IMAX CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Presented below is Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") forIMAX Corporation and its consolidated subsidiaries ("IMAX" or the "Company") for the three and nine months endedSeptember 30, 2022 and 2021. MD&A should be read in conjunction with Note 15, "Segment Reporting," in the accompanying Condensed Consolidated Financial Statements in Item 1. As ofSeptember 30, 2022 , the Company indirectly owns 71.41% of IMAX China Holding, Inc. ("IMAX China"), whose shares trade on theHong Kong Stock Exchange . IMAX China is a consolidated subsidiary of the Company. For the three months endedSeptember 30, 2022 , net income attributable to IMAX China is$4.2 million , of which$3.0 million is attributable to the shareholders of the Company (2021 -$6.7 million and$4.7 million , respectively).
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 or "forward-looking information" within the meaning of Canadian securities laws. These forward-looking statements include, but are not limited to, references to business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business, operations and technology, future capital expenditures (including the amount and nature thereof), industry prospects and consumer behavior, plans and references to the future success of the Company and expectations regarding its future operating, financial and technological results. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, risks related to the adverse impact of the COVID-19 pandemic; risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies ofthe United States andCanada , as well as geopolitical conflicts, such as the conflict betweenRussia andUkraine ; risks related to the Company's growth and operations inChina ; 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, including competitive actions by other companies; the failure to respond to change and advancements in digital technology; risks relating to consolidation among commercial exhibitors and studios; risks related to brand extensions and new business initiatives; conditions in the in-home and out-of-home entertainment industries; the opportunities (or lack thereof) that may be presented to and pursued by the Company; risks related to cyber-security and data privacy; risks related to the Company's inability to protect its intellectual property; risks related to climate change; risks related to weather conditions and natural disasters that may disrupt or harm the Company's business; risks related to the Company's indebtedness and compliance with its debt agreements; general economic, market or business conditions; risks related to political, economic and social instability, including with respect to theRussia -Ukraine conflict; the failure to convert theater system backlog into revenue; changes in laws or regulations; any statements of belief and any statements of assumptions underlying any of the foregoing; other factors and risks outlined in the Company's periodic filings with theUnited States Securities and Exchange Commission (the "SEC") or inCanada , the System for Electronic Document Analysis and Retrieval (the "SEDAR"); 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 forward-looking statements herein are made only as of the date hereof and the Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. The Company makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such filings have been made with theSEC and Canadian securities regulators. Reports may be obtained free of charge through theSEC's website at www.sec.gov or the SEDAR's website at www.sedar.com and through the Company's website at www.imax.com or by calling the Company's Investor Relations Department at 212-821-0100. No information included on the Company's website shall be deemed included or otherwise incorporated into this filing, except where expressly indicated. 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®, Filmed For IMAXTM, IMAX LiveTM, IMAX Enhanced®, IMAX nXos®, Films to the Fullest®, SSIMWAVE®, SSIMPLUS® and Viewer Score® are trademarks and trade names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions. 49 --------------------------------------------------------------------------------
Information posted on the Company’s and Investor Relations websites may be considered material to investors. Accordingly, investors, the media and others interested in the Company should monitor the Company’s websites in addition to the Company’s press releases,
OVERVIEW
IMAX is a premier global technology platform for entertainment and events. Through its proprietary software, theater architecture, patented intellectual property, and specialized equipment, IMAX offers a unique end-to-end solution to create superior, immersive content experiences for which the IMAX® brand is globally renowned. Top filmmakers, movie studios, artists, and creators utilize the cutting-edge visual and sound technology of IMAX to connect with audiences in innovative ways. As a result, IMAX is among the most important and successful global distribution platforms for domestic and international tentpole films and, increasingly, exclusive experiences ranging from live performances to interactive events with leading artists and creators. The Company leverages its proprietary technology and engineering in all aspects of its business, which principally consists of the digital remastering of films and other content into the IMAX format ("IMAX DMR"®) and the sale or lease of premium IMAX theater systems ("IMAX Theater Systems"). IMAX Theater Systems are based on proprietary and patented image, audio, and other technology developed over the course of the Company's history since its founding in 1968. The customers for IMAX Theater Systems are principally theater exhibitors that operate commercial multiplex theaters, and, to a much lesser extent, museums, science centers, and destination entertainment sites. The Company generally does not own the theaters in the IMAX network and is not an exhibitor, but instead sells or leases the IMAX Theater System to exhibitor customers along with a license to use its trademarks. As ofSeptember 30, 2022 , there were 1,703 IMAX Theater Systems in 87 countries and territories, including 1,622 commercial multiplexes, 12 commercial destinations, and 69 institutional locations in the Company's global theater network. This compares to 1,664 IMAX Theater Systems in 85 countries and territories as ofSeptember 30, 2021 , including 1,580 commercial multiplexes, 12 commercial destinations, and 72 institutional locations in the Company's global theater network. (See the table below under "IMAX Network and Backlog" for additional information on the composition of the IMAX network.)
The IMAX theater system offers the company’s exhibiting customers a combination of the following benefits:
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the ability to exhibit content that has undergone the IMAX DMR conversion process, which results in higher picture and sound fidelity than conventional cinematic experiences;
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advanced high-resolution projectors with specialized equipment and automated cinema control systems, which generate much more contrast and brightness than conventional cinema systems;
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large screens and exclusive cinema geometry, which results in a significantly wider field of view so that the screen extends to the edge of the viewer’s peripheral vision and creates more realistic images;
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advanced sound system components, which provide more expansive sound images and precise origin of sound at any specific location in an IMAX theater;
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specialized theater acoustics, which results in a four-fold reduction in background noise; and
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a license for the globally recognized IMAX brand.
50 -------------------------------------------------------------------------------- In addition, certain movies shown in IMAX theaters are filmed using proprietary IMAX film cameras or IMAX certified digital cameras, which offer filmmakers customized guidance and a workflow process to provide further enhanced and differentiated image quality and an IMAX-exclusive film aspect ratio that delivers up to 26% more image onto a standard IMAX movie screen. In select IMAX theaters worldwide, movies filmed with IMAX cameras have an IMAX-exclusive 1.43 film aspect ratio, with up to 67% more image.
Together, these components make IMAX theater audiences feel like they’re part of the on-screen action, creating a more intense, immersive and thrilling experience than a traditional theater.
As a result of the engineering and scientific achievements that are a hallmark of The IMAX Experience, the Company's exhibitor customers typically charge a premium for IMAX films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX films, generates incremental box office for the Company's exhibitor customers and for the movie studios releasing their films to the IMAX network. The incremental box office generated by IMAX films has helped establish IMAX as a key premium distribution and marketing platform forHollywood and foreign local language movie studios. As a premier global technology platform for entertainment and events, the Company strives to remain at the forefront of advancements in cinema technology. The Company offers a suite of IMAX Laser Theater Systems, which deliver increased resolution, sharper and brighter images, deeper contrast, and the widest range of colors available to filmmakers today. The Company further believes that its suite of IMAX Laser Theater Systems are helping facilitate the next major renewal and upgrade cycle for the global IMAX network. In addition, the Company continues to evolve its platform to bring new, innovative IMAX LiveTM events and experiences to audiences worldwide. The Company has a connected IMAX theater footprint capable of delivering live, interactive content with low latency and superior sight and sound. As ofSeptember 30, 2022 , 176 theaters in the IMAX network acrossthe United States ,Canada , andEurope were configured to enable the streaming of live events. The Company expects to have 250 connected IMAX theaters available for distributing IMAX Live events by the end of 2022. InSeptember 2022 , the Company acquiredSSIMWAVE Inc. ("SSIMWAVE"), a leader in AI-driven video quality solutions for media and entertainment companies. The acquisition of SSIMWAVE marks a significant expansion of the Company's strategy to deliver the highest quality video images on any screen - to drive new, recurring revenue and grow its global leadership in entertainment technology. (See "SSIMWAVE" under "Sources of Revenue - All Other" and Note 4 of Notes to Condensed Consolidated Financial Statements for additional information related to the Company's acquisition of SSIMWAVE.) Commencing inMarch 2022 , in response to the ongoing conflict betweenRussia andUkraine and resulting sanctions, the Company suspended its operations inRussia andBelarus . As ofSeptember 30, 2022 , the IMAX network includes 54 theaters inRussia , nine theaters inUkraine , and one theater inBelarus , and the Company's backlog includes 14 theaters inRussia , one theater inUkraine , and five theaters inBelarus with a total fixed contracted value of$22.9 million . In the first quarter of 2022, the Company recorded provisions for potential credit losses against substantially all of its receivables inRussia due to uncertainties associated with the ongoing conflict. These receivables relate to existing sale agreements as the Company is not party to any joint revenue sharing arrangements in these countries. In addition, exhibitors inRussia ,Ukraine , andBelarus were placed on nonaccrual status for maintenance revenue and finance income beginning in the first quarter of 2022, which resulted in decreases of$0.7 million and$2.1 million in revenue during the three and nine months endedSeptember 30, 2022 , respectively. Numerous multiplexes inUkraine have reopened since the conflict began and the Company remains optimistic that its theater network inUkraine will ultimately resume operations. The Company continues to monitor the evolving impacts of this conflict and its effects on the global economy and the Company. (See Note 5 of Notes to Condensed Consolidated Financial Statements and "Risk Factors - The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales, and future growth prospects." in Part II, Item 1A in this report.) OnSeptember 7, 2022 , Cineworld Group plc ("Cineworld"), the parent company ofRegal Entertainment Group , and certain of its subsidiaries andRegal CineMedia Holdings, LLC , filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in theSouthern District ofTexas . Based on its evaluation of its contracts with Cineworld, its assessment of the reorganization and its discussions with Cineworld to date, the Company has determined that no additional provision for expected credit losses is required. The Company also does not expect to see a material impact on its network of theaters with Cineworld resulting from this reorganization. There can, however, be no guarantees as to the ultimate outcome of a Chapter 11 proceeding. The Company has an unsecured claim of$11.4 million related to receivables from the entities included in the reorganization proceeding. 51 --------------------------------------------------------------------------------
IMPACT OF THE COVID-19 PANDEMIC
The impact of the COVID-19 pandemic is complex and continuously evolving, resulting in significant disruption to the Company's business and the global economy. At various points during the pandemic, authorities around the world imposed measures intended to control the spread of COVID-19, including stay-at-home orders and restrictions on large public gatherings, which caused movie theaters in countries around the world to temporarily close, including the IMAX theaters in those countries. As a result of these theater closures, movie studios postponed the theatrical release of most films originally scheduled for release in 2020 and early 2021, including many of the films scheduled to be shown in IMAX theaters, while several other films were released directly or concurrently to streaming platforms. Beginning in the third quarter of 2020, stay-at-home orders and capacity restrictions were lifted in many key markets and movie theaters throughout the IMAX network gradually reopened. However, following the emergence of the Omicron variant and the rise of COVID-19 cases inChina in the first quarter of 2022, the Chinese government reinstituted capacity restrictions and safety protocols on large public gatherings, which has led to the temporary closure of theaters in several cities. As ofSeptember 30, 2022 , approximately 92% of the IMAX theaters inGreater China were open at various capacities. On average, during the third quarter of 2022, approximately 82% of the IMAX theaters inGreater China were open at various capacities. For the nine months endedSeptember 30, 2022 , gross box office ("GBO") generated by IMAX films totaled$598.1 million , representing a$237.4 million (66%) increase versus the same period in 2021. Although GBO results during the nine months endedSeptember 30, 2022 were impacted by the COVID-related theater closures inChina , management remains encouraged by the overall positive trend in box office results and believes it indicates that moviegoers are returning to theaters, and in particular IMAX theaters, where and when theaters are open and they feel safe. Despite accounting for 1% of all domestic screens, the IMAX network had a domestic market share of 5% for the nine months endedSeptember 30, 2022 . Management is further encouraged by the return of the prevalence of exclusive theatrical windows and the strong pipeline ofHollywood movies scheduled to be released for theatrical exhibition throughout the remainder of 2022 and into 2023. However, the impact of the COVID-19 pandemic on the Company's business and financial results will continue to depend on numerous evolving factors that cannot be accurately predicted and that will vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence of new and the spread of existing variants of the virus, the progress made on administering vaccines and developing treatments and the effectiveness of such vaccines and treatments, the continuing impact of the pandemic on global economic conditions and ongoing government responses to the pandemic, which could lead to further theater closures, theater capacity restrictions and/or delays in the release of films. (See "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A in this report.)
REVENUE SOURCES
For the presentation of MD&A, the Company has organized its reportable segments into the following three categories: (i) IMAX Technology Network; (ii) IMAX Technology Sales and Maintenance; and (iii) Film Distribution and Post-Production. Within these three categories are the Company's following reportable segments: (i) IMAX DMR; (ii) Joint Revenue Sharing Arrangements ("JRSA"); (iii) IMAX Systems; (iv) IMAX Maintenance; (v) Other Theater Business; (vi) Film Distribution; and (vii) Film Post-Production. The Company's activities that do not meet the criteria to be considered a reportable segment are disclosed within All Other. 52 --------------------------------------------------------------------------------
IMAX Technology Network
The IMAX Technology Network category earns revenue based on contingent box office receipts. Included in the IMAX Technology Network category are the IMAX DMR segment and contingent rent from the JRSA segment, which are each described in more detail below. IMAX DMR IMAX DMR is a proprietary technology that digitally remasters films into IMAX formats. In a typical IMAX DMR film arrangement, the Company receives a percentage of the box office receipts from a movie studio in exchange for converting a commercial film into IMAX DMR format and distributing it through the IMAX network. The fee earned by the Company in a typical IMAX DMR arrangement averages approximately 12.5% of box office receipts (i.e., GBO less applicable sales taxes), except for withinGreater China , where the Company receives a lower percentage of net box office receipts for certainHollywood films. IMAX DMR digitally enhances the image resolution of films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. In addition, the original soundtrack of a film to be exhibited in IMAX theaters is remastered for IMAX digital sound systems. Unlike the soundtracks played in conventional theaters, IMAX remastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in an optimal listening position. IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release of the film. Collectively, the Company refers to these enhancements as "IMAX DNA". Filmmakers and movie studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting films with IMAX cameras to increase the audience's immersion in the film and to take advantage of the unique dimensions of the IMAX screen by projecting the film in a larger aspect ratio that delivers up to 26% more image onto a standard IMAX movie screen. In select IMAX theaters worldwide, movies filmed with IMAX cameras have an IMAX-exclusive 1.43 film aspect ratio, with up to 67% more image. The Company has a Filmed For IMAXTM program under which filmmakers craft films from their inception in various ways in order to optimize The IMAX Experience, which box office metrics demonstrate audiences respond extremely favorably to. Management believes that growth in international box office remains an important driver of growth for the Company. To support continued growth in international markets, the Company has sought to bolster its international film strategy, supplementing its slate ofHollywood films with appealing local language films released in select markets, particularly inChina .
The following table provides detailed information on the films that were released on the company’s worldwide network of theaters during the three and nine months ended
For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Hollywood film releases(1) 12 9 26 27 Local language film releases: China 9 9 13 16 Japan 3 2 6 7 South Korea 3 1 5 1 India 4 - 6 - France - - 1 - Indonesia 1 - 1 - Total local language film releases 20 12 32 24 Total film releases(2) 32 21 58 51 (1)
Includes five re-released films for the completed three and nine months
(2)
For the three and nine months ended
53 -------------------------------------------------------------------------------- The films distributed through the Company's global theater network during the nine months endedSeptember 30, 2022 include Top Gun: Maverick, Doctor Strange in the Multiverse of Madness, Jurassic World Dominion, The Batman, Thor: Love and Thunder, The Battle atLake Changjin 2, Spider-Man: No Way Home, and Fantastic Beasts: The Secrets of Dumbledore. In addition to the films released to the Company's global theater network during the nine months endedSeptember 30, 2022 , the Company has announced the following 30 additional titles scheduled to be released throughout the remainder of 2022 and 2023: Scheduled Title Studio Release Date(1) IMAX DNA 20th Century Amsterdam Studios October 2022 - Universal Halloween Ends Pictures October 2022 - Warner Bros. Black Adam Pictures October 2022 - Black Panther: Wakanda Walt Disney Forever Studios November 2022 Filmed For IMAX Indochine Pathé Live November 2022 Filmed For IMAX Violent Night Universal Pictures December 2022 - Walt Disney Avatar: The Way of Water Studios December 2022 - Walt Disney Titanic 3D(2) Studios February 2023 - Ant-Man and the Wasp: Walt Disney Quantumania Studios February 2023 Filmed For IMAX Creed III United Artists Releasing March 2023 Filmed For IMAX Shazam!: Fury of the Gods Warner Bros. Pictures March 2023 - John Wick: Chapter 4 Lionsgate March 2023 - The Super Mario Bros. Movie Universal Pictures April 2023 - Guardians of the Galaxy Vol. Walt Disney 3 Studios May 2023 Filmed For IMAX Fast X Universal Pictures May 2023 - The Little Mermaid Walt Disney Studios May 2023 - Spider-Man: Across the Sony Pictures Spider-Verse June 2023 - Transformers: Rise of the Paramount Beasts Pictures June 2023 - The Flash Warner Bros. Pictures June 2023 - Indiana Jones 5 Walt Disney Studios July 2023 - Mission: Impossible - Dead Paramount Reckoning Part One Pictures July 2023 Filmed For IMAX Oppenheimer Universal Shot with IMAX Film Pictures July 2023 Cameras Blue Beetle Warner Bros. Pictures August 2023 Filmed For IMAX The Equalizer 3 Sony Pictures September 2023 - The Nun 2 Warner Bros. Pictures September 2023 - A Haunting in Venice Walt Disney Studios September 2023 - Kraven the Hunter Sony Pictures October 2023 - Dune: Part Two Warner Bros. Pictures November 2023 Filmed For IMAX Wonka Warner Bros. Pictures December 2023 - Aquaman and the Lost Kingdom Warner Bros. Pictures December 2023 Filmed For IMAX (1) The scheduled release dates in the table above are subject to change, including as a result of the impact of the COVID-19 pandemic, may vary by territory, and may not reflect the date(s) of limited premiere events. (See "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A in this report.)
(2)
Refers to reissue films.
The Company remains in active negotiations with all majorHollywood studios for additional films to fill out its short- and long-term film slate for the IMAX network. The Company also expects to announce additional local language films to be released to its global theater network in the remainder of 2022 and 2023.
Joint Revenue Sharing Agreements – Conditional Rent
The JRSA segment provides IMAX Theater Systems to exhibitors through joint revenue sharing arrangements. Under the traditional form of these arrangements, the Company provides the IMAX Theater System under a long-term lease in which the Company assumes the majority of the equipment and installation costs. In exchange for its upfront investment, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront fee or annual minimum payments. Rental payments from the customer are required throughout the term of the arrangement and are due either monthly or quarterly. The Company retains title to the IMAX Theater System equipment components throughout the lease term, and the equipment is returned to the Company at the conclusion of the arrangement. 54 -------------------------------------------------------------------------------- Under certain other joint revenue sharing arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX Theater System in an amount that is typically half of what the Company would receive from a typical sale transaction. As with a traditional joint revenue sharing arrangement, the customer also pays the Company a percentage of contingent box office receipts over the term of the arrangement, although this percentage is typically half that of a traditional joint revenue sharing arrangement. For hybrid joint revenue sharing arrangements that take the form of a lease, the contingent rent is reported within the IMAX Technology Network, while the fixed upfront payment is recorded as revenue within IMAX Technology Sales and Maintenance, as discussed below. For hybrid joint revenue sharing arrangements that take the form of a sale, see the discussion below under IMAX Technology Sales and Maintenance. Under most joint revenue sharing arrangements (both traditional and hybrid), the initial non-cancellable term is 10 years or longer and is renewable by the customer for one to two additional terms of between three to five years. The Company has the right to remove the equipment for non-payment or other defaults by the customer. The contracts are non-cancellable by the customer unless the Company fails to perform its obligations. The revenue earned from customers under the Company's joint revenue sharing arrangements can vary from quarter-to-quarter and year-to-year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of IMAX Theater Systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements. Joint revenue sharing arrangements also require IMAX to provide maintenance and extended warranty services to the customer over the term of the lease in exchange for a separate fixed annual fee. These fees are reported within IMAX Technology Sales and Maintenance, as discussed below. Joint revenue sharing arrangements have been an important factor in the expansion of the Company's commercial theater network. Joint revenue sharing arrangements allow commercial theater exhibitors to install IMAX Theater Systems without the significant initial capital investment required in a sale or sales-type lease arrangement. Joint revenue sharing arrangements drive recurring cash flows and earnings for the Company as customers under these arrangements pay the Company a portion of their ongoing box office receipts. The Company funds its investment in equipment for joint revenue sharing arrangements through cash flows from operations. As ofSeptember 30, 2022 , the Company had 926 theaters under joint revenue sharing arrangements in its global commercial multiplex theater network, a 2% increase as compared to the 904 theaters as ofSeptember 30, 2021 . The Company also had contracts in backlog for 319 theaters under joint revenue sharing arrangements as ofSeptember 30, 2022 , including 100 upgrades to existing theater locations and 219 new theater locations.
Sales and maintenance of IMAX technology
The IMAX Technology Sales and Maintenance category earns revenue principally from the sale or sales-type lease of IMAX Theater Systems, as well as from the maintenance of IMAX Theater Systems. To a lesser extent, the IMAX Technology Sales and Maintenance category also earns revenue from certain hybrid joint revenue sharing arrangements and certain ancillary theater business activities. These activities are described in more detail below under the captioned section for each respective segment. IMAX Systems The IMAX Systems segment provides IMAX Theater Systems to exhibitors through sale arrangements or long-term lease arrangements that for accounting purposes are classified as sales-type leases. Under these arrangements, in exchange for providing the IMAX Theater System, the Company earns initial fees and ongoing consideration, which can include fixed annual minimum payments and contingent fees in excess of the minimum payments, as well as maintenance and extended warranty fees (see "IMAX Maintenance" below). The initial fees vary depending on the system configuration and location of the theater. Initial fees are paid to the Company in installments between the time of signing the arrangement and the time of system installation, which is when the total of these fees, in addition to the present value of future annual minimum payments, are recognized as revenue. Finance income is recognized over the term of a financed sale or sales-type lease arrangement. In addition, in sale arrangements, an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded is recorded as revenue in the period when the sale is recognized and is adjusted in future periods based on actual results and changes in estimates. Such variable consideration is only recognized on sales transactions to the extent the Company believes there is not a risk of significant revenue reversal. 55 -------------------------------------------------------------------------------- In sale arrangements, title to the IMAX Theater System equipment generally transfers to the customer. However, in certain instances, the Company retains title or a security interest in the equipment until the customer has made all payments required by the agreement or until certain shipment events for the equipment have occurred. In a sales-type lease arrangement, title to the IMAX Theater System equipment remains with the Company. The Company has the right to remove the equipment for non-payment or other defaults by the customer. The revenue earned from customers under the Company's theater system sale or lease agreements varies from quarter-to-quarter and year-to-year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the IMAX Theater Systems, the nature of the arrangement and other factors specific to individual contracts.
Joint Revenue Sharing Agreements – Fixed Fees
Under certain joint revenue sharing arrangements, known as hybrid arrangements, the customer is responsible for making fixed upfront payments prior to the delivery and installation of the IMAX Theater System in an amount that is typically half of what the Company would receive from a typical sale transaction. For hybrid joint revenue sharing arrangements that take the form of a lease, the contingent rent is reported within the IMAX Technology Network, as discussed above, while the fixed upfront payment is reported within IMAX Technology Sales and Maintenance.
IMAX interview
IMAX Theater System arrangements also include a requirement for the Company to provide maintenance services over the life of the arrangement in exchange for an extended warranty and annual maintenance fee paid by the exhibitor. Under these arrangements, the Company provides preventative and emergency maintenance services to ensure that each presentation is up to the highest IMAX quality standard. Annual maintenance fees are paid throughout the duration of the term of the theater agreements. Other Theater Business
The Other Theater Business segment mainly includes after-sales sales of IMAX theater system parts and 3D glasses.
Film distribution and post-production
Through its Film Distribution segment, the Company distributes large-format documentary films, primarily to institutional theaters. The Company receives as its distribution fee either a fixed amount or a fixed percentage of the theater box office receipts and, following the recoupment of its costs, is typically entitled to receive an additional percentage of gross revenues as participation revenues. InMarch 2022 , the Company released the IMAX documentary film entitled IMAX presents The Last Glaciers. In addition, the Company continues to evolve its platform to bring new, innovative IMAX Live events and experiences to audiences worldwide. The Company has a connected IMAX theater footprint capable of delivering live, interactive content with low latency and superior sight and sound. As ofSeptember 30, 2022 , 176 theaters in the IMAX network acrossthe United States ,Canada , andEurope were configured to enable the streaming of live events. The Company expects to have 250 connected IMAX theaters available for streaming IMAX Live events by the end of 2022. In the first quarter of 2022, the Company partnered withDisney for a live Q&A with director and producerPeter Jackson , streaming to 68 IMAX theaters inNorth America , followed by a special screening of The Beatles: Get Back - The Rooftop Concert, which was later released across the IMAX global network. In the second quarter of 2022, the Company partnered with Warner Bros. for a live Q&A that preceded a special screening of Fantastic Beasts: The Secrets of Dumbledore and partnered with Universal for a live Q&A that preceded a special screening of Jurassic World Dominion. Also, in the second quarter of 2022, IMAX Live, in partnership with Summer Game Fest 2022, presented Summer Game Fest, a first-fan celebration of the future of video games, in connected theaters. In the third quarter of 2022, the Company partnered with Warner Bros. for a live Q&A that preceded a special screening of Don't Worry Darling. Also in the third quarter of 2022, the Company presentedBrandi Carlile : In The Canyon Haze - Live fromLaurel Canyon , a one-night-only live concert performing her new deluxe album In The Canyon Haze for the very first time, in connected theaters acrossthe United States .
The Company continues to believe that the IMAX network provides a valuable platform for launching and distributing original content.
Through its film post-production segment, the Company provides film post-production and quality control services for large-format films, whether produced by IMAX or third parties, and digital post-production.
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All Other IMAX Enhanced IMAX Enhanced® is an initiative, in partnership with audio leader DTS (an Xperi subsidiary), to bring The IMAX Experience into the home. IMAX Enhanced provides end-to-end premium technology across streaming content and best-in-class entertainment devices, offering consumers high-fidelity playback of image and sound in the home and beyond, including the following features:
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The extended aspect ratio of IMAX, which is available on select titles and streaming platforms, including Disney+;
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IMAX’s exclusive remastering technology, which produces more vivid and faithful 4K HDR images on high-end TVs; and
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Signature IMAX sound, which is specially recreated and calibrated for home by DTS to unlock more immersive sound.
To be certified as IMAX Enhanced, leading consumer electronics manufacturers spanning 4K/8K televisions, projectors, A/V receivers, loudspeakers, soundbars and smartphones must meet a carefully prescribed set of audiovisual performance standards, set by a certification committee of IMAX and DTS engineers, along with some ofHollywood's leading technical specialists. At present, certified global device partners includeSony Electronics , Hisense, TCL, LG, Phillips, Xiaomi, Sound United and Honor, among others. As ofSeptember 30, 2022 , more than 200 IMAX Enhanced titles have been released across five of the biggest streaming platforms worldwide, including Disney+, Sony Bravia CORE,Tencent Video, iQiyi and Rakuten TV. Over 10 million IMAX Enhanced certified devices are estimated to be in the market today. The Company's collaboration withDisney , which was announced inNovember 2021 , allows fans to stream 17Disney titles in IMAX's Expanded Aspect Ratio at home on Disney+, including Doctor Strange in the Multiverse of Madness, Shang-Chi and The Legend of The Ten Rings, and Eternals, as well as Iron Man, Guardians of the Galaxy, Guardians of the Galaxy Vol. 2,Captain America : Civil War, Doctor Strange, Thor: Ragnarok, Black Panther, Avengers: Infinity War, Ant-Man and The Wasp,Captain Marvel , Avengers: Endgame, Black Widow, Lightyear, and Thor: Love and Thunder (content availability varies by region). The launch of IMAX Enhanced on Disney+ provides strong brand exposure for IMAX by expanding the Company's in-home entertainment footprint to more than 80 million subscribers. IMAX Enhanced and the collaboration withDisney is part of the Company's next evolutionary step to extend the IMAX brand and technology further into new use cases, including streaming entertainment and the consumer electronics market. In the first quarter of 2022, the Company's internal reporting was updated to reclassify the results of IMAX Enhanced out of the New Business Initiatives segment and into All Other for segment reporting purposes. IMAX Enhanced was the only component of the New Business Initiatives segment.
SSIMWAVE
OnSeptember 22, 2022 (the "Closing Date"), the Company acquired all of the issued and outstanding shares of SSIMWAVE pursuant to a share purchase agreement by and among the Company, SSIMWAVE, and related shareholders (the "Sellers"). SSIMWAVE provides perceptual quality measurement and optimization solutions based on artificial intelligence technologies for leading media and entertainment companies. Following the acquisition, SSIMWAVE became a wholly-owned subsidiary of the Company. As consideration for the acquisition of SSIMWAVE, the Company is paying an aggregate purchase price of approximately$23.1 million , comprised of: (i)$19.4 million in cash, of which$16.2 million was paid on the Closing Date, (ii) 160,547 common shares of the Company with a fair value of$1.9 million (the "IMAX Share Consideration"), and (iii) contingent consideration with a fair value of$1.8 million (the "Earn-Out Payment"). The fair value of the IMAX Share Consideration is reduced to reflect the fair value of certain restrictions on the future transfer of the shares. The Earn-Out Payment may be paid to certain Sellers in an aggregate amount of up to$2.0 million in cash, contingent upon and following the achievement of certain commercial and financial milestones during the period fromJanuary 1, 2023 toDecember 31, 2024 . The fair value of the Earn-Out Payment is based on management's assessment of the likelihood of achieving these milestones.
(See note 4 of the notes to the condensed consolidated financial statements for additional information relating to the company’s acquisition of SSIMWAVE.)
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Other
All Other also includes revenues from the one owned and operated IMAX theater inSacramento, California ; a commercial arrangement with one theater resulting in the sharing of profits and losses; the provision of management services to three other theaters; renting the Company's proprietary 2D and 3D large-format film and digital cameras to third-party production companies; and also offering production advice and technical assistance to both documentary andHollywood filmmakers. IMAX NETWORK AND BACKLOG IMAX Network
The following table provides detailed information about the IMAX network by type and geographic location at
September 30, 2022 September 30, 2021 Commercial Commercial Commercial Commercial Multiplex Destination Institutional
Total Multiplex Destination Institutional Total United States 364 4 25 393 362 4 27 393 Canada 40 1 7 48 39 1 7 47 Greater China(1) 776 - 14 790 752 - 15 767 Western Europe 117 4 8 129 116 4 8 128Asia (excluding Greater China) 131 2 2 135 121 2 2 125Russia /the CIS & Ukraine(2) 70 - - 70 68 - - 68 Latin America(3) 55 1 11 67 51 1 11 63 Rest of the World 69 - 2 71 71 - 2 73 Total(4) 1,622 12 69 1,703 1,580 12 72 1,664 (1)
(2)
In addition toRussia , the CIS includesAzerbaijan ,Belarus ,Kazakhstan , andKyrgyzstan . Commencing inMarch 2022 , in response to the ongoing conflict betweenRussia andUkraine and resulting sanctions, the Company suspended its operations inRussia andBelarus . As ofSeptember 30, 2022 , the IMAX network includes 54 theaters inRussia , nine theaters inUkraine , and one theater inBelarus .
(3)
(4)
Period-over-period changes in the table above are reported net of the effect of permanently closed theaters.
The Company currently believes that over time its commercial multiplex network could grow to approximately 3,318 IMAX theaters worldwide from the 1,622 theaters in the network as ofSeptember 30, 2022 . The Company believes that the majority of its future growth will come from international markets. As ofSeptember 30, 2022 , 75% of IMAX Theater Systems in the global commercial multiplex network were located within international markets (defined as all countries other thanthe United States andCanada ). Revenues and GBO derived from international markets continue to exceed revenues and GBO fromthe United States andCanada . Risks associated with the Company's international business, includingRussia , are outlined in "Risk Factors - The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects" in Part II, Item 1A in this report. In the year endedDecember 31, 2021 , 44% of the Company's consolidated revenue was generated from itsGreater China operations (2020 - 38%, 2019 - 31%). As ofSeptember 30, 2022 , the Company had 790 theaters operating inGreater China with an additional 211 theaters in backlog. The Company's backlog inGreater China represents 43% of its total current backlog, including upgrades in system type. The Company has a partnership inChina with Wanda Film ("Wanda"). As ofSeptember 30, 2022 , through the Company's partnership with Wanda, there are 375 IMAX Theater Systems operational inGreater China of which 361 are under the parties' joint revenue sharing arrangements. 58 -------------------------------------------------------------------------------- (See "Risk Factors - The Company faces risks in connection with its significant presence inChina and the continued expansion of its business there," "Risk Factors - General political, social and economic conditions can affect the Company's business by reducing both revenues generated from existing IMAX Theater Systems and the demand for new IMAX Theater Systems," and "Risk Factors - The Company may not convert all of its backlog into revenue and cash flows" in Part I, Item 1A of the Company's 2021 Form 10-K.) (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 Pandemic" and "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A of this report.) The following tables provide detailed information about the Company's global commercial multiplex theater network by arrangement type and geographic location as ofSeptember 30, 2022 and 2021:
Commercial
Traditional Hybrid
Sale / Sale-
JRSA JRSA type Lease Total Domestic Total (United States & Canada) 276 6 122 404
International:
Greater China 400 112 264 776 Asia (excluding Greater China) 34 4 93 131 Western Europe 47 28 42 117 Russia/the CIS & Ukraine(1) - - 70 70 Latin America 2 - 53 55 Rest of the World 17 - 52 69 International Total 500 144 574 1,218 Worldwide Total(2) 776 150 696 1,622 September 30, 2021 Commercial
Traditional Hybrid
Sale / Sale-
JRSA JRSA type Lease Total Domestic Total (United States & Canada) 274 5 122 401
International:
Greater China 389 109 254 752 Asia (excluding Greater China) 33 2 86 121 Western Europe 47 28 41 116 Russia/the CIS & Ukraine(1) - - 68 68 Latin America 1 - 50 51 Rest of the World 16 - 55 71 International Total 486 139 554 1,179 Worldwide Total(2) 760 144 676 1,580 (1) In addition toRussia , the CIS includesAzerbaijan ,Belarus ,Kazakhstan , andKyrgyzstan . Commencing inMarch 2022 , in response to the ongoing conflict betweenRussia andUkraine and resulting sanctions, the Company suspended its operations inRussia andBelarus . As ofSeptember 30, 2022 , the IMAX network includes 54 theaters inRussia , nine theaters inUkraine , and one theater inBelarus .
(2)
Period-over-period changes in the tables above are reported net of the effect of permanently closed theaters.
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Back
The following table provides detailed information on the Company’s backlog as of
September 30, 2022 September 30, 2021 Number of Dollar Value Number of Dollar Value Systems (in thousands) Systems (in thousands) New Upgrade New Upgrade New Upgrade New Upgrade Sale and sales-type lease arrangements 154 16$ 175,617 $ 18,312 170 12$ 194,539 $ 14,207 Hybrid JRSA 121 6 88,604 4,785 133 6 95,349 4,785 Traditional JRSA 98 (1) 94 (1) 200 (2) 4,500 (2) 108 (1) 77 (1) 200 (2) 5,500 (2) 373 (3) 116 (3)$ 264,421 (3)$ 27,597 (3) 411 95$ 290,088 $ 24,492 (1)
Includes 41 IMAX theater systems (2021 – 44) where the customer has the option to switch from a joint revenue sharing agreement to a sales agreement.
(2)
The consideration owed under joint revenue sharing arrangements, which are accounted for as leases, is typically contingent on the box office receipts earned by the exhibitor. Accordingly, such arrangements do not usually have a dollar value in backlog; however, certain joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments.
(3)
From
The number of IMAX Theater Systems in backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new arrangements signed from year-to-year, which adds to backlog and the installation and acceptance of IMAX Theater Systems and the settlement of contracts, both of which reduce backlog. The dollar value of backlog typically represents the fixed contracted revenue under signed IMAX Theater System sale and lease agreements that the Company expects to recognize as revenue upon installation and acceptance of the associated system, as well as an estimate of variable consideration in sale arrangements. The value of backlog does not include amounts allocated to maintenance and extended warranty revenues or revenue from theaters in which the Company has an equity interest, operating leases, and long-term conditional theater commitments. The Company believes that the contractual obligations for IMAX Theater System installations that are listed in backlog are valid and binding commitments. From time to time, in the normal course of its business, the Company will have customers who are unable to proceed with an IMAX Theater System installation for a variety of reasons, including the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the agreement with the customer is terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or fees that the customer previously made to the Company are recognized as revenue. Certain of the Company's contracts contain options for the customer to elect to upgrade system type during the term or to alter the contract structure (for example, from a joint revenue sharing arrangement to a sale) after signing, but before installation. Current backlog information reflects all known elections. 60 --------------------------------------------------------------------------------
The following tables provide detailed information on the Company’s backlog by type of arrangement and geographic location at
September 30, 2022 IMAX Theater System Backlog Traditional Hybrid Sale / Sales- JRSA JRSA type Lease Total Domestic Total (United States & Canada) 121 2 11 134
International:
Greater China 43 96 72 211 Asia (excluding Greater China) 5 14 31 50 Western Europe 18 13 4 35 Russia/the CIS & Ukraine(1) - - 21 21 Latin America 3 - 4 7 Rest of the World 2 2 27 31 International Total 71 125 159 355 Worldwide Total 192 127 170 489 (2) September 30, 2021 IMAX Theater System Backlog Traditional Hybrid Sale / Sales- JRSA JRSA type Lease Total Domestic Total (United States & Canada) 120 3 9 132
International:
Greater China 44 107 78 229 Asia (excluding Greater China) 4 15 31 50 Western Europe 11 12 7 30 Russia/the CIS & Ukraine - 1 23 24 Latin America 3 - 8 11 Rest of the World 3 1 26 30 International Total 65 136 173 374 Worldwide Total 185 139 182 506 (3) (1) In addition toRussia , the CIS includesAzerbaijan ,Belarus ,Kazakhstan , andKyrgyzstan . Commencing inMarch 2022 , in response to the ongoing conflict betweenRussia andUkraine and resulting sanctions, the Company suspended its operations inRussia andBelarus . As ofSeptember 30, 2022 , the Company's backlog includes 14 theaters inRussia , one theater inUkraine , and five theaters inBelarus with a total fixed contracted value of$22.9 million .
(2)
Includes 201 new IMAX laser theater systems and 116 upgrades of existing locations to IMAX laser theater systems.
(3)
Includes 157 new IMAX laser theater systems and 95 upgrades of existing locations to IMAX laser theater systems.
Approximately 73% of IMAX Theater System arrangements pending as of
(See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 Pandemic" and "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A of this report.) 61 --------------------------------------------------------------------------------
Signatures and Installations
The following tables provide detailed information on IMAX Theater System signings and installations for the three and nine months ended
For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Theater System Signings: New IMAX Theater Systems Sale and sales-type lease arrangements 3 4 9 13 Hybrid JRSA 1 - 3 - Traditional JRSA 7 5 9 8 Total new IMAX Theater Systems 11 9 21 21 Upgrades of IMAX Theater Systems 4 2 14 4 Total IMAX Theater System signings 15 11 35 25 For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Theater System Installations: New IMAX Theater Systems(1) Sale and sales-type lease arrangements 7 6 14 17 Hybrid JRSA 2 2 5 6 Traditional JRSA 7 6 16 15 Total new IMAX Theater Systems 16 14 35 38 Upgrades of IMAX Theater Systems 1 3 5 7 Total IMAX Theater System installations 17 17 40 45 (1) For the three months endedSeptember 30, 2022 , includes two IMAX Theater System that were relocated from their original locations (2021 - nil). For the nine months endedSeptember 30, 2022 , includes eight IMAX Theater Systems that were relocated from their original location. (2021 - nil). When a theater system under a sale or sales-type lease arrangement is relocated, the amount of revenue earned by the Company may vary from transaction-to-transaction and is usually less than the amount earned for a new sale. In certain situations when a theater system is relocated, the original location is upgraded to anIMAX Laser Theater System. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 Pandemic" and "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A of this report.) 62
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RESULTS OF OPERATIONS
The Company's business and future prospects are evaluated byRichard L. Gelfond , its Chief Executive Officer ("CEO"), using a variety of factors and financial and operational metrics including: (i) IMAX box office performance and the securing of new IMAX DMR films and other events to be exhibited in IMAX theaters; (ii) the signing, installation, and financial performance of theater system arrangements, particularly those involving laser-based projection systems; (iii) the success of the Company's investments in business evolution and brand extensions, including the integration and performance of SSIMWAVE and the distribution of live events to the IMAX network and IMAX Enhanced, (iv) revenues and gross margins earned by the Company's segments, as discussed below; (v) consolidated earnings from operations, as adjusted for unusual items; (vi) the continuing ability to invest in and improve the Company's technology to enhance the differentiation of The IMAX Experience versus other out-of-home experiences; (vii) the overall execution, reliability, and consumer acceptance of The IMAX Experience; and (viii) short- and long-term cash flow projections. The CEO is the Company's Chief Operating Decision Maker ("CODM"), as such term is defined under United States Generally Accepted Accounting Principles ("U.S. GAAP"). The CODM, along with other members of management, assesses segment performance based on segment revenues and gross margins. Selling, general and administrative expenses, research and development costs, the amortization of intangible assets, provision for (reversal of) current expected credit losses, certain write-downs, interest income, interest expense, and income tax (expense) benefit are not allocated to the Company's segments. The Company's reportable segments are organized into the following three categories: (i) IMAX Technology Network; (ii) IMAX Technology Sales and Maintenance; and (iii) Film Distribution and Post-Production. Within these categories are the Company's following reportable segments: (i) IMAX DMR; (ii) JRSA; (iii) IMAX Systems; (iv) IMAX Maintenance; (v) Other Theater Business; (vi) Film Distribution; and (vii) Film Post-Production, each of which are described above under "Sources of Revenue." The Company's activities that do not meet the criteria to be considered a reportable segment are disclosed within All Other. This categorization is consistent with how the CODM reviews the financial performance of the Company and makes strategic decisions regarding resource allocation and investments to meet long-term business goals. Management believes that a discussion and analysis based on the three categories listed above is significantly more relevant and useful to readers, as the Company's Condensed Consolidated Statements of Operations captions combine results from several segments. In the first quarter of 2022, the Company's internal reporting was updated to reclassify the results of IMAX Enhanced out of the New Business Initiatives segment and into All Other for segment reporting purposes. IMAX Enhanced was the only component of the New Business Initiatives segment. Prior period comparatives have been reclassified to conform with the current period presentation.
Results of operations for the three months ended
Net loss and adjusted net loss attributable to common shareholders
The following table presents the Company's net loss attributable to common shareholders and the associated per share amounts, as well as adjusted net loss attributable to common shareholders* and adjusted net loss attributable to common shareholders per share* for the three months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 (In thousands ofU.S. Dollars, except per share amounts) Net Loss Per Share Net Loss Per Share Net loss attributable to common shareholders$ (8,953 ) $ (0.16 ) $ (8,378 ) $ (0.14 ) Adjusted net loss attributable to common shareholders*$ (3,027 ) $ (0.05 ) $ (5,032 ) $ (0.08 )
* See “Non-GAAP Financial Measures” below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount.
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Revenues and gross margin (margin loss)
During the three months endedSeptember 30, 2022 , the Company's revenues and gross margin increased by$12.2 million (22%) and$4.2 million (15%), respectively, when compared to same period in 2021 principally due to the strength of the GBO performance of the IMAX Technology Network through the distribution of films such as Thor: Love and Thunder, Top Gun: Maverick, Moon Man, Nope, and Minions: The Rise of Gru.
The following table shows the Company’s revenue and gross margin (margin loss) by category and reportable segment for the three months ended
Revenue Gross Margin (Margin Loss) (In thousands of U.S. Dollars) 2022 2021 2022 2021 IMAX Technology Network IMAX DMR$ 19,919 $ 15,701 $ 11,408 $ 7,293 JRSA, contingent rent 12,540 9,887 6,302 3,626 32,459 25,588 17,710 10,919 IMAX Technology Sales and Maintenance IMAX Systems(1) 15,957 13,236 9,029 8,086 JRSA, fixed fees 998 1,036 (154 ) 280 IMAX Maintenance 13,939 13,055 6,406 6,462 Other Theater Business(2) 2,107 363 168 64 33,001 27,690 15,449 14,892 Film Distribution and Post-Production 2,049 1,598 (2,082 ) 416 Sub-total for reportable segments 67,509 54,876 31,077 26,227 All Other(3) 1,246 1,726 624 1,260 Total$ 68,755 $ 56,602 $ 31,701 $ 27,487 (1) The revenue from this segment includes the initial upfront payments and the present value of fixed minimum payments from sale and sales-type lease arrangements of IMAX Theater Systems, as well as the present value of estimated variable consideration from sales of IMAX Theater Systems. To a lesser extent, the revenue from this segment also includes finance income associated with these revenue streams.
(2)
Revenues from this segment mainly include after-sales sales of IMAX theater system parts and 3D glasses.
(3)
All Other includes the results from IMAX Enhanced, SSIMWAVE, and other ancillary activities. In the first quarter of 2022, the Company's internal reporting was updated to reclassify the results of IMAX Enhanced out of the New Business Initiatives segment into All Other for segment reporting purposes. Prior period comparatives have been revised to conform with the current period presentation. The results of SSIMWAVE, which was acquired onSeptember 22, 2022 , were not material to the period. (See "SSIMWAVE" under "Sources of Revenue - All Other" and Note 4 of Notes to Condensed Consolidated Financial Statements for additional information related to the Company's acquisition of SSIMWAVE.) 64 --------------------------------------------------------------------------------
IMAX Technology Network
IMAX Technology Network results are influenced by the level of commercial success and box office performance of the films released to the IMAX network, as well as other factors including the timing of the films released, the length of the theatrical distribution window, the take rates under the Company's DMR and joint revenue sharing arrangements and the level of marketing spend associated with the films released in the year. Other factors impacting IMAX Technology Network results include fluctuations in the value of foreign currencies versus theU.S. Dollar. For the three months endedSeptember 30, 2022 , IMAX Technology Network revenues and gross margin increased by$6.9 million (27%) and$6.8 million (62%), respectively, when compared to the same period in 2021 principally due to the strength of the GBO performance of the IMAX Technology Network. See below for separate discussions of IMAX DMR and JRSA contingent rent segment results for the period. IMAX DMR For the three months endedSeptember 30, 2022 , IMAX DMR revenues and gross margin increased by$4.2 million (27%) and$4.1 million (56%), respectively, when compared to the same period in 2021. These increases are primarily due to the strong performance of the films distributed through the IMAX network, which resulted in a$35.2 million (25%) increase in GBO in the third quarter of 2022 over the prior year comparative period, from$141.9 million to$177.1 million . This overall improvement in GBO for the period was partially offset by unfavorable foreign currency exchange rate movements. In the third quarter of 2022, GBO was generated by the exhibition of 36 films (27 new films, 4 carryovers, and 5 re-releases), including Thor: Love and Thunder, which generated GBO of$39.8 million in the period, and Top Gun: Maverick, which generated GBO of$20.4 million in the period. In addition, in the third quarter of 2022, local language films released to the Company's global theater network generated$53.0 million in GBO representing 30% of the Company's total GBO as compared to$32.0 million representing 23% of the Company's total GBO during the same period in the prior year. In the third quarter of 2021, GBO was generated by the exhibition of 24 films (21 new films and 3 carryovers). In addition to the level of revenues, IMAX DMR gross margin is also influenced by the costs associated with the films exhibited in the period, and can vary from period-to-period, especially with respect to marketing expenses. For the three months endedSeptember 30, 2022 , marketing expenses were$2.5 million , as compared to$3.2 million during the same period in 2021.
Joint Revenue Sharing Agreements – Conditional Rent
For the three months endedSeptember 30, 2022 , JRSA contingent rent revenue and gross margin increased by$2.7 million (27%) and$2.7 million (74%), respectively, when compared to the same period in 2021. These increases are largely due to a$19.8 million (28%) increase in GBO generated by theaters under joint revenue sharing arrangements in the third quarter of 2022 when compared to the same period in the prior year, from$71.2 million to$91.0 million . In addition to the level of revenues, JRSA contingent rent margin is also influenced by the level of costs associated with such arrangements, such as depreciation expense related to the underlying theater systems and costs incurred to upgrade theater systems from IMAX Xenon Theater Systems to IMAX Laser Theater Systems, as well as advertising, marketing, and commission costs primarily for the launch of new theaters. The level of depreciation expense in a period relative to the prior year is generally a function of the growth of the theater network and the mix of theater system configurations in the network. For the three months endedSeptember 30, 2022 , JRSA gross margin included depreciation expense of$5.6 million as compared to$5.5 million recorded in the same period of the prior year. For the three months endedSeptember 30, 2022 , JRSA gross margin includes advertising, marketing, and commission costs of$0.6 million , as compared to$0.7 million in the same period of the prior year.
Sales and maintenance of IMAX technology
The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a period, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation. The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company's theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company's control. For the three months endedSeptember 30, 2022 , IMAX Technology Sales and Maintenance revenue and gross margin increased by$5.3 million (19%) and$0.6 million (4%), respectively, when compared to the same period in the prior year. See below for separate discussions of IMAX Systems and IMAX Maintenance segment results for the period. 65 -------------------------------------------------------------------------------- The following table provides detailed information about the mix ofIMAX Theater Systems installed and recognized during the three months endedSeptember 30, 2022 and 2021: For the Three Months Ended September 30, 2022 2021 (In thousands of U.S. Dollars, except Number of Number of number of systems) Systems Revenue Systems Revenue New IMAX Theater Systems: Sale and sales-type lease arrangements(1) 7$ 7,779 6$ 7,239 JRSA - hybrid 2 998 2 1,031 Total new IMAX Theater Systems(2) 9 8,777 8 8,270 IMAX Theater System upgrades: Sale and sales-type lease arrangements(1) 1 1,544 1 1,316 Total upgraded IMAX Theater Systems 1 1,544 1 1,316 Total 10$ 10,321 9$ 9,586 (1) The arrangement for the sale of an IMAX Theater System includes fixed upfront and ongoing consideration, including indexed annual minimum payment increases over the term of the arrangement, as well as an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded.
(2)
Includes one IMAX Xenon Theater System that was relocated from its original location, which is subject to sales and sales-type lease arrangements (2021 - nil). When a theater system under a sales or sales-type lease arrangement is relocated, the amount of revenue earned by the Company may vary from transaction-to-transaction and is usually less than the amount earned for a new sale. In certain situations when a theater system is relocated, the original location is upgraded to an IMAX Laser Theater System. The average revenue per IMAX Theater System under sale and sales-type lease arrangements varies depending upon the number of IMAX Theater System commitments with a single respective exhibitor, an exhibitor's location and various other factors. The average revenue per full (i.e., excluding JRSA hybrid arrangements and relocations), new IMAX Theater System under sale and sales-type lease arrangements was$1.3 million for the three months endedSeptember 30, 2022 , as compared to$1.2 million during the same period of the prior year.
IMAX systems
For the three months endedSeptember 30, 2022 , IMAX Systems revenue and gross margin increased by$2.7 million (21%) and$0.9 million (12%), respectively, when compared to the same period in the prior year. The higher level of revenue and gross margin is the result of one additional IMAX Theater System installation, including upgrades, in the current period and an increase of$2.6 million due to the impact of amendments to existing theater system arrangements, offset by a decrease of$0.3 million in Finance Income associated with theaters inRussia ,Ukraine , andBelarus , which were placed on nonaccrual status due to the ongoingRussia -Ukraine conflict.
IMAX interview
For the three months endedSeptember 30, 2022 , IMAX Maintenance segment revenues increased by$0.9 million (7%) while the gross margin decreased by$0.1 million (1%), when compared to the same period in the prior year. The overall increase in IMAX Maintenance segment revenue is due to normalizing revenues as theaters reopen following the earlier stages of the COVID-19 pandemic, partially offset by a decrease of$0.4 million in revenue associated with theaters inRussia ,Ukraine , andBelarus , which were placed on nonaccrual status due to the ongoingRussia -Ukraine conflict. The decrease in gross margin is primarily the result of increased costs incurred in preparation for the strong pipeline of blockbuster releases in the remainder of 2022. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service. 66 --------------------------------------------------------------------------------
Film distribution and post-production
For the three months endedSeptember 30, 2022 , Film Distribution and Post-Production revenues increased by$0.5 million (28%) while gross margin decreased by$2.5 million , when compared to the same period in the prior year. The margin loss in the third quarter of 2022 is primarily the result of costs incurred to produce, market and distribute live events and documentary content during the period. These costs include infrastructure costs, depreciation expense and network connection fees of$1.0 million to operate the IMAX connected network for the three months endedSeptember 30, 2022 .
Selling, general and administrative expenses
The following table presents information about the Company's Selling, General and Administrative Expenses for the three months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Variance (In thousands of U.S. Dollars) 2022 2021 $ % Total selling, general and administrative expenses$ 32,905 $ 28,377 $ 4,528 16 % Less: Share-based compensation(1) 4,985 5,706 (721 ) (13 %) Total selling, general and administrative expenses, excluding share-based compensation$ 27,920 $ 22,671 $ 5,249 23 % (1) A portion of share-based compensation expense is recognized within Costs and Expenses Applicable to Revenue and Research and Development. (See Note 13 of Notes to Condensed Consolidated Financial Statements.) The increase in Selling, General and Administrative Expenses reflects the Company's higher level of business activity in the current period, as the effects of the COVID-19 pandemic continue to subside, resulting in higher staff costs, marketing expenses, and other expenses. Also influencing the comparison to the prior period are a$1.4 million decrease in COVID-19 government relief benefits,$1.0 million in professional fees incurred in the third quarter of 2022 in connection with the acquisition of SSIMWAVE, and$0.6 million resulting from unfavorable foreign currency exchange rate movements.
Research and development
A significant portion of the Company's recent research and development efforts have been focused on its laser-based projection systems, which the Company believes present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, consume less power and last longer than other digital projection technologies, and are capable of illuminating the largest screens in the IMAX network. To a lesser extent, the Company's recent research and development efforts have also focused on image enhancement technology, developing technologies and systems to help bring additional interactivity to its IMAX theater network. For the three months endedSeptember 30, 2022 , Research and Development expenses decreased by$0.9 million (45%), when compared to the same period in the prior year. The Company intends to continue research and development to further evolve its end-to-end technology. This includes bringing connectivity to the Company's global theater network and experimenting with live and interactive events worldwide; developing new IMAX film cameras and certifying additional digital cameras; further improving its proprietary DMR process for the delivery of content for both theatrical (including local language content) and home entertainment; and further improving the reliability of its projectors, as well as enhancing the Company's image and sound quality. In addition, teams from IMAX and SSIMWAVE are working to expand existing and/or develop new technologies which further enhance video quality, delivery, and creation across all devices. 67 --------------------------------------------------------------------------------
Charge for credit loss, net
For the three months endedSeptember 30, 2022 , the Company recorded current expected credit losses of$0.8 million , as compared to a net reversal of current expected credit losses of$3.3 million recognized in the prior year due to an improvement in the outlook for theater operators as the theatrical exhibition industry began to recover from the COVID-19 global pandemic. Management's judgments regarding expected credit losses are based on the facts available to management at the time that the Condensed Consolidated Financial Statements are prepared and involve estimates about the future. As a result, the Company's judgments and associated estimates of credit losses may ultimately prove, with the benefit of hindsight, to be incorrect.
(See notes 1 and 5 of the notes to the condensed consolidated financial statements.)
Interest charges
For the three months endedSeptember 30, 2022 , interest expense was$1.3 million , representing a decrease of$0.2 million (14%) when compared to interest expense of$1.5 million during the same period of the prior year. This decrease is principally due to repayments of revolving credit facility borrowings made in the prior year. Income Taxes For the three months endedSeptember 30, 2022 , the Company recorded income tax expense of$2.3 million (2021 -$4.4 million ). The Company's effective tax rate for the three months endedSeptember 30, 2022 of (43.4)% differs from the Canadian statutory tax rate of 26.5% primarily due to the fact that the Company recorded an additional$4.3 million valuation allowance against deferred tax assets in jurisdictions where management cannot reliably forecast that sufficient future tax liabilities will arise in specific jurisdictions, which includes the impact of the COVID-19 pandemic. Accordingly, the tax benefit associated with the current period losses in these jurisdictions is not ultimately reflected in the Company's Condensed Consolidated Statements of Operations.
(See note 12 of the notes to the condensed consolidated financial statements.)
Non-majority interests
The Company's Condensed Consolidated Financial Statements primarily include the non-controlling interest in the net income or loss of IMAX China, as well as the impact of non-controlling interests in the activity of itsOriginal Film Fund subsidiary. For the three months endedSeptember 30, 2022 , the net income attributable to non-controlling interests of the Company's subsidiaries was$1.2 million (2021 -$2.0 million ). 68 --------------------------------------------------------------------------------
Results of operations for the nine months ended
Net loss and adjusted net loss attributable to common shareholders
The following table presents the Company's net loss attributable to common shareholders and the associated per share amounts, as well as adjusted net loss attributable to common shareholders* and adjusted net loss attributable to common shareholders per share* for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (In thousands of U.S. Dollars, except per Per Per share amounts) Diluted Diluted Net Loss Share Net Loss Share Net loss attributable to common shareholders$ (25,413 ) $ (0.44 ) $ (32,429 ) $ (0.55 ) Adjusted net loss attributable to common shareholders*$ (7,349 ) $ (0.13 )
During the nine months endedSeptember 30, 2022 , the Company recorded a net non-cash provision of$6.9 million , or$0.12 per share, due to an increase in reserves given the uncertainty of collecting receivables inRussia . This provision was taken due to the ongoing conflict inUkraine and covers substantially all of the Company's net receivable exposure in the Russian market. Excluding the impact of this provision, net loss attributable to common shareholders* was$(18.5) million , or$(0.32) per share, and adjusted net loss attributable to common shareholders* was$(0.5) million , or$(0.01) per share. Over the past five years,Russia has represented on average approximately 3% of the GBO generated by IMAX films.
Revenues and gross margin
During the nine months endedSeptember 30, 2022 , the Company's revenues and gross margin increased by$56.4 million (39%) and$37.1 million (53%), respectively, when compared to same period in 2021 principally due to the strength of the GBO performance of the IMAX Technology Network through the distribution of films such as Top Gun: Maverick, Doctor Strange in the Multiverse of Madness, The Batman, Jurassic World Dominion, Thor: Love and Thunder, The Battle atLake Changjin 2, Spider-Man: No Way Home, and Fantastic Beasts: The Secrets of Dumbledore. Also contributing to the improvement versus the prior year is a$6.3 million (41%) improvement in IMAX Maintenance gross margin due to the continued global reopening of the IMAX theater network amidst the ongoing recovery of the theatrical exhibition industry from earlier stages of the COVID-19 pandemic. However, these factors were partially offset by a lower level of IMAX Theater System installations in the period due, in part, to the impact of COVID-related restrictions inChina .
* See “Non-GAAP Financial Measures” below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount.
69 --------------------------------------------------------------------------------
The following table shows the Company’s revenue and gross margin (margin loss) by category and reportable segment for the nine months ended
Revenue Gross Margin (Margin Loss) (In thousands of U.S. Dollars) 2022 2021 2022 2021 IMAX Technology Network IMAX DMR$ 67,064 $ 39,438 $ 42,965 $ 22,405 JRSA, contingent rent 43,708 26,108 25,389 7,299 110,772 65,546 68,354 29,704 IMAX Technology Sales and Maintenance IMAX Systems(1) 32,806 35,117 18,432 21,646 JRSA, fixed fees 2,486 3,776 79 783 IMAX Maintenance 43,564 33,196 21,643 15,360 Other Theater Business(2) 3,697 1,283 314 269 82,553 73,372 40,468 38,058
Film distribution and post-production 5,418 4,001
(3,470 ) 997 Sub-total for reportable segments 198,743 142,919 105,352 68,759 All Other(3) 4,016 3,392 2,156 1,612 Total$ 202,759 $ 146,311 $ 107,508 $ 70,371 (1) The revenue from this segment includes the initial upfront payments and the present value of fixed minimum payments from sale and sales-type lease arrangements of IMAX Theater Systems, as well as the present value of estimated variable consideration from sales of IMAX Theater Systems. To a lesser extent, the revenue from this segment also includes finance income associated with these revenue streams.
(2)
Revenues from this segment mainly include after-sales sales of IMAX theater system parts and 3D glasses.
(3)
All Other includes the results from IMAX Enhanced, SSIMWAVE, and other ancillary activities. In the first quarter of 2022, the Company's internal reporting was updated to reclassify the results of IMAX Enhanced out of the New Business Initiatives segment into All Other for segment reporting purposes. Prior period comparatives have been revised to conform with the current period presentation. The results of SSIMWAVE, which was acquired onSeptember 22, 2022 , were not material to the period. (See "SSIMWAVE" under "Sources of Revenue - All Other" and Note 4 of Notes to Condensed Consolidated Financial Statements for additional information related to the Company's acquisition of SSIMWAVE.)
IMAX Technology Network
IMAX Technology Network results are influenced by the level of commercial success and box office performance of the films released to the IMAX network, as well as other factors including the timing of the films released, the length of the theatrical distribution window, the take rates under the Company's DMR and joint revenue sharing arrangements and the level of marketing spend associated with the films released in the year. Other factors impacting IMAX Technology Network results include fluctuations in the value of foreign currencies versus theU.S. Dollar. For the nine months endedSeptember 30, 2022 , IMAX Technology Network revenues and gross margin increased by$45.2 million (69%) and$38.7 million (130%), respectively, when compared to the same period in 2021. See below for separate discussions of IMAX DMR and JRSA contingent rent segment results for the period.
DMR IMAX
For the nine months endedSeptember 30, 2022 , IMAX DMR revenues and gross margin increased by$27.6 million (70%) and$20.6 million (92%), respectively, when compared to the same period in 2021. These increases are primarily due to the strong performance of the films distributed through the IMAX network, which resulted in a$237.4 million (66%) increase in GBO during the nine months endedSeptember 30, 2022 , from$360.7 million to$598.1 million . This overall improvement in GBO for the period was partially offset by unfavorable foreign currency exchange rate movements. During the nine months endedSeptember 30, 2022 , GBO was generated by the exhibition of 68 films (53 new, 10 carryovers, and 5 re-releases), including Top Gun: Maverick, which generated GBO of$109.6 million in the period. During the nine months endedSeptember 30, 2021 , GBO was generated by the exhibition of 57 films (47 new, 6 carryovers, and 4 re-releases). 70 -------------------------------------------------------------------------------- In addition to the level of revenues, IMAX DMR gross margin is also influenced by the costs associated with the films exhibited in the period, and can vary from period-to-period, especially with respect to marketing expenses. For the nine months endedSeptember 30, 2022 , marketing expenses were$9.1 million , as compared to$5.8 million during the same period in 2021.
Joint Revenue Sharing Agreements – Conditional Rent
For the nine months endedSeptember 30, 2022 , JRSA contingent rent revenue and gross margin increased by$17.6 million (67%) and$18.1 million (248%), respectively, when compared to the same period in 2021. These increases are largely due to a$112.6 million (57%) increase in GBO generated by theaters under joint revenue sharing arrangements during the nine months endedSeptember 30, 2022 , from$196.8 million to$309.4 million . In addition to the level of revenues, JRSA contingent rent margin is also influenced by the level of costs associated with such arrangements, such as depreciation expense related to the underlying theater systems and costs incurred to upgrade theater systems from IMAX Xenon Theater Systems to IMAX Laser Theater Systems, as well as advertising, marketing and commission costs primarily for the launch of new theaters. The level of depreciation expense in a period relative to the prior year is generally a function of the growth of the theater network and the mix of theater system configurations in the network. For the nine months endedSeptember 30, 2022 , JRSA gross margin included depreciation expense of$16.6 million , which was consistent with the same period of the prior year. The lower level of depreciation expense in the current period is due, in part, to the effect of lease term extensions entered into with exhibitor customers as a result of the COVID-19 global pandemic, partially offset by incremental depreciation expense associated with a 2% increase in the number of theaters operating under joint revenue sharing arrangements. For the nine months endedSeptember 30, 2022 , JRSA gross margin includes advertising, marketing and commission costs of$1.0 million , as compared to$1.6 million in the same period in 2021.
Sales and maintenance of IMAX technology
The primary drivers of IMAX Technology Sales and Maintenance results are the number of IMAX Theater Systems installed in a period, and the level of gross margin percentage earned on each installation, as well as the associated maintenance contracts that accompany each theater installation. The installation of IMAX Theater Systems in newly built theaters or multiplexes, which make up a large portion of the Company's theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company's control. For the nine months endedSeptember 30, 2022 , IMAX Technology Sales and Maintenance revenue and gross margin increased by$9.2 million (13%) and$2.4 million (6%), respectively, when compared to the same period in the prior year. See below for separate discussions of IMAX Systems and IMAX Maintenance segment results for the period. 71 -------------------------------------------------------------------------------- The following table provides detailed information about the mix ofIMAX Theater Systems installed and recognized during the nine months endedSeptember 30, 2022 and 2021: For the Nine Months Ended September 30, 2022 2021 (In thousands of U.S. Dollars, except Number of Number of number of systems) Systems Revenue Systems Revenue New IMAX Theater Systems: Sale and sales-type lease arrangements(1) 14$ 13,552 17$ 22,264 JRSA - hybrid 5 2,508 6 3,561 Total new IMAX Theater Systems(2) 19 16,060 23 25,825 IMAX Theater System upgrades: Sale and sales-type lease arrangements(1) 3 4,452 2 2,753 JRSA - hybrid - - 1 775 Total upgraded IMAX Theater Systems 3 4,452 3 3,528 Total 22$ 20,512 26$ 29,353 (1) The arrangement for the sale of an IMAX Theater System includes fixed upfront and ongoing consideration, including indexed annual minimum payment increases over the term of the arrangement, as well as an estimate of the contingent fees that may become due if certain annual minimum box office receipt thresholds are exceeded.
(2)
Includes four IMAX Xenon Theater Systems that were relocated from their original location, which are subject to sales and sales-type lease arrangements (2021 - nil). When a theater system under a sales or sales-type lease arrangement is relocated, the amount of revenue earned by the Company may vary from transaction-to-transaction and is usually less than the amount earned for a new sale. In certain situations when a theater system is relocated, the original location is upgraded to an IMAX Laser Theater System. The average revenue per IMAX Theater System under sale and sales-type lease arrangements varies depending upon the number of IMAX Theater System commitments with a single respective exhibitor, an exhibitor's location and various other factors. The average revenue per full (i.e., excluding JRSA hybrid arrangements and relocations), new IMAX Theater System under sale and sales-type lease arrangements was$1.2 million for the nine months endedSeptember 30, 2022 , as compared to$1.3 million during the same period of the prior year.
IMAX systems
For the nine months endedSeptember 30, 2022 , IMAX Systems revenue and gross margin decreased by$2.3 million (7%) and$3.2 million (15%), respectively, when compared to the same period of the prior year. The lower level of revenue and gross margin is the result of four fewer IMAX Theater System installations, including upgrades, in the current period and a decrease of$0.9 million in Finance Income associated with theaters inRussia ,Ukraine , andBelarus , which were placed on nonaccrual status due to the ongoingRussia -Ukraine conflict. These factors are partially offset by an increase of$5.6 million due to the impact of amendments to existing theater system arrangements.
IMAX interview
For the nine months endedSeptember 30, 2022 , IMAX Maintenance segment revenues and gross margin increased by$10.4 million (31%) and$6.3 million (41%), respectively, when compared to the same period in the prior year, due to the continued global reopening of the IMAX theater network amidst the ongoing recovery of the theatrical exhibition industry from earlier stages of the COVID-19 pandemic. The overall increase in IMAX Maintenance segment revenues and gross margin is partially offset by a decrease of$1.2 million in revenue associated with theaters inRussia ,Ukraine , andBelarus , which were placed on nonaccrual status due to the ongoingRussia -Ukraine conflict. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service. 72 --------------------------------------------------------------------------------
Film distribution and post-production
For the nine months endedSeptember 30, 2022 , Film Distribution and Post-Production revenues increased by$1.4 million (35%) while gross margin decreased by$4.5 million , respectively, when compared to the same period of the prior year. The margin loss is primarily the result of costs incurred to produce, market and distribute live events and documentary content during the period. These costs include infrastructure costs, depreciation expense and network connection fees of$1.6 million to operate the IMAX connected network for the nine months endedSeptember 30, 2022 .
Selling, general and administrative expenses
The following table presents information about the Company's Selling, General and Administrative Expenses for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, Variance (In thousands of U.S. Dollars) 2022 2021 $ % Total selling, general and administrative expenses$ 100,181 $ 82,393 $ 17,788 22 %
Less: Stock-based compensation(1) 17,974 17,046,928
5 % Total selling, general and administrative expenses, excluding share-based compensation$ 82,207 $ 65,347 $ 16,860 26 % (1)
A portion of the stock-based compensation expense is recognized in Costs and expenses applicable to revenue and research and development. (See note 13 of the notes to the condensed consolidated financial statements.)
The increase in Selling, General and Administrative Expenses reflects the Company's higher level of business activity in the current period, as the effects of the COVID-19 pandemic continue to subside, resulting in higher staff costs, marketing expenses, and other expenses. Also influencing the comparison to the prior period was$4.1 million resulting from unfavorable foreign currency exchange rate movements, a decrease of$3.9 million in COVID-19 government relief payments, and$1.0 million in professional fees incurred in the third quarter of 2022 in connection with the acquisition of SSIMWAVE.
Research and development
A significant portion of the Company's recent research and development efforts have been focused on its laser-based projection systems, which the Company believes present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, consume less power and last longer than other digital projection technologies, and are capable of illuminating the largest screens in the IMAX network. To a lesser extent, the Company's recent research and development efforts have also focused on image enhancement technology, developing technologies and systems to help bring additional interactivity to its IMAX theater network.
For the nine months ended
The Company intends to continue research and development to further evolve its end-to-end technology. This includes bringing connectivity to the Company's global theater network and experimenting with live and interactive events worldwide; developing new IMAX film cameras and certifying additional digital cameras; further improving its proprietary DMR process for the delivery of content for both theatrical (including local language content) and home entertainment; and further improving the reliability of its projectors, as well as enhancing the Company's image and sound quality. In addition, teams from IMAX and SSIMWAVE are working to expand existing and/or develop new technologies which further enhance video quality, delivery, and creation across all devices.
Charge for credit loss, net
For the nine months endedSeptember 30, 2022 , the Company recorded current expected credit losses of$8.1 million , principally due to reserves established against substantially all of its receivables inRussia due to uncertainties associated with the ongoingRussia -Ukraine conflict, partially offset by the reversal of provisions associated with the COVID-19 pandemic as the outlook for the theatrical exhibition industry in Domestic and Rest of World markets continues to improve. 73 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , the Company recorded a net reversal of current expected credit losses of$4.9 million , principally due to the reversal of previously recorded credit loss expense as a result of an improving outlook for theater operators following the reopening of theaters and the resumption of normal film release schedules as the theatrical exhibition industry continues to recover from the COVID-19 global pandemic, as well as better than anticipated collection experience with respect to foreign studio receivable balances. Asset Impairment OnJanuary 10, 2022 ,IMAX (Shanghai) Culture and Technology Co., Ltd , a wholly-owned subsidiary of IMAX China, entered into a joint film investment agreement withWanda Film (Horgos) Co. Ltd. to investRMB 30.0 million ($4.7 million ) in the movieMozart from Space, which was released onJuly 15, 2022 . Pursuant to the investment agreement,IMAX (Shanghai) Culture and Technology Co., Ltd. has the right to receive a share of the profits or losses of the film distribution.IMAX (Shanghai) Culture and Technology Co., Ltd.'s commitment is limited to its investment and has no further obligation if the actual movie production cost exceeds the original budget. The investment meets the criteria for classification as a financial asset. The investment is measured at amortized cost less impairment losses and is recorded within Other Assets in the Condensed Consolidated Balance Sheets.
For the nine months ended
Legal judgment and arbitration awards
In the nine months endedSeptember 30, 2021 , the Company recorded a$1.8 million benefit within Legal Judgment and Arbitration Awards as a result of the settlement of the Giencourt matter, as discussed in Note 9(b)(ii) of Notes to Condensed Consolidated Financial Statements. There was no comparable amount recorded during 2022.
Realized and unrealized investment gains
In the first quarter of 2019, IMAX China (Hong Kong ), Limited, a wholly-owned subsidiary of IMAX China, entered into a cornerstone investment agreement with Maoyan Entertainment ("Maoyan") and purchased equity securities for$15.2 million . InFebruary 2021 , IMAX China (Hong Kong ), Limited sold all of its shares of Maoyan and recognized a gain of$5.2 million .
Interest charges
For the nine months endedSeptember 30, 2022 , interest expense was$4.4 million , representing a decrease of$1.2 million (21%) as compared to$5.5 million during the same period of the prior year. This decrease is principally due to repayments of revolving credit facility borrowings made in the prior year, partially offset by the expensing of$0.4 million in unamortized deferred financing costs associated with lenders that are no longer parties to the Credit Agreement. (See Note 8 of Notes to Condensed Consolidated Financial Statements.)
Income taxes
For the nine months endedSeptember 30, 2022 , the Company recorded income tax expense of$8.1 million (2021 -$9.4 million ). The Company's effective tax rate for the nine months endedSeptember 30, 2022 of (51.0)% differs from the Canadian statutory tax rate of 26.5% primarily due to the fact that the Company recorded an additional$14.7 million valuation allowance against deferred tax assets in jurisdictions where management cannot reliably forecast that sufficient future tax liabilities will arise in specific jurisdictions, which includes the impact of the COVID-19 pandemic. Accordingly, the tax benefit associated with the current period losses in these jurisdictions is not ultimately reflected in the Company's Condensed Consolidated Statements of Operations.
(See note 12 of the notes to the condensed consolidated financial statements.)
Non-majority interests
The Company's Condensed Consolidated Financial Statements primarily include the non-controlling interest in the net income or loss of IMAX China, as well as the impact of non-controlling interests in the activity of itsOriginal Film Fund subsidiary. For the nine months endedSeptember 30, 2022 , the net income attributable to non-controlling interests of the Company's subsidiaries was$1.5 million (2021 -$9.5 million ). 74 --------------------------------------------------------------------------------
CASH FLOW FOR THE NINE MONTHS ENDED
Operational activities
The net cash used in or provided by the Company's operating activities is affected by a number of factors, including: (i) the level of cash collections from customers in respect of existing IMAX Theater System sale and lease agreements, (ii) the amount of upfront payments collected in respect of IMAX Theater System sale and lease agreements in backlog, (iii) the box-office performance of films distributed by the Company and/or released to IMAX theaters, (iv) the level of inventory purchases, and (v) the level of the Company's operating expenses, including expenses for research and development and new business initiatives. For the nine months endedSeptember 30, 2022 , net cash provided by the Company's operating activities totaled$0.5 million , as compared to net cash used in operating activities of$19.6 million in the same period of the prior year. For the nine months endedSeptember 30, 2022 , the net cash provided by the Company's operating activities is principally due to cash collected from cash earnings in the period, as well as in respect of Financing and Variable Consideration Receivables, partially offset by an increase in Accounts Receivable of$18.1 million as a result of revenue growth attributable to the strength of the box office performance of the films distributed through the IMAX network,$10.1 million spent on inventory purchases, and$14.2 million spent in connection with the development of Film Assets. For the nine months endedSeptember 30, 2021 , the net cash used in the Company's operating activities was principally due to a significant increase in Accounts Receivable of$24.3 million as a result of theaters reopening amidst the early stages of recovery from the COVID-19 pandemic,$10.0 million spent in connection with the development of Film Assets, as well as a$9.5 million payment made in the second quarter of 2021 in connection with the settlement of the Giencourt matter, as discussed in Note 9(b)(ii) of Notes to Condensed Consolidated Financial Statements.
Investing activities
For the nine months endedSeptember 30, 2022 , net cash used in investing activities totaled$40.4 million , as compared to net cash provided by investing activities of$6.7 million in the same period of the prior year. For the nine months endedSeptember 30, 2022 , the net cash used in investing activities is primarily driven by$12.6 million paid for the acquisition of SSIMWAVE, net of cash and cash equivalents acquired,$14.5 million invested in equipment to be used in the Company's joint revenue sharing arrangements with exhibitors (2021 -$5.4 million ),$4.7 million invested byIMAX (Shanghai) Culture and Technology Co., Ltd , a wholly-owned subsidiary of IMAX China, in the movieMozart from Space (see "Asset Impairment" above),$5.2 million in purchases of property, plant and equipment, and$3.2 million of intangible assets acquired, principally related to the purchase or development of software (2021 -$3.4 million ). For the nine months endedSeptember 30, 2021 , the net cash provided by investing activities was primarily driven by$17.8 million in cash proceeds received from the sale of the Company's investment in Maoyan in the first quarter of 2021 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Realized and Unrealized Investment Gains").
Based on management’s current operating plan for 2022, the company plans to continue to use cash to deploy additional IMAX theater systems under joint revenue sharing agreements.
Capital expenditures, including the Company’s investment in joint revenue sharing agreements, the purchase of property, plant and equipment, the acquisition of other intangible assets and investments in films, were
Fundraising activities
For the nine months endedSeptember 30, 2022 , net cash used in financing activities totaled$64.6 million , as compared to$110.5 million used in financing activities in the same period of the prior year. For the nine months endedSeptember 30, 2022 , the net cash used in financing activities is principally due to$56.6 million used to repurchase common shares of the Company ($53.6 million ) and IMAX China ($3.0 million ),$3.4 million paid to purchase treasury stock for the settlement of restricted share units and related taxes,$2.7 million of dividends paid to the non-controlling interests of IMAX China, and$2.3 million in fees paid in relation to the Sixth Amended and Restated Credit Agreement entered into by the Company during the first quarter of 2022. (See Note 8 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for additional information on the Sixth Amended and Restated Credit Agreement.) 75 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , net cash used in financing activities was principally due to the$296.6 million in repayments of revolving credit facility borrowings, which were funded in part with a portion of the$223.7 million in net proceeds received from the issuance of the Convertible Notes, and the$19.1 million purchase of capped calls related to the Convertible Notes. (See Note 8 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for additional information on the issuance of the Convertible Notes and the related capped call transactions.)
CASH AND CAPITAL RESOURCES
As ofSeptember 30, 2022 , the Company's principal sources of liquidity included: (i) its balances of cash and cash equivalents ($87.2 million ); (ii) the anticipated collection of trade accounts receivable, which includes amounts owed under joint revenue sharing arrangements and DMR agreements with movie studios; (iii) the anticipated collection of financing receivables due in the next 12 months under sale and sales-type lease arrangements for theaters currently in operation; and (iv) installment payments expected in the next 12 months under sale and sales-type lease arrangements in backlog. Under the terms of the Company's typical sale and sales-type lease agreements, the Company receives substantial cash payments before it completes the performance of its contractual obligations. In addition, as ofSeptember 30, 2022 , the Company had$300.0 million in available borrowing capacity under its Sixth Amended and Restated Credit Agreement withWells Fargo Bank, National Association (the "Credit Agreement"),$26.4 million in available borrowing capacity under theIMAX (Shanghai) Multimedia Technology Co., Ltd. ("IMAX Shanghai") revolving credit facility with the Bank of China (the "Bank of China Facility "), and$23.8 million in available borrowing capacity under IMAX Shanghai's revolving credit facility withHSBC Bank (China) Company Limited ,Shanghai Branch (the "HSBC China Facility"). (See Note 8 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for a description of the material terms of the Credit Agreement, theBank of China Facility , and the HSBC China Facility.) The Company's$87.2 million balance of cash and cash equivalents as ofSeptember 30, 2022 (December 31, 2021 -$189.7 million ) includes$65.5 million in cash held outside ofCanada (December 31, 2021 -$102.1 million ), of which$27.9 million was held inthe People's Republic of China (the "PRC") (December 31, 2021 -$76.3 million ). In 2020, management completed a reassessment of its strategy with respect to the most efficient means of deploying the Company's capital resources globally. Based on the results of this reassessment, management concluded that the historical earnings of certain foreign subsidiaries in excess of amounts required to sustain business operations would no longer be indefinitely reinvested. In 2021,$20.4 million of historical earnings from a subsidiary inChina were distributed and, as a result,$2.0 million of foreign withholding taxes were paid to the relevant tax authorities. During the three months endedSeptember 30, 2022 ,$27.7 million of historical earnings from a subsidiary inChina were distributed and, as a result,$2.7 million of foreign withholding taxes were paid to the relevant tax authorities. As ofSeptember 30, 2022 , the Company's Condensed Consolidated Balance Sheets include a deferred tax liability of$14.9 million for the applicable foreign withholding taxes associated with the remaining balance of unrepatriated historical earnings that will not be indefinitely reinvested outside ofCanada . These taxes will become payable upon the repatriation of any such earnings. The Company forecasts its future cash flow and short-term liquidity requirements on an ongoing basis. These forecasts are based on estimates and may be materially impacted by factors that are outside of the Company's control (including the factors described in "Risk Factors" in Item 1A of the Company's 2021 Form 10-K, as supplemented by the risk factors in Part II, Item 1A of this report). As a result, there is no guarantee that these forecasts will come to fruition and that the Company will be able to fund its operations through cash flows from operations. In particular, the Company's operating cash flows and cash balances will be adversely impacted if management's projections of future signings and installations of IMAX Theater Systems and box office performance of IMAX DMR content are not realized. For the three and nine months endedSeptember 30, 2022 , GBO generated by films released to the IMAX network totaled$177.1 million and$598.1 million , respectively, surpassing the totals for the same periods in 2021 by$35.2 million (25%) and$237.4 million (66%), respectively. Although GBO results during the three and nine months endedSeptember 30, 2022 were impacted by the COVID-related theater closures inChina , management remains encouraged by the overall positive trend in box office results and believes it indicates that moviegoers are returning to theaters, and in particular IMAX theaters, where and when theaters are open and they feel safe. Despite accounting for 1% of all domestic screens, the IMAX network had a domestic market share of 5% for the nine months endedSeptember 30, 2022 . Management is further encouraged by the return of the prevalence of exclusive theatrical windows and the strong pipeline ofHollywood movies scheduled to be released for theatrical exhibition throughout the remainder of 2022 and into 2023.
Based on the Company’s current cash balances and cash flows from operations, management expects to have sufficient capital and liquidity to fund its expected operating and capital requirements over the course of the next twelve-month period following the date of this report.
76 -------------------------------------------------------------------------------- (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 Pandemic" and "Risk Factors - The Company has experienced a significant decrease in its revenues, earnings and cash flows due to the COVID-19 pandemic and its business, financial condition and results of operations may continue to be significantly harmed in future reporting periods" in Part II, Item 1A.) CONTRACTUAL OBLIGATIONS Payments to be made by the Company under contractual obligations as ofSeptember 30, 2022 are as follows: Payments Due by Period Total Less Than
(in thousands of
$ 42,684 $ 40,012 $ 2,406 $ 10$ 256 Pension obligations(2) 20,298 - - 20,298 - Operating lease obligations(3) 18,496 3,675 5,892 4,284 4,645 Finance lease obligations 960 480 480 - - HSBC Facility 4,396 4,396 - - -Bank of China Facility 367 367 - - - Federal Economic Development Loan(4) 2,777 - 1,081 1,235 461 Convertible Notes(5) 234,600 1,150 2,300 231,150 - Postretirement benefits obligations 2,859 109 249 246 2,255$ 327,437 $ 50,189 $ 12,408 $ 257,223 $ 7,617 (1)
Represents the total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered but not yet invoiced.
(2)
The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the "SERP"), covering its CEO, Mr.Richard L. Gelfond . The SERP has a fixed benefit payable of$20.3 million . The table above assumes thatMr. Gelfond will receive a lump sum payment of$20.3 million six months after retirement at the end of the term of his current employment agreement, which expires onDecember 31, 2025 , in accordance with the terms of the SERP, althoughMr. Gelfond has not informed the Company that he intends to retire at that time. (See Note 16 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1.)
(3)
Represents the total minimum annual rents payable under the Company’s operating leases.
(4)
The Federal Economic Development Loan will be repayable over 60 months, with repayments to begin in
(5)
The Convertible Notes bear interest at a rate of 0.500% per annum on the principal of$230.0 million , payable semi-annually in arrears onApril 1 andOctober 1 of each year. The Convertible Notes will mature onApril 1, 2026 , unless earlier repurchased, redeemed or converted. (See Note 8(b) of Notes to Condensed Consolidated Financial Statements in Part I, Item 1.)
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 3 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recently issued accounting standards and their impact on the Company's Condensed Consolidated Financial Statements. 77 --------------------------------------------------------------------------------
NON-GAAP FINANCIAL MEASURES
GAAP refers to generally accepted accounting principles inthe United States of America . In this report, the Company presents financial measures in accordance with GAAP and also on a non-GAAP basis under theSEC regulations. Specifically, the Company presents the following non-GAAP financial measures as supplemental measures of its performance:
•
Adjusted net loss attributable to common shareholders;
•
Adjusted net loss attributable to ordinary shareholders per basic and diluted share;
• EBITDA; and
•
EBITDA adjusted by credit facility.
Adjusted net loss attributable to common shareholders and adjusted net loss attributable to common shareholders per basic and diluted share exclude, where applicable: (i) share-based compensation; (ii) COVID-19 government relief benefits; (iii) legal judgment and arbitration awards; (iv) realized and unrealized investment gains or losses; (v) acquisition-related expenses, as well as the related tax impact of these adjustments; and (vi) income taxes resulting from management's decision to no longer indefinitely reinvest the historical earnings of certain foreign subsidiaries. The Company believes that these non-GAAP financial measures are important supplemental measures that allow management and users of the Company's financial statements to view operating trends and analyze controllable operating performance on a comparable basis between periods without the after-tax impact of share-based compensation and certain unusual items included in net loss attributable to common shareholders. Although share-based compensation is an important aspect of the Company's employee and executive compensation packages, it is a non-cash expense and is excluded from certain internal business performance measures. 78
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Reconciliations of net loss attributable to common shareholders and related per share amounts to adjusted net loss attributable to common shareholders and adjusted net loss attributable to common shareholders per basic and diluted share are set out in the tables below.
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