Lease Arrangements

6 Months Ended

Jun. 30, 2022

5. Lease Arrangements

(a)

IMAX Corporation as a Lessee

The Company’s operating lease arrangements principally involve office and warehouse space. Office equipment is generally purchased outright. Leases with an initial term of less than 12 months are not recorded on the Condensed Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it is reasonably certain that the renewal options on its warehouse leases will be exercised based on previous history, its current understanding of future business needs and its level of investment in leasehold improvements, among other factors. The incremental borrowing rate used in the calculation of the Company’s lease liabilities is based on the location of each leased property. None of the Company’s leases include options to purchase the leased property. The depreciable lives of right-of-use assets and related leasehold improvements are limited by the expected lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain office space to third parties, which have a remaining term of less than 12 months and are not expected to be renewed.

In the second quarter of 2022, the Company entered into a finance lease arrangement involving equipment used to facilitate the streaming of live events to IMAX theaters. The lease arrangement includes an option for the Company to purchase the equipment at the end of the lease term that is reasonably certain to be exercised. The resulting right-of-use assets are being depreciated from the lease commencement dates over the useful life of the underlying equipment. The incremental borrowing rate used in the calculation of the lease liabilities is based on the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. No finance lease costs were recorded during the three and six months ended June 30, 2022 as the lease commencement dates occurred at the end of the second quarter.

For the three and six months ended June 30, 2022 and 2021, the components of operating lease expense recorded within Selling, General and Administrative expenses are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands of U.S. Dollars)	2022		2021		2022		2021
Operating lease cost(1)	$	168	$	211	$	328	$	383
Amortization of operating lease assets		669		666		1,362		1,414
Interest on operating lease liabilities		201		231		416		473
Total lease cost	$	1,038	$	1,108	$	2,106	$	2,270

(1)

Includes short-term leases and variable lease costs, which are not significant for the three and six months ended June 30, 2022 and 2021.

For the six months ended June 30, 2022 and 2021, supplemental cash and non-cash information related to leases is as follows:


	Six Months Ended June 30,
(In thousands of U.S. Dollars)		2022			2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating leases	$		1,679	$		1,929
Finance leases			890		N/A
Supplemental disclosure of noncash leasing activities:
Right-of-use assets obtained in exchange for operating lease obligations	$		622	$		928
Right-of-use assets obtained in exchange for finance lease obligations			950		N/A

As of June 30, 2022 and December 31, 2021, supplemental balance sheet information related to leases is as follows:


		June 30,		December 31,
(In thousands of U.S. Dollars)		2022		2021
Assets	Balance Sheet Location
Operating lease right-of-use assets	Property, plant and equipment	$	11,342	$	12,132
Finance lease right-of-use assets	Property, plant and equipment		950	N/A
Liabilities	Balance Sheet Location
Operating lease liabilities	Accrued and other liabilities	$	13,964	$	14,691
Finance lease liabilities(1)	Accrued and other liabilities		60	N/A

(1)

Recorded net of a $0.9 million upfront payment made upon execution of the finance lease arrangement.

As of June 30, 2022 and December 31, 2021, the weighted-average remaining lease term and weighted-average interest rate associated with the Company’s operating leases are as follows:


	June 30,			December 31,
	2022			2021
Operating leases:
Weighted-average remaining lease term (years)		6.6			7.0
Weighted-average discount rate		5.99	%		5.97	%
Finance leases:
Weighted-average remaining lease term (years)		5.0		N/A
Weighted-average discount rate		6.00	%	N/A

As of June 30, 2022, the maturities of the Company’s operating and finance lease liabilities are as follows:


(In thousands of U.S. Dollars)	Operating Leases			Finance Leases
2022 (six months remaining)	$	1,575		$	—
2023		2,468			60
2024		2,256			—
2025		2,111			—
2026		2,095			—
Thereafter		6,547			—
Total lease payments	$	17,052		$	60
Less: interest expense		(3,088	)		—
Present value of lease liabilities	$	13,964		$	60

(b)

IMAX Corporation as a Lessor

The Company provides IMAX Theater Systems to customers through long-term lease arrangements that for accounting purposes are classified as sales-type leases. Under these arrangements, in exchange for providing the IMAX Theater System, the Company earns fixed upfront and ongoing consideration. Certain arrangements that are legal sales are also classified as sales-type leases as certain clauses within the arrangements limit transfer of title or provide the Company with conditional rights to the system. The customer’s rights under the Company’s sales-type lease arrangements are described in Note 3(p) of the Company's audited Consolidated Financial Statements included in its 2021 Form 10-K. Under the Company’s sales-type lease arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s lease portfolio terms are typically non-cancellable for 10 to 20 years with renewal provisions from inception. The Company’s sales-type lease arrangements do not contain a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and an extended warranty generally after the first year of the lease until the end of the lease term. The customer is responsible for obtaining insurance coverage for the IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the IMAX Theater System is returned to the Company.

The Company also provides IMAX Theater Systems to customers through joint revenue sharing arrangements. Under the traditional form of these arrangements, in exchange for providing the IMAX Theater System under a long-term lease, the Company earns rent based on a percentage of contingent box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront fee or annual minimum payments. 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. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 10 years or longer with renewal provisions. Title to the IMAX Theater System under a joint revenue sharing arrangement generally does not transfer to the customer. The Company’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as insurance and taxes and is required to pay the Company for maintenance and an extended warranty throughout the term. The customer is responsible for obtaining insurance coverage for the IMAX Theater System commencing on the date specified in the arrangement’s shipping terms and ending on the date the IMAX Theater System is returned to the Company.

The following lease payments are expected to be received by the Company for its sales-type leases and joint revenue sharing arrangements in each of the next five years and thereafter following the June 30, 2022 balance sheet date:


	Sales-Type		Joint Revenue
(In thousands of U.S. Dollars)	Leases		Sharing Arrangements
2022 (six months remaining)	$	1,734	$	95
2023		3,031		128
2024		2,914		—
2025		2,768		—
2026		2,558		—
Thereafter		15,433		—
Total	$	28,438	$	223

(See Note 4 for additional information related to the net investment in leases related to the Company’s sales-type lease arrangements.)