Good day, welcome to the Cineplex Inc. Q3 2020 analyst call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Melissa Pressacco, Senior Manager, Communications and Investor Relations. Please go ahead, Ms. Pressacco.
Thank you, Celestina. Good morning, and welcome to Cineplex's third quarter 2020 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-19 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 2020 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 2020 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-19 continues to significantly impact the financial performance of many businesses in Canada and around the world.
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 100+ 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-19 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.
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-19, resulting in substantial decreases when compared to last year. Although we were able to reopen all of our event 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 CAD 300 million in additional financing, obtained extended relief under our credit facilities, materially reduced our net cash lease outflows by approximately CAD 58 million, received approximately CAD 22.5 million in wage subsidies, 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 2021.
We remain focused on all other revenue-generating areas of our business, including Cineplex Digital Media, our expanded food delivery services through SkipTheDishes and Uber Eats, and our online digital movie platform, the Cineplex Store, which has experienced significant growth this year. So far this year, our Cineplex Store customer base has grown by 41% to 1.8 million registered users, and we have completed more than 2 million 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 CAD 125.
With people looking for creative and safe ways to come together, particularly as the holidays approach, private movie nights and venue rentals at The Rec Room and Playdium are great options to share a 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. On August 21st, 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 release in five months, Tenet, we proudly welcomed 1.6 million 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 place 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-19 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 95% were 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 teams. 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 reserved seating with physically distant spacing. We know that the magic of the movies and escaping to a movie theater provides 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. We continue to actively work with government regulators to advocate for our safety protocols within our venues and the zero transmission record we've provided to date.
Of course, we are encouraged by the recent news of the successful trial of COVID-19 vaccines. As initial reports suggest, a COVID-19 vaccine could be available within the first half of 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-19 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 II 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 am 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 a 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.
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: A New Age," "Funny Boy," "All My Life," "Nomadland," this year's 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," "Top Gun: Maverick," "Fast & Furious 9," "A Quiet Place Part II," "The Eternals," "Minions: The Rise of Gru," "Black Widow," "Candyman," "West Side Story," "Sing 2," "Mission: Impossible 7," and "Cruella." 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-19 on our business, and we will continue to do so. Although we know a 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, we will remain extremely strategic and agile in our approach to operating the company. We will review and refine our plans across the entire business 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-19 on our operations. For your further reference, our financial statements and MD&A have been filed on SEDAR and are also available on our Investor Relations website at cineplex.com. In addition, our credit facility amendment has been filed on SEDAR this morning. Our MD&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-19 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 2020.
As a result, we continued 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 CAD 58 million, which includes approximately CAD 37 million in lease savings and CAD 21 million 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 the Canada Emergency Wage Subsidy.
During Q3, we benefited from approximately CAD 22.5 million in subsidies, primarily under this program, and we were able to materially reduce our theater payroll to approximately CAD 3.9 million in Q3 2020 from approximately CAD 40.9 million 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 CAD 21.7 million from CAD 78 million in the prior year. In July, the company initiated a restructuring process, which will result in the elimination of approximately 130 roles for an annualized savings of approximately CAD 12 million. Approximately half of the savings relates to G&A and half relates to OpEx savings in the various businesses. During Q3, the company recorded approximately CAD 5.4 million in restructuring expenses related to this initiative.
As we look forward, we will continue to benefit from the CEWS 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 in 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 CAD 20 million per month before working capital.
During the second quarter, we had a positive source of working capital of approximately CAD 69 million as we were negotiating concessions with our landlord and other supplier partners. During the third quarter, we had a use of working capital of approximately CAD 35 million 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 CAD 21 million in lease rights. This is reflected as proceeds on our statement of cash flows. We have recorded a gain of approximately CAD 14 million on these transactions after derecognizing the component of our right of use assets. We issued approximately CAD 316.3 million in face value of convertible debentures during the third quarter. Of this total, approximately CAD 91.3 million 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 CAD 5.4 million during the quarter. Finally, we recorded a goodwill impairment charge of CAD 65.6 million, 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 12th. This amendment extends the suspension of financial covenant testing until the second quarter of 2021, but provides for a monthly liquidity test until the financial covenants are reintroduced. Please refer to our financial statements and our MD&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 CAD 316.3 million in face value of debentures during the quarter. Of this issuance, CAD 100 million 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 2021. 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 5 in our financial statements, we identify approximately CAD 78 million in operating losses available for carry forward and carryback.
Some of these losses are in entities that are not eligible for carryback, but we estimate a refund of approximately CAD 60 million. As a result of loss carrybacks when we file our tax returns in early 2021. We are continuing to bring CapEx down to approximately CAD 50 million for the next 12 months from our previously estimated run rate of approximately CAD 150 million. This CapEx reduction, coupled with the elimination of our dividend, will provide approximately CAD 200 million 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. 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 you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Derek Lessard from TD Securities.
Buddy, I hope you're all well and safe. Two questions from me. Maybe first one's for Ellis. 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, I guess, an improvement in the COVID situation and, Gord, maybe just wondering how much you think you can squeeze out of the restrictive lease rights or was CAD 21 million all of it?
Okay, thank you for your question, Derek. As it relates to production still continues in a number of parts of the world, and also locally with proper procedures that they are following. They're looking to continue with production. That being said, there have been delays along the way, but with the backlog of product from 2020 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.
On the lease rights section, during the last call, I mentioned that we expected in excess of CAD 20 million. That was our focus for lease rights transactions. We delivered CAD 21 million 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 we've conducted discussions in progress.
Thanks. Thanks, gentlemen.
We'll take our next question from Jeff Fan from Scotiabank.
Thanks. Good morning, everyone. Just a quick clarification on Gord's comment about the tax refund. Did you say that was 60, CAD 60 million? Maybe CAD 60 million. Okay. That you expect to receive that in early 2021?
Yeah. On the filing of the 2020 tax returns, which we will file as soon as we possibly can, the refund would come after the filing of those tax returns. 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 CAD 15 million-CAD 20 million 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. While you think about that, maybe a bigger picture question, looking out a little bit further, the COVID 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 that would be sufficient? Thanks.
Yeah. Thanks, Jeff. 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 CEWS program until June 2021. They have not, and they've continued to kind of increase the amount of the benefit throughout the remainder of 2020. At this point in time, they have not provided the details with respect to the first six months of 2021. We have been encouraged by the increased amount of subsidy available under CEWS program, the extension of the CEWS 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. As we look through the remainder of 2020, as Ellis mentioned, we've got some encouraging product being released into December. 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 CAD 20 million a month, and I'd expect that to continue.
On 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 second quarter of 2021. In its place, there's been a liquidity test which looks at the headroom that we have available under our borrowing facility and the credit facility amendment has been filed on SEDAR this morning. I invite you to look at the monthly details as provided in the credit facility as filed. The assumptions with respect is, 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 2021. You asked a question regarding the tax refund that we expect on the filing of our 2020 tax returns.
Those are two material inflows that we expect to occur within the first half of 2020 on the reintroduction of the earnings test. As we look at Q2, as you've seen obviously, we're expecting a tough winter as the environment around us works with the extension of COVID. As we've seen films shift and we see them shift into early Q2, is we are confident, or relatively confident in with the announcement of a vaccine becoming available is there is an end in sight. 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. A number of balls in the court. Unfortunately, I can't detail any of them specifically at this point in time, but I just wanted to make people feel comfortable that we're exploring anything and everything.
Thank you.
We'll take our next question from Aravinda Galappatthige from Canaccord Genuity.
Good morning, guys. 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 a 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 you had to kind of go back? I wanted to understand the construct of that. Secondly, with respect to asset sales beyond the sale of the head office, what were the other equity investments that I think you alluded to? A bigger picture question for Ellis.
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. 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 film-going tendency could sort of be affected if the closure period is extended? I just want to get your thoughts on that standpoint. I'll leave it there. Thank you.
Aravinda, it's Gord. 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 were 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. 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 we've delivered over that time period.
Your question is purely on the rent abatements number. What I want to stress to everyone is that these are not deferrals. This is really permanent forgiveness of rent during the closure and reopening period. This is not rent that we're going to repay over a future date. This is a negotiated permanent forgiveness of a component of rent during the closure period. We've continued to work with our landlord partners to provide relief throughout the remainder of 2020 and into 2021.
The element of relief is typically provided in some of the abatements, so full abatements that were 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. Hopefully that answers your question on 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 a cinema partnership. We have investments in some VR companies. We have an investment in Scene+, as an example, a loyalty partnership.
We have a number of investments out there that have potential value that we could potentially look for some liquidity on.
Thank you. Aravinda, good morning. Your question about our guests returning to the theater. What would be a great example is this week when we had the holiday on Tuesday for Remembrance Day in a number of provinces. 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. There was really no change in the type of product that was out there. Other than "Tenet" which is long in the tooth, there wasn't any really big movies. Our guests were out there.
They love 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 show times and implementing reserved seating and all of those different categories. 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. 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.
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. That puts me in a much more positive thought process as we move forward.
Great. Thank you, Ellis.
Thank you.
We'll take our next question from Adam Shine from National Bank Financial.
Thanks a lot. Good morning. Maybe one for you, Gord, and then I'll tie it in for Ellis. 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. 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. That's not necessarily the case going into Q2. I'm just wondering, maybe you could answer the first part and then tie it into Ellis's 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 it was just a cleaner way to approach what continues to be obviously an extended period of uncertainty?
Yeah. Looking at , I think there's obviously risk elements from the bank's perspective that they want to cover. Looking for two more quarters. There's announcement of a vaccine, the release schedules kind of lining up that with Bond coming in early April, that Q2 will be the quarter that the industry returns strong. The leverage test in Q2 2021 is an annualized amount, so it is in essence 4 x 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. The earnings test in Q2 2021 is based on, in essence, a 4x Q2 earnings result.
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-19, but the spring looks encouraging in our business.
Okay. Sorry, Ellis, I'll ask you a more detailed question in a moment. 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 an annualized test in Q4 is really just getting postponed out to the Q2, correct? That's the better read? Okay.
That's-
Perfect.
Correct.
Okay. Which makes my question rather moot, I guess, in the scheme of things. 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's certainly being set, and you guys are doing a great job in regards to controlling costs and things that you can control. 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 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.
As we look out, let's say, at Wonder Woman 1984 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 the real first movie, really post-pandemic?
Yes. Adam, as we've seen, a number of movies have moved from 2020 to 2021, "Wonder Woman 1984" is one that we keep talking to our studio partners at Warner Bros. Again, the challenge is, like you mentioned, the whole issue of where New York and L.A. are when the opening date arrives. They also have to have a couple of weeks to market the movie. Further to that, Europe in many, many locations and countries have been closed down again. 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? That one is still one that's being discussed.
Again, it's something that if they move, they would probably move it into the first or second quarter of 2021. At the moment, they haven't indicated that but the risk is there from its current date. We still have other movies. We are opening "Freaky," and a 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. Other than Tenet and Christopher 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 windowing that we've discussed for years and years. There could be adjustments based on that. I'm not, and Gord's not including that as part of our projections going forward.
Okay. Thank you.
Thank you.
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 denominator and the numerator? What is the debt calculation used in that? Maybe just walk us through any adjustments to a traditional report of EBITDA, anything that gets added or taken away there, 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.
Yeah. Debt as defined in the covenant would be credit facility debt only. To make it clear to everyone on this call, it excludes amounts due under the convertible debentures. Earnings. Earnings would be Q2 EBITDAaL adjusted for unusual or non-recurring items. A Q2 EBITDAaL adjusted for unusual or non-recurring non-cash items would be then multiplied by four, and that would be your annualized earnings amount. Those are your two elements, the annualized earning amount and then the debt balance under the 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 build-up in Q2, I think it was close to CAD 70 million, and roughly half of that, maybe a little more reversed in Q3. How should we think about that in sort of I guess what's the working capital outlook look like over the next couple of quarters?
Yeah. Thanks, Tim, for that question. Also, thanks for the reminder because I do look back at my notes and I realize, Jeff had asked that component of the question that I think I may have missed the response to that. As we look forward, 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. In Q1, there's typically a large drain in working capital. That would be a typical year. We're not in a typical year right now.
As you noted, and as I noted in my call script, too, is we had a large source of working capital in Q2 as we dealt with our suppliers and our partners and our landlord partners. As we came to terms with negotiated agreements with them, we paid and made full on our obligations to those partners during Q3. Large source in Q2 followed by, and as you noted, a drain in Q3. 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. I'm a little bit uncertain about consumer demand for purchasing gift cards during the pandemic. I believe there will be a source.
It's just I don't believe it will be in the magnitude that it has been historically. Vice versa, I would expect the same thing, the large drain in Q1 to be not as significant. Relatively neutral over the two quarters, but not having the same degree of variability as that we would historically. Hope that helps.
Sure does. 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 no, because part of it too was the collection of receivables. You can see our receivables balance at the end of Q3. There's a large source that was really enhanced collection of receivables of which, with the low business volumes and et cetera, the receivable balance is at sort of a historically low level right now.
Thank you.
Thank you.
Once again, if you'd like to ask a question, please press star one, we'll take our next question from Drew McReynolds from RBC. Drew, your line might be muted.
Hi. Sorry. Can you hear me?
Yes, we can hear you now.
Okay. Super. It's a little bit choppy on the phone. A couple of follow-ups for me. On Adam's question around video releases, I guess for you, Ellis, just to be clear, I know it's fluid, but doesn't it make sense at some point, studios to do staggered releases as opposed to what's been done in the past? I just want to confirm that isn't on the floor at this point? Secondly, I also may have missed from the head office what kind of financial and burn flows it means for you guys in Q1, assuming it goes?
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's right, Ellis. You obviously got a weekly, in the 10 days, I think, back. I guess the world does in an equal measure or get the scene in equal measure. Doesn't it make sense for the studios just to get a little bit more tactical on the release later global?
Yes. The studios are really committed to the theatrical experience. On the big movies, it really works to their advantage because I always say we are the engine that drives the train in the fact that we create the sequels for the studios, we create the benefits for merchandising and for theme park rides and all of those kinds of things. 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 will keep them for release as we move forward into 2021. There will be changes in how different studios approach the movies. 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.
Part of that is we have the Cineplex Store, which is basically being used regularly now, given the situation we are faced with COVID.
I see that, Ellis. Thank you.
I think on your second question, which was related to the building. Obviously, as I described, we're in the middle of negotiations with a number of parties. I don't want to 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 provision on the sale of the building that indicated a minimum proceeds amount of CAD 50 million. That's the only number I will provide is that I will confirm that yes, that was in the agreement, but we're currently in negotiations right now. That's all I can say.
Thank you for that.
It appears there are.
Thank you, Drew.
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. Again, that does conclude today's call. You may now disconnect.