IMAX Corporation (IMAX)

FORM 10-Q | Quarterly Report
Jul. 25, 2018 4:52 PM
|
About: IMAX Corporation (IMAX)View as PDF
IMAX CORP (Form: 10-Q, Received: 07/25/2018 16:56:22)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file Number 001-35066

 

 

IMAX Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Canada   98-0140269

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2525 Speakman Drive,

Mississauga, Ontario, Canada L5K 1B1

(905) 403-6500

 

902 Broadway, Floor 20

New York, New York, USA 10010

(212) 821-0100

(Address of principal executive offices, zip code, telephone numbers)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Shares, no par value   The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

  

Outstanding as of June 30,  2018

Common stock, no par value    62,521,916

 

 

 

 


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IMAX CORPORATION

Table of Contents

 

         Page  
PART I. FINANCIAL INFORMATION  

Item 1.

  Financial Statements      4  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      52  

Item 3.

  Quantitative and Qualitative Factors about Market Risk      89  

Item 4.

  Controls and Procedures      90  
PART II. OTHER INFORMATION  

Item 1.

  Legal Proceedings      91  

Item 1A.

  Risk Factors      91  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      91  

Item 6.

  Exhibits      91  

Signatures

       92  

 

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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 future capital expenditures (including the amount and nature thereof), business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business, operations and technology, plans and references to the future success of IMAX Corporation together with its consolidated subsidiaries (the “Company”) and expectations regarding the Company’s 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 of the United States and Canada; risks related to the Company’s growth and operations in China; the performance of IMAX DMR films; the signing of 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 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; risks related to the Company’s inability to protect the Company’s intellectual property; general economic, market or business conditions; the failure to convert theater system backlog into revenue; changes in laws or regulations; the failure to fully realize the projected cost savings and benefits from the Company’s restructuring initiative; 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.

 

 

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 ® , IMAX think big ® , think big ® and IMAX Is Believing ® , 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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IMAX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)

(Unaudited)

 

     June 30,
2018
    December 31,
2017
 

Assets

    

Cash and cash equivalents

   $ 133,042     $ 158,725  

Accounts receivable, net of allowance for doubtful accounts of $2,348 (December 31, 2017 — $1,613)

     113,461       130,546  

Financing receivables

     125,756       129,494  

Inventories

     40,705       30,788  

Prepaid expenses

     9,401       7,549  

Film assets

     15,193       5,026  

Property, plant and equipment

     276,129       276,781  

Other assets

     61,956       26,757  

Deferred income taxes

     24,386       30,708  

Other intangible assets

     30,456       31,211  

Goodwill

     39,027       39,027  
  

 

 

   

 

 

 

Total assets

   $ 869,512     $ 866,612  
  

 

 

   

 

 

 

Liabilities

    

Bank indebtedness

   $ 24,377     $ 25,357  

Accounts payable

     15,027       24,235  

Accrued and other liabilities

     107,799       100,140  

Deferred revenue

     110,286       113,270  
  

 

 

   

 

 

 

Total liabilities

     257,489       263,002  
  

 

 

   

 

 

 

Commitments and contingencies

    

Non-controlling interests

     7,578       1,353  
  

 

 

   

 

 

 

Shareholders’ equity

    

Capital stock common shares — no par value. Authorized — unlimited number. 62,747,512 issued and 62,521,916 outstanding (December 31, 2017 — 64,902,201 issued and 64,695,550 outstanding)

     431,003       445,797  

Less: Treasury stock, 225,596 shares at cost (December 31, 2017 — 206,651)

     (4,636     (5,133

Other equity

     179,767       175,300  

Accumulated deficit

     (75,908     (87,592

Accumulated other comprehensive loss

     (2,762     (626
  

 

 

   

 

 

 

Total shareholders’ equity attributable to common shareholders

     527,464       527,746  

Non-controlling interests

     76,981       74,511  
  

 

 

   

 

 

 

Total shareholders’ equity

     604,445       602,257  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 864,512     $ 866,612  
  

 

 

   

 

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

 

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IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2018     2017     2018     2017  

Revenues

        

Equipment and product sales

   $ 15,368     $ 21,334     $ 34,881     $ 32,879  

Services

     54,785       44,603       99,531       83,447  

Rentals

     25,124       19,438       43,326       35,294  

Finance income

     3,068       2,383       5,591       4,794  
  

 

 

   

 

 

   

 

 

   

 

 

 
     98,345       87,758       183,329       156,414  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses applicable to revenues

        

Equipment and product sales

     7,549       11,453       15,521       18,917  

Services

     23,633       21,266       43,984       41,080  

Rentals

     6,759       5,580       12,728       11,187  
     37,941       38,299       72,233       71,184  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     60,404       49,459       111,096       85,230  

Selling, general and administrative expenses

     32,608       28,589       60,691       59,531  

(including share-based compensation expense of $6.2 million and $10.7 million for the three and six months ended June 30, 2018 (2017 — $6.2 million and $11.0 million, respectively))

        

Research and development

     3,922       5,678       7,514       10,012  

Asset impairments

     —         1,225       —         1,225  

Amortization of intangibles

     965       779       1,857       1,380  

Receivable provisions, net of recoveries

     355       940       806       1,125  

Legal arbitration award

     7,500       —         7,500       —    

Exit costs, restructuring charges and associated impairments

     456       10,258       1,158       10,258  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     14,598       1,990       31,570       1,699  

Interest income

     243       280       490       508  

Interest expense

     (851     (435     (1,345     (890
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     13,990       1,835       30,715       1,317  

(Provision for) recovery of income taxes

     (3,635     238       (8,088     124  

Loss from equity-accounted investments, net of tax

     (100     (264     (305     (519
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10,255       1,809       22,322       922  

Less: net income attributable to non-controlling interests

     (2,630     (3,521     (6,192     (2,559
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ 7,625     $ (1,712   $ 16,130     $ (1,637
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common shareholders - basic and diluted:

 

Net income (loss) per share — basic and diluted

   $ 0.12     $ (0.03   $ 0.25     $ (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

 

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IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2018     2017     2018     2017  

Net income

   $ 10,255     $ 1,809     $ 22,322     $ 922  
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized net (loss) gain from cash flow hedging instruments

     (679     772       (1,686     1,085  

Realization of cash flow hedging net (gain) loss upon settlement

     (112     (101     (332     184  

Foreign currency translation adjustments

     (3,003     1,304       (951     1,762  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

     (3,794     1,975       (2,969     3,031  

Income tax benefit (expense) related to other comprehensive (loss) income

     207       (175     528       (332
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (3,587     1,800       (2,441     2,699  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     6,668       3,609       19,881       3,621  

Less: Comprehensive income attributable to non-controlling interests

     (1,667     (3,935     (5,887     (3,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to common shareholders

   $ 5,001     $ (326   $ 13,994     $ 502  
  

 

 

   

 

 

   

 

 

   

 

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

 

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IMAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

     Six Months Ended  
     June 30,  
     2018     2017  

Cash provided by (used in):

    

Operating Activities

    

Net income

   $ 22,322     $ 922  

Adjustments to reconcile net income to cash from operations:

    

Depreciation and amortization

     28,034       25,354  

Write-downs, net of recoveries

     1,686       13,155  

Change in deferred income taxes

     347       (3,133

Stock and other non-cash compensation

     11,920       12,570  

Unrealized foreign currency exchange loss (gain)

     473       (462

Loss from equity-accounted investments

     106       321  

Loss on non-cash contribution to equity-accounted investees

     199       198  

Investment in film assets

     (18,219     (19,589

Changes in other non-cash operating assets and liabilities

     (214     7,884  
  

 

 

   

 

 

 

Net cash provided by operating activities

     46,654       37,220  
  

 

 

   

 

 

 

Investing Activities

    

Purchase of property, plant and equipment

     (8,632     (9,771

Investment in joint revenue sharing equipment

     (8,455     (17,550

Acquisition of other intangible assets

     (1,705     (2,624

Investment in new business ventures

     —         (1,500
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,792     (31,445
  

 

 

   

 

 

 

Financing Activities

    

Repayment of bank indebtedness

     (1,000     (1,000

Repurchase of common shares

     (46,452     (46,138

Treasury stock purchased for future settlement of restricted share units

     (4,636     (5,412

Taxes withheld and paid on employee stock awards vested

     (1,279     (187

Settlement of restricted share units and options

     (1,529     (14,048

Issuance of subsidiary shares to a non-controlling interest

     6,696       —    

Common shares issued - stock options exercised

     799       14,419  

Dividend paid to non-controlling shareholders

     (4,623     —    

Credit facility amendment fees paid

     (1,963     —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (53,987     (52,366
  

 

 

   

 

 

 

Effects of exchange rate changes on cash

     442       76  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents during period

     (25,683     (46,515

Cash and cash equivalents, beginning of period

     158,725       204,759  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 133,042     $ 158,244  
  

 

 

   

 

 

 

(the accompanying notes are an integral part of these condensed consolidated financial statements)

 

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IMAX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)

(Unaudited)

1. Basis of Presentation

IMAX Corporation, together with its consolidated subsidiaries (the “Company”), prepares its financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

These condensed consolidated financial statements include the accounts of the Company, except for subsidiaries which the Company has identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary. The nature of the Company’s business is such that the results of operations for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all normal and recurring adjustments necessary to make the results of operations for the interim periods a fair statement of such operations.

The Company has evaluated its various variable interests to determine whether they are VIEs as required by the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”).

The Company has ten film production companies that are VIEs. For five of the Company’s film production companies, the Company has determined that it is the primary beneficiary of these entities as the Company has the power to direct the activities of the respective VIE that most significantly impact the respective VIE’s economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the respective VIE or the right to receive benefits from the respective VIE that could potentially be significant to the respective VIE. The majority of these consolidated assets are held by the IMAX Original Film Fund (the “Original Film Fund”) and the IMAX Virtual Reality Fund (the “VR Fund”) as described in note 17(b). For the other five film production companies which are VIEs, the Company does not consolidate these film entities since it does not have the power to direct activities and does not absorb the majority of the expected losses or expected residual returns. The Company used the equity method of accounting for these entities. A loss in value of an investment other than a temporary decline is recognized as a charge to the condensed consolidated statements of operations.

Total assets and liabilities of the Company’s consolidated VIEs are as follows:

 

     June 30,
2018
     December 31,
2017
 

Total assets

   $ 14,756      $ 7,539  

Total liabilities

   $ 13,691      $ 7,178  

Total assets and liabilities of the VIE entities which the Company does not consolidate are as follows:

 

     June 30,
2018
     December 31,
2017
 

Total assets

   $ 448      $ 448  

Total liabilities

   $ 373      $ 388  

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323 “Investments – Equity Method and Joint Ventures” (“ASC 323”) or ASC 320 “Investments in Debt and Equity Securities” (“ASC 320”), as appropriate.

All intercompany accounts and transactions, including all unrealized intercompany profits on transactions with equity-accounted investees, have been eliminated.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

These interim financial statements should be read in conjunction with the consolidated financial statements included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 31, 2017 (“the 2017 Form 10-K”) which should be consulted for a

 

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summary of the significant accounting policies utilized by the Company. These interim financial statements are prepared following accounting policies consistent with the Company’s financial statements for the year ended December 31, 2017, except as noted below.

2. New Accounting Standards and Accounting Changes

Adoption of New Accounting Policies

The Company adopted several standards including the following material standards on January 1, 2018, which are effective for annual periods ending after December 31, 2017, and for annual and interim periods thereafter.

In 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC Topic 606”). The Company adopted 2014-09 and several associated ASUs on January 1, 2018. See note 3 for a further discussion of the Company’s adoption of ASC Topic 606, including its 2018 operating results under the new standard.

Recently Issued FASB Accounting Standard Codification Updates

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The purpose of the amendment is to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. New disclosures will include qualitative and quantitative requirements to provide additional information about the amounts recorded in the financial statements. Lessor accounting will remain largely unchanged from current guidance; however, ASU 2016-02 will provide improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. For public entities, the amendments in ASU 2016-02 are effective for interim and annual reporting periods beginning after December 15, 2018. As a lessor, the Company has a significant portion of its revenue derived from leases, including its joint revenue sharing arrangements, and while the lessor accounting model is not fundamentally different, the Company continues to evaluate the effect of the standard on this revenue stream. The Company as a lessee, has entered into several leases that under ASC 840 are considered operating leases. The Company has inventoried its leases and continues to review its arrangements to identify any implied leases. The Company’s leases are primarily facility leases with various terms remaining. The Company is in the process of determining the rates to be used to discount its future performance obligation liabilities. The Company is currently evaluating the practical expedients offered by the standard and has not yet determined whether it will elect to apply them.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The purpose of ASU 2016-13 is to require a financial asset measured on the amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. For public entities, the amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2016-13 on its condensed consolidated financial statements.

The Company considers the applicability and impact of all recently issued FASB accounting standard codification updates. Accounting standards updates that are not noted above were assessed and determined to be not applicable or not significant to the Company’s condensed consolidated financial statements for the period ended June 30, 2018.

 

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3. Adoption of ASC Topic 606, Revenue from Contracts with Customers, effective January 1, 2018

As discussed in note 2, in 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. Several ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09 are intended to promote a more consistent interpretation and application of the principles outlined in the standard.

On January 1, 2018, the Company adopted ASC Topic 606, utilizing the modified retrospective transition method with a cumulative catch-up adjustment. Prior year amounts are presented in accordance with ASC Topic 605, “Revenue Recognition” or other applicable standards effective prior to January 1, 2018. The Company is applying the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. All system sales and maintenance contracts with the existing network of IMAX theaters and the backlog of sales contracts make up a significant majority of the Company’s open contracts at any point in time. DMR arrangements where the film continues to be shown by the Company’s exhibitor partners, film distribution arrangements with remaining terms, aftermarket sales orders that have been received but for which control of the assets has not yet transferred to the customer are all also considered open contracts.

The Company’s revenues from the sales of projection systems, provision of maintenance services, sale of aftermarket 3D glasses and parts, conversion of film content into the IMAX DMR format, distribution of documentary film content and the provision of post- production services are within the scope of the standard. The Company’s joint revenue sharing revenue arrangements, with the exception of those where the title transfers to the customer prior to recognition of the system revenue (hybrid sales arrangements), are not in scope of the standard due to their classification as leases. Similarly, any system revenue transactions classified as sales-type leases are excluded from the provisions of the new standard.

The Company has assessed its performance obligations under its arrangements pursuant to ASC Topic 606 and has concluded that there are no significant differences between the performance obligations required to be units of account under ASC Topic 606 and the deliverables considered to be units of account under ASC Topic 605. Specifically, the Company has concluded that its “System Obligation”, which consists of a theater system (projector, sound system, screen system and, if applicable, 3D glasses cleaning machine); services associated with the theater system including theater design support, supervision of installation services, and projectionist training; a license to use the IMAX brand to market the theater; 3D glasses; initial maintenance and extended warranty services; and potentially the licensing of films remains unchanged when considered under ASC Topic 606. The Company’s performance obligations for its DMR, maintenance, film distribution and aftermarket sales contracts remain similar to those under ASC Topic 605.

The new standard requires the Company to estimate the total consideration, including an estimate of future variable consideration, received in exchange for the goods delivered or services rendered. Certain of the Company’s revenue streams will be impacted by the variable consideration provisions of the new standard. The arrangements for the sale of projection systems include indexed minimum payment increases over the term of the arrangement, as well as provision for additional payments in excess of the minimum agreed payments in situations where the theater exceeds certain box office thresholds. Both of these contract provisions constitute variable consideration under the new standard that, subject to constraints to ensure reversal of revenues do not occur, require estimation and recognition upon transfer of control of the System Obligation to the customer, which is at the earlier of client acceptance of the installation of the system, including projectionist training, and the theater’s opening to the public. As this variable consideration extends through the entire term of the arrangement, which typically last 10 years, the Company applies constraints to its estimates and recognizes the variable consideration on a discounted present value basis at recognition. Under the previous standard, these amounts were recognized as reported by exhibitors (or customers) in future periods.

In certain joint revenue sharing arrangements, specifically the Company’s hybrid sales arrangements, the Company’s arrangements call for sufficient upfront revenues to cover the cost of the arrangement, with monthly payments calculated based on the theater’s net box office earned. Title and control of the projection system transfer to the customer at the point of revenue recognition, which is the earlier of client acceptance of the theater installation, including projectionist training, and theater opening to the public. Under the new revenue recognition standard, the percentage payment is considered variable consideration that must be estimated and recognized at the time of initial revenue recognition. Using box office projections and the Company’s history with theater and box office experience in different territories, the Company estimates the amount of percentage payment earned over the life of the arrangement, subject to sufficient constraint such that there is not a risk of significant revenue reversal. Under the previous recognition standard, these amounts were recognized as reported by exhibitors (or customers) in future periods. As a result, the Company has reclassified hybrid sales arrangements to the traditional sales segment since the total consideration received and the revenue recognition timing at transfer of control of the assets now very closely resemble those of the traditional sale arrangements.

 

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The Company’s arrangements include a requirement for the provision of maintenance services over the life of the arrangement, subject to a consumer price index increase on renewal each year. Under the new standard, the Company has included the future consideration from the provision of maintenance services in the relative selling price allocation calculation at the inception of the arrangement. Under the previous recognition standard, only the first year’s extended warranty and maintenance services included as part of the upfront consideration received by the Company was included in the relative selling price allocation to determine the allocation of consideration between deliverables, while the future years maintenance services were recognized and amortized over each year’s renewal term. Except in circumstances where customers prepay the entire term’s maintenance arrangement, payments are due to the Company for the years after the extended warranty and maintenance services offered as part of the System Obligation expire. Payments upon renewal each year can be either in arrears or in advance, and can vary in frequency from monthly to annually. At June 30, 2018, $17.0 million of consideration has been deferred in relation to outstanding stand ready performance obligations related to these maintenance services. As the maintenance services are a stand ready obligation, revenue, subject to appropriate constraint, is recognized evenly over the contract term, which is consistent with past treatment. The Company does not expect a significant change in the allocation of consideration between performance obligations to arise as a result of this change. The Company’s DMR and Film Distribution revenue streams fall under the variable consideration exemption for sales- or usage-based royalties. While the Company does not hold rights to the intellectual property in the form of the DMR film content, the Company is being reimbursed for the application of its intellectual property in the form of its patented DMR processes used in the creation of new intellectual property in the form of an IMAX DMR version of film. The Company’s Film Distribution revenues are strictly from the license of its intellectual property in the form of documentary film content to which the Company holds distribution rights.

The Company’s remaining revenue streams are not significantly impacted by the new standard. As the arrangements do not call for variable consideration and recognition of revenues transfer at the time of provision of service or transfer of control of goods as appropriate.

The recognition of variable consideration involves a significant amount of judgment. ASC Topic 606 requires variable consideration to be recognized subject to appropriate constraints to avoid a significant reversal of revenue in future periods. The standard identifies several examples of situations where constraining variable consideration would be appropriate:

 

    The amount of consideration is highly susceptible to factors outside the entity’s influence

 

    The uncertainty about the amount of consideration is not expected to be resolved for a long period of time

 

    The Company’s experience (or other evidence) with similar types of contracts is limited, or that experience has limited predictive value

 

    The Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances

The Company recorded an increase to opening retained earnings of $27.2 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact primarily related to revenue from its theater system business. The impact to revenues as a result of applying ASC Topic 606 was an increase of $0.5 million and $1.2 million for the three and six months ended June 30, 2018.

The following table presents the impacted financial statement line items in the Company’s condensed consolidated statement of operations:

 

     Three Months Ended  
     June 30, 2018  
(in thousands of U.S. dollars, except per share amounts)    Pre-adoption of
ASC Topic 606
     ASC Topic 606
Adjustments
     As
reported
 

Revenues

   $ 97,833      $ 512      $ 98,345  

Provision for income taxes

     (3,522      (113      (3,635

Net income

     9,856        399        10,255  

Less: net income attributable to non-controlling interests

     (2,537      (93      (2,630

Net income attributable to common shareholders

     7,319        306        7,625  

Net income per share attributable to common shareholders - basic and diluted

     0.12        —          0.12  

 

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     Six Months Ended  
     June 30, 2018  
(in thousands of U.S. dollars, except per share amounts)    Pre-adoption of
ASC Topic 606
     ASC Topic 606
Adjustments
     As
reported
 

Revenues

   $ 182,148      $ 1,181      $ 183,329  

Provision for income taxes

     (7,828      (260      (8,088

Net income

     21,401        921        22,322  

Less: net income attributable to non-controlling interests

     (6,031      (161      (6,192

Net income attributable to common shareholders

     15,370        760        16,130  

Net income per share attributable to common shareholders - basic and diluted

     0.24        0.01        0.25  

The following table presents the impact of ASC Topic 606 on the Company’s revenues by reportable segment:

 

     Three Months Ended  
     June 30, 2018  
     Pre-adoption of
ASC Topic 606
     ASC Topic 606
Adjustments
     As
reported
 

Network business

        

IMAX DMR

   $ 36,161      $ —        $ 36,161  

Joint revenue sharing arrangements – contingent rent (1)

     25,850        (1,120      24,730  

IMAX systems – contingent rent (1)

     475        (475      —    
  

 

 

    

 

 

    

 

 

 
     62,486        (1,595      60,891  
  

 

 

    

 

 

    

 

 

 

Theater business

        

IMAX systems

        

Sales and sales-type leases (2)

     8,588        3,393        11,981  

Ongoing fees and finance income (3)

     2,828        454        3,282  

Joint revenue sharing arrangements – fixed fees (4)

     2,762        (1,740      1,022  

Theater system maintenance

     12,335        —          12,335  

Other theater

     2,255        —          2,255  
  

 

 

    

 

 

    

 

 

 
     28,768        2,107        30,875  
  

 

 

    

 

 

    

 

 

 

New business

     3,116        —          3,116  
  

 

 

    

 

 

    

 

 

 

Other

        

Film post-production

     1,087        —          1,087  

Film distribution

     1,273        —          1,273  

Other

     1,103        —          1,103  
  

 

 

    

 

 

    

 

 

 
     3,463        —          3,463  
  

 

 

    

 

 

    

 

 

 

Total

   $ 97,833      $ 512      $ 98,345  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six Months Ended  
     June 30, 2018  
     Pre-adoption of
ASC Topic 606
     ASC Topic 606
Adjustments
     As
reported
 
  

 

 

    

 

 

    

 

 

 

Network business

        

IMAX DMR

   $ 63,214      $ —        $ 63,214  

Joint revenue sharing arrangements – contingent rent (1)

     44,381        (1,788      42,593  

IMAX systems – contingent rent (1)

     1,327        (1,327      —    
  

 

 

    

 

 

    

 

 

 
     108,922        (3,115      105,807  
  

 

 

    

 

 

    

 

 

 

Theater business

        

IMAX systems

        

Sales and sales-type leases (2)

     23,498        6,620        30,118  

Ongoing fees and finance income (3)

     5,431        581        6,012  

Joint revenue sharing arrangements – fixed fees (4)

     3,927        (2,905      1,022  

Theater system maintenance

     25,047        —          25,047  

Other theater

     3,631        —          3,631  
  

 

 

    

 

 

    

 

 

 
     61,534        4,296        65,830  
  

 

 

    

 

 

    

 

 

 

New business

     3,723        —          3,723  
  

 

 

    

 

 

    

 

 

 

Other

        

Film post-production

     4,250        —          4,250  

Film distribution

     1,844        —          1,844  

Other

     1,875        —          1,875  
  

 

 

    

 

 

    

 

 

 
     7,969        —          7,969  
  

 

 

    

 

 

    

 

 

 

Total

   $ 182,148      $ 1,181      $ 183,329  
  

 

 

    

 

 

    

 

 

 

 

(1) Contingent rent of $1.1 million and $1.8 million, respectively in the three and six months ended June 30, 2018, related to theater systems under hybrid sales arrangements and $0.5 million and $1.3 million, respectively in the three and six months ended June 30, 2018 related to theater systems under sales arrangements was recognized in the Company’s transition adjustment.
(2) Variable consideration of $1.7 million and $3.3 million, respectively in the three and six months ended June 30, 2018 relating to theater systems recognized as sales or hybrid sales was recognized as part of the System Obligation in the respective period and the fixed consideration recognized for theater systems installed under hybrid sales arrangements was reclassified from Joint revenue sharing arrangement – fixed fees as hybrid sales are no longer considered part of the Joint revenue sharing arrangement segment.
(3) Finance income of $0.5 million and $0.6 million, respectively in the three and six months ended June 30, 2018 was recognized on the future consideration related to contracts.
(4) Fixed consideration of $1.7 million and $2.9 million, respectively in the three and six months ended June 30, 2018 related to the recognition of theater systems under hybrid sales arrangements was reclassified to Sales and sales-type leases.

 

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Upon adoption of ASC Topic 606 the Company has evaluated its revenue streams by reportable segment and scoped out lease arrangements in accordance with the standard. The following table presents a breakdown of the Company’s revenues whereby fixed and variable consideration are subject to the new standard:

 

     Three Months Ended
June 30, 2018
 
     Subject to the New Revenue
Recognition Standard
     Subject to the
Lease Standard
        
     Fixed
consideration
     Variable
consideration
     Lease
arrangements
     Total  

Network business

           

IMAX DMR

   $ —        $ 36,161      $ —        $ 36,161  

Joint revenue sharing arrangements – contingent rent

     —          —          24,730        24,730  

IMAX systems – contingent rent

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          36,161        24,730        60,891  
  

 

 

    

 

 

    

 

 

    

 

 

 

Theater business

           

IMAX systems

           

Sales and sales-type leases

     9,874        2,107        —          11,981  

Ongoing fees and finance income

     3,282        —          —          3,282  

Joint revenue sharing arrangements – fixed fees

     1,022        —          —          1,022  

Theater system maintenance

     12,335        —          —          12,335  

Other theater

     2,255        —          —          2,255  
  

 

 

    

 

 

    

 

 

    

 

 

 
     28,768        2,107        —          30,875  
  

 

 

    

 

 

    

 

 

    

 

 

 

New business

     2,825        291        —          3,116  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

           

Film post-production

     1,087        —          —          1,087  

Film distribution

     —          1,273        —          1,273  

Other

     —          1,103        —          1,103  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,087        2,376        —          3,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,680      $ 40,935      $ 24,730      $ 98,345  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six Months Ended
June 30, 2018
 
     Subject to the New Revenue
Recognition Standard
     Subject to the
Lease Standard
        
     Fixed
consideration
     Variable
consideration
     Lease
arrangements
     Total  

Network business

           

IMAX DMR

   $ —        $ 63,214      $ —        $ 63,214  

Joint revenue sharing arrangements – contingent rent

     —          —          42,593        42,593  

IMAX systems – contingent rent

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          63,214        42,593        105,807  
  

 

 

    

 

 

    

 

 

    

 

 

 

Theater business

           

IMAX systems

           

Sales and sales-type leases

     25,822        4,296        —          30,118  

Ongoing fees and finance income

     6,012        —          —          6,012  

Joint revenue sharing arrangements – fixed fees

     1,022        —          —          1,022  

Theater system maintenance

     25,047        —          —          25,047  

Other theater

     3,631        —          —          3,631  
  

 

 

    

 

 

    

 

 

    

 

 

 
     61,534        4,296        —          65,830  
  

 

 

    

 

 

    

 

 

    

 

 

 

New business

     2,825        898        —          3,723  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

           

Film post-production

     4,250        —          —          4,250  

Film distribution

     —          1,844        —          1,844  

Other

     50        1,825        —          1,875  
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,300        3,669        —          7,969  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,659      $ 72,077      $ 42,593      $ 183,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the impact from the adoption of ASC Topic 606 on the Company’s assets and liabilities in the condensed consolidated balance sheet:

 

     Balance at             Balance at  
     December 31,
2017
     ASC Topic 606
Adjustments
     January 1,
2018
 

Assets

        

Other Assets

   $ 26,757      $ 34,384      $ 61,141  

Deferred income taxes

     30,708        (6,436      24,272  

Shareholders’ equity

        

Accumulated deficit

     (87,592      27,213        (60,379

Non-controlling interests

     74,511        735        75,246  

The Company has not experienced any significant true-ups or downs of its transition amounts.

 

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The following describes the Company’s updated revenue recognition policy to reflect the adoption of ASC Topic 606:

Contracts with Multiple Performance Obligations

The Company’s revenue arrangements with certain customers may involve performance obligations consisting of the delivery of a theater system (projector, sound system, screen system and, if applicable, 3D glasses cleaning machine); services associated with the theater system including theater design support, supervision of installation, and projectionist training; a license to use the IMAX brand; 3D glasses; maintenance and extended warranty services; and licensing of films. The Company evaluates all of the performance obligations in an arrangement to determine which are considered distinct, either individually or in a group, for accounting purposes and which of the deliverables represent separate units of accounting based on the applicable accounting guidance in the Leases Topic of the FASB ASC; the Guarantees Topic of the FASB ASC; and the Revenue Recognition Topic of the FASB. If separate units of accounting are either required under the relevant accounting standards or determined to be applicable under the Revenue Recognition Topic, the total consideration received or receivable in the arrangement is allocated based on the applicable guidance in the above noted standards.

Theater Systems

The Company has identified the projection system, sound system, screen system and, if applicable, 3D glasses cleaning machine, theater design support, supervision of installation, projectionist training and the use of the IMAX brand to be, as a group, a distinct performance obligation, and a single unit of accounting (the “System Obligation”). When an arrangement does not include all the performance obligations of a System Obligation, the performance obligations of the System Obligation included in the arrangement are considered by the Company to be a grouped distinct performance obligation and a single unit of accounting. The Company is not responsible for the physical installation of the equipment in the customer’s facility; however, the Company supervises the installation by the customer. The customer has the right to use the IMAX brand from the date the Company and the customer enter into an arrangement.

The Company’s System Obligation arrangements involve either a lease or a sale of the theater system. Consideration for the System Obligation, other than for those delivered pursuant to joint revenue sharing arrangements, consist of upfront or initial payments made before and after the final installation of the theater system equipment and ongoing payments throughout the term of the lease or over a period of time, as specified in the arrangement. The ongoing payments are the greater of an annual fixed minimum amount or a certain percentage of the theater box-office. Amounts received in excess of the annual fixed minimum amounts are considered contingent payments. The Company’s arrangements are non-cancellable, unless the Company fails to perform its obligations. In the absence of a material default by the Company, there is no right to any remedy for the customer under the Company’s arrangements. If a material default by the Company exists, the customer has the right to terminate the arrangement and seek a refund only if the customer provides notice to the Company of a material default and only if the Company does not cure the default within a specified period.

Consideration is allocated to each unit of accounting based on the unit’s relative selling prices. The Company uses vender-specific objective evidence of selling price (VSOE) when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. VSOE is established for the Company’s System Obligation, maintenance and extended warranty services and film license arrangements. The Company uses a best estimate of selling price (BESP) for units of accounting that do not have VSOE or third-party evidence of selling price. The Company determines BESP for a deliverable by considering multiple factors including the Company’s historical pricing practices, product class, market competition and geography.

Sales Arrangements

For arrangements qualifying as sales, the revenue allocated to the System Obligation is recognized in accordance with the Revenue Recognition Topic of the FASB ASC, when all of the following conditions signifying transfer of control have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided there is persuasive evidence of an arrangement, the price is fixed or determinable and collectability is reasonably assured.

The initial revenue recognized consists of the initial payments received and the present value of any future initial payments, fixed minimum ongoing payments and an estimate of future variable consideration (future CPI and additional payments in excess of the minimums in the case of full sale arrangements or a percentage of ongoing box office in the case of hybrid sales arrangements) that have been attributed to this unit of accounting.

 

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Table of Contents

The Company has also agreed, on occasion, to sell equipment under lease or at the end of a lease term. Consideration agreed to for these lease buyouts is included in revenues from equipment and product sales, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, collectability is reasonably assured and control of the theater system passes from the Company to the customer.

Taxes assessed by governmental authorities that are both imposed on and concurrent with the specific revenue-producing transactions and collected by the Company have been excluded from the measurement of the transaction prices discussed above.

Lease Arrangements

The Company uses the Leases Topic of FASB ASC to evaluate whether an arrangement is a lease within the scope of the accounting standard. Transactions accounted for under the Leases Topic of FASB ASC are not within the scope of Topic 606. Arrangements not within the scope of the accounting standard are accounted for either as a sales or services arrangement, as applicable.

For lease arrangements, the Company determines the classification of the lease in accordance with the Lease Topic of FASB ASC. A lease arrangement that transfers substantially all of the benefits and risks incident to ownership of the equipment is classified as a sales-type lease based on the criteria established by the accounting standard; otherwise the lease is classified as an operating lease. Prior to commencement of the lease term for the equipment, the Company may modify certain payment terms or make concessions. If these circumstances occur, the Company reassesses the classification of the lease based on the modified terms and conditions.

For sales-type leases, the revenue allocated to the System Obligation is recognized when the lease term commences, which the Company deems to be when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition; (ii) the 3D glasses cleaning machine, if applicable, has been delivered; (iii) projectionist training has been completed; and (iv) the earlier of (a) receipt of the written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided collectability is reasonably assured.

The initial revenue recognized for sales-type leases consists of the initial payments received and the present value of future initial payments and fixed minimum ongoing payments computed at the interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments are recognized when reported by theater operators, provided collectability is reasonably assured.

For operating leases, initial payments and fixed minimum ongoing payments are recognized as revenue on a straight-line basis over the lease term. For operating leases, the lease term is considered to commence when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and in full working condition; (ii) the 3D glasses cleaning machine, if applicable, has been delivered; (iii) projectionist training has been completed; and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater. Contingent payments in excess of fixed minimum ongoing payments are recognized as revenue when reported by theater operators, provided collectability is reasonably assured.

Revenues from joint revenue sharing arrangements with upfront payments that qualify for classification as sales-type leases are recognized in accordance with the sales and sales-type lease criteria discussed above. Contingent revenues from joint revenue sharing arrangements are recognized as box-office results and concessions revenues are reported by the theater operator, provided collectability is reasonably assured.

Finance Income

Finance income is recognized over the term of the sales-type lease or financed sales receivable, provided collectability is reasonably assured. Finance income recognition ceases when the Company determines that the associated receivable is not collectible.

Finance income is suspended when the Company identifies a theater that is delinquent, non-responsive or not negotiating in good faith with the Company. Once the collectability issues are resolved the Company will resume recognition of finance income.

 

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Table of Contents

Improvements and Modifications

Improvements and modifications to the theater system after installation are treated as separate revenue transactions, if and when the Company is requested to perform these services. Revenue is recognized for these services when the performance of the services has been completed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured.

Cost of Equipment and Product Sales

Theater systems and other equipment subject to sales-type leases and sales arrangements includes the cost of the equipment and costs related to project management, design, delivery and installation supervision services as applicable. The costs related to theater systems under sales and sales-type lease arrangements are relieved from inventory to costs and expenses applicable to revenues-equipment and product sales when revenue recognition criteria are met. In addition, the Company defers direct selling costs such as sales commissions and other amounts related to these contracts until the related revenue is recognized. The Company may have warranty obligations at or after the time revenue is recognized which require replacement of certain parts that do not affect the functionality of the theater system or services. The costs for warranty obligations for known issues are accrued as charges to costs and expenses applicable to revenues-equipment and product sales at the time revenue is recognized based on the Company’s past historical experience and cost estimates.

Cost of Rentals

For theater systems and other equipment subject to an operating lease or placed in a theater operators’ venue under a joint revenue sharing arrangement, the cost of equipment and those costs that result directly from and are essential to the arrangement, is included within property, plant and equipment. Depreciation and impairment losses, if any, are included in cost of rentals based on the accounting policy set out in note 2(g) of the Company’s Form 10-K. Under the new standard, commissions continue to be deferred and recognized as costs and expenses applicable to revenues-rentals in the month they are earned, which is typically the month of installation.

Terminations, Consensual Buyouts and Concessions

The Company enters into theater system arrangements with customers that contain customer payment obligations prior to the scheduled installation of the theater system. During the period of time between signing and the installation of the theater system, which may extend several years, certain customers may be unable to, or may elect not to, proceed with the theater system installation for a number of reasons including business considerations, or the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the arrangement may be terminated under the default provisions of the arrangement or by mutual agreement between the Company and the customer (a “consensual buyout”). Terminations by default are situations when a customer does not meet the payment obligations under an arrangement and the Company retains the amounts paid by the customer. Under a consensual buyout, the Company and the customer agree, in writing, to a settlement and to release each other of any further obligations under the arrangement or an arbitrated settlement is reached. Any initial payments retained or additional payments received by the Company are recognized as revenue when the settlement arrangements are executed and the cash is received, respectively. These termination and consensual buyout amounts are recognized in Other revenues.

In addition, the Company could agree with customers to convert their obligations for other theater system configurations that have not yet been installed to arrangements to acquire or lease the IMAX digital theater system. The Company considers these situations to be a termination of the previous arrangement and origination of a new arrangement for the IMAX digital theater system. For all arrangements entered into or modified prior to the date of adoption of the amended FASB ASC 605-25, the Company continues to defer an amount of any initial fees received from the customer such that the aggregate of the fees deferred and the net present value of the future fixed initial and ongoing payments to be received from the customer equals the selling price of the IMAX digital theater system to be leased or acquired by the customer. Any residual portion of the initial fees received from the customer for the terminated theater system is recorded in other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed. Under the amended FASB ASC 605-25, for all arrangements entered into or materially modified after the date of adoption, the total arrangement consideration to be received is allocated on a relative selling price basis to the digital upgrade and the termination of the previous theater system. The arrangement consideration allocated to the termination of the existing arrangement is recorded in Other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed.

The Company may offer certain incentives to customers to complete theater system transactions including payment concessions or free services and products such as film licenses or 3D glasses. Reductions in, and deferral of, payments are taken into account in determining the sales price either by a direct reduction in the sales price or a reduction of payments to be discounted in accordance with

 

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the Leases or Interests Topic of the FASB ASC. Free products and services are accounted for as separate units of accounting. Other consideration given by the Company to customers are accounted for in accordance with the Revenue Recognition Topic of the FASB ASC.

Maintenance and Extended Warranty Services

Maintenance and extended warranty services may be provided under a multiple element arrangement or as a separately priced contract. Revenues related to these services are deferred and recognized on a straight-line basis over the contract period and are recognized in Services revenues. Maintenance and extended warranty services includes maintenance of the customer’s equipment and replacement parts. Under certain maintenance arrangements, maintenance services may include additional training services to the customer’s technicians. All costs associated with this maintenance and extended warranty program are expensed as incurred. A loss on maintenance and extended warranty services is recognized if the expected cost of providing the services under the contracts exceeds the related deferred revenue. As the maintenance services are a stand ready obligation with the cost of providing the service expected to increase throughout the term, revenue is recognized over the term of the arrangement such that increased amounts are recognized in later periods.

Film Production and IMAX DMR Services

In certain film arrangements, the Company produces a film financed by third parties whereby the third party retains the copyright and the Company obtains exclusive distribution rights. Under these arrangements, the Company is entitled to receive a fixed fee or to retain as a fee the excess of funding over cost of production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which is charged to costs and expenses applicable to revenues-services. The production fees are deferred, and recognized as a reduction in the cost of the film based on the ratio of the Company’s distribution revenues recognized in the current period to the ultimate distribution revenues expected from the film. Film exploitation costs, including advertising and marketing are recorded in costs and expenses applicable to revenues-services as incurred.

Revenue from film production services where the Company does not hold the associated distribution rights are recognized in Services revenues when performance of the contractual service is complete, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collectability is reasonably assured.

Revenues from digitally re-mastering (IMAX DMR) films where third parties own or hold the copyrights and the rights to distribute the film are derived in the form of processing fees for the application of the Company’s patented processes calculated as a percentage of box-office receipts generated from the re-mastered films. Since these fees are subject to the sales-based royalty exception, they are recognized as Services revenues when box-office receipts are reported by the third party that owns or holds the related film rights, provided collectability is reasonably assured.

Losses on film production and IMAX DMR services are recognized as costs and expenses applicable to revenues-services in the period when it is determined that the Company’s estimate of total revenues to be realized by the Company will not exceed estimated total production costs to be expended on the film production and the cost of IMAX DMR services.

Film Distribution

Revenue from the flat-fee licensing of films whose distribution rights are owned by the Company is recognized in Services revenues when persuasive evidence of a licensing arrangement exists, the film has been completed and delivered, the license period has begun, the fee is fixed or determinable and collectability is reasonably assured. When license fees are based on a percentage of box-office receipts, the revenue is subject to the sales-based royalty exception and is recognized when box-office receipts are reported by exhibitors, provided collectability is reasonably assured. Film exploitation costs, including advertising and marketing, are recorded in costs and expenses applicable to revenues-services as incurred.

Film Post-Production Services

Revenues from post-production film services are recognized in Services revenues when performance of the contracted services is complete provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is reasonably assured.

 

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Other

The Company recognizes revenue in Services revenues from its owned and operated theaters resulting from box-office ticket and concession sales as tickets are sold, films are shown and upon the sale of various concessions. The sales are cash or credit card transactions with theater goers based on fixed prices per seat or per concession item.

In addition, the Company enters into commercial arrangements with third party theater owners resulting in the sharing of profits and losses which are recognized in Services revenues when reported by such theaters. The Company also provides management services to certain theaters and recognizes revenue over the term of such services.

Revenues on camera rentals are recognized in Rental revenues over the rental period.

Revenue from the sale of 3D glasses is recognized in Equipment and product sales revenue when the 3D glasses have been delivered to the customer.

Other service revenues are recognized in Service revenues when the performance of contracted services is complete.

4. Financing Receivables

Financing receivables, consisting of net investment in sales-type leases and receivables from financed sales of theater systems are as follows:

 

     June 30,
2018
     December 31,
2017
 

Gross minimum lease payments receivable

   $ 7,961      $ 8,537  

Unearned finance income

     (1,026      (1,147
  

 

 

    

 

 

 

Minimum lease payments receivable

     6,935        7,390  

Accumulated allowance for uncollectible amounts

     (155      (155
  

 

 

    

 

 

 

Net investment in leases

     6,780        7,235  
  

 

 

    

 

 

 

Gross financed sales receivables

     157,052        162,522  

Unearned finance income

     (37,237      (39,341
  

 

 

    

 

 

 

Financed sales receivables

     119,815        123,181  

Accumulated allowance for uncollectible amounts

     (839      (922
  

 

 

    

 

 

 

Net financed sales receivables

     118,976        122,259  
  

 

 

    

 

 

 

Total financing receivables

   $ 125,756      $ 129,494  
  

 

 

    

 

 

 

Net financed sales receivables due within one year

   $ 25,721      $ 25,455  

Net financed sales receivables due after one year

   $ 93,255      $ 96,804  

As at June 30, 2018, the financed sale receivables had a weighted average effective interest rate of 8.9% (December 31, 2017 — 9.1%).

 

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5. Inventories

 

     June 30,
2018
     December 31,
2017
 

Raw materials

   $ 25,907      $ 21,206  

Work-in-process

     4,027        2,601  

Finished goods

     10,771        6,981  
  

 

 

    

 

 

 
   $ 40,705      $ 30,788  
  

 

 

    

 

 

 

At June 30, 2018, finished goods inventory for which title had passed to the customer and revenue was deferred amounted to $4.1 million (December 31, 2017 — $4.9 million).

During the three and six months ended June 30, 2018, the Company recognized write-downs for excess and obsolete inventory based on current estimates of net realizable value considering future events and conditions of $nil and $nil, respectively (2017 — less than $0.1 million and less than $0.1 million, respectively).

6. Property, Plant and Equipment

 

     As at June 30, 2018  
            Accumulated      Net Book  
     Cost      Depreciation      Value  

Equipment leased or held for use

        

Theater system components

   $ 271,303      $ 113,578      $ 157,725  

Camera equipment

     5,757        4,220        1,537  
  

 

 

    

 

 

    

 

 

 
     277,060        117,798        159,262  
  

 

 

    

 

 

    

 

 

 

Assets under construction

     24,435        —          24,435  
  

 

 

    

 

 

    

 

 

 

Other property, plant and equipment

        

Land

     8,203        —          8,203  

Buildings

     75,880        18,659        57,221  

Office and production equipment

     45,620        25,250        20,370  

Leasehold improvements

     11,044        4,406        6,638  
  

 

 

    

 

 

    

 

 

 
     140,747        48,315        92,432  
  

 

 

    

 

 

    

 

 

 
   $ 442,242      $ 166,113      $ 276,129  
  

 

 

    

 

 

    

 

 

 
     As at December 31, 2017  
            Accumulated      Net Book  
     Cost      Depreciation      Value  

Equipment leased or held for use

        

Theater system components

   $ 264,259      $ 103,922      $ 160,337  

Camera equipment

     5,757        3,939        1,818  
  

 

 

    

 

 

    

 

 

 
     270,016        107,861        162,155  
  

 

 

    

 

 

    

 

 

 

Assets under construction

     23,398        —          23,398  
  

 

 

    

 

 

    

 

 

 

Other property, plant and equipment

        

Land

     8,203        —          8,203  

Buildings

     74,478        17,364        57,114  

Office and production equipment

     40,442        22,164        18,278  

Leasehold improvements

     10,974        3,341        7,633  
  

 

 

    

 

 

    

 

 

 
     134,097        42,869        91,228  
  

 

 

    

 

 

    

 

 

 
   $ 427,511      $ 150,730      $ 276,781  
  

 

 

    

 

 

    

 

 

 

 

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The Company recognized asset impairment charges of $0.8 million in the six months ended June 30, 2018 (2017 — $0.6 million) against property, plant and equipment after an assessment of the carrying value of certain assets in light of their future expected cash flows. In 2017, the Company also recognized property, plant and equipment impairment charges of $3.7 million. No such charge was recognized in the six months ended June 30, 2018.

7. Other Intangible Assets

 

     As at June 30, 2018  
            Accumulated      Net Book  
     Cost      Amortization      Value  

Patents and trademarks

   $ 12,592      $ 8,106      $ 4,486  

Licenses and intellectual property

     21,168        8,038        13,130  

Other

     20,784        7,944        12,840  
  

 

 

    

 

 

    

 

 

 
   $ 54,544      $ 24,088      $ 30,456  
  

 

 

    

 

 

    

 

 

 
     As at December 31, 2017  
            Accumulated      Net Book  
     Cost      Amortization      Value  

Patents and trademarks

   $ 12,184      $ 7,710      $ 4,474  

Licenses and intellectual property

     21,471        7,800        13,671  

Other

     19,529        6,463        13,066  
  

 

 

    

 

 

    

 

 

 
   $ 53,184      $ 21,973      $ 31,211  
  

 

 

    

 

 

    

 

 

 

Other intangible assets of $20.8 million are comprised mainly of the Company’s investment in an enterprise resource planning system. Fully amortized other intangible assets of $5.9 million are still in use by the Company.

During the six months ended June 30, 2018, the Company acquired $1.7 million in other intangible assets. The weighted average amortization period for these additions was 10 years.

During the three and six months ended June 30, 2018, the Company incurred costs of $0.1 million and $0.2 million, respectively to renew or extend the term of acquired other intangible assets which were recorded in selling, general and administrative expenses (2017 – less than $0.1 million and $0.1 million, respectively).

As at June 30, 2018, estimated amortization expense for each of the years ended December 31, are as follows:

 

2018 (six months remaining)

   $ 2,507  

2019

     5,015  

2020

     5,015  

2021

     5,015  

2022

     5,015  

 

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8. Credit Facility and Other Financing Arrangements

Credit Facility

On June 28, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as agent, and a syndicate of lenders party thereto. The Credit Agreement expands the Company’s revolving borrowing capacity from $200.0 million to $300.0 million, and also contains an uncommitted accordion feature allowing the Company to further expand its borrowing capacity to $440.0 million or greater, depending on the mix of revolving and term loans comprising the incremental facility. The new facility (the new “Credit Facility”) matures on June 28, 2023.

Loans under the new Credit Facility will bear interest, at the Company’s option, at (i) LIBOR plus a margin ranging from 1.00% to 1.75% per annum; or (ii) the U.S. base rate plus a margin ranging from 0.25% to 1.00% per annum, in each case depending on the Company’s Total Leverage Ratio (as defined in the Credit Agreement). In no event will the LIBOR rate be less than 0.00% per annum. The additional fees incurred as part of the new Credit Facility were $2.0 million.

The Credit Agreement requires that the Company maintain a Senior Secured Net Leverage Ratio (as defined in the Credit Agreement) of no greater than 3.25:1. In addition, the Credit Agreement contains customary affirmative and negative covenants for a transaction of this type, 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 representations, warranties and event of default provisions customary for a transaction of this type.

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

The Company was in compliance with all of its requirements at June 30, 2018.

Total amounts drawn and available under the Credit Facility at June 30, 2018 were $nil and $300.0 million, respectively (December 31, 2017 — $nil and $200.0 million, respectively). Subsequent to June 30, 2018, the Company borrowed $30.0 million under the Credit Facility to fully repay the Playa Vista Loan, referred to below, as well as fund working capital requirements.

As at June 30, 2018, the Company did not have any advance payment guarantees outstanding (December 31, 2017 — $nil), under the Credit Facility.

Working Capital Loan

Subsequent to June 30, 2018, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, entered into an unsecured revolving facility for up to RMB 200.0 million (approximately USD $30.0 million) to fund ongoing working capital requirements.

Playa Vista Financing

In 2014, IMAX PV Development Inc., a wholly-owned subsidiary of the Company (“PV Borrower”), entered into a loan agreement with Wells Fargo to principally fund the costs of development and construction of the Company’s new West Coast headquarters, located in the Playa Vista neighborhood of Los Angeles, California (the “Playa Vista Loan”).

At inception, the Playa Vista Loan was fully drawn at $30.0 million and bore interest at a variable rate per annum equal to 2.0% above the 30-day LIBOR rate. The Playa Vista Loan was to be fully due and payable on October 19, 2025 (the “Maturity Date”), and could be prepaid at any time without premium, but with all accrued interest and other applicable payments.

As at June 30, 2018, bank indebtedness includes the following:

 

     June 30,      December 31,  
     2018      2017  

Playa Vista Loan

   $ 24,667      $ 25,667  

Deferred charges on debt financing

     (290      (310
  

 

 

    

 

 

 
   $ 24,377      $ 25,357  
  

 

 

    

 

 

 

 

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Total amounts drawn under the loan at June 30, 2018 was $24.7 million (December 31, 2017 — $25.7 million). The effective interest rate for the three and six months ended June 30, 2018 was 4.02% and 3.86%, respectively (2017 — 3.08% and 2.97%, respectively).

Subsequent to June 30, 2018, the Company extinguished the Playa Vista Loan in its entirety by borrowing under its Credit Facility.

Wells Fargo Foreign Exchange Facility

Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. The settlement risk on its foreign currency forward contracts was $0.6 million at June 30, 2018, as the notional value exceeded the fair value of the forward contracts. As at June 30, 2018, the Company has $43.4 million in notional value of such arrangements outstanding.

Bank of Montreal Facility

As at June 30, 2018, the Company has available a $10.0 million facility (December 31, 2017 — $10.0 million) with the Bank of Montreal for use solely in conjunction with the issuance of performance guarantees and letters of credit fully insured by Export Development Canada (the “Bank of Montreal Facility”). As at June 30, 2018, the Company has outstanding letters of credit and advance payment guarantees outstanding of $0.1 million (December 31, 2017 — $nil), under the Bank of Montreal Facility.

9. Commitments, Contingencies and Guarantees

Commitments

In the ordinary course of business, the Company enters into contractual agreements with third parties that include non-cancellable payment obligations, for which it is liable in future periods. These arrangements can include terms binding the Company to minimum payments and/or penalties if it terminates the agreement for any reason other than an event of default as described by the agreement.

The Company has a minimum commitment of $2.7 million toward the development, production, post-production and marketing related to certain film and new content initiatives. As of June 30, 2018, the Company has spent $2.7 million, and does not expect to spend any additional funds during the remainder of the year.

Contingencies and guarantees

The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. In accordance with the Contingencies Topic of the FASB ASC, the Company will make a provision for a liability when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions in conjunction with any related provisions on assets related to the claims at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case. Should developments in any of these matters outlined below cause a change in the Company’s determination as to an unfavorable outcome and result in the need to recognize a material provision, or, should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on the Company’s results of operations, cash flows, and financial position in the period or periods in which such a change in determination, settlement or judgment occurs.

The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred.

(a) On May 15, 2006, the Company initiated arbitration against Three-Dimensional Media Group, Ltd. (“3DMG”) before the International Centre for Dispute Resolution in New York (the “ICDR”), alleging breaches of the license and consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying any breaches and asserting counterclaims that the Company breached the parties’ license agreement. The proceeding was suspended on May 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The proceeding was further suspended on October 11, 2010 pending resolution of re-examination proceedings involving one of 3DMG’s patents. Following a status conference on April 27, 2016 before the ICDR, the ICDR granted 3DMG leave to amend its answer and counterclaims, and subsequently lifted the stay in this matter. In its amended counterclaims, 3DMG sought damages for alleged unpaid royalties, damages and other fees under the license and consulting agreements, and the Panel also permitted 3DMG to advance new damage theories. The ICDR held a final hearing in July and October 2017, the parties submitted final, post-hearing briefs in December 2017, and the ICDR held closing oral arguments in March 2018. On July 11, 2018, the ICDR issued a Partial Final Award that found for 3DMG on certain claims and for the Company on other claims. As part of the Partial Final

 

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Award, the ICDR awarded damages in favor of 3DMG in the amount of $8.8 million, which is inclusive of approximately $1.8 million in pre-award interest. The ICDR also set a schedule for briefing by the parties on the only claim remaining in the arbitration, which is the possible shifting of attorney fees and expenses. A charge of $7.5 million was recorded in the period to the Legal arbitration award financial statement line item, reflecting current expectations of final settlement of the matter.

(b) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages before the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) of its December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-City Entertainment (I) PVT Limited (“E-City”). On March 27, 2008, the arbitration panel issued a final award in favor of the Company in the amount of $11.3 million, consisting of past and future rents owed to the Company, plus interest and costs, as well as an additional $2,512 each day in interest from October 1, 2007 until the date the award is paid. In July 2008, E-City commenced a proceeding in Mumbai, India seeking an order that the ICC award may not be recognized in India and on June 10, 2013, the Bombay High Court ruled that it had jurisdiction over the proceeding filed by E-City. The Company appealed that ruling to the Supreme Court of India, and on March 10, 2017, the Supreme Court set aside the Bombay High Court’s judgement and dismissed E-City’s petition. On March 29, 2017, the Company filed an Execution Application in the Bombay High Court seeking to enforce the ICC award against E-City and several related parties. That matter is currently pending. The Company has also taken steps to enforce the ICC final award outside of India. In December 2011, the Ontario Superior Court of Justice issued an order recognizing the final award and requiring E-City to pay the Company $30,000 to cover the costs of the application, and in October 2015, the New York Supreme Court recognized the Canadian judgment and entered it as a New York judgment. The Company intends to continue pursuing its rights and seeking to enforce the award, although no assurances can be given with respect to the ultimate outcome.

(c) In March 2013, IMAX (Shanghai), received notice from the Shanghai office of the General Administration of Customs (“Customs Authority”) that it had been selected for a customs audit (the “Audit”). In the course of the Audit, the Customs Authority discovered the underpayment by IMAX Shanghai of the freight and insurance portion of the customs duties and taxes applicable to the importation of certain IMAX theater systems during the period from October 2011 through March 2013. Though IMAX Shanghai’s importation agent accepted responsibility for the error giving rise to the underpayment, the matter was transferred first to the Anti-Smuggling Bureau (the “ASB”) of the Customs Authority and then to the Third Division of Shanghai People’s Procuratorate for further review. During the year ended December 31, 2017, at the request of the ASB, IMAX Shanghai paid approximately $0.15 million to the ASB to satisfy the amount owing as a result of the underpayment. Given that the amount of the underpayment exceeds RMB 200,000 (the applicable ASB threshold), the Company has been advised that the matter may be treated as a criminal rather than as an administrative matter. During the year ended December 31, 2017, IMAX Shanghai recorded an estimate of $0.3 million in respect of fines that it believes are likely to result from the matter. IMAX Shanghai has been advised that the range of potential penalties is between three and five times the underpayment depending on whether the matter is assessed as criminal or administrative; however, the actual amount of any fines or other penalties remains unknown and the Company cautions that these actual fines or other penalties maybe be greater or less than the amount accrued or the expected range.

(d) On November 11, 2013, Giencourt Investments, S.A. (“Giencourt”) initiated arbitration before the International Centre for Dispute Resolution in Miami, Florida, based on alleged breaches by the Company of its theater agreement and related license agreement with Giencourt. An arbitration hearing for witness testimony was held during the week of December 14, 2015. At the hearing, Giencourt’s expert identified monetary damages of up to approximately $10.4 million, which Giencourt sought to recover from the Company. The Company asserted a counterclaim against Giencourt for breach of contract and sought to recover lost profits in excess of $24.0 million under the agreements. Subsequently, in December 2015, Giencourt made a motion to the panel seeking to enforce a purported settlement of the matter based on negotiations between Giencourt and the Company. The panel held a final hearing with closing arguments in October 2016. On February 7, 2017, the panel issued a Partial Final Award and on July 21, 2017, the panel issued a Final Award (collectively, the “Award”), which held that the parties had reached a binding settlement, and therefore the panel did not reach the merits of the dispute. The Company strongly disputes that discussions about a potential resolution of this matter amounted to an enforceable settlement. In October 2017, the Company filed a petition to vacate the arbitration award in the United States Court for the Southern District of Florida on various grounds, including that the panel exceeded its jurisdiction. The petition is still pending. At this time, the Company is unable to determine the amounts that it may owe pursuant to the Award, or the timing of any such payments, and therefore no assurances can be given with respect to the ultimate outcome of the matter.

 

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(e) In addition to the matters described above, the Company is currently involved in other legal proceedings or governmental inquiries which, in the opinion of the Company’s management, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings.

(f) In the normal course of business, the Company enters into agreements that may contain features that meet the definition of a guarantee. The Guarantees Topic of the FASB ASC defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments (either in cash, financial instruments, other assets, shares of its stock or provision of services) to a third party based on (a) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty, (b) failure of another party to perform under an obligating agreement or (c) failure of another third party to pay its indebtedness when due.

Financial Guarantees

The Company has provided no significant financial guarantees to third parties.

Product Warranties

The Company’s accrual for product warranties, that was recorded as part of accrued and other liabilities in the condensed consolidated balance sheets was $0.2 million and $0.1 million at June 30, 2018 and December 31, 2017, respectively.

Director/Officer Indemnifications

The Company’s General By-law contains an indemnification of its directors/officers, former directors/officers and persons who have acted at its request to be a director/officer of an entity in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by the Canada Business Corporations Act , against expenses (including legal fees), judgments, fines and any amounts actually and reasonably incurred by them in connection with any action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Company. In addition, the Company has entered into indemnification agreements with each of its directors in order to effectuate the foregoing. The nature of the indemnification prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been accrued in the condensed consolidated balance sheets as at June 30, 2018 and December 31, 2017, with respect to this indemnity.

Other Indemnification Agreements

In the normal course of the Company’s operations, the Company provides indemnifications to counterparties in transactions such as: theater system lease and sale agreements and the supervision of installation or servicing of the theater systems; film production, exhibition and distribution agreements; real property lease agreements; and employment agreements. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims that may be suffered by the counterparty as a consequence of the transaction or the Company’s breach or non-performance under these agreements. While the terms of these indemnification agreements vary based upon the contract, they normally extend for the life of the agreements. A small number of agreements do not provide for any limit on the maximum potential amount of indemnification; however, virtually all of the Company’s system lease and sale agreements limit such maximum potential liability to the purchase price of the system. The fact that the maximum potential amount of indemnification required by the Company is not specified in some cases prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnifications and no amounts have been accrued in the condensed consolidated financial statements with respect to the contingent aspect of these indemnities.

 

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10. Condensed Consolidated Statements of Operations Supplemental Information

(a) Selling Expenses

The Company defers direct selling costs such as sales commissions and other amounts related to its sale and sales-type lease arrangements until the related revenue is recognized. These costs and direct advertising and marketing, included in costs and expenses applicable to Revenues – Equipment and product sales, totaled $0.5 million and $1.2 million for the three and six months ended June 30, 2018 (2017 — $0.8 million and $1.1 million, respectively).

Film exploitation costs, including advertising and marketing, totaled $7.3 million and $12.6 million for the three and six months ended June 30, 2018 (2017 — $4.1 million and $6.6 million, respectively), and are recorded in costs and expenses applicable to revenues-services as incurred.

Commissions are recognized as costs and expenses applicable to Revenues – Rentals in the month they are earned. These costs totaled $0.5 million and $0.6 million for the three and six months ended June 30, 2018 (2017 — $0.4 million and $0.5 million, respectively). Direct advertising and marketing costs for each theater are charged to costs and expenses applicable to Revenues – Rentals as incurred. These costs totaled an expense of $0.6 million and $0.7 million for the three and six months ended June 30, 2018 (2017 — $0.4 million and $0.7 million, respectively).

(b) Foreign Exchange

Included in selling, general and administrative expenses for the three and six months ended June 30, 2018 is a loss of $1.0 million and a loss of $1.1 million, respectively (2017 — gain of $0.2 million and gain of $0.2 million, respectively), for net foreign exchange gains/losses related to the translation of foreign currency denominated monetary assets and liabilities. See note 16(d) for additional information.

(c) Collaborative Arrangements

Joint Revenue Sharing Arrangements

In a joint revenue sharing arrangement, the Company receives a portion of a theater’s box office and concession revenues, and in some cases a small upfront or initial payment, in exchange for placing a theater system at the theater operator’s venue. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to equipment under joint revenue sharing arrangements generally does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on the date the theater systems are delivered back to the Company.

The Company has signed joint revenue sharing agreements with 39 exhibitors for a total of 1,192 theater systems, of which 738 theaters were operating as at June 30, 2018, the terms of which are similar in nature, rights and obligations. The accounting policy for the Company’s joint revenue sharing arrangements is disclosed in note 3.

Amounts attributable to transactions arising between the Company and its customers under joint revenue sharing arrangements are included in Revenue—Equipment and product sales and Rentals and for the three and six months ended June 30, 2018 amounted to $25.7 million and $43.6 million, respectively (2017 — $20.3 million and $36.0 million, respectively).

 

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IMAX DMR

In an IMAX DMR arrangement, the Company transforms conventional motion pictures into the Company’s large screen format, allowing the release of Hollywood content to the global IMAX theater network. In a typical IMAX DMR film arrangement, the Company will absorb its costs for the digital re-mastering and then recoup this cost from a percentage of the box-office receipts of the film, which in recent years has averaged approximately 12.5% outside of Greater China and a lower percentage for certain films within Greater China. The Company does not typically hold distribution rights or the copyright to these films.

For the six months ended June 30, 2018, the majority of IMAX DMR revenue was earned from the exhibition of 33 IMAX DMR films (2017 – 33) throughout the IMAX theater network.

Amounts attributable to transactions arising between the Company and its customers under IMAX DMR arrangements are included in Services revenue and for the three and six months ended June 30, 2018 amounted to $36.1 million and $63.2 million, respectively (2017 — $27.8 million and $51.2 million, respectively).

Co-Produced Film Arrangements

In certain film arrangements, the Company co-produces a film with a third party whereby the third party retains the copyright and rights to the film and the Company obtains exclusive theatrical distribution rights to the film. Under these arrangements, both parties contribute funding to the Company’s wholly-owned production company for the production of the film and for associated exploitation costs. Clauses in the film arrangements generally provide for the third party to take over the production of the film if the cost of the production exceeds its approved budget or if it appears as though the film will not be delivered on a timely basis.

As at June 30, 2018, the Company has two significant co-produced film arrangements which represent the VIE total assets balance of $14.8 million and liabilities balance of $13.7 million and three other co-produced film arrangements, the terms of which are similar. The accounting policies relating to co-produced film arrangements are disclosed in notes 2(a) of the Company’s 2017 Form 10-K, and in note 3.

For the three and six months ended June 30, 2018, amounts totaling a recovery of less than $0.1 million and expense of $0.2 million, respectively (2017 — expense of $0.2 million and $0.7 million, respectively) attributable to transactions between the Company and other parties involved in the production of the films have been included in cost and expenses applicable to Revenues – Services.

As at June 30, 2018, the Company is participating in one significant co-produced television arrangement. This arrangement is not a VIE.

For the three and six months ended June 30, 2018, revenues of less than $0.1 million and $0.4 million, respectively (2017 — $nil and $nil, respectively) and costs and expenses applicable to revenues of less than $0.1 million and $0.5 million, respectively (2017 — $0.8 million and $0.8 million, respectively) attributable to this collaborative arrangement have been recorded in Revenue – Services and Costs and expenses applicable to Revenues – Services, respectively.

 

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11. Condensed Consolidated Statements of Cash Flows Supplemental Information

(a) Changes in other non-cash operating assets and liabilities are comprised of the following:

 

     Six Months Ended  
     June 30,  
     2018      2017  

Decrease (increase) in:

     

Accounts receivable

   $ 16,212      $ (1,881

Financing receivables

     3,192        3,065  

Inventories

     (9,916      810  

Prepaid expenses

     (1,852      (2,829

Other assets

     (444      (191

Increase (decrease) in:

     

Accounts payable

     (9,161      1,816  

Accrued and other liabilities

     4,709        (16,267

Deferred revenue

     (2,954      23,361  
  

 

 

    

 

 

 
   $ (214    $ 7,884  
  

 

 

    

 

 

 

(b) Cash payments made on account of:

 

     Six Months Ended  
     June 30,  
     2018      2017  

Income taxes

   $ 8,224      $ 13,625  
  

 

 

    

 

 

 

Interest

   $ 561      $ 395  
  

 

 

    

 

 

 

(c) Depreciation and amortization are comprised of the following:

 

     Six Months Ended  
     June 30,  
     2018      2017  

Film assets

   $ 8,053      $ 8,347  

Property, plant and equipment

     

Joint revenue sharing arrangements

     10,040        8,596  

Other property, plant and equipment

     6,376        5,674  

Other intangible assets

     2,398        2,030  

Other assets

     612        446  

Deferred financing costs

     555        261  
  

 

 

    

 

 

 
   $ 28,034      $ 25,354  
  

 

 

    

 

 

 

 

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(d) Write-downs, net of recoveries, are comprised of the following:

 

     Six Months Ended  
     June 30,  
     2018      2017  

Accounts receivable

   $ 706      $ 2,164  

Property, plant and equipment (1)(3)

     506        4,273  

Joint revenue sharing arrangements (1)

     336        —    

Financing receivables

     100        186  

Other intangible assets

     38        —    

Film assets (2)(3)

     —          4,963  

Other assets (3)

     —          1,522  

Inventories

     —          47  
  

 

 

    

 

 

 
   $ 1,686      $ 13,155  
  

 

 

    

 

 

 

 

 

(1) The Company recognized asset impairment charges of $0.8 million (2017 — $0.6 million) against property, plant and equipment after an assessment of the carrying value of certain assets in light of their future expected cash flows.
(2) The Company reviewed the carrying value of certain documentary film assets as a result of lower than expected revenue being generated during the period and revised expectations for future revenues based on the latest information available. In the six months ended June 30, 2017, an impairment of $4.6 million was recorded based on the carrying value of these documentary films as compared to the related estimated future box office and revenues that would ultimately be generated by these films. No such impairment was recognized in the six months ended June 30, 2018.
(3) In 2017, as a result of the Company’s restructuring activities, certain long-lived assets were deemed to be impaired as the Company’s exit from certain activities limited the future revenue associated with these assets. The Company recognized film impairment charges of $0.3 million, property, plant and equipment charges of $3.7 million and other asset charges of $1.5 million. See note 18 for additional details.

(e) Significant non-cash investing and financing activities are comprised of the following:

 

     Six Months Ended  
     June 30,  
     2018      2017  

Net accruals related to:

     

Purchases of property, plant and equipment

   $ 500      $ 1,293  

Investment in joint revenue sharing arrangements

     (20      (4,612

Acquisition of other intangible assets

     (23      74  
  

 

 

    

 

 

 
   $ 457      $ (3,245
  

 

 

    

 

 

 

 

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12. Income Taxes

(a) Income Taxes

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations. During the quarter ended June 30, 2018, there was no change in the Company’s estimates of the recoverability of its deferred tax assets based on an analysis of both positive and negative evidence including projected future earnings.

As at June 30, 2018, the Company had net deferred income tax assets after valuation allowance of $24.4 million (December 31, 2017 — $30.7 million), which consists of a gross deferred income tax asset of $24.6 million (December 31, 2017 — $30.9 million), against which the Company is carrying a $0.2 million valuation allowance (December 31, 2017 — $0.2 million).

For the quarter ended June 30, 2018, the Company recorded a provision for income taxes of $3.6 million. Included in the provision for income taxes was $0.4 million related to its provision for uncertain tax positions and a $0.5 million provision related to stock-based compensation costs recognized in the period as the tax deduction was less than the cumulative book expense recorded.

On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act when a company does not have all the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. While the Company is able to make reasonable estimates of the impact of the reduction in corporate rate and other changes in the legislation the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions the Company may take.

The effect of the provisional re-measurement on deferred taxes due to the Tax Reform was reflected entirely in 2017. As of December 31, 2017, the Company was able to determine a reasonable estimate of the effects of tax reform and recorded that estimate as a provisional amount. The provisional re-measurement of the deferred tax assets and liabilities resulted in a $9.3 million discrete tax provision for the year. The provisional re-measurement amount may change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities.

In addition, the Tax Act also included a number of other changes. The Company continues to monitor the impact of the Tax Act during the measurement period, which can range up to one-year, due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act. No further changes have been reported as of June 30, 2018.

As a result, no U.S. income taxes have been provided for any undistributed foreign earnings, or any additional outside basis differences inherent in these foreign entities, as the Company is a Canadian corporation and these amounts continue to be indefinitely reinvested in foreign operations which are owned directly or indirectly.

The Company has not provided Canadian taxes on cumulative earnings of non-Canadian affiliates and associated companies that have been reinvested indefinitely. Taxes are provided for earnings of non-Canadian affiliates and associated companies when the Company determines that such earnings are no longer indefinitely reinvested.

Cash held outside of North America as at June 30, 2018 was $121.3 million (December 31, 2017 — $119.4 million), of which $44.7 million was held in the People’s Republic of China (“PRC”) (December 31, 2017 — $32.6 million). The Company’s intent is to permanently reinvest these amounts outside of Canada and the Company does not currently anticipate that it will need funds generated from foreign operations to fund North American operations. In the event funds from foreign operations are needed to fund operations in North America and if withholding taxes have not already been previously provided, the Company would be required to accrue and pay

 

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these additional withholding tax amounts on repatriation of funds from China to Canada. The Company currently estimates this amount to be $8.2 million.

(b) Income Tax Effect on Other Comprehensive Income (Loss)

The income tax benefit (expense) included in the Company’s other comprehensive income (loss) are related to the following items:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Unrealized change in cash flow hedging instruments

   $ 178      $ 26      $ 441      $ (56

Realized change in cash flow hedging instruments upon settlement

     29        (201      87        (276
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 207      $ (175    $ 528      $ (332
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Capital Stock

(a) Stock-Based Compensation

Compensation costs recorded in the condensed consolidated statements of operations for the Company’s stock-based compensation plans were $6.8 million and $11.6 million for the three and six months ended June 30, 2018, respectively (2017 — $6.9 million and $12.1 million, respectively). The following reflects the stock-based compensation expense recorded to the respective financial statement line items:

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2018      2017      2018      2017  

Cost and expenses applicable to revenues

   $ 398      $ 382      $ 732      $ 740  

Selling, general and administrative expenses

     6,242        6,236        10,659        10,998  

Research and development

     116        171        212        315  

Exit costs, restructuring charges and associated impairments

     —          73        (19      73  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,756      $ 6,862      $ 11,584      $ 12,126  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following reflects a breakdown of the Company’s stock-based compensation expense by each plan type:

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2018      2017      2018      2017  

Stock options

   $ 1,361      $ 1,012      $ 2,750      $ 2,366  

Restricted Share Units

     4,805        5,096        8,020        8,482  

China Long Term Incentive Plan Restricted Share Units

     537        244        720        412  

China Options

     53        381        94        631  

China Cash Settled Share-Based Payments

     —          129        —          235  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,756      $ 6,862      $ 11,584      $ 12,126  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Stock Option Summary

The following table summarizes certain information in respect of option activity under the Company’s Stock Option Plan (“SOP”) and IMAX Amended and Restated Long Term Incentive Plan (“IMAX LTIP”) for the six months ended June 30:

 

            Weighted Average Exercise  
     Number of Shares      Price Per Share  
     2018      2017      2018      2017  

Options outstanding, beginning of period

     5,082,100        5,190,542      $ 29.31      $ 28.35  

Granted

     878,629        679,030        22.06        32.16  

Exercised

     —          (658,341      —          21.90  

Forfeited

     (147,307      (40,336      30.77        32.01  

Expired

     (470,752      (22,269      31.77        37.08  
  

 

 

    

 

 

       

Options outstanding, end of period

     5,342,670        5,148,626        27.86        29.61  
  

 

 

    

 

 

       

Options exercisable, end of period

     3,708,881        3,895,973        28.68        28.87  
  

 

 

    

 

 

       

Restricted Share Units (“RSU”) Summary

The following table summarizes certain information in respect of RSU activity under the IMAX LTIP for the six months ended June 30:

 

     Number of Awards      Weighted Average Grant Date
Fair Value Per Share
 
     2018      2017      2018      2017  

RSUs outstanding, beginning of period

     995,329        1,124,180      $ 32.68      $ 33.01  

Granted

     591,296        420,467        20.92        31.62  

Vested and settled

     (335,308      (252,567      31.02        30.06  

Forfeited

     (53,029      (49,047      31.33        32.14  
  

 

 

    

 

 

       

RSUs outstanding, end of period

     1,198,288        1,243,033        27.40        33.16  
  

 

 

    

 

 

       

Issuer Purchases of Equity Securities

In 2017, the Company‘s Board of Directors approved a new $200.0 million share repurchase program for shares of the Company’s common stock. The share repurchase program expires on June 30, 2020. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. During the three and six months ended June 30, 2018, the Company repurchased 1,500,465 and 2,154,689 common shares, respectively (2017 – 1,736,150 and 1,736,150, respectively) at an average price of $22.01 and $21.54 per share, respectively (2017 – $26.57 and $26.57 per share, respectively).

The total number of shares purchased during the three and six months ended June 30, 2018 does not include any shares purchased in the administration of employee share-based compensation plans (which amounted to nil and 300,000, respectively (2017 — 235,412 and 604,036, respectively) common shares, at an average price of $nil and $20.55 per share, respectively (2017 — $31.96 and $32.32 per share, respectively)).

 

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(b) Net Income (Loss) Per Share

Reconciliations of the numerator and denominator of the basic and diluted per-share computations are comprised of the following:

 

     Three Months      Six Months  
     Ended June 30,      Ended June 30,  
     2018      2017      2018      2017  

Net income (loss) applicable to common shareholders

   $ 7,625      $ (1,712    $ 16,130      $ (1,637
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares (000’s):

           

Issued and outstanding, beginning of period

     63,956        66,573        64,696        66,160  

Weighted average number of shares repurchased, net of shares issued, during the period

     (642      (780      (765      (84
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares used in computing basic income per share

     63,314        65,793        63,931        66,076  

Assumed exercise of stock options and RSUs, net of shares assumed repurchased

     112        199        75        472  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares used in computing diluted income per share

     63,426        65,992        64,006        66,548  
  

 

 

    

 

 

    

 

 

    

 

 

 

The calculation of diluted earnings per share for the three and six months ended June 30, 2018 excludes 5,696,638 and 5,810,623 shares, respectively (2017 — 4,533,449 and 2,984,596 shares, respectively) that are issuable upon the vesting of 442,331 and 556,316 RSUs, respectively (2017 — 746,739 and 513,977 RSUs, respectively) and the exercise of 5,254,307 and 5,254,307 stock options, respectively (2017 — 3,786,710 and 2,470,619 stock options, respectively), as the impact would be antidilutive.

(c) Shareholders’ Equity Attributable to Common Shareholders

The following summarizes the movement of Shareholders’ Equity attributable to common shareholders for the six months ended June 30, 2018:

 

Balance as at December 31, 2017

   $     527,746  

Adjustments to capital stock:

  

Average carrying value of repurchased and retired common shares

     (14,794

Share held in treasury

     497  

Adjustments to other equity:

  

Employee stock options granted

     2,843  

RSUs granted

     8,740  

RSUs vested

     (7,915

Cash received from the issuance of common shares in excess of par value

     799  

Adjustments to accumulated deficit:

  

Net income attributable to common shareholders

     16,130  

Adoption of ASC Topic 606, Revenue from Contracts with Customers

     27,213  

Common shares repurchased and retired

     (31,659

Adjustments to accumulated other comprehensive loss:

  

Unrealized net loss from cash flow hedging instruments

     (1,686

Realization of cash flow hedging net gain upon settlement

     (332

Foreign currency translation adjustments

     (646

Tax effect of movement in other comprehensive loss

     528  
  

 

 

 

Balance as at June 30, 2018

   $     527,464  
  

 

 

 

 

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14. Segmented Information

Management, including the Company’s Chief Executive Officer (“CEO”) who is the Company’s Chief Operating Decision Maker (as defined in the Segment Reporting Topic of the FASB ASC), assesses segment performance based on segment revenues, gross margins and film performance. Selling, general and administrative expenses, research and development costs, amortization of intangibles, receivables provisions (recoveries), write-downs net of recoveries, interest income, interest expense and tax (provision) recovery are not allocated to the segments.

The Company’s reportable segments are organized under four primary groups identified by nature of product sold or service provided: (1) Network Business, representing variable revenue generated by box office results and which includes the reportable segment of IMAX DMR and contingent rent from the joint revenue sharing arrangements and IMAX systems segments (effective January 1, 2018, the Company no longer includes hybrid joint revenue sharing arrangements, which take the form of a sale, in the joint revenue sharing arrangement reportable segment. These arrangements are now reflected under the IMAX systems segment of Theater Business); (2) Theater Business, representing revenue generated by the sale and installation of theater systems and maintenance services, primarily related to the IMAX Systems and Theater System Maintenance reportable segments, and also includes hybrid (fixed and contingent) revenues and upfront installation costs from sales arrangements previously reported in the joint revenue sharing arrangements segment and after-market sales of projection system parts and 3D glasses from the other segment; (3) New Business, which includes content licensing and distribution fees associated with the Company’s original content investments, virtual reality initiatives, and other business initiatives that are in the development and/or start-up phase, and (4) Other; which includes the film post-production and distribution segments and certain IMAX theaters that the Company owns and operates, camera rentals and other miscellaneous items from the other segment. The Company is presenting information at a disaggregated level to provide more relevant information to readers, as permitted by the standard. On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments on a prospective basis, refer to note 3 for additional information. In addition, refer to Item 2 of the Company’s Form 10-Q for additional information regarding the four primary groups mentioned above.

Transactions between the film production IMAX DMR segment and the film post-production segment are valued at exchange value. Inter-segment profits are eliminated upon consolidation, as well as for the disclosures below.

 

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     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Revenue (1)

           

Network business

           

IMAX DMR

   $ 36,161      $ 27,757      $ 63,214      $ 51,166  

Joint revenue sharing arrangements – contingent rent (2)

     24,730        18,896        42,593        34,130  

IMAX systems – contingent rent (2)

     —          790        —          1,478  
  

 

 

    

 

 

    

 

 

    

 

 

 
     60,891        47,443        105,807        86,774  
  

 

 

    

 

 

    

 

 

    

 

 

 

Theater business

           

IMAX systems (2)

     15,263        18,738        36,130        28,265  

Joint revenue sharing arrangements – fixed fees (2)

     1,022        1,408        1,022        1,878  

Theater system maintenance

     12,335        10,904        25,047        21,949  

Other theater

     2,255        1,699        3,631        3,864  
  

 

 

    

 

 

    

 

 

    

 

 

 
     30,875        32,749        65,830        55,956  
  

 

 

    

 

 

    

 

 

    

 

 

 

New business

     3,116        1,311        3,723        2,591  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

           

Film post-production

     1,087        4,149        4,250        7,220  

Film distribution

     1,273        938        1,844        1,450  

Other

     1,103        1,168        1,875        2,423  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,463        6,255        7,969        11,093  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 98,345      $ 87,758      $ 183,329      $ 156,414  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Margin

           

Network business

           

IMAX DMR (3)

   $ 24,280      $ 16,998      $ 43,063      $ 34,466  

Joint revenue sharing arrangements – contingent rent (2)(3)

     18,621        13,668        31,362        23,920  

IMAX systems – contingent rent (2)

     —          790        —          1,478  
  

 

 

    

 

 

    

 

 

    

 

 

 
     42,901        31,456        74,425        59,864  
  

 

 

    

 

 

    

 

 

    

 

 

 

Theater business

           

IMAX systems (2)(3)

     10,133        12,263        24,425        18,004  

Joint revenue sharing arrangements – fixed fees (2)(3)

     246        176        246        264  

Theater system maintenance

     5,088        4,434        11,292        8,683  

Other theater

     563        405        517        834  
  

 

 

    

 

 

    

 

 

    

 

 

 
     16,030        17,278        36,480        27,785  
  

 

 

    

 

 

    

 

 

    

 

 

 

New business

     1,906        (1,183      436        (1,520
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

           

Film post-production

     (150      2,425        1,535        3,525  

Film distribution (3)

     (237      (427      (1,476      (4,190

Other

     (46      (90      (304      (234
  

 

 

    

 

 

    

 

 

    

 

 

 
     (433      1,908        (245      (899
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 60,404      $ 49,459      $ 111,096      $ 85,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) The Company’s largest customer represented 18.7% and 18.0% of total revenues for the three and six months ended June 30, 2018, respectively (2017 —15.1% and 15.8%, respectively).
(2) On January 1, 2018, the Company adopted ASC Topic 606, utilizing the modified retrospective transition method with a cumulative catch-up adjustment. The Company is applying the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. All system sales and maintenance contracts with the existing network of IMAX theaters and the backlog of sales contracts make up a significant majority of the Company’s open contracts at any point in time. DMR arrangements where the film continues to be shown by the Company’s exhibitor partners, film distribution arrangements with remaining terms, aftermarket sales orders that have been received but for which control of the assets has not yet transferred to the customer are all also considered open contracts. Refer to note 3 for additional information.
(3) IMAX DMR segment margins include marketing costs of $6.5 million and $10.6 million for the three and six months ended June 30, 2018, respectively (2017 — $4.7 million and $7.3 million, respectively). Joint revenue sharing arrangements segment margins include advertising, marketing and commission costs of $1.0 million and $1.2 million for the three and six months ended June 30, 2018, respectively (2017 — $0.8 million and $1.2 million, respectively). IMAX systems segment margins include marketing and commission costs of $0.5 million and $1.2 million for the three and six months ended June 30, 2018, respectively (2017 — $0.8 million and $1.1 million, respectively). Film distribution segment margins include marketing expense of $0.8 million and $2.0 million for the three and six months ended June 30, 2018, respectively (2017 — a recovery of $0.6 million and a recovery of $0.7 million, respectively).

Geographic Information

Revenue by geographic area is based on the location of the customer. Revenue related to IMAX DMR is presented based upon the geographic location of the theaters that exhibit the re-mastered films. IMAX DMR revenue is generated through contractual relationships with studios and other third parties and these may not be in the same geographical location as the theater.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Revenue

           

United States

   $ 38,081      $ 26,511      $ 65,713      $ 51,706  

Greater China

     23,341        32,982        51,487        51,572  

Asia (excluding Greater China)

     11,371        7,514        20,601        15,944  

Western Europe

     9,050        6,942        19,312        12,756  

Latin America

     4,856        3,780        6,335        5,434  

Canada

     3,444        3,030        6,010        6,313  

Russia & the CIS

     2,346        2,471        4,336        5,654  

Rest of the World

     5,856        4,528        9,535        7,035  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 98,345      $ 87,758      $ 183,329      $ 156,414  
  

 

 

    

 

 

    

 

 

    

 

 

 

No single country in the Rest of the World, Western Europe, Latin America and Asia (excluding Greater China) classifications comprises more than 10% of the total revenue.

 

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15. Employee’s Pension and Postretirement Benefits

(a) Defined Benefit Plan

The Company has an unfunded U.S. defined benefit pension plan (the “SERP”) covering Richard L. Gelfond, CEO of the Company.

The following table provides disclosure of the pension obligation for the SERP:

 

     June 30,      December 31,  
     2018      2017  

Projected benefit obligation:

     

Obligation, beginning of period

   $ 19,003      $ 19,580  

Interest cost

     211        427  

Actuarial gain

     —          (1,004
  

 

 

    

 

 

 

Obligation, end of period and unfunded status

   $ 19,214      $ 19,003  
  

 

 

    

 

 

 

The following table provides disclosure of pension expense for the SERP:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Interest cost

   $ 105      $ 107      $ 211      $ 213  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pension expense

   $ 105      $ 107      $ 211      $ 213  
  

 

 

    

 

 

    

 

 

    

 

 

 

No contributions are expected to be made for the SERP during the remainder of 2018. The Company expects interest costs of $0.2 million to be recognized as a component of net periodic benefit cost during the remainder of 2018.

The accumulated benefit obligation for the SERP was $19.2 million at June 30, 2018 (December 31, 2017 — $19.0 million).

The following benefit payments are expected to be made as per the current SERP assumptions and the terms of the SERP in each of the next 5 years, and in the aggregate:

 

2018 (six months remaining)

   $ —    

2019

     —    

2020

     20,076  

2021

     —    

2022

     —    

Thereafter

     —    
  

 

 

 
   $ 20,076  
  

 

 

 

The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2019), although Mr. Gelfond has not informed the Company that he intends to retire at that time.

(b) Defined Contribution Pension Plan

The Company also maintains defined contribution plans for its employees, including its executive officers. The Company makes contributions to these plans on behalf of employees in an amount up to 5% of their base salary subject to certain prescribed maximums. During the three and six months ended June 30, 2018, the Company contributed and expensed an aggregate of $0.3 million and $0.6 million, respectively (2017 — $0.3 million and $0.6 million, respectively) to its Canadian defined contribution plan and an aggregate of $0.1 million and $0.3 million, respectively (2017 — $0.2 million and $0.4 million, respectively) to its defined contribution employee plan under Section 401(k) of the U.S. Internal Revenue Code.

 

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(c) Postretirement Benefits—Executives

The Company has an unfunded postretirement plan for Mr. Gelfond and Bradley J. Wechsler, Chairman of the Company’s Board of Directors. The plan provides that the Company will maintain health benefits for Messrs. Gelfond and Wechsler until they become eligible for Medicare and, thereafter, the Company will provide Medicare supplement coverage as selected by Messrs. Gelfond and Wechsler. The postretirement benefits obligation as at June 30, 2018 is $0.7 million (December 31, 2017 — $0.7 million). The Company has expensed less than $0.1 million and less than $0.1 million for the three and six months ended June 30, 2018, respectively (2017 — less than $0.1 million and less than $0.1 million, respectively).

The following benefit payments are expected to be made as per the current plan assumptions in each of the next 5 years:

 

2018 (six months remaining)

   $ 24  

2019

     26  

2020

     33  

2021

     37  

2022

     40  

Thereafter

     550  
  

 

 

 

Total

   $ 710  
  

 

 

 

(d) Postretirement Benefits – Canadian Employees

The Company has an unfunded postretirement plan for its Canadian employees upon meeting specific eligibility requirements. The Company will provide eligible participants, upon retirement, with health and welfare benefits. The postretirement benefits obligation as at June 30, 2018 is $1.6 million (December 31, 2017 — $1.7 million). The Company has expensed less than $0.1 million and less than $0.1 million for the three and six months ended June 30, 2018, respectively (2017 — less than $0.1 million and less than $0.1 million, respectively).

The following benefit payments are expected to be made as per the current plan assumptions in each of the next 5 years:

 

2018 (six months remaining)

   $ 89  

2019

     107  

2020

     84  

2021

     109  

2022

     97  

Thereafter

     1,130  
  

 

 

 

Total

   $ 1,616  
  

 

 

 

(e) Deferred Compensation Retirement Plan

The Company maintains a deferred compensation plan (“the Retirement Plan”) covering Greg Foster, CEO of IMAX Entertainment and Senior Executive Vice President of the Company. The Company has agreed to make a total contribution of $3.2 million pursuant to a schedule set forth in Mr. Foster’s employment agreement. The Retirement Plan is subject to a vesting schedule based on continued employment with the Company, and will vest in 25% increments on July 2 of 2019, 2022, 2025 and 2027, but will vest in full if Mr. Foster’s employment terminates under specified circumstances, including if the Company terminates his employment without cause, if he resigns for good reason, or if the Company does not offer to renew Mr. Foster’s employment on terms substantially similar to those set forth in his current employment agreement and, as a result, Mr. Foster incurs a separation from service. As at June 30, 2018, the Company had an unfunded benefit obligation recorded of $1.3 million (December 31, 2017 — $1.0 million). The Company recognized an expense of $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively (2017 – recovery of $0.1 million and an expense of $0.1 million, respectively).

 

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16. Financial Instruments

(a) Financial Instruments

The Company maintains cash with various major financial institutions. The Company’s cash is invested with highly rated financial institutions.

The Company’s accounts receivables and financing receivables are subject to credit risk. The Company’s accounts receivable and financing receivables are concentrated with the theater exhibition industry and film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. The Company believes it has adequately provided for related exposures surrounding receivables and contractual commitments.

(b) Fair Value Measurements

The carrying values of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due within one year approximate fair values due to the short-term maturity of these instruments. The Company’s other financial instruments are comprised of the following:

 

     As at June 30, 2018      As at December 31, 2017  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Level 1

           

Cash and cash equivalents (1)

   $ 133,042      $ 133,042      $ 158,725      $ 158,725  

Level 2

           

Net financed sales receivable (2)

   $ 118,976      $ 118,923      $ 122,259      $ 122,918  

Net investment in sales-type leases (2)

     6,780        6,842        7,235        7,409  

Convertible loan receivable (2)

     1,500        1,500        1,500        1,500  

Equity securities (3)

     2,014        2,014        2,016        2,016  

Foreign exchange contracts — designated forwards (3)

     (593      (593      1,425        1,425  

Borrowings under the Playa Vista Loan (1)

     (24,667      (24,667      (25,667      (25,667

 

(1) Recorded at cost, which approximates fair value.
(2) Estimated based on discounting future cash flows at currently available interest rates with comparable terms.
(3) Value determined using quoted prices in active markets.

There were no significant transfers between Level 1 and Level 2 during the three and six months ended June 30, 2018 or 2017. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. There were no transfers in or out of the Company’s level 3 assets during the three and six months ended June 30, 2018.

(c) Financing Receivables

The Company’s net investment in leases and its net financed sale receivables are subject to the disclosure requirements of ASC 310 “Receivables”. Due to differing risk profiles of its net investment in leases and its net financed sales receivables, the Company views its net investment in leases and its net financed sale receivables as separate classes of financing receivables. The Company does not aggregate financing receivables to assess impairment.

The Company monitors the credit quality of each customer on a frequent basis through collections and aging analyses. The Company also holds meetings monthly in order to identify credit concerns and whether a change in credit quality classification is required for the customer. A customer may improve in their credit quality classification once a substantial payment is made on overdue balances or the customer has agreed to a payment plan with the Company and payments have commenced in accordance to the payment plan. The change in credit quality indicator is dependent upon management approval.

 

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The Company classifies its customers into four categories to indicate the credit quality worthiness of its financing receivables for internal purposes only:

Good standing — Theater continues to be in good standing with the Company as the client’s payments and reporting are up-to-date.

Credit Watch — Theater operator has begun to demonstrate a delay in payments, and has been placed on the Company’s credit watch list for continued monitoring, but active communication continues with the Company. Depending on the size of outstanding balance, length of time in arrears and other factors, transactions may need to be approved by management. These financing receivables are considered to be in better condition than those receivables related to theaters in the “Pre-approved transactions” category, but not in as good of condition as those receivables in “Good standing.”

Pre-approved transactions only — Theater operator is demonstrating a delay in payments with little or no communication with the Company. All service or shipments to the theater must be reviewed and approved by management. These financing receivables are considered to be in better condition than those receivables related to theaters in the “All transactions suspended” category, but not in as good of condition as those receivables in “Credit Watch.” Depending on the individual facts and circumstances of each customer, finance income recognition may be suspended if management believes the receivable to be impaired.

All transactions suspended — Theater is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater is classified as “All transactions suspended” the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped.

The following table discloses the recorded investment in financing receivables by credit quality indicator:

 

     As at June 30, 2018      As at December 31, 2017  
     Minimum      Financed             Minimum      Financed         
     Lease      Sales             Lease      Sales         
     Payments      Receivables      Total      Payments      Receivables      Total  

In good standing

   $ 5,746      $ 115,399      $ 121,145      $ 6,265      $ 118,060      $ 124,325  

Credit Watch

     584        3,112        3,696        568        2,926        3,494  

Pre-approved transactions

     605        423        1,028        557        1,003        1,560  

Transactions suspended

     —          881        881        —          1,192        1,192  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,935      $ 119,815      $ 126,750      $ 7,390      $ 123,181      $ 130,571  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

While recognition of finance income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectibility issues are resolved and the customer has returned to being in good standing, the Company will resume recognition of finance income.

 

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The Company’s investment in financing receivables on nonaccrual status is as follows:

 

     As at June 30, 2018      As at December 31, 2017  
     Recorded      Related      Recorded      Related  
     Investment      Allowance      Investment      Allowance  

Net investment in leases

   $ —        $ —        $ —        $ —    

Net financed sales receivables

     881        (739      1,192        (922
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 881      $ (739    $ 1,192      $ (922
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers financing receivables with aging between 60-89 days as indications of theaters with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once a theater’s aging exceeds 90 days, the Company’s policy is to review and assess collectibility on the theater’s past due accounts. Over 90 days past due is used by the Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for dispute resolution or for the provision of further information or supporting documentation to the customer.

The Company’s aged financing receivables are as follows:

 

     As at June 30, 2018  
                                 Related                   Recorded  
     Accrued                    Billed      Unbilled      Total            Investment  
     and                    Financing      Recorded      Recorded      Related     Net of  
     Current      30-89 Days      90+ Days      Receivables      Investment      Investment      Allowances     Allowances  

Net investment in leases

   $ 154      $ 57      $ 423      $ 634      $ 6,301      $ 6,935      $ (155   $ 6,780  

Net financed sales receivables

     2,822        1,600        4,039        8,461        111,354        119,815        (839     118,976  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,976      $ 1,657      $ 4,462      $ 9,095      $ 117,655      $ 126,750      $ (994   $ 125,756  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     As at December 31, 2017  
                                 Related                   Recorded  
     Accrued                    Billed      Unbilled      Total            Investment  
     and                    Financing      Recorded      Recorded      Related     Net of  
     Current      30-89 Days      90+ Days      Receivables      Investment      Investment      Allowances     Allowances  

Net investment in leases

   $ 103      $ 74      $ 376      $ 553      $ 6,837      $ 7,390      $ (155   $ 7,235  

Net financed sales receivables

     3,285        1,399        3,763        8,447        114,734        123,181        (922     122,259  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3,388      $ 1,473      $ 4,139      $ 9,000      $ 121,571      $ 130,571      $ (1,077   $ 129,494  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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The Company’s recorded investment in past due financing receivables for which the Company continues to accrue finance income is as follows:

 

     As at June 30, 2018  
                                 Related             Recorded  
     Accrued                    Billed      Unbilled             Investment  
     and                    Financing      Recorded      Related      Past Due  
     Current      30-89 Days      90+ Days      Receivables      Investment      Allowance      and Accruing  

Net investment in leases

   $ 37      $ 41      $ 423      $ 501      $ 1,262      $ —        $ 1,763  

Net financed sales receivables

     729        894        3,942        5,565        25,455        —          31,020  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 766      $ 935      $ 4,365      $ 6,066      $ 26,717      $ —        $ 32,783  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As at December 31, 2017  
                                 Related             Recorded  
     Accrued                    Billed      Unbilled             Investment  
     and                    Financing      Recorded      Related      Past Due  
     Current      30-89 Days      90+ Days      Receivables      Investment      Allowance      and Accruing  

Net investment in leases

   $ 68      $ 70      $ 376      $ 514      $ 2,287      $ —        $ 2,801  

Net financed sales receivables

     1,165        743        3,363        5,271        27,430        —          32,701  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,233      $ 813      $ 3,739      $ 5,785      $ 29,717      $ —        $ 35,502  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers financing receivables to be impaired when it believes it to be probable that it will not recover the full amount of principal or interest owing under the arrangement. The Company uses its knowledge of the industry and economic trends, as well as its prior experiences to determine the amount recoverable for impaired financing receivables. The following table discloses information regarding the Company’s impaired financing receivables:

 

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     For the Three Months Ended June 30, 2018  
                         Average      Interest  
     Recorded      Unpaid      Related     Recorded      Income  
     Investment      Principal      Allowance     Investment      Recognized  

With an allowance recorded:

             

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    

Net financed sales receivables

     869        12        (739     930        —    

With no related allowance recorded:

             

Net investment in leases

     —          —          —         —          —    

Net financed sales receivables

     —          —          —         —          —    

Total:

             
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net financed sales receivables

   $ 869      $ 12      $ (739   $ 930      $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     For the Three Months Ended June 30, 2017  
                         Average      Interest  
     Recorded      Unpaid      Related     Recorded      Income  
     Investment      Principal      Allowance     Investment      Recognized  

With an allowance recorded:

             

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    

Net financed sales receivables

     427        —          (427     463        —    

With no related allowance recorded:

             

Net investment in leases

     —          —          —         —          —    

Net financed sales receivables

     —          —          —         —          —    

Total:

             
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net financed sales receivables

   $ 427      $ —        $ (427   $ 463      $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     For the Six Months Ended June 30, 2018  
                         Average      Interest  
     Recorded      Unpaid      Related     Recorded      Income  
     Investment      Principal      Allowance     Investment      Recognized  

Recorded investment for which there is a related allowance:

             

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    

Net financed sales receivables

     869        12        (739     991        —    

Recorded investment for which there is no related allowance:

             

Net investment in leases

     —          —          —         —          —    

Net financed sales receivables

     —          —          —         —          —    

Total recorded investment in impaired loans:

             
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net financed sales receivables

   $ 869      $ 12      $ (739   $ 991      $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     For the Six Months Ended June 30, 2017  
                         Average      Interest  
     Recorded      Unpaid      Related     Recorded      Income  
     Investment      Principal      Allowance     Investment      Recognized  

Recorded investment for which there is a related allowance:

             

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    

Net financed sales receivables

     427        —          (427     494        —    

Recorded investment for which there is no related allowance:

             

Net investment in leases

     —          —          —         —          —    

Net financed sales receivables

     —          —          —         —          —    

Total recorded investment in impaired loans:

             
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net investment in leases

   $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net financed sales receivables

   $ 427      $ —        $ (427   $ 494      $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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The Company’s activity in the allowance for credit losses for the period and the Company’s recorded investment in financing receivables are as follows:

 

     Three Months Ended June 30, 2018      Six Months Ended June 30, 2018  
     Net Investment      Net Financed      Net Investment      Net Financed  
     in Leases      Sales Receivables      in Leases      Sales Receivables  

Allowance for credit losses:

           

Beginning balance

   $ 155      $ 922      $ 155      $ 922  

Charge-offs

     —          (183      —          (183

Recoveries

     —          —          —          —    

Provision

     —          100        —          100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 155      $ 839      $ 155      $ 839  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 155      $ 839      $ 155      $ 839  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financing receivables:

           

Ending balance: individually evaluated for impairment

   $ 6,935      $ 119,815      $ 6,935      $ 119,815  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended June 30, 2017      Six Months Ended June 30, 2017  
     Net Investment      Net Financed      Net Investment      Net Financed  
     in Leases      Sales Receivables      in Leases      Sales Receivables  

Allowance for credit losses:

           

Beginning balance

   $ 672      $ 494      $ 672      $ 494  

Charge-offs

     (351      (67      (351      (67

Recoveries

     —          —          —          —    

Provision

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 321      $ 427      $ 321      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 321      $ 427      $ 321      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financing receivables:

           

Ending balance: individually evaluated for impairment

   $ 6,698      $ 113,329      $ 6,698      $ 113,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(d) Foreign Exchange Risk Management

The Company is exposed to market risk from changes in foreign currency rates. A majority portion of the Company’s revenues is denominated in U.S. dollars while a substantial portion of its costs and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the Company is periodically converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In China and Japan, the Company has ongoing operating expenses related to its operations in Chinese Renminbi and Japanese yen, respectively. Net cash flows are converted to and from U.S. dollars through the spot market. The Company also has cash receipts under leases denominated in Chinese Renminbi, Japanese yen, Canadian dollars and Euros which are converted to U.S. dollars through the spot market. In addition, because IMAX films generate box office in 79 different countries, unfavourable exchange rates between applicable local currencies, and the U.S. dollar affect the Company’s reported gross box-office and revenues, further impacting the Company’s results of operations. The Company’s policy is to not use any financial instruments for trading or other speculative purposes.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. Certain of these foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of the FASB ASC at inception, and continue to meet hedge effectiveness tests at June 30, 2018 (the “Foreign Currency Hedges”), with settlement dates throughout 2018 and 2019. Foreign currency derivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the condensed consolidated statements of operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. For foreign currency cash flow hedging instruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to the condensed consolidated statements of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the condensed consolidated statements of operations. The Company currently does not hold any derivatives which are not designated as hedging instruments.

The following tabular disclosures reflect the impact that derivative instruments and hedging activities have on the Company’s condensed consolidated financial statements:

Notional value of foreign exchange contracts:

 

     June 30,      December 31,  
     2018      2017  

Derivatives designated as hedging instruments:

     

Foreign exchange contracts — Forwards

   $ 43,440      $ 35,170  
  

 

 

    

 

 

 

Fair value of derivatives in foreign exchange contracts:

 

            June 30,      December 31,  
     Balance Sheet Location      2018      2017  

Derivatives designated as hedging instruments:

        

Foreign exchange contracts — Forwards

     Other assets      $ 149      $ 1,447  
     Accrued and other liabilities        (742      (22
     

 

 

    

 

 

 
      $ (593    $ 1,425  
     

 

 

    

 

 

 

 

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Table of Contents

Derivatives in Foreign Currency Hedging relationships are as follows:

 

         Three Months Ended June 30,     Six Months Ended June 30,  
         2018     2017     2018     2017  

Foreign exchange contracts — Forwards

   Derivative (Loss) Gain Recognized in OCI (Effective Portion)   $ (679   $ 772     $ (1,686   $ 1,085  
    

 

 

   

 

 

   

 

 

   

 

 

 
     Location of Derivative Gain                        
     (Loss) Reclassified from AOCI   Three Months Ended June 30,     Six Months Ended June 30,  
    

into Income (Effective Portion)

  2018     2017     2018     2017  

Foreign exchange contracts — Forwards

   Selling, general and administrative expenses   $ 112     $ 101     $ 332     $ (184
    

 

 

   

 

 

   

 

 

   

 

 

 
         Three Months Ended June 30,     Six Months Ended June 30,  
         2018     2017     2018     2017  

Foreign exchange contracts — Forwards

   Derivative Gain (Loss) Recognized In and Out of OCI (Effective Portion)   $ —       $ (33   $ 46     $ (80
    

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s estimated net amount of the existing losses as at June 30, 2018 is $0.2 million, which is expected to be reclassified to earnings within the next twelve months.

(e) Investments in New Business Ventures

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323 or FASB ASC 320, as appropriate.

As at June 30, 2018, the equity method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2017 — $nil). The Company’s accumulated losses in excess of its equity investment were $2.2 million as at June 30, 2018, and are classified in Accrued and other liabilities. For the three months ended June 30, 2018, gross revenues, cost of revenue and net loss for the Company’s investment was $1.0 million, $0.8 million and $0.4 million, respectively (2017 — $0.2 million, $0.9 million and $0.7 million, respectively). For the six months ended June 30, 2018, gross revenues, cost of revenue and net loss for the Company’s investment was $1.5 million, $1.7 million and $1.0 million, respectively (2017 — $0.5 million, $1.8 million and $1.4 million, respectively) The Company has determined it is not the primary beneficiary of this VIE, and therefore this entity has not been consolidated. In a prior year, the Company issued a convertible loan of $1.5 million to this entity with a term of 3 years with an annual effective interest rate of 5.0%. The instrument is classified as an available-for-sale investment due to certain features that allow for conversion to common stock in the entity in the event of certain triggers occurring.

In addition, the Company has an investment in preferred stock of another business venture of $1.5 million which meet the criteria for classification as a debt security under the FASB ASC 320 and is recorded at a fair value of $nil at June 30, 2018 (December 31, 2017 — $nil). This investment was classified as an equity investment.

Furthermore, the Company has an investment of $1.0 million (December 31, 2017 — $1.0 million) in the shares of an exchange traded fund. This investment is also classified as an equity investment.

As at June 30, 2018, the Company held investments with a total value of $3.5 million in the preferred shares of enterprises which meet the criteria for classification as an equity security under FASB ASC 325, carried at historical cost, net of impairment charges. The carrying value of these equity security investments was $1.0 million at June 30, 2018 (December 31, 2017 — $1.0 million).

The total carrying value of investments in new business ventures at June 30, 2018 is $3.5 million (December 31, 2017 — $3.5 million) and is recorded in Other assets.

 

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17. Non-Controlling Interests

(a) IMAX China Non-Controlling Interest

The Company indirectly owns approximately 67.93% of IMAX China Holding, Inc. (“IMAX China”), whose shares trade on the Hong Kong Stock Exchange. IMAX China remains a consolidated subsidiary of the Company.

The following summarizes the movement of the non-controlling interest in shareholders’ equity, in the Company’s subsidiary for the six months ended June 30, 2018:

 

Balance as at December 31, 2017

   $ 74,511  

Retained earnings impact resulting from the adoption of ASC Topic 606, Revenue from Contracts with Customers

     735  

Net income

     6,663  

Other comprehensive loss

     (305

Dividends paid to non-controlling shareholders

     (4,623
  

 

 

 

Balance as at June 30, 2018

   $ 76,981  
  

 

 

 

(b) Other Non-Controlling Interest

The Company’s Original Film Fund was established in 2014 to co-finance a portfolio of 10 original large-format films. The initial investment in the Original Film Fund was committed to by a third party in the amount of $25.0 million, with the possibility of contributing additional funds. The Company has contributed $9.0 million to the Original Film Fund since 2014, and has reached its maximum contribution. The Company sees the Original Film Fund as a self-perpetuating vehicle designed to generate a continuous, steady flow of high-quality documentary content. As at June 30, 2018, the Original Film Fund invested $19.7 million toward the development of original films. The related production, financing and distribution agreement includes put and call rights relating to change of control of the rights, title and interest in the co-financed pictures.

The Company also established its VR Fund among the Company, its subsidiary IMAX China and other strategic investors to help finance the creation of interactive VR content experiences for use across all VR platforms, including in the pilot IMAX VR Centers. The VR Fund recently helped finance the production of one interactive VR experience, which debuted exclusively in the pilot IMAX VR Centers in November 2017 before being made available to other VR platforms. The VR Fund continues to finance other productions of interactive VR experiences as part of its ongoing activities. As at June 30, 2018, the Company invested $4.0 million toward the development of VR content.

The following summarizes the movement of the non-controlling interest in temporary equity, in the Company’s subsidiary for the six months ended June 30, 2018:

 

Balance as at December 31, 2017

   $ 1,353  

Issuance of subsidiary shares to non-controlling interests

     6,696  

Net loss

     (471
  

 

 

 

Balance as at June 30, 2018

   $ 7,578  
  

 

 

 

 

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18. Exit costs, restructuring charges and associated impairments

The Company recognized the following charges in its condensed consolidated statements of operations for the three and six months ended June 30:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Restructuring charges

   $ 456      $ 4,705      $ 1,158      $ 4,705  

Asset impairments

     —          5,553        —          5,553  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 456      $ 10,258      $ 1,158      $ 10,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

(a) Restructuring charges

In June 2017, the Company implemented a cost reduction plan with the goal of increasing profitability, operating leverage and free cash flow. The cost reduction plan included the exit from certain non-core businesses or initiatives, as well as a one-time reduction in workforce. Restructuring charges are comprised of employee severance costs including benefits and stock-based compensation, costs of consolidating facilities and contract termination costs. Restructuring charges are based upon plans that have been committed to by the Company, but may be refined in subsequent periods. These charges are recognized pursuant to FASB ASC 420. A liability for a cost associated with an exit or disposal activity is recognized and measured at its fair value in the condensed consolidated statement of operations in the period in which the liability is incurred. When estimating the value of facility restructuring activities, assumptions are applied regarding estimated sub-lease payments to be received, which can differ from actual results.