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Cineplex Inc. is seeking additional financing and possibly the sale of some assets to meet its debt obligations, and has cautioned that if unsuccessful, its status as a going concern could be at risk.

The company reported its first-quarter earnings on Monday, providing a glimpse into the business impact of the COVID-19 pandemic, on the heels of its failed deal to be acquired by UK-based Cineworld Group PLC.

Under the terms of that deal, which fell apart earlier this month, Cineplex was unable to take on additional debt while absorbing the hit from widespread closures during the pandemic. The company obtained covenant relief from lenders to its credit facilities until the end of August, but warned it could default on those covenants sometime before the end of September. It is now seeking financing. As of March 31, Cineplex had $665-million in long-term debt.

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The company’s report includes stark “going concern” language about its future prospects. Companies prepare financial statements under the assumption that they will stay in business and be a “going concern.” But if there’s meaningful doubt about that, they or their auditors must insert a warning to shareholders.

“While Cineplex currently has sufficient liquidity to satisfy its immediate financial obligations, there can be no assurance that the steps that management is taking will provide sufficient liquidity in the near term to meet its ongoing obligations, nor can it be assured that it will be able to obtain additional financing at favourable terms, or at all. These material uncertainties lend significant doubt about the Company’s ability to continue as a going concern,” the report stated.

Cineplex's 164 movie theatres have been severely impacted by widespread business shut-downs that were intended to curb the spread of COVID-19. The Toronto-based company has conducted temporary layoffs and salary cutbacks, slashed spending, negotiated rent relief with landlords and delayed payments to suppliers, suspended its dividend and applied for government supports such as wage subsidies.

In its first-quarter earnings release on Monday, the company reported a $173.1-million impairment charge on both its assets and goodwill, contributing to a net loss of $178.4-million or $2.82 per share in the three months ended March 31 compared to a net loss of $7.4-million or 12 cents per share in the same period last year. The company said that the impairment charge was driven by the decline in its stock price in recent months, estimated losses from the pandemic-related closures and reopenings, and the time it will take for business to return to normal.

Cineplex closed all its theatres nationwide on March 16.

“While it is impossible to predict how long this crisis will last and how significant the impact will be on our business, we know guests miss the magic of the big screen and sound, and have a new appreciation for shared experiences with friends and family that can’t be replicated at home,” chief executive officer Ellis Jacob said in a statement on Monday. The report also noted that “a backlog of anticipated releases of strong film content” would help draw people to theatres.

Cineworld Group PLC announced it had pulled out of the $2.2-billion deal to acquire Cineplex on June 12. Cineplex has said it will pursue legal action, seeking damages for what it has characterized as a breach of contractual obligations by Cineworld. Cineworld has said it will "vigorously defend" itself against those allegations and reserved the right to seek damages from Cineplex for breaches.

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The theatre closures -- as well as speculation that the Cineworld deal was in peril even before it was called off -- have battered Cineplex's stock price. The deal valued the Canadian company at $34 per share; in mid-March it fell to less than $10. The shares closed at $9.92 on Monday, before the earnings release.

Cineplex reported first-quarter revenue of $282.8-million, down 22 per cent from $364.6-million in the same period last year.

Last week, Cineplex announced that it would scale back its reopening plans, after news that the release of the highly-anticipated film Tenet had been delayed until Aug. 12. The company had initially planned for a reopening this Friday of all of its theatres in British Columbia, Alberta, Saskatchewan, Quebec, New Brunswick, Nova Scotia and Newfoundland. But last Friday the company said it would open only "select locations" in those provinces to begin with, and would reopen other locations more gradually throughout July. Cinemas are still waiting for permission to reopen in Ontario, Manitoba and Prince Edward Island.

With a report from David Milstead

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