Good day, and welcome to the Simplex Inc. Q3 twenty twenty Analyst Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Melissa Persacco, Senior Manager, Communications and Investor Relations.
Please go ahead, Persacco.
Thank you, Celestina. Good morning, and welcome to Cineplex's third quarter twenty twenty conference call. With me today is Ellis Jacob, our President and Chief Executive Officer and Gord Nelson, our Chief Financial Officer. Before I turn the call over to Ellis, let me remind you that certain statements being made are forward looking and subject to various risks and uncertainties. Such forward looking statements are based on management's beliefs and assumptions regarding the information currently available.
Actual results could differ materially from those expressed in the forward looking statements. Factors that could cause results to vary include, among other things, the negative impact of the COVID-nineteen pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities and general economic conditions. I will now turn the call over to Ellis Jacob.
Thank you, Melissa. Good morning, and welcome to our Q3 twenty twenty conference call. We are glad you could join us today. I hope you and your families are well and staying healthy. This morning, much like our Q1 and Q2 twenty twenty earnings calls, we are not going to spend a lot of time on the actual financial results.
Instead, we will provide an update on the most recent actions we are taking to manage through this crisis, the status of our resumed operations as we safely welcome guests back to our venues and what we are doing to position the company for continued success looking forward. As always, we will conclude the call with our customary questions and answer period. COVID-nineteen continues to significantly impact the financial performance of many businesses in Canada and around the world. And while we are feeling the effects of the pandemic much longer than we had originally anticipated, we are encouraged by the recent news of a vaccine available in the near future. In the meantime, we are confident in our ability to navigate through the remainder of the storm and ensure the long term success of the company.
Throughout our one hundred plus year history, we have faced adversity and have always emerged well positioned for future growth and this time will be no different. Despite the tough industry and economic conditions, we remain confident in three key areas. First, we are confident in our response to COVID-nineteen and the actions we've taken to stabilize the company's financial position. Second, we remain confident in our business reopening plan as we safely welcome guests back to the theaters and entertainment venues where and when permitted. And third, we remain confident in the exhibition industry's ability to recover in the long term.
As we look ahead to an exciting film slate in 2021 and beyond. While Gord will go into more detail in a moment, it goes without saying that much like the first and second quarter, our third quarter results were again severely impacted by COVID-nineteen resulting in substantial decreases when compared to last year. Although we were able to reopen all of our venues with a phased approach during the quarter, the combination of capacity restrictions and a lack of film product impacted our revenues. However, during this time, the team continued to work harder than ever to adapt our operations, manage our cash burn and strengthen Cineplex's financial position. Building on our response to the pandemic in the second quarter, we remain laser focused on significantly reducing capital expenditures and our two primary operating costs, lease costs and payroll, which Gord will elaborate on shortly.
Overall, in the short and medium term, we are focusing on a smaller number of projects and priorities supported by a sustainable financial model. As a result, we have reduced our operating costs and overheads accordingly to reflect this. In addition, we raised over $300,000,000 in additional financing, obtained extended relief under our credit facilities, materially reduced our net cash lease outflows by approximately $58,000,000 received approximately $22,500,000 in wage subsidy and are generating a substantial tax asset from our operating losses, which we will realize in 2021. We also began the sales process of our head office, which we expect to complete in early twenty twenty one. We remain focused on all other revenue generating areas of our business, including Cineplex Digital Media, our expanded food delivery services through Skip the Dishes and Uber Eats and our online digital movie platform, the Cineplex Stove, which has experienced significant growth this year.
So far this year, our Cineplex Stove customer base has grown by 41% to 1,800,000 registered users, and we have completed more than 2,000,000 transactions. To drive additional revenue through our Groups and Events business since reopening, we have been promoting private events at our venues and we are now set to ramp up marketing efforts for this program. Today, I'm pleased to officially launch Private Movie Nights at Cineplex, which offers movie lovers an easy and affordable way to reserve an entire auditorium with up to 20 guests starting with an accessible price point of just $125 With people looking for creative and safe ways to come together, particularly as the holidays approach, private movie nights and venue rentals at Rec Room and Palladium are great options to share the social experience with family and friends safely. Moving on to our resumed operations and reopenings during the quarter, we remain confident in our guests mounting desire to return to our theaters and entertainment venues as well as the industry leading health and safety protocols we have put in place to keep them safe. After almost four months of closure during the pandemic and as restrictions lifted across individual provinces, we moved ahead with our phased approach to reopening our theaters and entertainment venues in late June and July.
Then on August 21, we became one of the first major theater circuits in North America to reopen all of its theaters across the country coast to coast. During the third quarter, with the first major film released in five months, Tenant, we proudly welcomed 1,600,000 guests back to our theaters. This signaled to us as well as our studio partners that Canadians have missed the magic of the big screen and are confident in the rigorous health and safety protocols we have put in Slate in our venues. As you've heard me say before, the health and safety of our employees and guests is our top priority and we are proud that no outbreaks or transmissions of COVID-nineteen can be attributed to movie theaters. Our guests are happy to be back, not just anecdotally, but our data validates this as well.
Surveys conducted by our team during the quarter showed that 95% were satisfied with their overall experience, 96% were satisfied with overall cleanliness and ninety five percent was satisfied with auditorium health and safety. What's more, these figures are actually up from the same period one year ago, reflective of our strong focus of effort and execution excellence by our operations team. When we look at moviegoing, we know that it doesn't pose the same risk as other indoor services and gatherings. The spacious footprint and headroom naturally offers a great ability for guests to physically distance both in the lobby and the auditoriums. We deliver a manageable and predictable flow of guests that most other businesses cannot replicate by staggering our show times and implementing reserve seating with physically distant spacing.
We know that the magic of the movies and escaping to a movie theater provide guests and their families with a safe and temporary break from the mounting pressures and anxiety created by the pandemic. This is what so many of us need right now, a safe escape, especially as we approach the long winter months. We continue to take our cues from the government as they respond to the second wave across the country and adjust provincial regulations and safety guidelines as required. We know there is a risk we may be required to shut down our theaters and venues again, such as the recent reinstated temporary closures in Ontario, Quebec and Manitoba. In response to public health authorities, we have made proactive operational changes and will continue to adjust as required.
Future adjustments will depend on how the COVID case numbers evolve over time, but we continue to actively work with government regulators to advocate for our protocols within our venues and the zero transmission records we've provided to date. Of course, we are encouraged by the recent news of the successful trial of COVID-nineteen vaccine. As initial reports suggest, the COVID-nineteen vaccine could be available within the 2021, and this is an important milestone. As the vaccine becomes widely available, COVID cases will reduce, restrictions will loosen and attendance numbers will rebound as guests seek out social experiences, especially when the deferred film content hits the big screen. Looking at what's happening in Japan, since the government eased restrictions on movie theaters and allowed them to open at full capacity in mid October, the country's box office has been booming and there remains no claims of COVID-nineteen transmission in a cinema.
The recent release of an anime film shattered the record for the biggest opening weekend in Japanese history, surpassing the three day total of Frozen two when it opened in Japan last year. This is a clear sign that Japan's movie industry has rebounded from the damage caused by the coronavirus, just as the exhibition industry will rebound in Canada and in other parts of the world. As we look to the remainder of 2020 and into 2021, we remain extremely strategic and agile in our approach and are more than confident in the team's ability to pivot as needed through these challenging times, which leads me to the final key area, our confidence in Cineplex and the exhibition industry's ability to rebound in 2021 as evidenced by our guest desire to return to the theaters and the upcoming film slate. As I mentioned earlier, guests are craving human connection and sharing social experiences with the ones they love. We know that when new movies are released, they will want to come back and experience it in a theater.
And while there's still a risk that the schedule could shift again, right now, we have the following films to look forward to for the balance of 2020: The Croods, The New Age, Funny Boy, All My Life, Nomadland, this year's TIFF People's Choice Award winner, the Tom Hanks film News of the World and, of course, Wonder Woman 1984 among others hitting the big screen. As you know, many key titles shifted from 2020 into next year, which when combined with what was previously announced for 2021 makes for a very exciting year at the box office. These are first run titles that are ready to be released and that studios want and need to land in theaters. Even though certain titles have shifted, studios have assured us they are still supporting theatrical releases, which is why when we look at 2021, we can't help but expect it will be an even bigger year than originally anticipated. Given the sheer volume of titles, it looks like we may have a new major release almost every week.
These include James Bond, No Time to Die, Maverick, Fast and Furious nine, A Quiet Place two, The Eternals, Minions, The Rise of Gru, Black Widow, Candyman, West Side Story, Sing two, Mission Impossible seven and Skoolala. When I look back at the past eight months, I'm extremely proud of our team's ability and focus in this environment and everything we have accomplished. We have fortified the financial position of our company, raised the necessary funds to extend our financial runway and developed the gold standard in health and safety protocols to safely welcome guests back. We have worked hard to mitigate the impact of COVID-nineteen on our business and we will continue to do so. Although we know vaccine is on the horizon, we also recognize that there will be challenges ahead.
We are confident in the measures we have put in place to manage through this pandemic and soften the negative impact on our business. As we look to the future, extremely strategic and agile in our approach to operating the company. We will review and refine our plans across the entire business we and continue to take the necessary steps to ensure Cineplex remains on solid financial ground and is well positioned for a strong and healthy future. With that, I will pass the call over to Gord. Thank you.
Thanks, Ellis. I am pleased to present a condensed summary of the third quarter results for Cineplex Inc. And to provide additional detail on the ongoing financial impacts of COVID-nineteen on our operations. For your further reference, our financial statements and MD and A have been filed on SEDAR and are also available on our Investor Relations website at cineplex.com. And in addition, our credit facility amendment has been filed on SEDAR this morning.
Our MD and A and earnings press release includes a fulsome narrative on the operational results, so I will focus on highlighting and quantifying some of the key items, including commentary on cost control, accounting matters, liquidity initiatives and outlook. The COVID-nineteen pandemic continued to have a material negative impact on all aspects of Cineplex's core businesses, resulting in material decreases in revenue, results of operations and cash flows for Q3 twenty twenty. As a result, we continue to focus on cost control and liquidity. With respect to cost control, I want to provide some additional details on our largest fixed and semi fixed costs, our lease costs and our payroll expenses. Lease costs are our largest fixed costs.
During Q2 and Q3, we maintained strong communication channels with our landlord partners in identifying opportunities for relief during these unprecedented times. Our focus has been on working with them to identify opportunities for abatements during the closure period, to convert fixed components of rent to variable rent during the reopening period and to jointly look for other opportunities under our existing lease agreements. During the Q2 and Q3 period, we were able to materially reduce net cash lease outflows by approximately $58,000,000 which includes approximately $37,000,000 in lease savings and $21,000,000 as a result of the sale of certain restrictive rights to landlords. We anticipate further savings will be secured during the fourth quarter of this year as well into 2021. The benefits of the initiatives taken in Q2 and Q3 will continue to provide relief through the remainder of 2020.
Payroll is our largest semi fixed cost. With the mandated closure, we immediately initiated temporary layoffs and reduced full time employee salaries across the board by agreement with the employees. We reviewed and applied for government subsidy programs where available, including
Subsidy.
During Q3, we benefited from approximately $22,500,000 in subsidies primarily under this program, and we were able to materially reduce our theater payroll to approximately $3,900,000 in Q3 twenty twenty from approximately $40,900,000 in the prior year quarter. Our total company employee salaries and benefits for the quarter, as identified in Note 12 of the financial statements, decreased to $21,700,000 from $78,000,000 in the prior year. In July, the company initiated a restructuring process, which will result in the elimination of approximately 130 rolls for an annualized savings of approximately $12,000,000 Approximately half of the savings relates to G and A and half relates to OpEx savings in these various businesses. During Q3, the company recorded approximately $5,400,000 in restructuring expenses related to this initiative. As we look forward, we will continue to benefit from the CUSE program through its expiry in June 2021 and will derive future savings as a result of the recent restructuring process.
With respect to other supplier partners and expense control, we put in place immediate expense and CapEx curtailment programs during the closure period and worked with our supplier partners to provide elements of relief, including eliminating or reducing amounts due for contractual monthly services in addition to payment deferrals and abatements. You can continue to see the benefits of these initiatives in the substantial cost reductions in a number of our controllable cost categories. In addition, we continue to monitor other subsidy and relief programs, which could benefit Cineplex. With all the actions previously described, we were able to continue to achieve our projected monthly cash burn rate of approximately $20,000,000 per month before working capital. During the second quarter, we had a positive source of working capital of approximately $69,000,000 as we were negotiating concessions with our landlord and other supplier partners.
And during the third quarter, we had a use of working capital of approximately $35,000,000 as we settled amounts outstanding as a result of these successful negotiations. In total, during the second quarter, this positive working capital impact offset the net cash burn, whereas during the third quarter, this use of working capital was additive to the net cash burn. I would now like to discuss select accounting impacts during the quarter. As I mentioned during last quarter's call, we had completed a thorough review of our rights under our lease agreements and where we thought we had attractive rights, we approached landlords to monetize some of these rights. During the third quarter, we monetized approximately $21,000,000 in lease rights, and this is reflected as proceeds on our statement of cash flows.
And we have recorded a gain of approximately $14,000,000 on these transactions after derecognizing the component of our right of use assets. We issued approximately $316,300,000 in face value of convertible debentures during the third quarter. Of this total, approximately $91,300,000 has been reflected as an equity component in our financial statements. I refer you to note 10 of our financial statements for further details. With respect to the previously announced program to eliminate approximately 130 employees, we recorded a restructuring charge of approximately $5,400,000 during the quarter.
And finally, we recorded a goodwill impairment charge of $65,600,000 which was related to a triggering event caused by the substantial decline in our share price as at quarter end. I would now like to focus on some of our liquidity initiatives. We entered into the second credit agreement amendment with our bank syndicate on November 12. This amendment extends the suspension of financial covenant testing until the 2021, but provides for a monthly liquidity test until the financial covenants are reintroduced. Please refer to our financial statements and our MD and A for further details on this amendment.
This amendment provides additional relief during the extended closure and reopening period. As previously mentioned, we issued approximately $316,300,000 in face value of debentures during the quarter. Of this issuance, dollars 100,000,000 of the proceeds was used to permanently pay down the current credit facility. In addition to the convertible debenture offering, we are investigating extracting value from our owned real estate portfolio, which includes our head office building in Toronto and other assets, which would include some of our equity investments. With respect to the building, we initiated a sales process in September 2020 and expect to close this transaction in early January twenty twenty one.
While 2020 has been a challenging year from an operating perspective, Cineplex has historically been a tax paying entity and the losses created in 2020 will be eligible for carryback and for refund upon filing our 2020 tax returns. In Note five, in our financial statements, we identify approximately $78,000,000 in operating losses available for carryforward and carryback. Some of these are in losses sorry, some of these losses are in entities that are not eligible for carryback, but we estimate a refund of approximately $60,000,000 as a result of loss carrybacks when we file our tax returns in early twenty twenty one. We are continuing to bring CapEx down to approximately $50,000,000 for the next twelve months from our previously estimated run rate of approximately $150,000,000 This CapEx reduction, coupled with the elimination of our dividend, will provide approximately $200,000,000 in additional liquidity as compared to prior years. We have taken a number of significant steps during Q2 and Q3 to manage our costs and improve our liquidity position and balance sheet.
Despite the current environment, we feel very comfortable with where we have positioned the company today. As we look ahead, we continue to focus on the reopening of our businesses and continuing to explore further opportunities for cost reduction and value creation. And that concludes our remarks for this morning. And we'd now like to turn the call over to the conference operator for questions.
Great. Thank And we'll take our first question from Derek Lazard from TD Securities.
Two
questions for me. Maybe one first one is for Alex. I'm just interested in what you're hearing maybe in terms of Hollywood production schedules and the slate for next year, of course, assuming that there's an improvement in the COVID situation and Gord. I was just wondering how much you think you can squeeze out of the restrictive lease rights or was $21,000,000 all of it?
Thank you for your question, Derek. As it relates to production, production still continues in a number of parts of the world and also locally with proper procedures that they are following, they are looking to continue with production. That being said, there have been delays along the way. But with the backlog of product from '20 moving into 2021, I don't think it should be a concern as we move forward with the number of big movies that will be available for the exhibition side of the business.
And then on the lease rates section, during the last call, I mentioned that we expected in excess of $20,000,000 That was our focus for lease rates transactions. We delivered $21,000,000 during the quarter. We continue to discuss with landlords. But at this point in time, I would say that there's no kind of material additional rights that with respect to discussions and progress.
Thanks. Thanks, gentlemen.
And we'll take our next question from Jeff Fan from Scotiabank.
Just a quick clarification on Gord's comment about the tax refund. Did you say that was six-zero, dollars 60,000,000? And then maybe $60,000,000 okay. And that you expect to receive that in early twenty twenty one?
Yes. So on the filing of the 2020 tax returns, which we will file as soon as we possibly can, is the refund would come after the filing of those tax returns. So select returns in those entities of which those losses will be available to be carried back.
Okay. Excellent. Regarding the cash burn looking forward, you guys have done a good job of keeping it within the range of that 15,000,000 to $20,000,000 per month before working capital. Wondering if you can give us a sense as to whether that's going to continue through Q4 and what we should assume for working capital use or source for Q4? And then while you're thinking about that, maybe a bigger picture question looking out a little bit further, the covenant relief extension for six months, How do you know and how do you think about the six month period, whether that's enough?
What are some of the assumptions that you think are really important to get us to get you to that six month extension that would be sufficient? Thanks.
Yes. Thanks, Jeff. So with respect to the first part of your question on kind of cash burn as we look forward is there's a number of mitigating factors as we look forward. The one thing that we're very pleased with is that the government of Canada has announced the extension of the CUES program until June 2021. Now they have not and they've continued to kind of increase the amount of the benefit throughout the remainder of 2020.
But they at this point in time, they have not provided the details with respect to the first six months of 2021. So we have been encouraged by the increased amount of subsidy available under CUES program, the extension of the CUES program from which was originally provided earlier this year. In addition, as we look with our rent abatements and continue to work with our landlord partners, as I mentioned, is those benefits look to extend through the remainder of 2020 and then likely not as significantly, but we continue to work with our landlord partners into 2021. So and then as we look through 2020, the remainder of 2020, as Ellis mentioned, we've got some encouraging product being released into December. And so to the extent that we can provide some incrementally positive results from being open, you put all those factors together.
And as I've always said is, we hope that we can manage to keep our cash burn rate around $20,000,000 a month, and I'd expect that to continue. The second question related to covenant relief and the assumptions behind that covenant relief is as we mentioned, the earnings test has been extended until the 2021. In its place, there's been a liquidity test, which looks at the headroom that we have available under our boring facility and the credit facility amendment has been filed on SEDAR this morning. And so I invite you to look at the monthly details as provided in the credit facility as filed. So the assumptions with respect is so first and foremost, there's a number of liquidity events, which I sort of referred to in my script this morning, including the sale of our office building, which we expect to happen in early January twenty twenty one.
You asked the question regarding the tax refund that we expect on the filing of our 2020 tax returns. So those are two material inflows that we expect to occur within the 2020 on the reintroduction of the earnings test. And then as we look at Q2, as you've seen, obviously, we're expecting a tough winter as the environment around us looks at the extension of COVID. But as we've seen films shift and we see them shift into early Q2, is we are confident or relatively confident and with the announcement of a vaccine becoming available, there is an end in sight.
And then
obviously, with respect to liquidity matters, I also mentioned that we're exploring other potential asset sales and opportunities to create value and create liquidity. So a number of balls and of course, unfortunately, I can't detail any of them specifically at this point in time, but I just want to make people feel comfortable that we're exploring anything and everything.
Thank you.
And we'll take our next question from Aravinda Galappatthige from Canaccord Genuity.
Good morning, guys. I hope you're well. Thanks for taking my question. A couple from me. First of all, on the changes and adjustments to the lease payments.
Gord, can you just talk to what that structure is? I understand the monetization of the rights, but in terms of lowering the ongoing payment, is that based on a new kind of flexible, I'll call it, variable structure? Has that been negotiated? Or is that sort of more quarterly negotiations that are happening that are constantly had to kind of go back? I wanted to understand the construct of that.
And secondly, with respect to asset sales beyond the sale of the head office, what would be the equity investments that you were I think you alluded to? And then a bigger picture question for Alice. In terms of the returns, the sort of the examples we have globally, Japan and I think even China sort of come back quite well. Do you like how do you see sort of the potential trends? I know it's a very futuristic question, but is there a danger that unlike in China and Japan where the closures were more limited in terms of period that if there's an extended closure that that film going tendency could sort of be affected if the closure period
I just want to get your thoughts on that standpoint. I'll leave it there. Thank you.
Erwin, it's Gort. So I'll take your first two questions and then leave the third one for Ellis. On your first question regarding kind of the cost and the structuring of the rent concessions that was delivered during Q2 and Q3. First of all, I want to ensure that people understand and it's important to look at kind of Q2 and Q3 together as opposed to one quarter in isolation because we were negotiating and dealing with our landlords primarily throughout Q2 and into Q3 and then papering those agreements in Q3. So the net impact is really when I think you should look at both Q2 and Q3 together, and that's where we describe the significant amounts that were delivered over that time period.
Now your question is purely on the rent abatements number. And so I wanna what I wanna do I wanna stress to everyone is that these are not deferrals. So this is really permanent forgiveness of rent during the closure and reopening period. This is not rent that we're gonna repay, you know, over a future date. This is a negotiated permanent forgiveness of a component of rent during the closure period.
And so we've continued to work with our landlord partners to provide relief throughout the remainder of 2020 and into 2021. And the element of relief is typically provided in some of the abatements, so full abatements that we received during certain closure periods as well as what I described as conversion of some elements of rent to a variable component of rent, which means we would pay rent based on how successful the revenue was in the boxes and or reduced fixed amounts as the business is projected to ramp up over the next number of months. So hopefully, that answers your question on kind of the structure of those rent concessions. With respect to your second question on the other liquidity events, which includes potentially asset sales and equity investments in particular, we have a number of equity related investments on our balance sheet. We have investments in the cinema partnership.
We have investments in some VR companies. We have an investment in SCENE as an example, a loyalty partnership. So we have a number of investments out there that have potential value that we could potentially look for some liquidity at.
Thank you, Arvinda. Good morning. And no question about our guests returning to the theater. And what would be a great example is this week when we had the holiday on Tuesday for Remembrance Day in a number of provinces. And when I looked at the numbers, for example, for Alberta, British Columbia and Nova Scotia, the numbers were significantly higher than what we were seeing in previous weeks.
And there was really no change in the type of product that was out there. And there are other than Tenant, which is long in the tooth. There wasn't any really big movies. But our guests were out there. They loved the magic of the movies, and they wanted to be in an environment which was safe with their families.
And we are providing that with the physical distancing and making sure that we are staggering our showtimes and implementing reserved seating in all of those different categories. So to me, I think what we're going to see is as the theaters continue to be allowed to increase capacity and open, our guests are going to want to come back. And Japan saw that. We have seen that in Australia in a big way, too. Taiwan, China, there's a lot of locations where the numbers are just astronomical compared to what they were even pre COVID.
So we are in the struggle because of where we are today, but we see the light at the end of the tunnel looking at some of the other countries and what they've been able to achieve. So that puts me in a much more positive thought process as we move forward.
And we'll take our next question from Adam Shine from National Bank Financials.
Thanks a lot. Good morning. Maybe one for you, Gord, and then I'll tie it in for Ellis. So Gord, I guess a number of us might have assumed that you would have certainly gotten the second relief into Q1 at the very least. You got it into Q2.
And I'm just curious, the last concession or the first concession that you got in terms of the waiver sort of created an annualization test for the leverage in Q4. And that's not necessarily the case going into Q2. So I'm just wondering, maybe you can answer the first part and then tied into Ellis' answer. Is there this ongoing concern that with all these ongoing postponements that why play games, guessing as to what exactly is going to be the real reboot of new releases in Q2 or could that bleed into Q3 next year? Is that part of the consideration at all?
Or was just a cleaner way to approach what continues to be obviously an extended period of uncertainty?
Yes. So look at I think from there's obviously risk elements from the bank's perspective that they want to cover. So looking for two more quarters, there's announcement of a vaccine, the release schedules kind of lining up that bond coming in early April, Q2 will be the quarter that the industry returns strong. And so the leverage test in 2021 is an annualized amount. So it is, in essence, 4x the Q2 results for the earnings test.
There are some elements of the credit facility amendment, including elements related to CapEx and others that are more on an LTM basis. But the earnings test in Q2 twenty twenty one is based on, in essence, a 4x Q2 earnings results. So I think it's a vote of confidence from our lending syndicate that there's going to be a tough winter as we go through with respect to COVID-nineteen, but the spring looks encouraging in our business.
Okay. So maybe sorry, Alex, I'll ask you a more detailed question in a moment. So Gord, I guess I initially misread it. I thought there was a full suspension of the covenant test all the way through the Q2, but indeed what was originally created as annualized testing Q4 is really just getting postponed out to the Q2, correct? That's the better read.
Okay, perfect. Okay, which makes my question rather moot, I guess, in the scheme of things. But thanks for that clarification. Ellis, I guess the question to you is, look, you've always said you don't have control over the product. You set the table, and the table is certainly being set.
And you guys are doing a great job in regards to controlling costs and things that you can't control. But can you get us under the hood or into some of the conversations with the studios? We all know and you've even put in your release that California, call it L. A. Specifically and New York, New York City specifically, are issues that the industry look to in terms of resolving to maybe ease up on some of the studios inclination not to move at the present time.
But as we look out, let's say, Wonder Woman as maybe the last hope for a big movie to close out this year, what's the risk of that just getting pushed out obviously and then really not much showing up in Q1 and we really do wait ultimately for No Time to Die as a real first movie really post pandemic?
Yes. And Adam, I mean, as we've seen a number of movies have moved from 2020 to 2021. And Wonder Woman is one that we keep talking to our studio partners at Warner Brothers. But again, the challenge is, like you mentioned, the whole issue of where New York and LA are when the opening date arrives. And they also have to have a couple of weeks to market the movie.
And further to that, in many, many locations and countries have been closed down again. So they look at it from an overall perspective and say, what position will this movie be in and how much can we release it across the world and also in specific markets in North America. So that one is still one that's being discussed. But again, it's something that if they move, they would probably move it into the 2021. But at the moment, they haven't indicated that, but the risk is there that, that could also move from its current date.
And we still have other movies. We are opening freaky and number of movies through the next couple of weeks. They're not massive titles, but they do bring people back to the theaters, which to me is really important.
Thanks for that. Maybe just one follow-up. It's other than Tenet and Chris or Nolan's concession to the industry, it really has been every man for himself during the pandemic. Is there any sign that perhaps the studios offer some concessions to the industry as we move into 2021, be it film splits or other considerations?
I think, Adam, that goes to a much broader discussion as to where is the movie playing and how long it plays in the theaters and all of the windowings that we've discussed for years and years. And there could be adjustments based on that. But I'm not and Gord's not including that as part of our projections going forward.
Okay. Thank you.
Thank you.
And we'll take our next question from Tim Casey from BMO.
Thanks. Good morning. Gord, could you
walk us through that earnings test in Q2 in terms of the, I guess, the denominator and the numerator? I mean, what is the debt calculation used in that? And maybe just walk us through any adjustments to a traditional report of EBITDA, anything that gets added or can't get away or just so we can get a sense of what banks are, I guess, expecting the low end of projected EBITDA to be to satisfy that test?
Yes. So
debt, as defined in the covenant, would be credit facility debt only. So to make it clear to everyone on this call, it excludes amounts due under the convertible debentures. And then earnings, so earnings would be Q2 EBITDA for unusual or nonrecurring items. And then that would be so Q2 EBITDA adjusted for unusual or nonrecurring noncash items would be then multiplied by four, And that would be your annualized earnings amount. And then that and so those are your two elements, the annualized earning amount and then the debt balance under credit facility.
Does that help clarify?
Sure does. Just one follow-up, if I could. Just speaking to working capital, usually you get a big source of working capital in Q4 when people buy gift cards, and then that reverses usually in Q1, if you could walk through what your assumptions are on how those swings will go this year. And then just to the working capital buildup in Q2, I think it was close to 70,000,000 and roughly half of that, maybe a little more reversed in Q2. How should we think about that?
And is there more I guess, what's the working capital outlook look like over the next couple of quarters? Yes.
Thanks, Tim, for that question. And also thanks for the reminder because I do look back at my notes and I realize Jeff had asked that component of the question. I think I may have
missed the response to that. So
yes, as we look forward, like typically in a traditional year, as you all know, the Q2 and Q3 are relatively working capital neutral. There's typically a big source of working capital in Q4 as we sell corporate gift cards and gift certificates to customers as well as have the significant ramp up to the holiday business from a media perspective. And then in 1, there's typically a large drain in working capital. So that would be a typical year. We're not in a typical year right now.
So in and as you noted, and as I noted in my call script too, is we had a a large source of working capital in q two as, you know, we dealt with our suppliers and our partners and our landlord partners. And as we came to terms with negotiated agreements with them, we paid and made made full on our obligations to those partners during q three. So, so large source in Q2 followed by and as you noted, a drain in Q3. So as I look to Q4, and the big question is and it's a bit unknown is I would fully expect we're not going to get that material large source of working capital in Q4 that we would typically get because I'm a little bit uncertain about consumer demand for purchasing gift cards during the pandemic. So I believe there will be
a source. It just I don't believe it will
be in the magnitude that it has been historically. And then vice versa, I would expect the same thing, the large drain in Q1 to be not as significant. So relatively neutral over the two quarters and but not having the same degree of variability that we would historically. Hope that helps.
Sure does. And just to clarify on the big source in Q2, is there more of that to reverse? Or do you think that's going to stick?
I think that's great. No, because I mean part of it too was the collection of receivables. So we and you can see our receivable balance at the end of Q3. So there's a large source that was really collection of enhanced collection of receivables of which with the low business volumes and etcetera, the receivable balance is at sort of historically low level right now.
Thank you.
Thank you.
And we'll take our next question from Drew McReynolds from RBC. Andrew, your line might be muted.
Hi. Sorry. Can can you hear me?
Yes. We can hear you now.
Okay. Super to little bit choppy on the phone. A couple of, I guess, follow ups for Mike. On Adam's question around deal releases, I guess, for you, Ellis, just to be clear, I know it's but it doesn't make sense at some point, studios to do some good releases as opposed to what's been done in that time. So I just want to confirm that that isn't on the floor at this point.
And then secondly, I also may have missed from the, I guess, set of the head offs, what kind of financial inflows these for you guys in Q1 assuming it was?
We the first question, Drew, that you asked, were you talking about the different ways that the studios are releasing their movies because it wasn't clear when I heard the question.
Yeah. That that's that's right, Ellis. So you you obviously got a weekly in in in the ten weeks, I think, back in August. I guess the world doesn't, I mean, equal measure or get the scene in equal measure, doesn't it make sense to for the studios just a little bit more tactical on the release later, Cripple?
Yes. And the studios are really committed to the theatrical experience. And on the big movies, it really works to their advantage because I always say we are the engine that drives the train. And the fact that we create the sequel to the studios, we create the benefits for merchandising and for theme park rides and all of those kinds of things. So will there be changes?
There will be changes, but I don't see that happening with the big blockbuster movies that the studios have made and we'll keep them for release as we move forward into 2021. And there will be changes in how different studios approach the movies. And during the COVID period, we are always talking to them about ways that we can benefit both Cineplex and the studio partner as we move forward. And, you know, part of that is we have the Cineplex store, which is basically being used regularly now given the situation we are faced with with COVID.
I hope I see that. Thank you.
And then I think on your second question, which is related to the building, You know, obviously, as I described, we're in the middle of negotiations, you know, with a number of parties. So I'm you know, I I don't wanna signal a value. I will note though that and, Drew, I'm not sure whether it was you or someone else noted that in the previous credit agreement, there was a a provision on the sale of the building that indicated a minimum proceeds amount of $50,000,000. So so that's the only number I will provide is that, yeah, I will confirm that, yes, that was in the agreement, but we're currently in negotiations So that's all I can say.
Thank you for your feedback.
And it appears there are no further questions at this time. Mr. Ellis Jacob, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you very much. Thanks again for joining our call this morning. We look forward to speaking with you again in the New Year for our fourth quarter and year end results. Until then, on behalf of the entire senior leadership team at Cineplex, we wish you and your families a safe and joyful holiday season. Thank you, and have a great weekend.
Thank you. And again, that does conclude today's call. You may now disconnect.