IMAX CORPORATION Presented below is Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") forIMAX Corporation and its consolidated subsidiaries ("IMAX" or the "Company") for the three and nine months endedSeptember 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. ("IMAX China"), whose shares trade on theHong Kong Stock Exchange . IMAX China is a consolidated subsidiary of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this quarterly report may constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, references to business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business, operations and technology, future capital expenditures (including the amount and nature thereof), plans and references to the future success of the Company and expectations regarding its future operating, financial and technological results. 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 ofthe United States andCanada ; risks related to the Company's growth and operations inChina ; the performance of IMAX DMR® films; the signing of IMAX 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 failure to respond to change and advancements in digital technology; risks relating to recent consolidation among commercial exhibitors and movie studios; risks related to new business initiatives; conditions in the in-home and out-of-home entertainment industries; the opportunities (or lack thereof) that may be presented to and pursued by the Company; risks related to cyber-security and data privacy; risks related to the Company's inability to protect its intellectual property; general economic, market or business conditions; the failure to convert IMAX 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; 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 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 theUnited States Securities and Exchange Commission (the "SEC"). Reports may be obtained free of charge through theSEC's website at www.sec.gov and through the Company's website at www.imax.com or by calling the Company's Investor Relations Department at 212-821-0100. No information included on the Company's website shall be deemed included or otherwise incorporated into this filing, except where expressly indicated.
The information posted on the Company's corporate and Investor Relations
websites may be deemed material to investors. Accordingly, investors, media and
others interested in the Company should monitor the Company's websites in
addition to the Company's press releases,
IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It In IMAX®, The IMAX
Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, DMR®, IMAX
nXos® and Films to the Fullest®, are trademarks and trade names of the Company
or its subsidiaries that are registered or otherwise protected under laws of
various jurisdictions.
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OVERVIEW
IMAX is one of the world's leading entertainment technology companies,
specializing in technological innovations powering the presentation of some of
today's most immersive entertainment experiences. Through its proprietary
software, theater architecture, patented intellectual property and specialized
equipment, IMAX offers a unique end-to-end cinematic solution to create the
highest-quality, most immersive motion picture and other entertainment event
experiences for which the IMAX® brand has become known globally. Top filmmakers
and movie studios utilize the cutting-edge visual and sound technology of IMAX
to connect with audiences in innovative ways, and, as a result, IMAX's network
is among the most important and successful distribution platforms for major
films and other events around the world.
The Company leverages its innovative technology and engineering in all aspects
of its business, which principally consists of the digital remastering of films
and other presentations into the IMAX format ("IMAX DMR") and the sale or lease
of premium IMAX theater systems ("IMAX Theater Systems").
IMAX Theater Systems are based on proprietary and patented image, audio and
other technology developed over the course of the Company's 52-year history. The
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 IMAX Theater System provides the Company's exhibitor customers with a combination of the following benefits:
• the ability to exhibit content that has undergone the IMAX DMR® conversion
process, which results in higher image and sound fidelity than conventional
cinema experiences;
• advanced, high-resolution projectors with specialized equipment and automated
theater control systems, which generate significantly more contrast and
brightness than conventional theater systems;
• large screens and proprietary theater geometry, which result in a
substantially larger field of view so that the screen extends to the edge of
a viewer's peripheral vision and creates more realistic images;
• advanced sound system components, which deliver more expansive sound imagery
and pinpointed origination of sound to any specific spot in an IMAX theater;
• specialized theater acoustics, which result in a four-fold reduction in
background noise; and
• a license to the globally recognized IMAX brand.
In addition, certain movies shown in IMAX theaters are filmed using proprietary
IMAX film and IMAX certified digital cameras, which offer filmmakers customized
guidance and a workflow process to provide further enhanced and differentiated
image quality and a film aspect ratio that delivers up to 26% more image onto a
movie screen.
Together these components cause audiences in IMAX theaters to feel as if they are a part of the on-screen action, creating a more intense, immersive and exciting experience than a traditional theater.
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As a result of the engineering and scientific achievements that are a hallmark
of The IMAX Experience®, the Company's exhibitor customers typically charge a
premium for IMAX DMR films over films exhibited in their other auditoriums. 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.
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 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.
IMPACT OF COVID-19 PANDEMIC
In late-January 2020 , in response to the public health risks associated with the
novel coronavirus and the disease that it causes ("COVID-19"), the Chinese
government directed exhibitors in China to temporarily close more than 70,000
movie theaters, including all of the approximately 700 IMAX theaters in mainland
China . On March 11, 2020 , due to the worsening public health crisis associated
with the novel coronavirus, COVID-19 was characterized as a pandemic by the
World Health Organization , and in the following weeks, local, state and national
governments instituted stay-at-home orders and restrictions on large public
gatherings which caused movie theaters in countries around the world to
temporarily close, including substantially all of the IMAX theaters in those
countries. As a result of the theater closures, Hollywood and Chinese movie
studios postponed the theatrical release of multiple films, including many
scheduled to be shown in IMAX theaters, while certain other films have been
released directly to streaming platforms. More recently, stay-at-home orders
have been lifted in many countries and movie theaters throughout the IMAX
network gradually reopened in the third quarter of 2020 with reduced capacities,
physical distancing requirements, and other safety measures. During the third
quarter of 2020, 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.
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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 installations of certain theater systems
were delayed, and maintenance services were generally suspended for theaters
that were closed. During time periods in which there is a lack of new films
released by movie studios and a significant number of theaters in the IMAX
network are closed, the Company has and will continue to experience a
significant decline in earnings and operating cash flows as it is generating
significantly lower than normal levels of GBO-based revenue from its joint
revenue sharing arrangements and digital remastering services, it is unable to
provide normal maintenance services to any of the theaters that remain closed,
and while some installation activity is continuing, certain theater system
installations have, and may continue to be delayed. In addition, the Company has
experienced and is likely to continue to experience delays in collecting
payments due under existing theater sale or lease arrangements from its
exhibitor partners who are now facing financial difficulties as a result of the
theater closures. In response, the Company has provided temporary relief to
exhibitor partners by waiving maintenance fees during periods when theaters are
closed and, in certain situations, by providing extended payment terms on annual
minimum payment obligations in exchange for a corresponding extension of the
term of the underlying sale or lease arrangement. For the three and nine months
ended September 30, 2020 , the Company increased its provision for current
expected credit losses by $3.9 million and $15.6 million , respectively,
principally reflecting a reduction in the credit quality of its theater related
accounts receivable, financing receivables and variable consideration
receivables.
The Company may continue to be significantly impacted by the COVID-19 global
pandemic even after a significant portion or all theaters are reopened. The
global economic impact of COVID-19 has led to record levels of unemployment in
certain countries, which has led to, and may continue to result in lower
consumer spending. The timing and extent of a recovery of consumer behavior and
willingness to spend discretionary income on movie-going may delay the Company's
ability to generate significant GBO-based revenue until such time as consumer
behavior normalizes and consumer spending recovers.
In response to uncertainties associated with the COVID-19 global pandemic, the
Company has taken and is continuing to take significant steps to preserve cash
by eliminating non-essential costs, placing certain employees on a temporary
furlough for at least the remainder of the current fiscal year, reducing the
working hours of other employees and deferring all non-essential capital
expenditures to minimum levels. The Company has also implemented an active cash
management process, which, among other things, requires senior management
approval of all outgoing payments. In addition, in the first quarter of 2020,
the Company drew down the $280.0 million in remaining available borrowing
capacity under its credit facility, which was then amended in June 2020 to,
among other things, suspend the senior secured net leverage ratio financial
covenant in the underlying credit agreement through the first quarter of 2021
and substitute quarterly EBITDA from the third and fourth quarters of 2019 in
lieu of the EBITDA for the corresponding quarters of 2020 to meet the original
senior secured net leverage ratio financial covenant (see Note 7 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).
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In the third quarter of 2020, the Company also updated its recoverability tests
of the carrying values of the theater system equipment supporting its joint
revenue sharing arrangements, which are recorded within Property, Plant and
Equipment. In performing its reviews of recoverability, the Company estimated
the undiscounted future cash flows expected to result from the use of the assets
and determined that there was no impairment as of September 30, 2020 . The cash
flow estimates used in these tests are consistent with management's estimated
long-term projections, against which various sensitivity analyses were
performed. These estimates are highly uncertain due to the COVID-19 global
pandemic; therefore, management's estimated cash flows factor in a number of
underlying variables and ranges of possible cash flow scenarios. Actual results
may materially differ from management's estimates, especially due to the
uncertainties associated with the COVID-19 pandemic (see Note 1 of Notes to
Condensed Consolidated Financial Statements).
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.
SOURCES OF REVENUE
For the purposes of MD&A the Company has organized its reportable segments into
the following four categories: (i) IMAX Technology Network; (ii) IMAX Technology
Sales and Maintenance; (iii) New Business Initiatives; and (iv) Film
Distribution and Post-production. Within these categories are the Company's
following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing
Arrangements; (iii) IMAX Systems; (iv) IMAX Maintenance; (v) Other Theater
Business; (vi) New Business Initiatives; (vii) Film Distribution; and (viii)
Film Post -production. 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, 2019 (the "2019 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.
IMAX DMR
The Company has developed IMAX DMR, a proprietary technology that digitally remastersHollywood 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. In recent years, the percentage of gross box office receipts earned in IMAX DMR arrangements has averaged approximately 12.5%, except for withinGreater China , where the Company receives a lower percentage of net box office receipts for certainHollywood films. 50 -------------------------------------------------------------------------------- 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 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. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in an optimal listening position. IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release of the film. Collectively, the Company refers to these enhancements as "IMAX DNA". 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. Avengers: Endgame, the highest-grossing film in history, released inApril 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. 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 inChina . During 2019, 18 local language IMAX DMR films were released to the IMAX network, including 14 inChina and one in each ofJapan ,South Korea ,India andRussia . The blockbusterNe Zha : The IMAX Experience was released inChina inJuly 2019 and was the Company's first Chinese animated local language film title. During the nine months endedSeptember 30, 2020 , six local language IMAX DMR films were released to the IMAX network, including two inRussia , two inChina , and one in each ofJapan andSouth 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 majorHollywood 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.
Joint Revenue Sharing Arrangements - Contingent Rent
The JRSA segment provides IMAX theater systems to exhibitors through joint
revenue sharing arrangements. Under the traditional form of these arrangements,
IMAX provides the IMAX projection and sound system under a long-term lease in
which the Company assumes the majority of the equipment and installation costs.
In exchange for its upfront investment, the Company earns rent based on a
percentage of contingent box office receipts and, in some cases, concession
revenues, rather than requiring the customer to pay a fixed upfront fee or
annual minimum payments. Rental payments from the customer are required
throughout the term of the arrangement and are due either monthly or quarterly.
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. 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. For hybrid joint
revenue sharing arrangements that take the form of a lease, the contingent rent
is reported within the IMAX Technology Network, while the fixed upfront payment
is recorded as revenue within IMAX Technology Sales and Maintenance, as
discussed below. For hybrid joint revenue sharing arrangements that take the
form of a sale, see the discussion below under IMAX Technology Sales and
Maintenance.
Under most joint revenue sharing arrangements (both traditional and hybrid), the
initial non-cancellable term is 10 years or longer and is renewable by the
customer for one to two additional terms of between three to five years. The
Company has the right to remove the equipment for non-payment or other defaults
by the customer. The contracts are non-cancellable by the customer unless the
Company fails to perform its obligations.
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The revenue earned from customers under the Company's joint revenue sharing
arrangements can vary from quarter-to-quarter and year-to-year based on a number
of factors including film performance, the mix of theater system configurations,
the timing of installation of these theater systems, the nature of the
arrangement, the location, size and management of the theater and other factors
specific to individual arrangements.
Joint revenue sharing arrangements also require IMAX to provide maintenance and
extended warranty services to the customer over the term of the lease in
exchange for a separate fixed annual fee. These fees are reported within IMAX
Technology Sales and Maintenance, as discussed below.
IMAX Technology Sales and 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.
IMAX Systems
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. Under these arrangements, in exchange for providing the IMAX Theater System, the Company earns initial fees and ongoing consideration (which can include fixed annual minimum payments and contingent fees in excess of the minimum payments), as well as maintenance and extended warranty fees (see "IMAX Maintenance" below). The initial fees vary depending on the system configuration and location of the theater. Initial fees are paid to the Company in installments between the time of signing the arrangement and the time of system installation, which is when the total of these fees, in addition to the present value of future annual minimum payments, are recognized as revenue. Finance income is recognized over the term of a financed sale or sales-type lease arrangement. In addition, in sale arrangements, an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded, is recorded as revenue in the period when the sale is recognized and is adjusted in future periods based on actual results and changes in estimates. Such variable consideration is only recognized on sales transactions to the extent the Company believes there is not a risk of significant revenue reversal. In sale arrangements, title to the IMAX Theater System equipment generally transfers to the customer. However, in certain instances, the Company retains title or a security interest in the equipment until the customer has made all payments required by the agreement or until certain shipment events for the equipment have occurred. In a sales-type lease arrangement, title to the IMAX Theater System equipment remains with the Company. 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.
Joint Revenue Sharing Arrangements - Fixed Fees
Under certain joint revenue sharing arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX Theater System in an amount that is typically half of what the Company would receive from a typical sale transaction. For hybrid joint revenue sharing arrangements that take the form of a lease, the contingent rent is reported within the IMAX Technology Network, as discussed above, while the fixed upfront payment is reported within IMAX Technology Sales and Maintenance.
IMAX Maintenance
For all IMAX theaters, theater owners or operators are also responsible for paying the Company an annual maintenance and extended warranty fee. Under these arrangements, the Company provides proactive and emergency maintenance services to every theater in its network to ensure that each presentation is up to the highest IMAX quality standard. Annual maintenance fees are paid throughout the duration of the term of the theater agreements.
Other Theater Business
The Other Theater Business segment principally includes after-market sales of IMAX projection system parts and 3D glasses.
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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 andConnected Theaters , as discussed below.
IMAX Enhanced
InSeptember 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 ofHollywood'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 includeSony Electronics , Denon, Marantz, Pioneer, and TCL (among others), as well as movie studio partners including Sony Pictures and Paramount Pictures.
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
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, inOctober 2020 .
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The following table provides detailed information about the IMAX network by type
and geographic location as at
September 30, 2020 September 30, 2019
Commercial Commercial Commercial Commercial
Multiplex Destination Institutional Total Multiplex Destination Institutional Total
United States 371 4 30 405 369 4 33 406
Canada 39 2 7 48 39 2 7 48
Greater China(1) 710 - 16 726 666 - 15 681
Western Europe 115 4 9 128 107 4 10 121
Asia (excluding Greater China) 123 2 2 127 115 2 2 119
Russia & the CIS 68 - - 68 65 - - 65
Latin America(2) 51 1 11 63 49 1 12 62
Rest of the World 65 - 2 67 63 1 2 66
Total 1,542 13 77 1,632 1,473 14 81 1,568
(1)
(2)
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 atSeptember 30, 2020 . The Company believes that the majority of its future growth will come from international markets. As atSeptember 30, 2020 , 72.2% of IMAX Theater Systems in operation were located within international markets (defined as all countries other thanthe United States andCanada ), an increase from 71.0% as atSeptember 30, 2019 . Revenues and gross box office derived from international markets continue to exceed revenues and gross box office fromthe United States andCanada . 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 itsGreater China operations in the year endedDecember 31, 2019 . As atSeptember 30, 2020 , the Company had 726 theaters operating inGreater China with an additional 258 theaters in backlog that are scheduled to be installed by 2028. The Company's backlog inGreater China represents 47.3% of its total current backlog, including upgrades. The Company's largest single international partnership is inChina with Wanda Film ("Wanda"). Wanda's total commitment to the Company is for 358 IMAX Theater Systems inGreater China (of which 353 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 inChina " 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. 54 -------------------------------------------------------------------------------- The following tables provide detailed information about the Commercial Multiplex theaters in operation within the IMAX network by arrangement type and geographic location as atSeptember 30, 2020 and 2019:September 30, 2020 Commercial
Traditional Hybrid Sale / Sales-
JRSA JRSA type Lease Total
Domestic Total (United States & Canada) 279 5 126 410
International:
Greater China 365 105 240 710
Asia (excluding Greater China) 33 2 88 123
Western Europe 48 27 40 115
Russia & the CIS - - 68 68
Latin America 2 - 49 51
Rest of the World 15 - 50 65
International Total 463 134 535 1,132
Worldwide Total(1) 742 139 661 1,542
September 30, 2019
Commercial
Traditional Hybrid Sale / Sales-
JRSA JRSA type Lease Total
Domestic Total (United States & Canada) 276 5 127 408
International:
Greater China 339 103 224 666 Asia (excluding Greater China) 34 1 80 115 Western Europe 42 26 39 107 Russia & the CIS - - 65 65 Latin America 1 - 48 49 Rest of the World 14 - 49 63 International Total 430 130 505 1,065 Worldwide Total(1) 706 135 632 1,473
(1) 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.
55
--------------------------------------------------------------------------------Sales Backlog
The following table provides detailed information about the Company's sales
backlog as at
September 30, 2020 September 30, 2019
Number of Dollar Value Number of Dollar Value
Systems (in thousands) Systems (in thousands)
New Upgrade New Upgrade New Upgrade New Upgrade
Sales and sales-type lease
arrangements 184 9 $ 212,623 $ 11,418 186 19 $ 223,834 $ 23,692
Hybrid JRSA 139 7 98,398 5,560 140 9 101,295 7,110
Traditional JRSA 125 (1) 81 (1) 300 (2) 5,500 (2) 156 (1) 97 (1) 400 (2) 7,000 (2)
448 97 $ 311,321 $ 22,478 482 125 $ 325,529 $ 37,802 (1) Includes 46 IMAX Theater Systems (2019 - 50) where the customer has the
option to convert from a joint revenue sharing arrangement to a sales
arrangement.
(2) Reflects contractual upfront payments. Future contingent payments are not
reflected as these are based on negotiated shares of box office results.
The number of IMAX Theater Systems in the backlog reflects the minimum number of commitments under signed contracts. 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. 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. From time to time, in the normal course of its business, the Company will have customerswho 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. Once the determination is made that the customer will not proceed with installation, the agreement with the customer is terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or fees that the customer previously made to the Company are recognized as revenue. Certain of the Company's contracts contain options for the customer to elect to upgrade system type during the term or to alter the contract structure (for example, from a joint revenue sharing arrangement to a sale) after signing but before installation. Current backlog information reflects all known elections. 56
-------------------------------------------------------------------------------- The following tables provide detailed information about the Company's sales backlog by arrangement type and geographic location as atSeptember 30, 2020 and 2019: September 30, 2020 IMAX Theater System Backlog Traditional Hybrid JRSA JRSA Sale / Lease Total Domestic Total (United States & Canada) 123 3 10 136
International:
Greater China 59 113 86 258
Asia (excluding Greater China) 5 15 30 50
Western Europe 12 13 6 31
Russia & the CIS - 1 15 16
Latin America 3 - 9 12
Rest of the World 4 1 37 42
International Total 83 143 183 409
Worldwide Total 206 146 193 545 (1)
September 30, 2019
IMAX Theater System Backlog
Traditional Hybrid
JRSA JRSA Sale / Lease Total
Domestic Total (United States & Canada) 143 3 17 163
International:
Greater China 76 130 80 286 Asia (excluding Greater China) 12 - 42 54 Western Europe 16 16 10 42 Russia & the CIS - - 14 14 Latin America 1 - 9 10 Rest of the World 5 - 33 38 International Total 110 146 188 444 Worldwide Total 253 149 205 607 (2)
(1) Includes 155 new IMAX with Laser projection system configurations and 92
upgrades of existing locations to IMAX with Laser projection system
configurations.
(2) Includes 145 new IMAX with Laser projection system configurations and 119
upgrades of existing locations to IMAX with Laser projection system
configurations.
Approximately 75.0% of IMAX Theater System arrangements in backlog as at
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.
57
--------------------------------------------------------------------------------Signings and Installations
The following tables provide detailed information about IMAX Theater System
signings and installations for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Theater System Signings:
New IMAX Theater Systems
Sales and sales-type lease arrangements 8 22 22 38
Hybrid joint revenue sharing lease
arrangements - - 17 48
Traditional joint revenue sharing
arrangements - - 2 4
Total new IMAX Theater Systems 8 22 41 90
Upgrades of IMAX Theater Systems 2 8 13 36
Total IMAX Theater System signings 10 30 54 126
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Theater System Installations:
New IMAX Theater Systems
Sales and sales-type lease arrangements 9 14 13 29
Hybrid joint revenue sharing lease
arrangements 1 4 3 13
Traditional joint revenue sharing
arrangements 8 12 10 29
Total new IMAX Theater Systems 18 30 26 71
Upgrades of IMAX Theater Systems 5 9 12 20
Total IMAX Theater System installations 23 39 38 91
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.
58
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The Company's business and future prospects are evaluated by
• 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; and
• 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. GAAP. The CODM, along with other members of management,
assess segment performance based on segment revenues and gross margins. Selling,
general and administrative expenses, research and development costs, the
amortization of intangibles, provisions for (recoveries of) current expected
credit losses, certain write-downs, interest income, interest expense and income
tax (expense) benefit are not allocated to the Company's segments.
The Company has organized its reportable segments into the following four
categories: (i) IMAX Technology Network; (ii) IMAX Technology Sales and
Maintenance; (iii) New Business Initiatives; and (iv) Film Distribution and
Post-production. Within these categories are the Company's following reportable
segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements; (iii) IMAX
Systems, (iv) IMAX Maintenance; (v) Other Theater Business; (vi) New Business
Initiatives; (vii) Film Distribution; and (viii) Film Post -production, 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.
59
--------------------------------------------------------------------------------
Results of Operations for the Three Months Ended
For the three months endedSeptember 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$0.15 per basic and diluted share, for the same period in 2019. For the three months endedSeptember 30, 2020 , the Company reported an adjusted net loss attributable to common shareholders* of$(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
(In thousands of U.S. dollars) Revenue Gross Margin (Margin Loss)
2020 2019 2020 2019
IMAX Technology Network
IMAX DMR $ 6,886 $ 26,665 $ 3,079 $ 17,866
Joint revenue sharing arrangements,
contingent rent 4,473 16,605 (2,491 ) 9,524
11,359 43,270 588 27,390
IMAX Technology Sales and Maintenance
IMAX Systems (1) 17,437 20,977 8,671 11,652
Joint revenue sharing arrangements,
fixed fees 57 1,438 (117 ) 136
IMAX Maintenance 5,855 13,657 794 6,125
Other Theater Business (2) 307 1,560 31 505
23,656 37,632 9,379 18,418
New Business Initiatives 378 596 372 541Film Distribution and Post-production 1,865 3,528
(6,061 ) 50 Sub-total 37,258 85,026 4,278 46,399 Other (2 ) 1,364 (449 ) 721 Total$ 37,256 $ 86,390 $ 3,829 $ 47,120
(1) 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, this line item also includes finance
income associated with these revenue streams.
(2) 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.
60
--------------------------------------------------------------------------------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 ofAsia . As a result, the Company's results of operations for the period materially declined when compared to the prior year. For the three months endedSeptember 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.
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 theU.S. dollar and potential currency devaluations. For the three months endedSeptember 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. See below for separate discussions of IMAX DMR and JRSA contingent rent results for the period.
IMAX DMR
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 ofAsia . As a result, for the three months endedSeptember 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. 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 endedSeptember 30, 2020 , marketing expenses were$0.4 million , as compared to$4.3 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 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 ofGreater China . As a result, for the three months endedSeptember 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 atSeptember 30, 2020 , 881 theaters were operating under joint revenue sharing arrangements, as compared to 841 theaters as atSeptember 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. 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 endedSeptember 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 endedSeptember 30, 2020 , JRSA gross margin includes advertising, marketing and commission costs of$0.7 million , as compared to$0.8 million in the same period of the prior year. 61 --------------------------------------------------------------------------------
IMAX Technology Sales and Maintenance
The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a period, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation. The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company's theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company's control. The following table provides detailed information about the mix ofIMAX Theater System installations for the three months endedSeptember 30, 2020 and 2019: For the Three Months Ended September 30, 2020 2019 Number of Number of Systems Revenue Systems Revenue New IMAX Theater Systems - installed and recognized Sales and sales-types lease arrangements(1) 9$ 9,721 14$ 17,282 Joint revenue sharing arrangements - hybrid(2) 1 57 4 1,544 Total new IMAX Theater Systems 10 9,778 18 18,826 IMAX theater system upgrades - installed and recognized Sales and sales-types lease arrangements 3 4,811 - - Total IMAX Theater Systems installed and recognized 13$ 14,589 18$ 18,826
(1) 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.
(2) 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), newIMAX Theater System under sales and sales-type lease arrangements was$1.1 million for the three months endedSeptember 30, 2020 , as compared to$1.2 million during the same period of the prior year. For the three months endedSeptember 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.
IMAX Systems
For the three months endedSeptember 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 endedSeptember 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. 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. 62 --------------------------------------------------------------------------------
Film Distribution and Post-production
For the three months endedSeptember 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 ofSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 theHong 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 endedSeptember 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. 63
--------------------------------------------------------------------------------
Income Taxes
For the three months endedSeptember 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. 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. The Company's effective tax rate for the three months endedSeptember 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 atSeptember 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 atSeptember 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 endedSeptember 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 itsOriginal Film Fund subsidiary. For the three months endedSeptember 30, 2020 , the net loss attributable to non-controlling interests of the Company's subsidiaries was$1.3 million (2019 - net income of$1.9 million ). 64 --------------------------------------------------------------------------------
Results of Operations for the Nine Months Ended
For the nine months endedSeptember 30, 2020 , the Company reported a net loss attributable to common shareholders of$(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$0.47 per basic and diluted share, for the same period in 2019. For the nine months endedSeptember 30, 2020 , the Company reported an adjusted net loss attributable to common shareholders* of$(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$0.70 per diluted share*, for the same period in 2019. The following table sets forth the breakdown of revenue and gross margin (margin loss) by category and reportable segment for the nine months endedSeptember 30, 2020 and 2019: (In thousands of U.S. dollars) Revenue Gross Margin (Margin Loss) 2020 2019 2020 2019 IMAX Technology Network IMAX DMR$ 18,061 $ 93,908 $ 7,492 $ 61,602 Joint revenue sharing arrangements, contingent rent 10,307 60,189
(10,610 ) 40,777
28,368 154,097 (3,118 ) 102,379
IMAX Technology Sales and Maintenance
IMAX Systems (1) 27,674 50,504 14,497 26,723
Joint revenue sharing arrangements,
fixed fees 1,196 6,525 110 1,301
IMAX Maintenance 13,225 39,815 (355 ) 17,046
Other Theater Business (2) 1,261 5,766 77 1,821
43,356 102,610 14,329 46,891
New Business Initiatives 1,488 1,908 1,245 1,441Film Distribution and Post-production 7,541 9,791
(9,392 ) 483 Sub-total 80,753 268,406 3,064 151,194 Other 260 2,979 (1,837 ) 619 Total$ 81,013 $ 271,385 $ 1,227 $ 151,813
(1) Includes initial upfront payments and the present value of fixed minimum
payments from 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.
(2) 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.
65
--------------------------------------------------------------------------------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 endedJune 30, 2020 , with the theaters inGreater 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; 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 ofAsia . As a result of these factors, the Company's results of operations for the nine months endedSeptember 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
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 theU.S. dollar and potential currency devaluations. For the nine months endedSeptember 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.
IMAX DMR
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 endedJune 30, 2020 , with the theaters inGreater 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; 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 ofAsia . As a result of these factors, for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2019 . In addition to the level of revenues, IMAX DMR gross margin is also influenced by the costs associated with the films exhibited in the period, and can vary from period-to-period, particularly with respect to marketing expenses. For the nine months endedSeptember 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
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 endedJune 30, 2020 , with the theaters inGreater 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; 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 ofAsia . As a result of these factors, for the nine months endedSeptember 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 atSeptember 30, 2020 , 881 theaters were operating under joint revenue sharing arrangements, as compared to 841 theaters as atSeptember 30, 2019 , an increase of 5%. 66 -------------------------------------------------------------------------------- In addition to the level of revenues, JRSA margin is also influenced by the level of costs associated with such arrangements, such as depreciation expense related to the underlying theater systems and costs incurred to upgrade theater systems from digital xenon to IMAX with Laser, as well as advertising, marketing and commission costs primarily for the launch of new theaters. The level of depreciation expense in a period relative to the prior year is a function of the growth of the theater network and the mix of theater system configurations in the network. For the nine months endedSeptember 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 endedSeptember 30, 2020 , JRSA gross margin includes certain advertising, marketing and commission costs of$1.3 million , as compared to$1.1 million in the same period of the prior year.
IMAX Technology Sales and Maintenance
The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a period, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation. The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company's theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company's control. The following table provides detailed information about the mix of IMAX Theater System installations for the nine months endedSeptember 30, 2020 and 2019: For the Nine Months Ended September 30, 2020 2019 Number of Number of Systems Revenue Systems Revenue New IMAX Theater Systems - installed and recognized Sales and sales-types lease arrangements(1) 13$ 13,452 29$ 37,224 Joint revenue sharing arrangements - hybrid(2) 3 1,183 13 6,608 Total new IMAX Theater Systems 16 14,635 42 43,832 IMAX theater system upgrades - installed and recognized Sales and sales-types lease arrangements 3 4,811 2 2,028 Total IMAX Theater Systems installed and recognized 19$ 19,446 44$ 45,860
(1) 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.
(2) 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 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) IMAX Theater System under sales and sales-type lease arrangements was$1.0 million during the nine months endedSeptember 30, 2020 , compared to$1.3 million during the same period of the prior year. For the nine months endedSeptember 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. 67 --------------------------------------------------------------------------------
IMAX Systems
For the nine months endedSeptember 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 endedSeptember 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. 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-production
For the nine months endedSeptember 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 ofSeptember 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 nine months endedSeptember 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 endedSeptember 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 theCanada Emergency Wage Subsidy program and theU.S. CARES Act, of which$4.5 million was recognized in the nine months endedSeptember 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. These factors are partially offset by a$13.6 million (36%) 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.
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 endedSeptember 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 theConnected Theaters initiative. 68
-------------------------------------------------------------------------------- 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.
Credit Loss Expense
For the nine months endedSeptember 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. 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 endedSeptember 30, 2019 , credit loss expense was$2.0 million . (See Notes 2 and 3 of Notes to Condensed Consolidated Financial Statements.)
Asset Impairments
For the nine months endedSeptember 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 theHong 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 endedSeptember 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.
Income Taxes
For the nine months endedSeptember 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. The Company's effective tax rate for the nine months endedSeptember 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. 69 -------------------------------------------------------------------------------- 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 ofCanada as atSeptember 30, 2020 was$76.4 million (December 31, 2019 -$90.1 million ), of which$62.6 million was held inthe People's Republic of China ("PRC") (December 31, 2019 -$67.6 million ). As atSeptember 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 atSeptember 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 endedSeptember 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.
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 itsOriginal Film Fund subsidiary. For the nine months endedSeptember 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 ).
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement
The Company has a credit agreement, the Fifth Amended and Restated Credit Agreement, withWells Fargo Bank, National Association ("Wells Fargo"), as agent, and a syndicate of lenders party thereto (the "Credit Agreement"). The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries (the "Guarantors") and are secured by first-priority security interests in substantially all the assets of the Company and the Guarantors. The facility provided by the Credit Agreement (the "Credit Facility") matures onJune 28, 2023 . The Credit Agreement has a revolving borrowing capacity of$300.0 million , and contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to$440.0 million or greater, subject to certain conditions, depending on the mix of revolving and term loans comprising the incremental facility. In the first quarter of 2020, in response to uncertainties associated with the outbreak of the COVID-19 global pandemic and its impact on the Company's business, the Company drew down the$280.0 million in available borrowing capacity under the Credit Facility, resulting in total outstanding borrowings of$300.0 million . The Credit Agreement contains a covenant that requires the Company to maintain a Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), as at the last day of anyFiscal 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. 70
-------------------------------------------------------------------------------- OnJune 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 effective from the date of the Amendment until the earlier of the delivery of the compliance certificate for the fourth quarter of 2021 and the date on which the Company, in its sole discretion, elects to calculate its compliance with the Senior Secured Net Leverage Ratio by using either its actual EBITDA or annualized EBITDA (the "Designated Period"). The Company was in compliance with all of its requirements under the Credit Agreement, as amended, as atSeptember 30, 2020 , and based on current projections expects to be in compliance through the next twelve months. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) LIBOR plus a margin ranging from 1.00% to 1.75% per annum; or (ii) theU.S. base rate plus a margin ranging from 0.25% to 1.00% per annum, in each case depending on the Company's Total Leverage Ratio (as defined in the Credit Agreement); provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the applicable margin for LIBOR borrowings will be 2.50% per annum and the applicable margin forU.S. base rate borrowings will be 1.75% per annum. The effective interest rate for the three and nine months endedSeptember 30, 2020 was 2.70% and 2.24%, respectively (2019 - 3.34% and 3.50%, respectively).
In addition, the Credit Facility has standby fees ranging from 0.25% to 0.38% per annum, based on the Company's Total Leverage Ratio with respect to the unused portion of the Credit Facility; provided, however, that from the effective date of the Amendment until the Company delivers a compliance certificate under the Credit Facility following the end of the Designated Period, the standby fee will be 0.50% per annum.
The Company incurred fees of approximately$1.1 million in connection with the Amendment, which are being amortized on a straight-line basis throughDecember 31, 2021 . 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.
Working Capital Facility
OnJuly 24, 2020 ,IMAX (Shanghai) Multimedia Technology Co., Ltd. ("IMAXShanghai "), the Company's majority-owned subsidiary inChina , 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 atSeptember 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 atDecember 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 endedSeptember 30, 2020 was 4.35%.
Letters of Credit and Other Commitments
As at
OnOctober 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 byExport Development Canada (the "NBC Facility") to replace aBank of Montreal Facility with substantially the same terms which expired onSeptember 30, 2019 . TheNBC 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 atSeptember 30, 2020 , the Company did not have any letters of credit or advance payment guarantees outstanding under the NBC Facility. 71
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Cash and Cash Equivalents
As ofSeptember 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); (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 ofSeptember 30, 2020 includes$76.4 million in cash held outside ofCanada (December 31, 2019 -$90.1 million ), of which$62.6 million was held inthe People's Republic of China (the "PRC") (December 31, 2019 -$67.6 million ). In the first quarter of 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company's capital resources globally. 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, during the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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. 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. The Company forecasts its short-term liquidity requirements on a quarterly and annual basis. Since the Company's future cash flows are based on estimates and there may be factors that are outside of the Company's control (see "Risk Factors" in Item 1A in the Company's 2019 Form 10-K), there is no guarantee that the Company will continue to be able to fund its operations through cash flows from operations. Under the terms of the Company's typical sale and sales-type lease agreements, the Company receives substantial cash payments before the Company completes the performance of its obligations. 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 endedSeptember 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 partnerswho are 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. 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.
72
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See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Impact of COVID-19 Pandemic" in Item 2 of this Form 10-Q and "Risk
Factors - The Company has experienced a significant decrease in its revenues,
earnings and cash flows due to the COVID-19 global pandemic and its business,
financial condition and results of operations may continue to be significantly
harmed in future reporting periods" in Part II, Item 1A of this Form 10-Q.
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 signedIMAX 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 endedSeptember 30, 2020 as compared to net cash provided by operating activities of$67.3 million for the nine months endedSeptember 30, 2019 . In the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 as compared to$53.9 million for the nine months endedSeptember 30, 2019 . Financing Activities Net cash provided by financing activities totaled$233.5 million for the nine months endedSeptember 30, 2020 , as compared to$53.4 million used in financing activities in the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 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. 73
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CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations as at
Payments Due by Period
Total Less Than
(In thousands of U.S. Dollars) Obligation One Year 1 to 3 years 3 to 5 years Thereafter
Purchase obligations(1) $ 35,758 $ 34,988 $ 758 $ - $ 12
Pension obligations(2) 20,298 - 20,298 - -
Operating lease obligations(3) 19,890 2,985 4,734 3,805 8,366
Credit Facility(4) 300,000 - 300,000 - -
Working Capital Facility 253 253 - - -
Postretirement benefits obligations 2,170 105 221 241 1,603
$ 378,369 $ 38,331 $ 326,011 $ 4,046 $ 9,981 (1) 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.
(2) The Company has an unfunded defined benefit pension plan, the SERP, covering
assumes that
months after retirement at the end of the term of his current employment
agreement (
although
at that time.
(3) Represents total minimum annual rental payments to be made under operating
leases, mostly consisting of rent at the Company's property in
at the various owned and operated theaters.
(4) The Company is not required to make any minimum payments on the Credit
Facility.
Pension and Postretirement Obligations
The Company has an unfunded defined benefit pension plan, the SERP, coveringMr. Gelfond . Pursuant to an amendment datedNovember 1, 2019 to an existing employment agreement, the term ofMr. Gelfond's employment was extended throughDecember 31, 2022 , althoughMr. 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 toMr. Gelfond under the SERP has been fixed at$20.3 million . As atSeptember 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 ). The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As atSeptember 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 ). InJuly 2000 , the Company agreed to maintain health benefits for Messrs. Gelfond andBradley J. Wechsler , the Company's former Co-CEO and current Chairman of its Board of Directors, upon retirement. As atSeptember 30, 2020 , the Company's Condensed Consolidated Balance Sheet includes an unfunded benefit obligation of$0.6 million recorded within accrued and other liabilities (December 31, 2019 -$0.7 million ). The Company maintained a nonqualified deferred compensation benefit plan (the "Retirement Plan") covering the former CEO ofIMAX 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 atDecember 31, 2018 and the accelerated costs were recognized and reflected in Executive Transition Costs in the Consolidated Statement of Operations. As atSeptember 30, 2020 , the benefit obligation related to the Retirement Plan was$3.6 million (December 31, 2019 -$3.6 million ) and is recorded on the Company's Condensed Consolidated Balance Sheets within Accrued and Other Liabilities. As the Retirement Plan is fully vested, the benefit obligation is measured at the present value of the benefits expected to be paid in the future with the accretion of interest recognized in the Condensed Consolidated Statements of Operations within Retirement Benefits Non-service Expenses. 74 -------------------------------------------------------------------------------- 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 atSeptember 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.
NON-GAAP FINANCIAL MEASURES
GAAP refers to generally accepted accounting principles inthe United States of America . In this report, the Company presents financial measures in accordance with GAAP and also on a non-GAAP basis underU.S. Securities and Exchange Commission rules. 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;
• EBITDA; and
• 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: (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. 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.
75
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Three Months Ended Three Months Ended
September 30, 2020 September 30, 2019
(In thousands of U.S. dollars, except
per share amounts) Net Loss Diluted EPS Net Income Diluted EPS
Reported net (loss) income
attributable to common shareholders $ (47,209 ) $ (0.80 ) $ 9,033 $ 0.15
Adjustments(1):
Share-based compensation 5,019 0.09 $ 5,390 0.09
(Gain) loss in fair value of
investments (1,091 ) (0.02 ) 341 -
COVID-19 government relief benefits (2,084 ) (0.03 ) - -
Tax impact on items listed above(2) 611 0.01 (1,953 ) (0.03 )
Income tax effects related to the
removal of the indefinitely reinvested
assertion on the historical earnings
of certain subsidiaries 129 - - -
Adjusted net (loss) income(1) $ (44,625 ) $ (0.75 )
Weighted average basic shares
outstanding 58,859 61,304
Weighted average diluted shares
outstanding 58,859 61,479
Nine Months Ended Nine Months Ended
September 30, 2020 September 30, 2019
(In thousands of U.S. dollars, except
per share amounts) Net Loss Diluted EPS Net Income Diluted EPS
Reported net (loss) income attributable
to common shareholders $ (122,530 ) $ (2.06 ) $ 28,695 $ 0.47
Adjustments(1):
Share-based compensation 15,262 0.26 16,466 0.26
Exit costs, restructuring charges and
associated impairments - - 850 0.01
Loss in fair value of investments 661 0.01 1,742 0.03
COVID-19 government relief benefits (5,235 ) (0.08 ) - -
Tax impact on items listed above(2) (584 ) (0.01 ) (4,437 ) (0.07 )
Income tax effects related to the
removal of the indefinitely reinvested
assertion on the historical earnings of
certain subsidiaries 13,014 0.21 - -
Adjusted net (loss) income(1) $ (99,412 ) $ (1.67 ) Weighted average basic shares outstanding 59,360 61,337 Weighted average diluted shares outstanding 59,360 61,509
(1) Reflects amounts attributable to common shareholders.
(2) 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.
In addition to the non-GAAP financial measures discussed above, management also
uses "EBITDA," as such term is defined in the Credit Agreement, and which is
referred to herein as "Adjusted EBITDA per Credit Facility." As allowed by the
Credit Agreement, Adjusted EBITDA per Credit Facility includes adjustments in
addition to the exclusion of interest, taxes, depreciation and amortization.
Accordingly, this non-GAAP financial measure is presented to allow a more
comprehensive analysis of the Company's operating performance and to provide
additional information with respect to the Company's compliance against its
Credit Agreement requirements in the current period, if applicable. In addition,
the Company believes that Adjusted EBITDA per Credit Facility presents relevant
and useful information widely used by analysts, investors and other interested
parties in the Company's industry to evaluate, assess and benchmark the
Company's results.
76
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EBITDA is defined as net (loss) income excluding: (i) interest expense, net of
interest income; (ii) income tax (benefit) expense; and (iii) depreciation and
amortization, including film asset amortization. Adjusted EBITDA per Credit
Facility is defined as EBITDA excluding: (i) share-based and other non-cash
compensation; (ii) gain (loss) in fair value of investments; (iii) write-downs,
net of recoveries, including asset impairments and credit loss expense; and (iv)
(gain) loss from equity accounted investments.
A reconciliation of net loss attributable to common shareholders, the most
directly comparable GAAP measure, to EBITDA and Adjusted EBITDA per Credit
Facility is presented in the table below. The Company believes that net loss
attributable to common shareholders is the most directly comparable GAAP measure
because it reflects the earnings relevant to the Company's shareholders, rather
than including the non-controlling interest. As such, beginning in the first
quarter of 2020, the Company has updated the reconciliations for such non-GAAP
financial measures included herein.
For the Three Months Ended September 30, 2020 (1)
Attributable to
Non-controlling
Less: Attributable
Interests and to Attributable to
Non-controlling
Common Shareholders Interests Common Shareholders
(In thousands of U.S. Dollars)
Reported net loss $ (48,484 ) $ (1,275 ) $ (47,209 )
Add (subtract):
Income tax expense (benefit) 19,349 (503 ) 19,852
Interest expense, net of interest
income 1,509 (81 ) 1,590
Depreciation and amortization,
including film asset amortization 14,112 1,182 12,930
EBITDA $ (13,514 ) $ (677 ) $ (12,837 )
Share-based and other non-cash
compensation 5,495 292 5,203
Gain in fair value of investments (1,575 ) (484 ) (1,091 )
Write-downs, including asset
impairments and credit loss expense 10,458 3,324 7,134
Loss from equity accounted investments 1,329 - 1,329
Adjusted EBITDA per Credit Facility $ 2,193 $ 2,455 $ (262 )
For the Twelve Months Ended September 30, 2020 (1)
Attributable to
Non-controlling
Less: Attributable
Interests and to Attributable to
Non-controlling Common
Common Shareholders Interests Shareholders
(In thousands of U.S. Dollars)
Reported net loss $ (116,590 ) $ (12,231 ) $ (104,359 )
Add (subtract):
Income tax expense 29,388 5,549 23,839
Interest expense, net of interest
income 2,564 (388 ) 2,952
Depreciation and amortization,
including film asset amortization 59,281 4,737 54,544
EBITDA $ (25,357 ) $ (2,333 ) $ (23,024 )
Share-based and other non-cash
compensation 22,518 885 21,633
Gain in fair value of investments (1,087 ) (364 ) (723 )
Write-downs, including asset
impairments and credit loss expense 32,743 8,590 24,153
Loss from equity accounted investments 1,799 - 1,799
Adjusted EBITDA per Credit Facility $ 30,616 $ 6,778 $ 23,838
(1) 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
information see Note 7 of Notes to Condensed Consolidated Financial
Statements.
77
-------------------------------------------------------------------------------- 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.
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