Item 1.
|
Financial Statements
|
IPIC
Entertainment Inc.
Unaudited Condensed Consolidated Balance Sheets
(In
thousands, except share and per share data)
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,562
|
|
|
$
|
6,026
|
|
Accounts receivable
|
|
|
3,266
|
|
|
|
3,874
|
|
Inventories
|
|
|
1,233
|
|
|
|
1,218
|
|
Prepaid expenses
|
|
|
4,016
|
|
|
|
3,808
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,077
|
|
|
|
14,926
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
144,562
|
|
|
|
143,539
|
|
Deposits
|
|
|
330
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
156,969
|
|
|
$
|
158,724
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ / Members’ Deficit
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
10,323
|
|
|
$
|
12,629
|
|
Accrued expenses
|
|
|
5,706
|
|
|
|
5,039
|
|
Accrued payroll
|
|
|
3,189
|
|
|
|
4,048
|
|
Accrued insurance
|
|
|
1,178
|
|
|
|
1,392
|
|
Taxes payable
|
|
|
1,585
|
|
|
|
958
|
|
Deferred revenue
|
|
|
5,122
|
|
|
|
5,541
|
|
Total current liabilities
|
|
|
27,103
|
|
|
|
29,607
|
|
|
|
|
|
|
|
|
|
|
Long-term debt – related party
|
|
|
203,567
|
|
|
|
188,261
|
|
Deferred rent
|
|
|
53,355
|
|
|
|
49,354
|
|
Accrued interest – long-term
|
|
|
5,590
|
|
|
|
9,398
|
|
Other long-term liabilities
|
|
|
1,245
|
|
|
|
1,325
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
290,860
|
|
|
|
277,945
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ deficit
|
|
|
-
|
|
|
|
-
|
|
Class A Common Stock; $0.0001 par value; 100,000,000 shares authorized; 7,144,133
issued and outstanding as of March 31, 2019 and as of December 31, 2018
|
|
|
1
|
|
|
|
1
|
|
Class B Common Stock; $0.0001 par value; 25,000,000 shares authorized; 4,323,755
issued and outstanding as of March 31, 2019 and as of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
(121,822
|
)
|
|
|
(121,988
|
)
|
Accumulated deficit
|
|
|
(28,062
|
)
|
|
|
(18,757
|
)
|
Total stockholders’ / members’ deficit attributable to
IPIC Entertainment Inc.
|
|
|
(149,883
|
)
|
|
|
(140,744
|
)
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
15,992
|
|
|
|
21,523
|
|
Total stockholders’ / members’ deficit
|
|
|
(133,891
|
)
|
|
|
(119,221
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ / Members’
Deficit
|
|
$
|
156,969
|
|
|
$
|
158,724
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
IPIC
Entertainment Inc.
Unaudited Condensed Consolidated Statements of Operations
(In
thousands, except share and per share data)
|
|
Three Months Ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018 (Restated)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Food and beverage
|
|
$
|
15,685
|
|
|
$
|
19,992
|
|
Theater
|
|
|
14,071
|
|
|
|
17,753
|
|
Other
|
|
|
482
|
|
|
|
959
|
|
Total revenues
|
|
|
30,238
|
|
|
|
38,704
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
|
4,071
|
|
|
|
5,486
|
|
Cost of theater
|
|
|
5,618
|
|
|
|
7,687
|
|
Operating payroll and benefits
|
|
|
9,144
|
|
|
|
10,578
|
|
Occupancy expenses
|
|
|
4,910
|
|
|
|
4,676
|
|
Other operating expenses
|
|
|
5,599
|
|
|
|
7,608
|
|
General and administrative expenses
|
|
|
5,062
|
|
|
|
13,115
|
|
Depreciation and amortization expense
|
|
|
4,787
|
|
|
|
4,840
|
|
Pre-opening expenses
|
|
|
1,138
|
|
|
|
-
|
|
Loss on abandonment of lease
|
|
|
-
|
|
|
|
1,839
|
|
Operating expenses
|
|
|
40,329
|
|
|
|
55,829
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,091
|
)
|
|
|
(17,125
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,832
|
)
|
|
|
(4,614
|
)
|
Total other expense
|
|
|
(4,832
|
)
|
|
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(14,923
|
)
|
|
|
(21,739
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
13
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,936
|
)
|
|
|
(21,761
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
|
(5,631
|
)
|
|
|
(15,385
|
)
|
Net loss attributable to IPIC Entertainment Inc.
|
|
$
|
(9,305
|
)
|
|
|
(6,376
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per Class A common share (Note 9)
(1)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.26
|
)
|
|
|
(1.70
|
)
|
Diluted
|
|
$
|
(1.26
|
)
|
|
|
(1.70
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of Class A common shares outstanding (Note 9)
(1)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,365,472
|
|
|
|
1,135,437
|
|
Diluted
|
|
|
7,365,472
|
|
|
|
1,135,437
|
|
|
|
|
|
|
|
|
|
|
(1)
Basic and diluted net loss per Class A common share is applicable only for periods after the Company’s IPO. See Note
11 “Net Loss per Share”.
See
accompanying notes to unaudited condensed consolidated financial statements.
IPIC
Entertainment Inc.
Unaudited Condensed Consolidated Statements of Cash
Flows
(In
thousands)
|
|
Three Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
$
|
(1,341
|
)
|
|
$
|
(10,626
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,218
|
)
|
|
|
(3,570
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,218
|
)
|
|
|
(3,570
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Members’ contributions
|
|
|
-
|
|
|
|
2,500
|
|
Proceeds from issuance of common stock sold in initial public offering, net
of offering costs
|
|
|
-
|
|
|
|
12,325
|
|
Repayment of notes payable to related parties
|
|
|
-
|
|
|
|
(15,000
|
)
|
Repayment of short-term borrowings
|
|
|
(434
|
)
|
|
|
(755
|
)
|
Borrowings on long-term debt – related party
|
|
|
6,529
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,095
|
|
|
|
17,070
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,464
|
)
|
|
|
2,874
|
|
Cash and cash equivalents at the beginning of period
|
|
|
6,026
|
|
|
|
10,505
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
3,562
|
|
|
$
|
13,379
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
IPIC
Entertainment Inc.
Unaudited Condensed Consolidated Statements of Cash
Flows
(In
thousands)
|
|
Three Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
-
|
|
|
$
|
9,561
|
|
Cash paid for income taxes
|
|
$
|
13
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activity:
|
|
|
|
|
|
|
|
|
Property and equipment financed through liabilities
|
|
$
|
1,249
|
|
|
$
|
183
|
|
Insurance premiums financed through short term borrowings
|
|
$
|
434
|
|
|
$
|
755
|
|
Interest payment-in-kind
|
|
$
|
8,777
|
|
|
$
|
-
|
|
Conversion of notes payable to related parties to equity
|
|
$
|
-
|
|
|
$
|
37,157
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
iPic
Entertainment Inc.
Unaudited
Condensed Consolidated Statement of Changes in Redeemable
Non-Controlling Interests and Stockholders’
/ Members’ Equity (Deficit)
(In
thousands, except share and per share data )
|
|
Members’ Equity
|
|
|
Class A Common Stock
|
|
|
Class B Common Stock
|
|
|
Additional Paid In
|
|
|
Accumulated
|
|
|
Total
Stockholders’/
Members’ Equity
|
|
|
Redeemable
Non-Controlling
|
|
|
|
(Deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Interest
|
|
Members’ deficit – December
31, 2017
|
|
$
|
(124,225
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(124,225
|
)
|
|
$
|
-
|
|
Activity prior
to the initial public offering and related organizational transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,442
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,442
|
)
|
|
|
-
|
|
Member’s contributions
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
Equity-based compensation
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
-
|
|
Effects of the
initial public offering and related organizational transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock in the IPO, net of underwriting
discount and offering costs
|
|
|
-
|
|
|
|
818,429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,375
|
|
|
|
-
|
|
|
|
1,375
|
|
|
|
10,948
|
|
Issuance of common stock
|
|
|
|
|
|
|
429,730
|
|
|
|
-
|
|
|
|
9,926,621
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
Conversion of notes payable and accrued interest
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
4,151
|
|
|
|
|
|
|
|
4,151
|
|
|
|
33,006
|
|
Allocation of equity to non-controlling interest in iPic-Gold
Class Holdings, LLC
|
|
|
126,072
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,083
|
)
|
|
|
-
|
|
|
|
111,989
|
|
|
|
(111,989
|
)
|
Activity subsequent
to the initial public offering and related organizational transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,934
|
)
|
|
|
(1,934
|
)
|
|
|
(15,385
|
)
|
Equity-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
946
|
|
|
|
-
|
|
|
|
946
|
|
|
|
7,527
|
|
Remeasurement of redeemable non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198,786
|
)
|
|
|
|
|
|
|
(198,786
|
)
|
|
|
198,786
|
|
Equity (Deficit) – March
31, 2018
|
|
$
|
0
|
|
|
|
1,248,159
|
|
|
$
|
-
|
|
|
|
9,926,621
|
|
|
$
|
1
|
|
|
$
|
(206,397
|
)
|
|
$
|
(1,934
|
)
|
|
$
|
(208,330
|
)
|
|
$
|
122,893
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
IPIC
Entertainment Inc.
Unaudited
Condensed Consolidated Statements of Changes in Stockholders’/ Members’Deficit
(In
thousands, except share and per share data)
|
|
Members’
|
|
|
Class A
Common Stock
|
|
|
Class B
Common Stock
|
|
|
Additional
Paid In
|
|
|
Accumulated
|
|
|
Total
Stockholders’/
Members’
Deficit
Attributable
to IPIC
Entertainment
|
|
|
Non-
controlling
|
|
|
Total
Stockholders ’/
Members ’
|
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Inc.
|
|
|
Interests
|
|
|
Deficit
|
|
Deficit – December 31, 2018
|
|
$
|
-
|
|
|
|
7,144,133
|
|
|
$
|
1
|
|
|
|
4,323,755
|
|
|
$
|
-
|
|
|
$
|
(121,988
|
)
|
|
$
|
(18,757
|
)
|
|
$
|
(140,744
|
)
|
|
$
|
21,523
|
|
|
$
|
(119,221
|
)
|
Net loss
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,305
|
)
|
|
|
(9,305
|
)
|
|
|
(5,631
|
)
|
|
|
(14,936
|
)
|
Equity-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
166
|
|
|
|
|
|
|
|
166
|
|
|
|
100
|
|
|
|
266
|
|
Deficit – March 31, 2019
|
|
$
|
-
|
|
|
|
7,144,133
|
|
|
$
|
1
|
|
|
|
4,323,755
|
|
|
$
|
-
|
|
|
$
|
(121,822
|
)
|
|
$
|
(28,062
|
)
|
|
$
|
(149,883
|
)
|
|
$
|
15,992
|
|
|
$
|
(133,891
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
IPIC
Entertainment Inc.
Notes to Unaudited Condensed Consolidated Financial
Statements
March 31, 2019 and 2018
($
in thousands, except share and per share data)
NOTE
1 — Organization and Summary of Significant Accounting Policies
Organization
IPIC Entertainment Inc. (“IPIC”)
was formed as a Delaware corporation on October 18, 2017. IPIC was formed for the purpose of completing an initial public offering
(“IPO”) and related transactions in order to carry on the business of IPIC-Gold Class Entertainment, LLC (“IPIC-Gold
Class”) and its subsidiaries. Additionally, IPIC-Gold Class Holdings LLC (“Holdings”) was formed as a Delaware
limited liability company on December 22, 2017, to hold the equity interests in IPIC-Gold Class. IPIC is the sole managing member
of Holdings, and Holdings is the sole managing member of IPIC-Gold Class and its subsidiaries. Holdings is consolidated as part
of IPIC. The assets and liabilities of Holdings represent substantially all of our consolidated assets and liabilities. IPIC and
its subsidiaries are collectively referred to throughout the consolidated financial statements and related notes as the “Company”,
“we”, “our” or “us”.
Principles of Consolidation and Basis of Presentation
The accompanying (a) unaudited
condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements
that included explanatory going concern language in the independent registered public accounting firm’s report
accompanying those statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in
accordance with the instructions to Form 10–Q. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete consolidated financial statements.
In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for
the fair presentation of the financial position of the Company as of March 31, 2019, the results of operations for the three month
period ended March 31, 2019 and 2018 and the cash flows for the three month periods ended March 31, 2019 and 2018, and should be
read in conjunction with the Company’s Annual Report on Form 10–K for the year ended December 31, 2018.
All
significant intercompany balances and transactions have been eliminated in consolidation.
Locations
At
March 31, 2019 and 2018, the Company operated a total of sixteen and fifteen cinemas, respectively, in the following locations
throughout the United States:
● Glendale,
Wisconsin
1
|
● Scottsdale,
Arizona
|
● Pasadena, California
|
● Bolingbrook,
Illinois
|
● Austin, Texas
|
● South Barrington,
Illinois
|
● Fairview, Texas
|
● Los Angeles,
California
|
● Boca Raton, Florida
|
● Houston, Texas
|
● Bethesda, Maryland
|
● Fort Lee, New
Jersey
|
● North Miami,
Florida
|
● New York, New
York
|
● Redmond, Washington
|
● Dobbs Ferry,
New York
|
● Delray Beach, Florida
2
|
|
1
|
Location was closed
in the first quarter of 2018. Refer to Note 3 “Property and Equipment”.
|
2
|
Location was opened
on March 7, 2019
|
New
Accounting Standards
As
an emerging growth company, the Company has elected the option to defer the effective date for adoption of new or revised accounting
guidance. This option allows the Company to adopt new guidance on the effective date for entities that are not public business
entities.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09,
Revenue
from Contracts with Customers (Topic 606) (“ASU 2014-09”)
. The purpose of ASU 2014-09 is to clarify the principles
for recognizing revenue and create a common revenue standard for U.S. GAAP and International Financial Reporting Standards. ASU
2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts
for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance
contracts or lease contracts). The following subsequent Accounting Standards Updates either clarified or revised guidance set
forth in ASU 2014-09:
|
●
|
In
August 2015, the FASB issued Accounting Standards Update 2015-14,
Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date (“ASU 2015-14”)
. ASU 2015-14 deferred the effective date of ASU 2014-09. The
guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 for public business
entities and for all other entities subsequent to December 15, 2018, including interim reporting periods within that reporting
period.
The Company has adopted the new standard in the first quarter of 2019.
|
|
●
|
In March 2016, the
FASB issued Accounting Standards Update 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenues Gross versus Net) (“ASU 2016-08”)
. The purpose of ASU 2016-08 is to clarify
the implementation of revenue recognition guidance for principal versus agent considerations.
|
|
●
|
In April 2016, the
FASB issued Accounting Standards Update 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing (“ASU 2016-10”)
. The purpose of ASU 2016-10 is to clarify certain aspects of identifying
performance obligations and licensing implementation guidance.
|
|
●
|
In May 2016, the
FASB issued Accounting Standards Update 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients (“ASU 2016-12”).
The purpose of ASU 2016-12 is to address certain narrow aspects
of Accounting Standards Codification (“ASC”) Topic 606 including assessing collectability, presentation of sales
taxes, noncash considerations, contract modifications and completed contracts at transition.
|
|
●
|
In December 2016,
the FASB issued Accounting Standards Update 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers (“ASU 2016-20”).
The purpose of ASU 2016-20 is to amend certain narrow aspects of
the guidance issued in ASU 2014-09 related to the disclosure of performance obligations, as well as other amendments related
to loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.
|
In March 2016, the FASB issued Accounting
Standards Update 2016-04,
Liabilities-Extinguishments of Liabilities (Subtopic 405-20)
. This amendment provides a narrow
scope exception to Liabilities-Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to
be accounted for in accordance with the breakage guidance in Accounting Standards Update 2014-09,
Revenue from Contracts with
Customers (Topic 606)
. Under the new guidance, if an entity expects to be entitled to a breakage amount for a liability resulting
from the sale of a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion
to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant
reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage
amount for a prepaid stored-value product, the entity shall derecognize the amount related to the breakage when the likelihood
of the product holder exercising its remaining rights becomes remote. The Accounting Standards Update is effective for public
business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning
after December 15, 2018. The Company has adopted the new standard in the first quarter of 2019.
NOTE 2 — REVENUE RECOGNITION
Revenue Recognition Policy
Food and beverage revenue is our largest source
of revenue. This includes all food and beverage sales within our restaurants, theaters and bars. Food revenues refer to food and
non-alcoholic beverages, and food offerings vary based on regional preferences and concepts as described in our restaurant brands
section. Beverage revenues refer to alcoholic beverages sold within our locations, all of which are fully licensed.
Theater revenue is our second largest source of
revenue. We predominantly license first-run films from major distributors through direct negotiation. All of our theaters are equipped
to offer content in 2D and 3D format. Theater revenue depends largely on the timing and popularity of films released by distributors,
so revenues attributed to any one particular distributor can vary significantly from year to year based on content. Theater revenue
includes revenue from all sponsorship activities, advertising, rental of auditoriums for private functions, live shows, gaming
events, academy screenings, corporate functions, corporate rentals, other revenue-generating showings, and other fees. Other Revenue
includes membership revenue, bowling, parking and valet, and gift card breakage.
The Company recognizes food and beverage revenue
at the point of sale. Theater revenue is recognized at the time tickets are remitted to the theater for admission. These performance
obligations are satisfied at a point in time when the customer obtains control of the goods, which generally occurs at or near
the same time the transaction was initiated for food and beverage or upon showing of the movie for which an admission ticket was
purchased. The proceeds from advance ticket sales and the sale of gift certificates and gift cards are deferred and recognized
as revenues once the respective admission ticket that was purchased in advance or gift certificate or gift card is received or
tendered at the theaters.
The Company is required to collect certain taxes
from customers on behalf of government agencies and remit these to the applicable government agencies on a periodic basis. These
taxes are legal assessments on the customer and the Company has a legal obligation to act as a collection agent. Because the Company
does not retain these taxes, the Company does not include such amounts in revenues. The Company records a liability when the amounts
are collected and relieves the liability when payments are made to the applicable government agencies.
The Company maintains a membership program, whereby
members earn and accrue points based on purchases, which are redeemable on future purchases of tickets or food and beverage. For
every dollar a member spends, the member receives one point which is equal to one cent. Points are redeemable once a member earns
500 points or greater. The Company uses the deferred revenue model which results in the transaction price being allocated to the
products and services sold and the award credits, with revenue recognized as each element is delivered. The portion of the theater
and food and beverage revenues attributed to the rewards is deferred as a reduction of theater and food and beverage revenues,
respectively. Upon redemption, deferred rewards are recognized as revenues along with associated cost of goods. The Company charges
an annual fee for this membership program, which is recorded as deferred revenue and recognized over the duration of the twelve-month
membership period the customer is receiving the benefits. The revenue from the annual fee is included in other revenues in the
accompanying Unaudited Condensed Consolidated Statements of Operations.
The Company sells gift cards to customers
at its locations and through its website. There are no administrative fees charged nor do the gift cards have an expiration
date. Revenues from gift cards are recognized when gift cards are redeemed. In addition, the Company recognizes “breakage”
on unredeemed gift cards based upon historical redemption patterns and the time that has transpired since the card was last used.
The Company recognizes breakage proportionally to the percentage of redemptions that historically occur in each year after a gift
card is sold. Revenue from gift card breakage is included in other revenues in the accompanying Unaudited Condensed Consolidated
Statements of Operations.
Adoption of ASC Topic 606
The Company adopted ASC 606 on January 1,
2019 using the modified retrospective method; therefore, the comparative information has not been adjusted for the three
months ended March 31, 2018. The Company has completed its analysis and concluded the adoption of ASC 606 did not materially
impact the timing of revenue recognition for food and beverage revenue, theater revenue, membership rewards program, other
revenue streams, including revenues for unredeemed gift cards and advance ticket sales.
Disaggregation of Revenue
:
Revenue is disaggregated
in the following tables by major revenue types and by timing of revenue recognition:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
Major revenue types
|
|
|
|
Food and beverage
|
|
$
|
15,685
|
|
Theater
|
|
|
14,071
|
|
Other
|
|
|
482
|
|
Total revenues
|
|
$
|
30,238
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
Timing of revenue recognition
|
|
|
|
Products and services transferred at a point in time
|
|
$
|
29,756
|
|
Products and services transferred over time
|
|
|
482
|
|
Total revenues
|
|
$
|
30,238
|
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Contract liabilities:
|
|
|
|
|
|
|
Deferred revenue related to contracts with customers
(1)
|
|
$
|
5,122
|
|
|
$
|
5,541
|
|
|
(1)
|
Revenue recognized for period ending March 31, 2019, $2,512
|
Note
3 — Property And Equipment
Property
and equipment, net consists of the following:
|
|
March
31,
2019
|
|
|
December 31,
2018
|
|
Leasehold improvements
|
|
$
|
140,489
|
|
|
$
|
133,743
|
|
Furniture, fixtures and office equipment
|
|
|
65,824
|
|
|
|
59,207
|
|
Construction in progress (site development)
|
|
|
2,401
|
|
|
|
11,968
|
|
Projection equipment and screens
|
|
|
12,703
|
|
|
|
11,125
|
|
Computer hardware and software
|
|
|
7,593
|
|
|
|
7,157
|
|
|
|
|
229,010
|
|
|
|
223,200
|
|
Less: accumulated depreciation and amortization
|
|
|
(84,448
|
)
|
|
|
(79,661
|
)
|
Total
|
|
$
|
144,562
|
|
|
$
|
143,539
|
|
After a detailed review of first generation
(Generation I) locations, the Company decided against reinvestment at its Glendale, Wisconsin location, where the Bayshore Mall
was placed into receivership. The Company instead announced the closing of this location effective March 8, 2018. The decision
to close the location was made during an all-hands conference call on March 5, 2018. The events giving rise to that decision include
the mall entering receivership during the last quarter of 2017 and the underperformance of the site during the first quarter of
2018. The Company evaluated the long-lived assets at its Glendale location at December 31, 2017 and determined that the long-lived
assets with a carrying value of $428 were no longer recoverable. Consequently, the assets were written down to $0.
The
remaining minimum lease obligation at the date of closure was approximately $4,100 over the next six years.
The
Company has established a liability of $1,839 for the remaining lease obligation associated with the Glendale location in
the accompanying unaudited condensed consolidated balance sheets. The current portion of the lease liability is included with
“Accrued expenses” and the long-term portion is included in “Other long-term liabilities”. As of March
31, 2019, the future lease obligation was recorded at present value and discounted at an annual rate of 13%. Sublease payments
were anticipated to be received 24 months from the abandonment date. The sublease payments were estimated to be 50% less than
the Company’s lease payment obligation through the remainder of the lease.
The
Company capitalizes interest costs on borrowings incurred during the new construction or upgrade of qualifying assets. During
the three months ended March 31, 2019 and 2018, the Company incurred interest costs totaling $4,988 and $4,614 respectively, of
which $156 and $0 was capitalized, respectively.
NOTE
4 — BORROWINGS
Long-Term
Debt — Related Party
The
Company has a $225,828 non-revolving credit facility (the “Non-revolving Credit Facility”) with the Teachers’
Retirement System of Alabama (the “TRSA”) and The Employees’ Retirement System of Alabama (the “ERSA”)
(the TRSA and the ERSA are known collectively as the “RSA”). The terms of the facility provide that the Company can
borrow under the facility for a thirteen-year period commencing September 30, 2010 in three tranches (hereinafter, “Tranche
1”, “Tranche 2”, and “Tranche 3”). Proceeds of the loans were initially to be used for up to 80%
of eligible construction costs. As a condition to any advance, the Company was required to provide funding for the applicable
project costs in an amount equal to 25% of such advance, with the proceeds of either (x) contributions to the Company from certain
shareholders (other than RSA) or (y) subordinated loans to the Company from certain shareholders (other than RSA) (the “Matching
Requirement”). In addition, the remaining availability required the Company to achieve certain operating targets to continue
borrowing (the “Operating Target Requirement”). On June 22, 2018 the Non-revolving Credit Facility was modified to
remove the matching requirement and to permit us to borrow up to $17,923 on five planned remodeling projects. An amount equal
to eighty percent (80%) of the total costs to develop each project constitutes a “Project Tranche”. Any changes to
the amount of a Project Tranche (either increases or decreases) are subject to prior written consent from the lender. On June
29, 2018 the Non-revolving Credit Facility was further modified to permit us to borrow funds up to $8,233 for working capital
expenses (including, among other things, accrued interest on the Non-revolving Credit Facility, which may be paid in kind), in
addition to the borrowing for planned 2018 remodeling projects. On June 29, 2018 the Non-revolving Credit Facility was amended
to remove the Operating Target Requirement for planned remodeling and working capital advances.
The Tranche 1 and Tranche 2 commitment amounts
of $15,828 and $24,000 respectively, were fully borrowed against as of March 31, 2019 and December 31, 2018. Of the total commitment
amounts of $186,000 available in Tranche 3, $163,738 and $148,433 were borrowed as of March 31, 2019 and December 31, 2018, respectively.
As of March 31, 2019, $22,262 remained available to borrow from Tranche 3 for the planned remodels and new construction, as well
as, working capital requirements subject to certain limitations.
The
effective interest rate on Tranche 1 and Tranche 2 borrowings is approximately 6.95% per annum. The cumulative difference between
the interest computed using the stated interest rates (8.00% at March 31, 2019 and December 31, 2018) and the effective interest
rate of 6.95% is $532 and $621 at March 31, 2019 and December 31, 2018, respectively, and is recorded in “Accrued interest
- long-term” in the accompanying unaudited condensed consolidated balance sheets. The interest rate on Tranche 3 borrowings
is fixed at 10.50% per annum.
Short-Term
Financing
The Company periodically enters into short-term
financing arrangements to finance the costs of its property and casualty insurance premiums. The loans are due in equal monthly
installments of principal and interest, generally paid over a period of less than one year. Interest accrues on the unpaid principal
at 3.63% per annum. At March 31, 2019 and December 31, 2018, the Company’s obligation under premium financing arrangements
was $1,177 and $1,392, respectively, and is included in accrued insurance in the accompanying unaudited condensed consolidated
balance sheets.
NOTE
5 — DEFICIT
Incentive
stock options
The
following is a summary of the Company’s Non-Qualified Options (as defined by Section 422 of the Internal Revenue Code of
1986, “Options”) activity:
|
|
Options
|
|
|
Weighted Average
Grant Date Fair Value Per Option
|
|
|
Weighted Average Exercise Price per Option
|
|
Outstanding - December 31, 2018
|
|
|
1,040,424
|
|
|
$
|
4.31
|
|
|
$
|
16.80
|
|
Exercisable - December 31, 2018
|
|
|
346,749
|
|
|
$
|
3.77
|
|
|
$
|
14.15
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
(2,526
|
)
|
|
$
|
4.24
|
|
|
$
|
16.46
|
|
Outstanding – March 31, 2019
|
|
|
1,037,898
|
|
|
$
|
4.31
|
|
|
$
|
16.82
|
|
Exercisable – March 31, 2019
|
|
|
343,598
|
|
|
$
|
3.77
|
|
|
$
|
14.17
|
|
At March 31, 2019, the total intrinsic
value of the Options outstanding and exercisable was $0. As of March 31, 2019, the weighted average remaining contractual term
of Options outstanding was 9 years.
A
total of 142,898 Options were vested as of March 31, 2019.
The
Company recognized an aggregate of $266 and $322 in compensation expense during the three months ended March 31, 2019 and
2018, respectively, related to the Options. At March 31, 2019, unrecognized stock-based compensation was $2,984 for the
Options, which is expected to be recognized over a weighted average remaining life of approximately 2.38 years.
Restricted
stock units
On
December 6, 2017 IPIC granted 483,864 Restricted Stock Units (“RSUs”) to our named executive officers and certain
other employees. The awards contained no future service requirement and fully vested when the IPO occurred. Therefore, on February
1, 2018, the Company recognized compensation expense related to these RSUs of $8,235. The average grant date fair value of the
RSUs was $17.02 per unit. At March 31, 2019 there was no unrecognized compensation costs related to the RSUs.
The
RSUs will remain outstanding until the issuance of Class A shares on the different settlement dates. On May 15, 2018 247,755 of
the RSUs were exchanged for Class A shares. On June 29, 2018 14,770 of the RSUs were exchanged for Class A shares. The remaining
221,339 RSUs will be exchanged for Class A shares on May 15, 2019.
Stock
issuance
In
accordance with the Holdings LLC Agreement, on July 12, 2018, each of Village Roadshow, Teachers’ Retirement System of Alabama
and Employees’ Retirement System of Alabama assigned 100% of its respective membership units of Holdings to IPIC in exchange
for a corresponding number of shares of IPIC’s Class A Common Stock (2,801,433 shares, 1,876,960 shares and 924,473 shares
of Class A Common Stock, respectively) (the “Exchange”). As part of the Exchange and in accordance with IPIC’s
Amended and Restated Certificate of Incorporation, each such investor’s Class B common stock were canceled.
NOTE
6 — COMMITMENTS
AND CONTINGENCIES
Operating
Leases
At
March 31, 2019, future minimum payments under non-cancelable operating leases are as follows.
2019 – 2020
|
|
$
|
22,330
|
|
2020 – 2021
|
|
|
24,144
|
|
2021 – 2022
|
|
|
27,513
|
|
2022 – 2023
|
|
|
28,434
|
|
2023 – 2024
|
|
|
28,583
|
|
Thereafter
|
|
|
336,684
|
|
|
|
|
|
|
|
|
$
|
467,688
|
|
Certain
operating leases require contingent rental payments based on a percentage of sales in excess of stipulated amounts. Rent expense
during the three months ended March 31, 2019 was as follows:
|
|
2019
|
|
|
2018
|
|
Minimum rentals
|
|
$
|
4,114
|
|
|
$
|
4,136
|
|
Contingent rentals
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,114
|
|
|
$
|
4,136
|
|
Litigation
The
Company is exposed to litigation in the normal course of business.
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise
from time to time that may harm the Company’s business.
The Company currently is a defendant in a class
action lawsuit captioned Mary Ryan and Johanna Nielson v. IPIC-Gold Class Entertainment, LLC, Case # BC 688633, which was filed
in Superior Court of the State of California, County of Los Angeles, on December 29, 2017. This lawsuit asserts failure to pay
minimum wage, pay overtime wages, provide meal breaks and rest periods, and provide accurate itemized wage statements with respect
to certain workers. On February 6, 2019, the parties reached a preliminary agreement to settle the lawsuit for $1,500. The parties
are in the process of negotiating a settlement agreement for submission to the court for preliminary approval of the settlement.
The $1,500 expense was recorded at December 31, 2018 and still remains outstanding as of March 31, 2019.
Other
than the lawsuit described above in consultation with legal counsel, the Company is currently not aware of any legal proceedings or claims that it believes could
have, individually or in the aggregate, a material adverse effect on the business, financial condition, operating results or cash
flows. However, lawsuits or any other legal or administrative proceeding, regardless of the outcome, may result in diversion of
resources, including management’s time and attention.
NOTE
7 — INCOME TAXES
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Pre-tax book loss
|
|
$
|
(14,936
|
)
|
|
$
|
(21,739
|
)
|
Less: net loss prior to the Organizational Transactions
|
|
|
—
|
|
|
|
4,442
|
|
Less: net loss attributable to non-controlling interests
|
|
|
5,632
|
|
|
|
15,385
|
|
Net loss attributable to IPIC before income taxes
|
|
$
|
(9,304
|
)
|
|
$
|
(1,912
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes at U.S. federal statutory rate
|
|
$
|
(1,954
|
)
|
|
$
|
(402
|
)
|
State and local income taxes, net of federal benefit
|
|
|
(454
|
)
|
|
|
(64
|
)
|
Increase in valuation allowance
|
|
|
2,422
|
|
|
|
488
|
|
Income tax expense
|
|
$
|
13
|
|
|
$
|
22
|
|
We
file U.S federal and state income tax returns in jurisdictions with varying statutes of limitations. As of March 31,
2019, the 2015 through 2018 tax years generally remain subject to examination by federal and most state tax authorities. The use
of net operating losses generated in tax years prior to 2013 may also subject returns for those years to examination. The Company
currently does not have any income tax audits in process.
As
of December 31, 2018, our federal and state net operating loss carryforwards for income tax purposes were $13,841. Due to
the Tax Cuts and Jobs Act of 2017, the Federal operating loss carryforwards generated in 2018 do not expire.
We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances
when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of March 31, 2019, we
concluded, based on the weight of all available positive and negative evidence, that all our deferred tax assets do not meet the
more likely than not threshold to be realized. As such, a full valuation allowance was recognized of $12,865 The net change in
valuation allowance for the quarter ending March 2019 was an increase of $2,422.
Pursuant
to our election under Section 754 of the Internal Revenue Code (the “Code”), we expect to obtain an increase in our
share of the tax basis in the net assets of Holdings when LLC Interests are redeemed or exchanged by the non-controlling interest
holders and other qualifying transactions. We intend to treat any redemptions and exchanges of LLC Interests by the non-controlling
interest holders as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce
the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses)
on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
NOTE 8 — GOING CONCERN AND MANAGEMENT’S PLAN
REGARDING FUTURE OPERATIONS
The
Company incurred a net loss for the three months ended March 31, 2019 of $14,936. In addition, the Company’s liabilities
exceeded its assets by $133,891 and the Company had a working capital deficit of $15,026 at March 31, 2019.
The
Company had cash and cash equivalents of $3,562 at March 31, 2019 and used $1,341 in cash for operating activities for the three
months ended March 31, 2019.
The Company’s
ability to continue as a going-concern is dependent on refinancing of existing debt or obtaining additional equity. The main sources
of funding are expected to be the RSA Non-revolving Credit Facility and new financing.
Management
believes that growth into new locations is critical to the Company’s ability to achieve profitability and generate cash
from operating activities. Management considers the continued availability of the Non-revolving Credit Facility and obtaining
new financing to be significant to its ability to satisfy its payment obligations as they become due, including but not limited
to, planned remodeling of existing locations, construction of new locations and funding operations.
To meet our capital and operating needs,
the Company is considering multiple alternatives, including, but not limited to, equity financings, debt financings and other funding
transactions, as well as restructuring of its outstanding indebtedness and operational changes to increase revenues and contain
costs. No assurance can be given that any future financing, funding transaction or restructuring will be available or, if available,
that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may
contain undue restrictions on operations in the case of debt financing or cause substantial dilution for stockholders in the case
of equity financing.
Additionally, we are required to comply
with Securities and Exchange Commission and NASDAQ rules and requirements when raising capital, which may make it more difficult
for us to raise significant amounts of capital. If we cannot raise needed funds, we might be forced to make substantial reductions
in our operating expenses, which could adversely affect our ability to implement our business plan and ultimately our viability
as a company.
Management has determined that these conditions
and events raise substantial doubt about the Company’s ability to continue as a going concern. These condensed financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might result from this uncertainty.
NOTE
9 — NET LOSS PER SHARE
The
Company computed net loss per share only for the period our common stock was outstanding during 2018, referred to as the “Post-IPO
Period”. We have defined the Post-IPO Period as February 1, 2018, the date our shares began trading on the NASDAQ, through
March 31, 2018, or 59 days of activity for the reporting period ended March 31, 2018. Basic net loss per share is computed by
dividing the net loss attributable to Class A Common Stockholders for the Post-IPO Period by the weighted-average number of shares
of Class A Common Stock outstanding during the Post-IPO Period. The weighted average number of Restricted Stock Units to be settled
in shares of Class A Common Stock became fully vested on the IPO date. The Company analyzed the calculation of earnings per unit
for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these unaudited
condensed consolidated financial statements. Therefore, earnings per unit information has not been presented for periods prior
to the IPO on February 1, 2018.
Diluted
net loss per share is computed by adjusting the net loss available to Class A Common Stockholders and the weighted-average number
of shares of Class A Common Stock outstanding to give effect to potentially dilutive securities. Shares of Class B Common Stock
issued do not participate in earnings of the Company. As a result, the shares of Class B Common Stock are not considered participating
securities and are not included in the weighted-average shares outstanding for purposes of computing net loss per share. Class
B Common Stockholders have the option to exchange an equivalent number of LLC Interests of Holdings for Class A Common Stock of
IPIC maintaining a one-to-one ratio. Therefore, the equivalent number of shares of Class A Common Stock could be issuable in exchange
for the Class B Common Stockholders’ LLC Interests of Holdings.
Basic
and diluted loss per share/unit for the period ended March 31, 2019:
|
|
Three Months Ended
March
2019
|
|
|
February 1,
2018
Through
March 31,
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to iPic Entertainment Inc. – Actual Dollars
|
|
$
|
(9,305,403
|
)
|
|
$
|
(1,934,412
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
|
7,144,133
|
|
|
|
818,237
|
|
Restricted Stock Units
|
|
|
221,339
|
|
|
|
317,200
|
|
Weighted-average Class A common shares outstanding for the period ended March 31, 2019
|
|
|
7,365,472
|
|
|
|
1,135,437
|
|
|
|
|
|
|
|
|
|
|
Net loss per Class A common share — basic and diluted
|
|
$
|
(1.26
|
)
|
|
$
|
(1.70
|
)
|
The
Company has issued potentially dilutive instruments in the form of our Non-Qualified Options granted to our employees and directors.
In addition, warrants were issued to selling agents upon completion of the IPO for services rendered. The Company did not include
any of these instruments in its calculation of diluted net loss per share during the period because to include them would be anti-dilutive
due to the Company’s loss from operations during the period.
The
following table summarizes the types of potentially dilutive securities outstanding as of March 31, 2019:
|
|
March 31,
2019
|
|
|
|
|
|
LLC Interests
|
|
|
4,323,755
|
|
Non-Qualified Options
|
|
|
1,037,898
|
|
Selling Agents’ Warrants
|
|
|
18,005
|
|
Total
|
|
|
5,379,658
|
|
Item 2.
|
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
|
Overview
IPIC
strives to be our guests’ favorite local destination for a night out on the town. Our newest locations blend three distinct
areas — a polished-casual restaurant, a farm-to-glass full-service bar, and our world-class luxury theater auditoriums with
in-theater dining — into a one-of-a-kind experience. Our team endeavors to deliver world class hospitality in innovative,
one-of-a-kind theaters which we believe are among the finest in the world. Our chefs and mixologists create craveable food and
drink offerings that are outstanding on a standalone basis, but it is the interplay between our entertainment, dining and full-service
bar areas that is the defining feature of a typical four-hour guest experience. We thoughtfully design the layout, ambiance, and
energy-flow of each unit to maximize the crossover between these activities. With constantly changing movie content and menu offerings,
each visit is different, providing our customers with a reason to visit us repeatedly. We believe that we deliver an experience
that is innovative, unique and cannot be easily replicated at home or elsewhere without the hassle of having to visit multiple
destinations. Our locations also act as great venues for private events, family and business functions and other corporate-sponsored
events. We believe our concept is well-positioned within today’s ever-increasing experiential economy. We believe that we
pioneered the concept of polished-casual dining in a luxury theater auditorium and are one of the largest combined movie theater
and restaurant entertainment destinations with locations engineered from the ground up to provide our guests with a luxurious
movie-going experience at an affordable price.
Growth
Strategies and Outlook
Our
growth strategy consists of the following components:
Opening
new IPIC locations.
This is our greatest immediate opportunity for growth. We believe that we are still in the very nascent
stage of our growth story. We currently operate 123 screens at 16 locations in 9 states with an additional 3 locations under construction
and a pipeline of an additional 12 sites that either have a signed lease or are in lease negotiations. We believe that we currently
control less than 0.5% market share of the theater business in the United States, based on data provided by the National Association
of Theatre Owners and our financial results. We believe there is tremendous whitespace opportunity to expand in both existing
and new U.S. markets, as well as overseas, and we have invested in our infrastructure through new hires at our home office to
enable us to continue to grow with discipline. We have upgraded four Generation I locations and one Generation II location in
2018. On March 7, 2019 we opened a new location in Delray Beach, Florida and plan to open another domestic location in 2019. We
will continue to pursue a disciplined new store growth strategy in both new and existing markets where we can achieve consistent
high store revenues and attractive store-level cash-on-cash returns.
Growing
our comparable-store sales
.
We intend to grow our comparable-store sales by continuing to differentiate the IPIC brand
from other food and entertainment alternatives, through the following strategies:
|
●
|
Differentiate
our food and beverage offering
|
|
●
|
Relentless efforts
on hospitality
|
|
●
|
Grow usage of
alternative content
|
|
●
|
Enhance brand
awareness and drive incremental visits to our stores through innovative marketing and promotions
|
|
●
|
Grow our special
events usage
|
Improving
our margins.
We believe we are well-positioned to increase margins and believe we have additional opportunities to reduce
costs. Based on the operating leverage generated by our business model, which has been enhanced by operating initiatives implemented
by management in recent years, we believe we have the potential to improve margins and deliver greater earnings from potential
future increases in comparable-store sales. Under our current cost structure, we generally estimate that about 30% of any comparable-store
sales growth that exceeds the cost of inflation in that store would flow through to our Adjusted EBITDA. We also believe that
improved labor scheduling technology will allow us to increase labor productivity in the future. We believe that our continued
focus on operating margins at individual locations and the deployment of best practices across our store base is expected to yield
incremental margin efficiencies.
Key
Performance Indicators
We
monitor and analyze many key performance measures to manage our business and evaluate financial and operating performance. These
measures include:
New
store openings.
Our ability to expand our business and reach new customers is influenced by the opening of additional
IPIC locations in both new and existing markets. The success of our new IPIC locations is indicative of our brand appeal and the
efficacy of our site selection and operating models. On March 7
th
, 2019 we opened our 16
th
location in Delray
Beach, FL. We plan to open one additional site in 2019 in Irvine, CA, and we have recently signed leases for new sites in Atlanta,
GA, Hicksville, NY and McLean, VA.
Comparable-store
sales.
Comparable-store sales are a year-over-year comparison of sales at IPIC locations open at the end of the period
which have been open for at least 12 months prior to the start of such quarterly period. It is a key performance indicator used
within the industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends. Our comparable
stores consisted of 14 and 15 stores at the end of March 2018 and March 2019, respectively. From period to period, comparable-store
sales are generally impacted by attendance and average spend per person. Spend per person is, in turn, composed of pricing and
sales-mix changes.
Store-Level
margins.
Store-level margins are total revenues less store-level expenses consisting of food and beverage cost of goods
sold, box office and other income costs of goods sold, labor costs, occupancy expenses and other operating expenses.
Store-level
cash-on-cash returns.
We target our new locations, which are approximately 40,000 square feet, to achieve year three store-level
cash-on-cash returns in excess of 20%. Cash-on-cash returns are defined by Store-level EBITDA divided by net development costs.
Net development costs are defined by gross development costs less landlord contributions. To achieve this return, we target a
ratio of year 3 store revenues to net development costs in excess of 1.00 and individual IPIC Store-level EBITDA margins in excess
of 15%. We do not always achieve these target figures due to factors both within and outside of our control.
Financial
Overview
Revenue:
Total revenue consists of food and beverage, theater and other revenues. Our revenue growth is primarily influenced by the
number of new IPIC locations and growth in comparable store revenues.
Food and Beverage Revenue
is our
largest source of revenue. This includes all food and beverage sales within our restaurants, theaters and bars. Food revenues refer
to food and non-alcoholic beverages, and food offerings vary based on regional preferences and restaurant concepts. Beverage revenues
refer to alcoholic beverages sold within our locations, all of which are fully licensed.
Theater
Revenue
is our second largest source of revenue. We predominantly license first-run films from major distributors through
direct negotiation. All of our theaters are equipped to offer content in 2D and 3D format. Theater revenue depends largely on
the timing and popularity of films released by distributors, so revenues attributed to any one particular distributor can vary
significantly from year to year based on content. Theater revenue includes revenue from all sponsorship activities, advertising,
rental of auditoriums for private functions, live shows, gaming events, academy screenings, corporate functions, corporate rentals,
other revenue-generating showings, and other fees.
Other
Revenue
includes membership revenue, parking and valet revenue, and gift card breakage.
Cost
of food and beverage:
Food and beverage costs are driven by supplier pricing movements and product mix. We continually strive
to negotiate favorable pricing, select high-quality products, and monitor and control the use of our food and beverage products
optimally.
Cost
of theater:
Film rental fees are paid based on box office receipts and are ordinarily paid from 20 to 35 days following receipt.
These fees are negotiated directly with distributors and vary from film to film. We maintain strong relationships with the top
film distributors, and our film buying group has decades of experience in the industry.
Result
of Operations
The
following table presents the results of operations for the periods indicated. The period-to-period comparisons of results are
not necessarily indicative of results for future periods.
($
in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018 (Restated)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Food and beverage
|
|
$
|
15,685
|
|
|
$
|
19,992
|
|
Theater
|
|
|
14,071
|
|
|
|
17,753
|
|
Other
|
|
|
482
|
|
|
|
959
|
|
Total revenues
|
|
|
30,238
|
|
|
|
38,704
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
|
4,071
|
|
|
|
5,486
|
|
Cost of theater
|
|
|
5,618
|
|
|
|
7,687
|
|
Operating payroll and benefits
|
|
|
9,144
|
|
|
|
10,578
|
|
Occupancy expenses
|
|
|
4,910
|
|
|
|
4,676
|
|
Other operating expenses
|
|
|
5,599
|
|
|
|
7,608
|
|
General and administrative expenses
|
|
|
5,062
|
|
|
|
13,115
|
|
Depreciation and amortization expense
|
|
|
4,787
|
|
|
|
4,840
|
|
Pre-opening expenses
|
|
|
1,138
|
|
|
|
-
|
|
Loss on abandonment of lease
|
|
|
-
|
|
|
|
1,839
|
|
Operating expenses
|
|
|
40,329
|
|
|
|
55,829
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,091
|
)
|
|
|
(17,125
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4,832
|
)
|
|
|
(4,614
|
)
|
Total other expense
|
|
|
(4,832
|
)
|
|
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(14,923
|
)
|
|
|
(21,739
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
13
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,936
|
)
|
|
|
(21,761
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
|
(5,631
|
)
|
|
|
(15,385
|
)
|
Net loss attributable to IPIC Entertainment Inc.
|
|
$
|
(9,305
|
)
|
|
|
(6,376
|
)
|
Period-to-Period
Comparisons
We
have incurred net losses and currently have negative cash flows from operating activities. We anticipate this to continue in the
near term as we continue to focus our efforts on expanding our customer base and theater locations.
Three
months ended March 31, 2019 versus March 31, 2018
Revenues
Total
revenue for the three months ended March 31, 2019 decreased by $8.5 million to $30.2 million, which represented a 22.0% decrease
in total revenue as compared to $38.7 million of revenue in the three months ended March 31, 2018, due to a decrease in attendance. The $8.5 million decrease in
revenue was derived from the following sources: (i) $0.3 million from a net decrease in year-over-year revenue from non-comparable
stores and in other revenue; and (ii) an $8.2 million or 21.7% decrease in comparable-store sales due to a decrease in attendance.
Cost
of Food and Beverage
In
the three months ended March 31, 2019, cost of food and beverage decreased by $1.4 million to $4.1 million (or to 26.1% of applicable
revenue) from $5.5 million (or 27.5% of applicable revenue) in the three months ended March 31, 2018. The decrease in food and
beverage costs as a percent of applicable sales was driven by a same-store margin improvement of 144 basis points.
Cost
of Theater
In
the three months ended March 31, 2019, cost of theater decreased by $2.1 million to $5.6 million (or to 39.7% of applicable revenue)
from $7.7 million (or 43.3% of applicable revenue) in the three months ended March 31, 2018. Cost of theater decreased as a percentage
of applicable sales due largely to the differing mix of films between the two periods.
Operating
Payroll and Benefits
In
the three months ended March 31, 2019, operating payroll and benefits decreased by $1.5 million to $9.1 million (or to 30.1% of
total revenue) from $10.6 million (or 27.4% of total revenue) in the three months ended March 31, 2018. The decrease in operating
payroll and benefits was driven by a weak Q1 film slate, which also caused an increase in operating payroll and benefits as a
percent of revenue due to deleverage.
Occupancy
Expenses
In
the three months ended March 31, 2019, occupancy expenses increased by $0.2 million to $4.9 million (or to 16.2% of total revenue)
from $4.7 million (or 12.1% of total revenue) in the three months ended March 31, 2018. The increase in occupancy expenses was
derived from a $0.2 million increase in occupancy expenses at comparable stores.
Other
Operating Expenses
In the three months ended March 31, 2019,
other operating expenses decreased by $2.0 million to $5.6 million (or to 18.5% of total revenue) from $7.6 million (or 19.6% of
total revenue) in the three months ended March 31, 2018. The decrease in other operating expenses was derived primarily from: (i)
a $1.4 million decrease in other operating expenses at comparable stores due to elimination of temporary staging required for live
shows; and (ii) a $0.5 million decrease in non-recurring charges to $0.1 million in the three months ended March 31, 2019 from
$0.6 million in the three months ended March 31, 2018 due to lower repair and maintenance spend.
General
and Administrative Expenses
General
and administrative expenses consist primarily of personnel, facilities and professional expenses for the various departments of
our corporate headquarters. In the three months ended March 31, 2019, general and administrative expenses decreased by $8.0 million
to $5.1 million (or 16.9% of total revenue) from $13.1 million (or 33.9% of total revenue) in the three months ended March 31,
2018. The decrease in general and administrative expenses was driven by a reduction in equity-based compensation of $8.3 million
compared to the prior year period. Equity-based compensation was $8.6 million in the prior year period due to Non-Qualified
Options and Restricted Stock Units issued to employees as part of the IPO on February 1, 2018.
Depreciation
and Amortization Expense
Depreciation
and amortization expense includes the depreciation of property and equipment. In the three months ended March 31, 2019, depreciation
and amortization expense was $4.8 million, which did not change compared to the prior year period amount of $4.8 million.
Pre-Opening
Expenses
Pre-opening
expenses include costs associated with the opening and organizing of new stores, including pre-opening rent, staff training and
recruiting, and travel costs for employees engaged in such pre-opening activities. In the three months ended March 31, 2019, pre-opening
expenses increased by $1.1 million to $1.1 million from $0.0 million in the three months ended March 31, 2018. This increase is
attributable to the opening of the new location in Delray Beach, Florida on March 7, 2019.
Loss
on Abandonment of Lease
In
the three months ended March 31, 2019, loss on abandonment of lease decreased by $1.8 million to $0.0 million from $1.8 million
in the three months ended March 31, 2018. The amount in the prior year period was due to $1.8 million in costs associated with
lease abandonment at our former Glendale, WI location.
Interest
Expense
Interest
expense includes the cost of our debt obligations, including the amortization of loan fees and any interest income earned. In
the three months ended March 31, 2019, interest expense increased by $0.2 million to $4.8 million from $4.6 million in the three
months ended March 31, 2018. The increase in interest expense was a result of higher debt levels associated with the Non-revolving
Credit Facility for full-period financing charges associated with our newest locations.
Income
Tax Expense
In
the three months ended March 31, 2019, income tax expense remained consistent with the income tax expense in the three
months ended March 31, 2018. Our effective tax rate differs from the statutory rate due to non-controlling interest, changes
in the tax valuation allowance, state income taxes and the impact of certain expenses which are not deductible for income tax
purposes.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements other than operating leases.
Liquidity
and Capital Resources
Based upon our working capital deficiency
of $15.0 million and net asset deficit of $133.9 million, as of March 31, 2019, we require and are actively exploring restructuring
of our indebtedness, additional equity and/or debt financing to continue our operations.
As of May 17, 2019, we had
outstanding $203.6 million of indebtedness under our Non-Revolving Credit Facility. In the next twelve months we are
obligated to pay interest in an aggregate amount of $21.1 under the Non-Revolving Credit Facility, with a payment of
approximately $10.1 million due on July 1, 2019 and a payment of approximately $11.0 million on January 1, 2020. As a result
of our working capital deficit and our current liquidity position, we expect to draw down a substantial portion of the
remaining principal balance of the Non-Revolving Credit Facility to make the interest payment due on July 1, 2019. If we are
not able to improve our liquidity position prior to the January 1, 2020 interest payment due date for our Non-Revolving
Credit Facility, we may not have sufficient available cash to pay the interest due on January 1, 2020. As a result, we may be
required to seek a waiver or forbearance from our lenders in order to avoid a default under the Non-Revolving Credit
Facility. We are actively seeking to raise additional capital and/or restructure our outstanding indebtedness under our
Non-Revolving Credit Facility in order to avoid a default. We may retain one or more advisors to assist us in connection with
raising capital and/or restructuring our indebtedness. However, there can be no assurance that we will be successful in doing
so. These conditions raise substantial doubt about our ability to continue as a going concern.
Additionally, we are required to comply
with SEC and Nasdaq rules and requirements when raising capital, which may make it more difficult for us to raise significant amounts
of capital. If we cannot raise needed funds or restructure our outstanding indebtedness, we might be forced to make substantial
reductions in our operating expenses, which could adversely affect our ability to implement our business plan and ultimately our
viability as a company.
In
the three months ended March 31, 2019, working capital decreased by $0.3 million, to a deficiency of $15.0 million, compared
to a deficiency of $14.7 million at December 31, 2018. This increase stemmed from additional working capital utilized from the
opening of the new location in Delray Beach, Florida.
Summary
of Cash Flows
Our primary sources of liquidity and capital
resources have been cash on hand, contributions from owners and the Non-Revolving Credit Facility. Aside from capital expenditures,
our primary requirements for liquidity are for lease obligations, debt service on our Non-Revolving Credit Facility, working capital
and general corporate needs. Guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of
the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.
The
following table and discussion presents, for the periods indicated, a summary of our key cash flows from operating, investing
and financing activities.
$
in thousands
|
|
Three months ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Net cash used in operating activities
|
|
$
|
(1,341
|
)
|
|
$
|
(10,626
|
)
|
Net cash used in investing activities
|
|
|
(7,218
|
)
|
|
|
(3,570
|
)
|
Net cash provided by financing activities
|
|
|
6,095
|
|
|
|
17,070
|
|
Net decrease in cash
|
|
|
(2,464
|
)
|
|
|
2,874
|
|
Cash at beginning of period
|
|
|
6,026
|
|
|
|
10,505
|
|
Cash at end of period
|
|
$
|
3,562
|
|
|
$
|
13,379
|
|
Operating
Activities
Net
cash used in operating activities for the three months ended March 31, 2019 and for the three months ended March 31, 2018 of $1.3
million and $10.6 million, respectively. The increase in cash flows from operating activities for the 2019 period as compared
to the 2018 period was due to changes in amortization of deferred rent and interest paid in kind.
Investing
Activities
During
the three months ended March 31, 2019, net cash in the amount of $7.2 million was used in investing activities, while during the
three months ended March 31, 2018, net cash used in investing activities was $3.6 million. The increase in cash used in investing
activities was mainly attributed to construction of our newest site in Delray Beach, FL.
Financing
Activities
Net
cash provided by financing activities during the three months ended March 31, 2019 and the three months ended March 31, 2018 was
$6.1 million and $17.1 million, respectively. During the three months ended March 31, 2019, $6.5 million of financing was provided
by borrowings on long term debt. During the three months ended March 31, 2018, $13.6 million of financing was provided by the
issuance of common stock sold in the initial public offering.
Critical
Accounting Policies
We
make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our
unaudited condensed consolidated financial statements. The nature of the estimates and assumptions are material due to the levels
of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We have identified the accounting for going concern, long-lived assets, income taxes and stock-based compensation as critical
accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective
and complex judgments.
We
believe the current assumptions and other considerations used to estimate amounts reflected in our unaudited condensed consolidated
financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used
in estimating amounts reflected in our unaudited condensed consolidated financial statements, the resulting changes could have
a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse
effect on our consolidated financial condition.
For
further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Notes to our audited financial statements included in our Annual Report on
Form 10-K. There has been no material change to these estimates for the three months ended March 31, 2019.
Recent
Accounting Pronouncements
Refer
to Note 1 “Organization and Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements.
NON-GAAP
FINANCIAL MEASURES
Certain
financial measures presented in this Form 10-Q, such as EBITDA, Adjusted EBITDA and Store-Level EBITDA are not recognized under
accounting principles generally accepted in the United States, which we refer to as “GAAP.” We define these terms
as follows:
|
●
|
“EBITDA”
means, for any reporting period, net loss before interest, taxes, depreciation, and amortization.
|
|
●
|
“Adjusted
EBITDA” is a supplemental measure of our performance and is also the basis for performance evaluation under our executive
compensation programs. Adjusted EBITDA is defined as EBITDA adjusted for the impact of certain non-cash and other items that
we do not consider in our evaluation of ongoing operating performance. These items include, among other things, equity-based
compensation expense, pre-opening expenses, other income and loss on disposal of property and equipment, impairment of property
and equipment as well as certain non-recurring charges. We believe that Adjusted EBITDA is an appropriate measure of operating
performance because it eliminates the impact of expenses that do not relate to our ongoing business performance.
|
|
●
|
“Store-Level
EBITDA” is a supplemental measure of our performance which we believe provides management and investors with additional
information to measure the performance of our locations, individually and as an entirety. Store-Level EBITDA is defined by
us as EBITDA adjusted for pre-opening expenses, other income, loss on disposal of property and equipment, impairment of property
and equipment, non-recurring charges, and general and administrative expense. We use Store-Level EBITDA to measure operating
performance and returns from opening new stores. We believe that Store-Level EBITDA is another useful measure in evaluating
our operating performance because it removes the impact of general and administrative expenses, which are not incurred at
the store level, and the costs of opening new stores, which are non-recurring at the store-level, and thereby enables the
comparability of the operating performance of our stores for the periods presented. We also believe that Store-Level EBITDA
is a useful measure in evaluating our operating performance within the entertainment and dining industry because it permits
the evaluation of store-level productivity, efficiency and performance, and we use Store-Level EBITDA as a means of evaluating
store financial performance compared with our competitors.
|
You
are encouraged to evaluate the adjustments we have made to GAAP financial measures and the reasons we consider them appropriate
for supplemental analysis. In evaluating Adjusted EBITDA and Store-Level EBITDA, you should be aware that in the future we may
incur income and expenses that are the same as or similar to some of the adjustments in this Form 10-Q.
EBITDA,
Adjusted EBITDA and Store-Level EBITDA are included in this Report because they are key metrics used by management and our board
of directors to assess our financial performance. EBITDA and Adjusted EBITDA are frequently used by analysts, investors and other
interested parties to evaluate companies in our industry. Store-Level EBITDA is utilized to measure the performance of our locations,
both individually and in entirety.
EBITDA,
Adjusted EBITDA and Store-Level EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered
as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as measures of liquidity,
or any other performance measure derived in accordance with GAAP. Our presentation of EBITDA, Adjusted EBITDA and Store-Level
EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally,
EBITDA, Adjusted EBITDA and Store-Level EBITDA are not intended to be measures of free cash flow for management’s discretionary
use, as they do not reflect tax payments, debt service requirements, capital expenditures, IPIC openings and certain other cash
costs that may recur in the future, including, among other things, cash requirements for working capital needs and cash costs
to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results
in addition to using EBITDA and Adjusted EBITDA. Our measures of EBITDA, Adjusted EBITDA and Store-Level EBITDA are not necessarily
comparable to similarly titled captions of other companies due to different methods of calculation.
Non-GAAP
Financial Measures
$
in thousands
|
|
Three Months Ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,936
|
)
|
|
$
|
(21,761
|
)
|
Plus:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,832
|
|
|
|
4,614
|
|
Income tax expense
|
|
|
13
|
|
|
|
22
|
|
Depreciation and amortization expense
|
|
|
4,787
|
|
|
|
4,840
|
|
EBITDA
|
|
|
(5,304
|
)
|
|
|
(12,285
|
)
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
Pre-opening expenses
|
|
|
1,138
|
|
|
|
-
|
|
Equity-based compensation
|
|
|
266
|
|
|
|
8,568
|
|
Loss on abandonment of lease
|
|
|
-
|
|
|
|
1,839
|
|
Non-recurring charges
|
|
|
123
|
|
|
|
652
|
|
Adjusted EBITDA
|
|
|
(3,777
|
)
|
|
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
4,796
|
|
|
|
4,547
|
|
Store-Level EBITDA
|
|
$
|
1,019
|
|
|
$
|
3,321
|
|