

The $9.5 million valuation allowance recorded in the current period is reflected within Income Tax Expense in the Company’s Condensed Consolidated Statements of Operations ($7.0 million) and within Shareholder’s Equity on the Company’s Condensed Consolidated Balance Sheets ($2.5 million).

The valuation allowance recorded against the Company’s deferred tax assets is primarily the result of uncertainties related to the long-term impact of the COVID-19 global pandemic.

The utilization of the Company’s deferred tax assets is dependent on having a sufficient level of future tax liabilities, such as taxable income, in the jurisdictions where the deferred tax assets relate.

Accordingly, the net amount recorded on the Condensed Consolidated Balance Sheets relies on management’s projections of future taxable income.

The valuation allowance is expected to reverse at the point in time when management determines it is more likely than not that the Company will incur sufficient tax liabilities to allow it to utilize the deferred tax assets against which the valuation allowance is recorded.

However, as discussed in Note 1 of Notes to Condensed Consolidated Financial Statements , should actual results differ from management’s projections of future taxable income, an increased valuation allowance may be required.

Despite the valuation allowance recorded against its deferred tax assets, the Company remains entitled to benefit from tax attributes which currently have a valuation allowance applied to them.

Non-Controlling Interests

The Company’s Condensed Consolidated Financial Statements include the non-controlling interest in the net income (loss) of IMAX China as well as the impact of non-controlling interests in the activity of its Original Film Fund subsidiary.

For the nine months ended September 30, 2020, the net loss attributable to non-controlling interests of the Company’s subsidiaries was $15.4 million (2019 ─ net income of $8.5 million).

For the three months ended March 31, 2021, the net income attributable to non-controlling interests of the Company’s subsidiaries was $4.3 million (2020 ─ net loss of $(10.1) million ).

CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Operating Activities

The net cash used in or provided by the Company’s operating activities is affected by a number of factors, including:

(i) the level of cash collections from customers in respect of existing IMAX Theater System sale and lease agreements, (ii) the amount of upfront payments collected in respect of IMAX Theater System sale and lease agreements in backlog, (iii) the box-office performance of films distributed by the Company and/or released to IMAX theaters, (iv) the level of inventory purchases and (v) the level of the Company’s operating expenses, including expenses for research and development and new business initiatives.

For the three months ended March 31, 2021, net cash used in the Company’s operating activities totaled $11.0 million, as compared to net cash provided by operating activities of $6.0 million in the same period of the prior year.

For the three months ended March 31, 2021, the net cash used in the Company’s operating activities is principally due to an increase in Accounts Receivable of $13.7 million as a result of theaters reopening amidst the early stages of recovery from the COVID-19 global pandemic, partially offset by cash collected in respect of IMAX Theater System sale and lease agreements in backlog and cash collected in advance of providing maintenance services.

For the three months ended March 31, 2020, net cash provided by operating activities was primarily driven by a decrease in Accounts Receivable of $28.2 million, which reflects cash receipts reduced by amounts billed, partially offset by an increase in inventories of $18.3 million resulting from a slowdown in manufacturing, shipments and installation of IMAX Theater Systems at customer sites due to government restrictions in various countries limiting public gatherings as a result of the outbreak of the COVID-19 global pandemic.

Investing Activities

For the three months ended March 31, 2021, net cash provided by investing activities totaled $14.3 million, as compared to net cash used in investing activities of $2.7 million in the same period of the prior year.

For the three months ended March 31, 2021, the net cash provided by investing activities is primarily driven by $17.8 million in cash proceeds received from the sale of the Company’s investment in Maoyan (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized and Unrealized Investment Gains (Losses) ”).

This cash inflow is partially offset by $1.5 million invested in equipment to be used in the Company’s joint revenue sharing arrangements with exhibitors, $1.5 million of intangible assets acquired, principally related to the purchase or development of software (2020 — $0.9 million) , and $0.5 million for the purchase of property, plant and equipment (2020 — $0.3 million) .

Based on management’s current operating plan for 2021, the Company expects to continue to use cash to deploy additional IMAX Theater Systems under joint revenue sharing arrangements.

Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, other intangible assets and investments in film assets were $5.7 million for the three months ended March 31, 2021, as compared to $5.8 million for the three months ended March 31, 2020.

Financing Activities

For the three months ended March 31, 2021, net cash used in financing activities totaled $52.6 million, as compared to $239.2 million provided by financing activities in the same period of the prior year.

In the first quarter of 2021, the net cash used in financing activities is principally due to $255.0 million in repayments of Credit Facility borrowings, which were funded in part with a portion of the $223.7 million in net proceeds received from the issuance of the Convertible Notes (as defined in “Liquidity and Capital Resources”) .

The net cash used in financing activities for the current period is also the result of the $19.1 million purchase of capped calls related to the Convertible Notes.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for additional information on the issuance of the Convertible Notes and the related capped call transactions.)

For the three months ended March 31, 2020, net cash provided by financing activities was principally due to the $280.0 million in revolving credit facility borrowings drawn in the period, partially offset by $36.6 million paid to repurchase common shares under the Company’s share repurchase program, $3.1 million paid to purchase treasury stock for the settlement of restricted share units and related taxes, $0.9 million for the repurchase of common shares under the IMAX China share repurchase program, and $0.2 million of taxes withheld and paid on vested employee stock awards.

LIQUIDITY AND CAPITAL RESOURCES

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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 the first quarter of 2020, in response to uncertainties associated with the outbreak of the COVID-19 global pandemic and its impact on the Company’s business, the Company drew down $280.0 million in available borrowing capacity under the Credit Facility, resulting in total outstanding borrowings of $300.0 million, which remained outstanding as of December 31, 2020.

In the first quarter of 2021, the Company repaid $255.0 million of Credit Facility borrowings, using cash on hand following the issuance of the Convertible Notes (as discussed below).

As of March 31, 2021, outstanding borrowings under the Credit Facility were $45.0 million.

As of March 31, 2021, and December 31, 2020, the Company did not have any letters of credit or advance payment guarantees outstanding under the Credit Facility.

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

In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit indebtedness, liens, capital expenditures, asset sales, investments and restricted payments, in each case subject to negotiated exceptions and baskets.

The Credit Agreement also contains customary representations, warranties and event of default provisions.

On June 10, 2020, the Company entered into the First Amendment to the Credit Agreement (the “Amendment”), which, among other things, (i) suspends the Senior Secured Net Leverage Ratio covenant through the first quarter of 2021, (ii) re-establishes the Senior Secured Net Leverage Ratio covenant thereafter, provided that for subsequent quarters that such covenant is tested, as applicable, the Company will be permitted to use its quarterly EBITDA (as defined in the Credit Agreement) from the third and fourth quarters of 2019 in lieu of the EBITDA for the corresponding quarters of 2020, (iii) adds a $75.0 million minimum liquidity covenant measured at the end of each calendar month and (iv) restricts the Company’s ability to make certain restricted payments, dispositions and investments, create or assume liens and incur debt that would otherwise have been permitted by the Credit Agreement.

The modifications to the negative covenants, the minimum liquidity covenant and modifications to certain other provisions in the Credit Agreement pursuant to the Amendment are effect ive 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 .

On March 15, 2021, the Company entered into the Second Amendment to the Credit Agreement (as amended by the First Amendment to the Credit Agreement, dated as of June 10, 2020), (collectively, the “Amendments”).

The Amendments, among other things, (i) suspend the Senior Secured Net Leverage Ratio covenant through the first quarter of 2022, (ii) re-establish 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 EBITDA for the corresponding quarters of 2021, (iii) add a $75.0 million minimum liquidity covenant measured at the end of each calendar month, (iv) restrict 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 and (v) permit the issuance of the Convertible Notes (as discussed below) and related transactions, including the capped call transactions, or other unsecured debt, in an amount not to exceed $290.0 million.

The modifications to the negative covenants, the minimum liquidity covenant and modifications to certain other provisions in the Credit Agreement pursuant to the Amendments are effective until the earlier of the delivery of the compliance certificate for the fourth quarter of 2022 or the date on which the Company, in its sole discretion, elects to calculate its compliance with the Senior Secured Net Leverage Ratio by using either its actual EBITDA or annualized EBITDA (the “Designated Period”).

As of March 31, 2021, the Company was in compliance with all of its requirements under the Credit Agreement, as amended.

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;

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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.

provided, however, that from the effective date of the First Amendment to the Credit Agreement 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).

The effective interest rate for the three months ended March 31, 2021 was 2.65% (2020 ― 2.03%).

In addition, the Credit Facility has standby fees ranging from 0.25% to 0.38% per annum, based on the Company’s Total Leverage Ratio with respect to the unused portion of the Credit Facility;

The Company incurred fees of approximately $1.1 million in connection with the Amendment, which are being amortized on a straight-line basis through December 31, 2021.

The Company incurred fees of approximately $ 1.

2 million in connection with the Amendment s , which are being amortized on a straight-line basis to Interest Expense over the relevant amendment period s .

Working Capital Facility

On July 24, 2020, IMAX (Shanghai) Multimedia Technology Co., Ltd.

(“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, renewed its unsecured revolving facility for up to 200.0 million Renminbi (approximately $30.0 million) 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 related to the Working Capital Facility for the three and nine months ended September 30, 2020 was 4.35%.

Letters of Credit and Other Commitments

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

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

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

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

Cash and Cash Equivalents

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

(i) its balances of cash and cash equivalents ($305.2 million, which reflects the full draw of the Credit Facility in the first quarter of 2020);

(“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 $30.4 million) to fund ongoing working capital requirements (the “Working Capital Facility”).

The Working Capital Facility expires in July 2021.

As of March 31, 2021 and December 31, 2020, outstanding Working Capital Facility borrowings were 49.9 million Renminbi ($7.6 million).

As of March 31, 2021, the amount available for future borrowings under the Working Capital Facility was 140.1 million Renminbi ($21.3 million) and 10.0 million Renminbi ($1.5 million) was available for letters of guarantee.

The amount available for future borrowings under the Working Capital Facility is not subject to a standby fee.

The effective interest rate for borrowings under the Working Capital Facility for the three months ended March 31, 2021 was 4.34% (December 31, 2020 ― 4.31%).

Subsequent to March 31, 2021, IMAX Shanghai made a repayment of Working Capital Facility borrowings of 1.7 million Renminbi ($0.3 million).

Wells Fargo Foreign Exchange Facility

Within the Credit Facility, the Company is able to enter into foreign currency forward contracts and/or other swap arrangements.

As of March 31, 2021, the net unrealized gain on the Company’s outstanding foreign currency forward contracts was $1.7 million, representing the amount by which the fair value of these forward contracts exceeded their notional value (December 31, 2020 ― $2.0 million).

As of March 31, 2021, the notional value of the Company’s outstanding foreign currency forward contracts was $21.9 million (December 31, 2020 ― $31.9 million).

On October 28, 2019, the Company entered into a $5.0 million facility with the National Bank of Canada (the “NBC Facility”) fully insured by Export Development Canada for use solely in conjunction with the issuance of performance guarantees and letters of credit.

The Company did not have any letters of credit or advance payment guarantees outstanding as of March 31, 2021 and December 31, 2020 under the NBC Facility.

Convertible Notes

On March 19, 2021, the Company issued $230.0 million of 0.500% Convertible Senior Notes due 2026 (the “Convertible Notes”) in a private placement conducted pursuant to Rule 144A under the Securities Act of 1933, as amended.

The net proceeds from the issuance of the Convertible Notes were $223.7 million, after deducting the initial purchasers’ discounts and commissions.

In addition, the Company incurred $1.2 million of debt issuance costs associated with the Convertible Notes.

The Company used a portion of the net proceeds from the issuance of the Convertible Notes to make a partial repayment of outstanding Credit Facility borrowings (as discussed above), and intends to use the remainder for working capital or other general corporate purposes.

The Convertible Notes are senior unsecured obligations of the Company and bear interest at a rate of 0.500% per annum on the principal thereof, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021.

The Convertible Notes will mature on April 1, 2026, unless they are redeemed or repurchased by the Company or converted on an earlier date.

Holders of the Convertible Notes have the right to convert their notes in certain circumstances and during specified periods.

Before January 1, 2026, holders of the Convertible Notes have the right to convert their notes only upon the occurrence of certain events.

From and after January 1, 2026, holders of the Convertible Notes may convert their notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date.

Upon conversion, the Company will pay or deliver, as applicable, cash or a combination of cash (in an amount no less than the principal amount of the Convertible Notes being converted) and common shares, at its election, based on the applicable conversion rates.

T he initial conversion rate is 34.7766 common shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $28.75 per common share, and is subject to adjustment upon the occurrence of certain events.

The Convertible Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after April 6, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for a specified period of time.

In addition, calling any note for redemption will constitute a “make-whole fundamental change” with respect to that note, in which case the conversion rate applicable to the conversion of that note will be increased in certain circumstances if such note is converted after it is called for redemption.

In addition, upon the occurrence of a “fundamental change” (as defined in the indenture governing the Convertible Notes), holders may require the Company to repurchase their notes at a cash repurchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any.

On January 1, 2021, the Company elected to early adopt ASU No.

2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”).

ASU 2020-06 simplifies the accounting for convertible debt that may be settled in cash.

As a result, the Company recorded the Convertible Notes entirely as a liability in the Condensed Consolidated Balance Sheets, net of initial purchasers’ discounts and commissions and other debt issuance costs, with interest expense reflecting the cash coupon plus the amortization of the discounts and capitalized costs.

Additionally, ASU 2020-06 modifies the treatment of convertible debt securities that may be settled in cash or shares by requiring the use of the “if-converted” method.

Under the “if-converted” method, because the principal amount of the Convertible Notes is settled in cash and the conversion spread is settleable in the Company’s common shares, diluted earnings per share is calculated by including the net number of incremental shares that would be issued upon conversion of the Convertible Notes, using the average market price during the period.

Accordingly, the application of the “if-converted” method may reduce the Company’s reported diluted earnings per share.

In connection with the pricing of the Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions are expected to reduce potential dilution resulting from the common shares the Company is required to issue and/or to offset any potential cash payments the Company is required to make in excess of the principal amount of the Convertible Notes in the event that the market price per share of the Company’s common shares is greater than the strike price of the Capped Call Transactions with such reduction and/or offset subject to a cap.

The Capped Call Transactions have an initial cap price of $37.2750 per share of the Company’s common shares, which represents a premium of 75% over the last reported sale price of the common shares on March 16, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions.

Collectively, the Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of the Company’s common shares underlying the Convertible Notes.

The cost of the Capped Call Transactions was approximately $19.1 million.

The Capped Call Transactions are separate transactions, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the notes.

Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions.

The Capped Call Transactions meet all of the applicable criteria for equity classification in accordance with ASC 815-10-15-74(a), “Derivatives and Hedging—Embedded Derivatives—Certain Contracts Involving an Entity’s Own Equity,” and, as a result, the related $19.1 million cost was recorded as a reduction to Other Equity within Shareholders’ Equity on the Company’s Condensed Consolidated Statements of Shareholder’s Equity and Condensed Consolidated Balance Sheets.

Assessment of Liquidity and Capital Requirements

As of March 31, 2021, the Company’s principal sources of liquidity included:

(i) its balances of cash and cash equivalents ($267.8 million);

(ii) the anticipated collection of trade accounts receivable, which includes amounts owed under joint revenue sharing arrangements and DMR agreements with movie studios;

(iii) the anticipated collection of financing receivables due in the next 12 months;

and (iv) payments expected in the next 12 months on its existing sales and sales type lease backlog.

The Company’s $305.2 million balance of cash and cash equivalents as of September 30, 2020 includes $76.4 million in cash held outside of Canada (December 31, 2019 — $90.1 million), of which $62.6 million was held in the People’s Republic of China (the “PRC”) (December 31, 2019 — $67.6 million).

and (iv) installment payments expected in the next 12 months on its existing sales and sales and sales-type lease arrangements in backlog.

The Company’s $267.8 million balance of cash and cash equivalents as of March 31, 2021 includes $115.1 million in cash held outside of Canada ( December 31, 2020 — $89.9 million ), of which $84.2 million was held in the People’s Republic of China (the “PRC”) ( December 31, 2020 — $76.7 million ).

In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company’s capital resources globally.

As a result, during the nine months ended September 30, 2020 , the Company recognized a deferred tax liability of $18.7 million for the applicable foreign withholding taxes associated with these historical earnings, which will become payable upon the repatriation of any such earnings.

During the nine months ended September 30, 2020, cash and cash equivalents increased by $195.7 million principally due to financing cash inflows of $233.5 million, which include the full draw of the Credit Facility in the first quarter of 2020, as discussed above.

These financing cash inflows are partially offset by $30.8 million of cash used to fund the Company’s operating activities as the COVID-19 global pandemic resulted in a significant decline in revenue and earnings.

In addition, during the nine months ended September 30, 2020, the Company invested $7.6 million in equipment to be used in its joint revenue sharing arrangements with exhibitors, intangible assets and property, plant and equipment.

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

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

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

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

The repercussions of the COVID-19 global pandemic 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 GBO results declined significantly, the installation of certain theater systems was 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 may continue to experience delays in collecting payments due under existing theater sale or lease arrangements from its exhibitor partners who are facing financial difficulties as a result of the theater closures.

Based on the Company’s current cash forecasts, management expects the Company’s average monthly change in cash and cash equivalents for the fourth quarter of 2020 and first quarter of 2021 to be approximately break-even.

This reflects an improvement when compared to the Company’s average monthly change in cash and cash equivalents of $7.8 million in the second and third quarters of 2020.

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

Operating Activities

The Company’s net cash used in or provided by operating activities is affected by a number of factors, including:

(i) the level of cash collections from customers in respect of existing IMAX Theater System sale and lease agreements, (ii) the amount of upfront payments collected from newly signed IMAX Theater System sale and lease agreements, (iii) the box-office performance of films distributed by the Company and/or released to IMAX theaters, (iv) the level of inventory purchases and (v) the level of the Company’s operating expenses, including expenses for research and development and new business initiatives.

Net cash used in operating activities totaled $30.8 million for the nine months ended September 30, 2020 as compared to net cash provided by operating activities of $67.3 million for the nine months ended September 30, 2019.

In the nine months ended September 30, 2020, the net cash outflow from operating activities is principally due to the significant decrease in the Company’s revenue and earnings as a result of the COVID-19 global pandemic.

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

These cash outflows are partially offset by a $30.4 million decrease in accounts receivable.

Investing Activities

Net cash used in investing activities totaled $7.6 million for the nine months ended September 30, 2020, which includes $5.3 million invested in equipment to be used in the Company’s joint revenue sharing arrangements with exhibitors.

In addition, the Company acquired $1.7 million of intangible assets, principally related to the purchase or development of software, and purchased $0.7 million of property, plant and equipment.

In the nine months ended September 30, 2019, net cash used in investing activities totaled $53.7 million including the purchase by IMAX China (Hong Kong), Limited, a wholly-owned subsidiary of IMAX China of equity securities in Maoyan for $15.2 million.

Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, other intangible assets and investments in film assets were $13.8 million for the nine months ended September 30, 2020 as compared to $53.9 million for the nine months ended September 30, 2019.

Financing Activities

Net cash provided by financing activities totaled $233.5 million for the nine months ended September 30, 2020, as compared to $53.4 million used in financing activities in the nine months ended September 30, 2019.

During the nine months ended September 30, 2020, the net cash provided by financing activities was principally due to the $280.0 million in Credit Facility borrowings drawn in the first quarter of 2020, as discussed above, and $0.2 million drawn on IMAX China’s Working Capital Facility, partially offset by $36.6 million paid to repurchase common shares under the Company’s share repurchase program, $3.3 million paid to purchase treasury stock for the settlement of restricted share units and related taxes, $1.5 million for the repurchase of common shares under the IMAX China share repurchase program, $4.2 million of dividends paid to the non-controlling interest shareholders of IMAX China and $1.0 million in credit agreement amendment fees.

The impact of the COVID-19 global pandemic has resulted in significantly lower levels of revenues, earnings and operating cash flows during 2020 and through the end of the first quarter of 2021, when compared to periods prior to the onset of the pandemic, as GBO results from the Company’s theater customers declined significantly, the installation of certain theater systems was delayed, and maintenance services were generally suspended for theaters that were closed .

The Company continues to experience a significant decline in earnings and operating cash flows as it is generating 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 been, and may continue to be delayed.

In response, the Company has provided temporary relief to exhibitor partners by waiving or reducing maintenance fees during periods when theaters are closed or operational with reduced capacities and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding or longer extension of the term of the underlying sale or lease arrangement.

Based on the Company’s current cash balances and operating cash flows, management expects to have sufficient capital and liquidity to fund its anticipated operating needs and capital requirements during the next twelve month period following the date of this report.

CONTRACTUAL OBLIGATIONS

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

Payments to be made by the Company under contractual obligations as of March 31, 2021 are as follows:

Payments Due by Period

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Working Capital Facility

Convertible Notes (5)

Postretirement benefits obligations

Represents total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered, but yet to be invoiced.

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

Gelfond, with a fixed benefit payable of $20.3 million.

The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “ SERP”), covering its CEO, Mr.

The SERP has a fixed benefit payable of $20.3 million.

The table above assumes that Mr.

Gelfond will receive a lump sum payment of $20.3 million six months after retirement at the end of the term of his current employment agreement (December 31, 2022) in accordance with the terms of the SERP, although Mr.

Gelfond will receive a lump sum payment of $20.3 million six months after retirement at the end of the term of his current employment agreement, which expires on December 31, 2022, in accordance with the terms of the SERP, although Mr.

Gelfond has not informed the Company that he intends to retire at that time.

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

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

Represents total minimum annual rental payments due under the Company’s operating leases, which almost entirely consist of rent at the Company’s leased office space in New York.

The Company is not required to make any minimum payments on the Credit Facility, which matures on June 28, 2023.

The Convertible Notes bear interest at a rate of 0.500% per annum on the principal of $230.0 million, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021.

The Convertible Notes will mature on April 1, 2026, unless earlier repurchased, redeemed or converted.

Pension and Postretirement Obligations

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

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

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

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

Under the terms of the SERP, if Mr.

Gelfond’s employment is terminated other than for cause (as defined in his employment agreement), he is entitled to receive SERP benefits in the form of a lump sum payment.

SERP benefit payments to Mr.

Gelfond are subject to a deferral of six months after the termination of his employment, at which time Mr.

Gelfond will be entitled to receive interest on the deferred amount credited at the applicable federate rate for short-term obligations.

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

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

Gelfond has not informed the Company that he intends to retire at that time.

Under the terms of the amendment to his employment agreement, the total amount of benefit payable to Mr.

Under the terms of this amendment to his employment agreement, the total benefit payable to Mr.

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

As at September 30, 2020, the Company’s Condensed Consolidated Balance Sheet includes the present value of the related benefit obligation of approximately $19.1 million recorded within accrued and other liabilities (December 31, 2019— $18.8 million).

As of March 31, 2021, the Company’s Condensed Consolidated Balance Sheets include the present value of the related SERP benefit obligation of approximately $20.1 million recorded within Accrued and Other Liabilities (December 31, 2020— $20.1 million).

The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements.

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

As of March 31, 2021, the Company’s Condensed Consolidated Balance Sheets include an unfunded benefit obligation of $1.8 million within Accrued and Other Liabilities related to this plan (December 31, 2020 — $1.9 million).

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

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

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

As of March 31, 2021 , the Company ’s Condensed Consolidated Balance Sheet s include an unfunded benefit obligation of $0.7 million within A ccrued and O ther L iabilities ( December 31, 2020 — $0.7 million ).

In the first quarter of 2021, Mr.

Wechsler notified the Company’s Board of Directors that he will not stand for re-election as a director at the Company’s annual meeting of shareholders on June 9, 2021.

Upon his departure, the Company will maintain Mr.

Wechsler’s current health benefits through December 31, 2021, and thereafter will provide him with Medicare supplemental coverage.

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 in 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.

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

As of March 31, 2021, the benefit obligation related to the Retirement Plan was $3.7 million (December 31, 2020 — $3.7 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1 for a discussion of recently issued accounting standards and their impact on the Company’s financial statements.

As of March 31, 2021, fair value of the COLI asset was $3.2 million (December 31, 2020 — $3.2 million).

Gains and losses resulting from changes in the cash surrender value of the COLI asset are recognized in the Condensed Consolidated Statements of Operations within Realized and Unrealized Investment Gains (Losses).

OFF-BALANCE SHEET ARRANGEMENTS

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

NON-GAAP FINANCIAL MEASURES

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Specifically, the Company presents the following non-GAAP financial measures as supplemental measures of its performance:

Adjusted net (loss) income attributable to common shareholders;

Adjusted net (loss) income attributable to common shareholders per basic and diluted share;

Adjusted net loss attributable to common shareholders;

Adjusted net loss attributable to common shareholders per basic and diluted share;

Adjusted EBITDA per Credit Facility.

Adjusted net (loss) income attributable to common shareholders and adjusted net (loss) income attributable to common shareholders per basic and diluted share exclude, where applicable:

Adjusted net loss attributable to common shareholders and adjusted net loss attributable to common shareholders per basic and diluted share exclude, where applicable:

(i) share-based compensation;

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

The Company believes that these non-GAAP financial measures are important supplemental measures that allow management and users of the Company’s financial statements to view operating trends and analyze controllable operating performance on a comparable basis between periods without the after-tax impact of share-based compensation and certain unusual items included in net (loss) income attributable to common shareholders .

(ii) COVID-19 government relief benefits;

(iii) realized and unrealized investment gains or losses, as well as the related tax impact of these adjustments, and (iv) income taxes resulting from management’s decision to no longer indefinitely reinvest the historical earnings of certain foreign subsidiaries.

Although share-based compensation is an important aspect of the Company’s employee and executive compensation packages, it is a non-cash expense and is excluded from certain internal business performance measures.

A reconciliation of net (loss) income attributable to common shareholders and the comparable per share amounts, the most directly comparable GAAP measures, to adjusted net (loss) income attributable to common shareholders and adjusted net (loss) income attributable to common shareholders per diluted share is presented in the table below.

The Company believes that net (loss) income attributable to common shareholders is the most directly comparable GAAP measure because it reflects the earnings relevant to the Company’s shareholders, rather than including the non-controlling interest.

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

A reconciliation of net loss attributable to common shareholders and the associated per share amounts to adjusted net loss attributable to common shareholders and adjusted net loss attributable to common shareholder s per diluted share is presented in the table below.

Three Months Ended

September 30, 2020

September 30, 2019

(In thousands of U.S.

dollars, except per share amounts)

Reported net (loss) income attributable to common shareholders

Adjustments (1) :

Share-based compensation

(Gain) loss in fair value of investments

COVID-19 government relief benefits

Tax impact on items listed above (2)

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

Adjusted net (loss) income (1)

Weighted average basic shares outstanding

Weighted average diluted shares outstanding

Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(In thousands of U.S.

Dollars, except per share amounts)

Reported net (loss) income attributable to common shareholders

Reported net loss attributable to common shareholders

Adjustments (1) :

Share-based compensation

Exit costs, restructuring charges and associated impairments

Loss in fair value of investments

COVID-19 government relief benefits (2)

Realized and unrealized investment (gains) losses

Tax impact on items listed above

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

Adjusted net (loss) income (1)

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

Adjusted net loss (1)

Weighted average basic shares outstanding

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Reflects amounts attributable to common shareholders.

The tax impact on the listed items includes a year-to-date additive adjustment in the current year related to the valuation allowance recorded in respect of certain deferred tax assets in the three months ended September 30, 2020.

For the three months ended March 31, 2021, the Company recognized $1.5 million in benefits from the CEWS program, as reductions to Selling, General and Administrative Expenses ($1.2 million) and Costs and Expenses Applicable to Revenues ($0.3 million) in the Condensed Consolidated Statements of Operations.

No such benefits were incurred in same period of 2020.

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

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In addition, the Company believes that Adjusted EBITDA per Credit Facility presents relevant and useful information widely used by analysts, investors and other interested parties in the Company’s industry to evaluate, assess and benchmark the Company’s results.

EBITDA is defined as net (loss) income excluding:

EBITDA is defined as net income or loss excluding:

(i) interest expense, net of interest income;

(ii) income tax (benefit) expense ;

(ii) income tax expense or benefit;

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

Adjusted EBITDA per Credit Facility is defined as EBITDA excluding:

(i) s hare-based and other non-cash compensation ;

(ii) g ain (loss) in fair value of investment s ;

( i ii ) w rite-downs, net of recoveries , including asset impairments and credit loss expense ;

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

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

The Company believes that net loss attributable to common shareholders is the most directly comparable GAAP measure because it reflects the earnings relevant to the Company’s shareholders, rather than including the non-controlling interest.

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

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

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

(ii) realized and unrealized investment gains or losses;

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

(iv) legal judgment and arbitration awards;

and (v) the gain or loss from equity accounted investments.

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

For the Three Months Ended March 31, 2021 (1)

Attributable to

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Attributable to

(In thousands of U.S.

Common Shareholders

1 unchanged sentence

Common Shareholders

(In thousands of U.S.

Reported net loss

Add (subtract):

Income tax expense (benefit)

Income tax expense

Interest expense, net of interest income

1 unchanged sentence

Share-based and other non-cash compensation

Gain in fair value of investments

Realized and unrealized investment gains

Write-downs, including asset impairments and credit loss expense

Loss from equity accounted investments

Adjusted EBITDA per Credit Facility

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

For the Twelve Months Ended March 31, 2021 (1)

Attributable to

3 unchanged sentences

Attributable to

(In thousands of U.S.

Common Shareholders

1 unchanged sentence

Common Shareholders

(In thousands of U.S.

Reported net loss

4 unchanged sentences

Share-based and other non-cash compensation

Gain in fair value of investments

Realized and unrealized investment gains

Write-downs, including asset impairments and credit loss expense

Legal judgment and arbitration awards

Loss from equity accounted investments

Adjusted EBITDA per Credit Facility

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

During the second quarter of 2020, the Company entered into the Amendment to the Credit Facility Agreement which provides for, among other things, the suspension of the Senior Secured Net Leverage Ratio financial covenant through the first quarter of 2021.

For more information see Note 7 of Notes to Condensed Consolidated Financial Statements.

The Senior Secured Net Leverage Ratio is calculated using Adjusted EBITDA per Credit Facility determined on a trailing twelve-month basis.

During the first quarter of 2021, the Company entered into the Second Amendment to the Credit Facility Agreement which, among other things, suspends the Senior Secured Net Leverage Ratio financial covenant in the Credit Agreement through the first quarter of 2022 and, once re-established, permits the Company to use EBITDA from the third and fourth quarters of 2019 in lieu of EBITDA for the corresponding quarters of 2021 .

(See Note 7 of Notes to Condensed Consolidated Financial Statements.)

The Company cautions users of its financial statements that these non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies.

Additionally, the non-GAAP financial measures used by the Company should not be considered as a substitute for, or superior to, the comparable GAAP amounts.

OFF-BALANCE SHEET ARRANGEMENTS

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

Quantitative and Qualit ative Disclosures about Market Risk

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

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

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

Dollar, the Canadian Dollar and the Chinese Yuan Renminbi.

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

Foreign Exchange Rate Risk

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

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

A portion of the Company’s net U.S.

Dollar cash flows is converted to Canadian Dollars to fund Canadian Dollar expenses through the spot market.

In addition, IMAX films generate box office in 84 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S.

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

The Company has incoming cash flows from its revenue generating theaters and ongoing operating expenses in China through its majority-owned subsidiary IMAX Shanghai.

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

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

Dollars through the spot market.

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

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

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

Certain of the Company’s subsidiaries held approximately 550.0 million Renminbi ($83.7 million ) in cash and cash equivalents as of March 31, 2021 (December 31, 2020 — 500.3 million Renminbi or $76.7 million) and are required to transact locally in Renminbi.

Foreign currency exchange transactions, including the remittance of any funds into and out of the PRC, are subject to controls and require the approval of the China State Administration of Foreign Exchange to complete.

Any developments relating to the Chinese economy and any actions taken by the Chinese government are beyond the control of the Company;

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

For the three months ended March 31, 2021, the Company recorded a foreign exchange net gain of $0.6 million as compared to a foreign exchange net loss of $(0.7) million for the three months ended March 31, 2020, associated with the translation of foreign currency denominated monetary assets and liabilities.

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

The forward contracts have settlement dates throughout 2021.

Foreign currency derivatives are recognized and measured in the 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.

Certain of these foreign currency forward contracts held by the Company as of March 31, 2021, are designated and qualify as foreign currency cash flow hedging instruments.

The Company currently has cash flow hedging instruments associated with Selling, General and Administrative Expenses, Inventories and capital expenditures.

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

For foreign currency cash flow hedging instruments related to Inventories, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in Other Comprehensive Income and reclassified to Inventories on the Condensed Consolidated Balance Sheets when the forecasted transaction occurs.

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

The notional value of foreign currency cash flow hedging instruments that qualify for hedge accounting at March 31, 2021 was $21.5 million (December 31, 2020 — $26.4 million).

A gain of $0.3 million was recorded to Other Comprehensive Loss with respect to the change in fair value of these contracts for the three months ended March 31, 2021 (2020 — loss of $(2.9) million).

A gain of $0.2 million was reclassified from Accumulated Other Comprehensive Income to Selling, General and Administrative Expenses and Inventories for the three months ended March 31, 2021 (2020 — loss of $(0.4) million).

An unrealized gain of less than $0.1 million resulting from a change in the classification of certain forward contracts no longer meeting the requirements for hedge accounting was reclassified from Accumulated Other Comprehensive Loss to Selling, General and Administrative Expenses.

The notional value of forward contracts that do not qualify for hedge accounting at March 31, 2021 was $0.4 million (December 31, 2020 — $5.6 million).

For all derivative instruments, the Company is subject to counterparty credit risk to the extent that the counterparty may not meet its obligations to the Company.

To manage this risk, the Company enters into derivative transactions only with major financial institutions.

At March 31, 2021, the Company’s Financing Receivables and working capital items denominated in Canadian Dollars, Renminbi, Japanese Yen, Euros and other foreign currencies translated into U.S.

Dollars was $147.2 million.

Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at March 31, 2021, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $14.7 million.

A significant portion of the Company’s Selling, General, and Administrative Expenses is denominated in Canadian Dollars.

Assuming a 1% change appreciation or depreciation in foreign currency exchange rates at March 31, 2021, the potential change in the amount of Selling, General, and Administrative Expenses would be less than $0.1 million.

Interest Rate Risk Management

The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash, and its interest expense from variable-rate borrowings.

Specifically, the Company’s largest exposure with respect to variable rate debt comes from changes in LIBOR.

As of March 31, 2021, the Company had drawn down $45.0 million on its Credit Facility (December 31, 2020 — $300.0 million), which is subject to a variable effective interest rate.

The Company had variable rate debt instruments representing 8.9% and 56.3% of its total liabilities as of March 31, 2021 and December 31, 2020, respectively.

If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by $0.1 million and interest income from cash would increase by $0.3 million.

These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable rate debt and cash balances at March 31, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis