IMAX Corporation (IMAX) shares nearly halved in the last few days after the company dropped two bombshells on investors. The first one came in their 10Q filing, where they announced the SEC's informal inquiry into their revenue recognition:

"The Company is in the process of responding to an informal inquiry from the U.S. Securities and Exchange Commission regarding the Company's timing of revenue recognition, including its application of multiple element arrangement accounting in its revenue recognition for theater systems ... As reported in the Company's 2005 10-K, the Company recognized revenue in the fourth quarter of 2005 on 10 theater installations in theaters which did not open in that quarter."

According to the company, these ten installations all took place within a reasonable timeframe (although not all in the fourth quarter); however, one of the ten systems had to be removed at a cost of about $0.1m, which was not recorded into income. This is an example of one of the most common types of revenue recognition fraud, and will likely not have a large material impact on the company.

Investors were hit with another bombshell on August 10th, when the company stated in their 8k filing:

"Today the Company reported that while it received significant initial interest [to acquire the company,] from multiple parties, its view is that there are presently no buyers who have indicated a willingness to acquire the Company at a valuation sought by the Board of Directors. Because interest remains from several parties at a lower valuation, however, the Board has authorized the Company's bankers to explore these opportunities. This process is ongoing."

The original range, cited by analysts, was around $12 - $14 per share. It is uncertain what the "interested parties" now being considered by the company's bankers are willing to pay. But with the stock currently trading around $6, the company would not be able to turn down any offer above $9, which would represent a 33% premium over today's price. Moreover, the company has a strong balance sheet, strong growth, and is trading at only 10x earnings after its decline.

So, have investors overreacted to these two events? Well, there is still a strong possibility of buyout at a substancial premium to the current price, and even if the stock doesn't get bought out, it is still in a solid financial position on its own. This is definitely a stock worth keeping an eye on.