Risks Related to
Our Business and Industry
Our
long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop
and expand our operations in existing and new markets.
One
of the key means of achieving our growth strategies will be through opening and operating new iPic locations on a profitable basis
for the foreseeable future. We must identify target markets where we can enter or expand, taking into account numerous factors
such as the location, demographics, traffic patterns and information gathered from our various contacts. We may not be able to
open our planned new iPic locations within budget or on a timely basis, if at all, given the uncertainty of these factors, which
could adversely affect our business, financial condition and results of operations. As we operate more iPic locations, our rate
of expansion relative to the size of our location base will eventually decline.
The
number and timing of new units opened during any given period may be negatively impacted by a number of factors including, without
limitation:
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the
identification and availability of attractive sites for new iPic locations and the ability
to negotiate suitable lease terms;
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the
lack of development and overall decrease in commercial real estate due to a macroeconomic
downturn;
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recruitment
and training of qualified personnel in the local market;
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our
ability to obtain all required governmental permits, including zonal approvals, on a
timely basis;
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our
ability to control construction and development costs of new units;
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competition
in new markets, including competition for appropriate sites;
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failure
of the landlords to timely deliver real estate to us;
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the
proximity of potential sites to an existing iPic, and the impact of cannibalization on
future growth;
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anticipated
commercial, residential and infrastructure development near our new iPic locations; and
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the
cost and availability of capital to fund construction costs and pre-opening expenses.
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Accordingly,
we cannot assure you that we will be able to successfully expand as we may not correctly analyze the suitability of a location
or anticipate all of the challenges imposed by expanding our operations. Our growth strategy and the substantial investment associated
with the development of each new location may cause our operating results to fluctuate and be unpredictable or adversely affect
our profits. In addition, as has happened when other restaurant concepts have tried to expand, we may find that our concept has
limited appeal in new markets or we may experience a decline in the popularity of our concept in the markets in which we operate.
If we are unable to expand in existing markets or penetrate new markets, our ability to increase our revenues and profitability
may be materially harmed or we may face losses.
Optimizing
our theater circuit through new construction and the transformation of our existing theaters is subject to delay and unanticipated
costs.
The
availability of attractive site locations for new theater construction is subject to various factors that are beyond our control.
These factors include:
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local
conditions, such as scarcity of space or increase in demand for real estate, demographic
changes and changes in zoning and tax laws; and
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competition
for site locations from both theater companies and other businesses.
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We
typically require 24 to 36 months from the time we reach an agreement with a landlord to when a new theater opens. In addition,
improving our existing theaters is subject to substantial risks such as difficulty obtaining permits, landlord approvals and new
types of operating licenses (e.g. liquor licenses). We may also experience cost overruns from delays or other unanticipated costs
in both new construction and facility improvements. Furthermore, our new sites and transformed locations may not perform to our
expectations.
Our
failure to manage our growth effectively could harm our business and operating results.
Our
growth plan includes a significant number of potential new iPic locations. Our existing management systems, financial and management
controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively
will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain management
and operating personnel, particularly in new markets. We may not be able to respond on a timely basis to all of the changing demands
that our planned expansion will impose on management and on our existing infrastructure, or be able to hire or retain the necessary
management and operating personnel, which could harm our business, financial condition or results of operations. These demands
could cause us to operate our existing business less effectively, which in turn could cause deterioration in the financial performance
of our existing units. If we experience a decline in financial performance, we may decrease the number of or discontinue new openings,
or we may decide to close units that we are unable to operate in a profitable manner.
Our
theaters and restaurants operate in highly competitive environments.
The
motion picture exhibition industry is fragmented and highly competitive with no significant barriers to entry. Our theaters are
subject to varying degrees of competition in the geographic areas in which we operate. Competitors may be national circuits, regional
circuits or smaller independent exhibitors. Moviegoers are generally not brand conscious and usually choose a theater based on
its location, the films showing there, showtimes and its amenities. Competition among theater exhibition companies is often intense
with respect to the following factors:
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Attracting
patrons.
The competition for patrons is dependent upon factors such as the availability
of popular motion pictures, the location and number of theaters and screens in a market,
the comfort and quality of the theaters and pricing. Many of our competitors have sought
to increase the number of screens that they operate and provide a more luxurious experience
by enhancing food and beverage options and installing recliner seating. Certain of the
larger theater chains, such as AMC and Regal, have been converting some of their existing
theaters to include in-theater dining and recliner seating, often at the same price or
a marginally higher price than their traditional theaters. Should other theater operators
in our markets choose to implement these or other initiatives, the performance of our
theaters may be significantly and negatively impacted.
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Licensing
motion pictures.
We believe that the principal competitive factors with respect
to film licensing include licensing terms, number of seats and screens available for
a particular picture, revenue potential and the location and condition of an exhibitor’s
theaters.
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New
sites and acquisitions.
We must compete with exhibitors and others in our efforts
to locate and acquire attractive new and existing sites for our iPic units. There can
be no assurance that we will be able to acquire such new sites or existing theaters at
reasonable prices or on favorable terms. Moreover, some of these competitors may be stronger
financially than we are. As a result of the foregoing, we may not succeed in acquiring
theaters or may have to pay more than we would prefer to make an acquisition.
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Multiple
competitors for both out-of-home and in-home entertainment.
The theatrical exhibition
industry faces competition from other forms of out-of-home entertainment, such as concerts,
amusement parks and sporting events and from other distribution channels for filmed entertainment,
such as cable television, pay-per-view, video on demand, subscription based video streaming
services, such as Netflix, Amazon Prime and Hulu, and home video systems and from other
forms of in-home or on-the-go entertainment.
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New
marketing approaches.
Many of our competitors have partnered with MoviePass
Inc. (“MoviePass”), a subscription-based movie ticketing service. For a monthly
fee of $9.95, MoviePass subscribers can attend one movie per day at no additional cost.
MoviePass’ growing popularity may negatively impact our theaters by providing patrons
with a cheaper alternative to paying each time they go to the movies.
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New
technology.
New innovations and technology will continue to impact our industry.
If we are unable to respond to or invest in future technology and the changing preferences
of our customers, we may not be able to compete with other exhibitors or other entertainment
venues, which could also adversely affect our results of operations.
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Like
the motion picture exhibition industry, the restaurant industry is fragmented and highly competitive with no significant barriers
to entry. We compete in the restaurant industry with multi-unit national, regional and locally-owned and/or operated limited-service
restaurants and full-service restaurants. Many of our competitors offer breakfast, lunch and dinner, as well as dine-in, carry-out
and delivery services. Many of our competitors have existed longer than we have and may have a more established market presence,
better locations and greater name recognition nationally or in some of the local markets in which we operate or plan to operate.
We
face significant competition for restaurant guests, and our inability to compete effectively may affect our traffic, iPic sales
and store-level operating profit margins.
We
rely on our food and beverage service for a majority of our revenue. The restaurant industry is intensely competitive with many
well-established companies that compete directly and indirectly with us with respect to food quality, service, price and value,
design and location. Some of our competitors have significantly greater financial, marketing, personnel and other resources than
we do. In addition, many of our competitors have greater name recognition nationally or in some of the local markets in which
we have or plan to have an iPic. Any inability to successfully compete with the restaurants in our markets will place downward
pressure on our guest traffic and may prevent us from increasing or sustaining our revenues and profitability.
New
iPic locations, once opened, may not be profitable; recently, our comparable-store sales have declined; and the performance of
our units that we have experienced in the past may not be indicative of future results.
Our
results have been, and in the future may continue to be, significantly impacted by the timing of new location openings (often
dictated by factors outside of our control), including landlord delays, associated pre-opening expenses and operating inefficiencies,
as well as changes in our geographic concentration due to the opening of new units. We typically incur the most significant portion
of pre-opening expenses associated with a given location within the six months preceding the opening. Our experience has been
that labor and operating costs associated with a newly opened location for the first several months of operation are materially
greater than what can be expected after that time, both in aggregate dollars and as a percentage of sales. Our new units commonly
take 16 to 20 weeks to reach planned operating expense levels due to inefficiencies typically associated with new openings, including
the training of new personnel, new market learning curves, inability to hire sufficient qualified staff and other factors. We
may incur additional costs in new markets, particularly for transportation and distribution, which may impact the profitability
of those units. Accordingly, the volume and timing of new openings may have a material adverse impact on our profitability.
In
recent periods, our comparable-store sales have declined, as have those of certain of our competitors. Specifically, in the nine
months ended September 30, 2017 as compared to the nine months ended September 30, 2016, our comparable-store sales declined by
$6.3 million. This was partly due to the fact that there were relatively few successful movie releases during the first nine months
of calendar year 2017. In the year ended December 31, 2016 as compared to the year ended December 31, 2015, our comparable-store
sales declined by $6.2 million. This was partly due to the fact that there was a material increase in the percentage of the motion
picture industry’s 2016 total box-office receipts that stemmed from children’s or animated films that do not generally
appeal to our more adult clientele. For 2016, industry reports noted that approximately 50% of industry sales from 2016’s
Top-15 grossing films were from children’s or animated films (as opposed to 18% of industry sales from 2015’s Top-15
grossing films coming from children’s or animated films).
Although
we target specified operating and financial metrics, new units may not meet these targets or may take longer than anticipated
to do so. Any new location we open may not be profitable or achieve operating results similar to those of our existing units,
which could adversely affect our business, financial condition or results of operations.
We
may not achieve the expected benefits and performance from strategic theater acquisitions.
In
any acquisition, we expect to benefit from cost savings through, for example, the reduction of overhead and theater level costs,
and from revenue enhancements resulting from the acquisition. However, there can be no assurance that we will be able to generate
sufficient cash flow from these acquisitions to service any indebtedness incurred to finance such acquisitions or realize any
other anticipated benefits, nor can there be any assurance that our profitability will be improved by any one or more acquisitions.
Any acquisition may involve operating risks, such as:
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the
difficulty of assimilating and integrating the acquired operations and personnel into
our current business;
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the
potential disruption of our ongoing business;
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the
diversion of management’s attention and other resources;
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the
possible inability of management to maintain uniform standards, controls, procedures
and policies;
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the
risks of entering markets in which we have little or no experience;
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the
potential impairment of relationships with employees;
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the
possibility that any liabilities we may incur or assume may prove to be more burdensome
than anticipated; and
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the
possibility that the acquired theaters do not perform as expected.
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We
have no control over distributors of the films and our business may be adversely affected if our access to motion pictures is
limited or delayed.
We
rely on distributors of motion pictures, over whom we have no control, for the films that we exhibit. Major motion picture distributors
are required by law to offer and license film to exhibitors, including us, on a film-by-film and theater-by-theater basis. Consequently,
we cannot assure ourselves of a supply of motion pictures by entering into long-term arrangements with major distributors, but
must compete for our licenses on a film-by-film and theater-by-theater basis. Our business depends on maintaining good relations
with these distributors, as this affects our ability to negotiate commercially favorable licensing terms for first-run films or
to obtain licenses at all. With only seven distributors representing approximately 90% of the U.S. box office in 2016, there is
a high level of concentration in the industry. Our business may be adversely affected if our access to motion pictures is limited
or delayed because of deterioration in our relationships with one or more distributors, or for some other reason. To the extent
that we are unable to license a popular film for exhibition in our theaters, our operating results may be materially adversely
affected.
We
depend on motion picture production and performance.
Our
ability to operate successfully depends upon the availability, diversity and appeal of motion pictures, our ability to license
motion pictures and the performance of such motion pictures in our markets. Our revenues are dependent upon the timing and popularity
of film releases by distributors. The most marketable films are usually released during the summer and the calendar year-end holiday
seasons. Therefore, our business is subject to significant seasonal fluctuations, with higher attendance and revenues generally
occurring during the summer months and holiday seasons. We license first-run motion pictures, the success of which has increasingly
depended on the marketing efforts of the major motion picture studios. Poor performance of, or any disruption in the production
of these motion pictures (including by reason of a strike or lack of adequate financing), or a reduction in the marketing efforts
of the major motion picture studios, could hurt our business and results of operations. Conversely, the successful performance
of these motion pictures, particularly the sustained success of any one motion picture, or an increase in effective marketing
efforts of the major motion picture studios, may generate positive results for our business and operations in a specific quarter
or year that may not necessarily be indicative of, or comparable to, future results of operations. Given the relatively small
number of theaters and screens that we operate (particularly when compared to our larger competitors), if a major motion picture
studio decides to delay the release of a first-run motion picture from one quarter to a subsequent quarter, that could have a
material adverse effect on our results of operations in the earlier quarter. As movie studios rely on a smaller number of higher
grossing “tent pole” films, there may be increased pressure for higher film licensing fees. In addition, a change
in the type and breadth of movies offered by motion picture studios may adversely affect the demographic base of moviegoers. As
a result of the foregoing factors, our results of operations may vary significantly from quarter to quarter and from year to year.
The
motion picture exhibition industry has experienced fluctuations in attendance during recent years.
The
U.S. motion picture exhibition industry has been subject to periodic short-term increases and decreases in attendance and box
office revenues. According to the Motion Picture Association of America, attendance at movies in the United States and Canada
was 1.32 billion during 2016 and 2015 and 1.27 billion during 2014. During the past ten years, attendance at movies in the United
States and Canada has ranged from a high of 1.42 billion in 2009 to a low of 1.27 billion in 2014. We expect the cyclical nature
of the U.S. motion picture exhibition industry to continue for the foreseeable future, and any decline in attendance could materially
adversely affect our results of operations. To offset any decrease in attendance, we plan to offer products unique to the motion
picture exhibition industry, such as specially selected alternative programming and a luxury in-theater dining experience. We
cannot assure you, however, that our offering of such content and services will offset any decrease in attendance that the industry
may experience.
An
increase in the use of alternative film delivery methods or other forms of entertainment may drive down our attendance and limit
our ticket prices.
We
compete with other film delivery methods, including network, syndicated cable and satellite television and DVDs, as well as video-on-demand,
pay-per-view services, video streaming and downloads via the Internet. We also compete for the public’s leisure time and
disposable income with other forms of entertainment, including sporting events, amusement parks, live music concerts and live
theater. An increase in the popularity of these alternative film delivery methods and other forms of entertainment could reduce
attendance at our theaters, limit the prices we can charge for admission and materially adversely affect our business and results
of operations.
Our
results of operations may be impacted by shrinking video release windows.
Over
the last decade, the average video release window, which represents the time that elapses from the date of a film’s theatrical
release to the date a film is available on DVD or similar on-demand release to an important downstream market, has decreased from
approximately six months to approximately three to four months. If patrons choose to wait for a DVD release, video streaming or
other home entertainment options rather than attend a theater for viewing the film, it may materially adversely impact our business
and results of operations, financial condition and cash flows. Several major film studios have tested premium video-on-demand
products released in homes approximately simultaneously with a movie’s theatrical debut, which threatened the length of
the release window. Additionally, for the past several years, Amazon Studios has been producing and acquiring original movies
for theatrical release with video streaming available just four to eight weeks after their theatrical debut. We cannot assure
you that the release window, which is determined by the film studios, will not shrink further or be eliminated altogether, which
could have a material adverse impact on our business and results of operations.
Our
continued success depends in part on the continued popularity of our menu and the experience we offer guests.
Consumer
tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect
the restaurant business and our competitors may react more efficiently and effectively to those conditions. In addition, some
of our competitors in the past have implemented programs that provide price discounts on certain menu offerings, and they may
continue to do so in the future. If we are unable to continue to compete effectively, our traffic, sales and store-level operating
profit margins could decline and our business, financial condition and results of operations would be materially adversely affected.
Food
safety and food-borne illness incidents could adversely affect guests’ perception of our brand, result in lower sales and
increase operating costs.
Food
safety is a top priority and we dedicate substantial resources to help ensure that our guests enjoy safe, quality food products.
However, food-borne illnesses and other food safety issues have occurred in the food industry in the past, and could occur in
the future. A negative report or negative publicity, whether or not related to one of our iPic locations, may have an adverse
impact on demand for our food and could result in decreased guest traffic to our units. A decrease in guest traffic to our iPic
locations as a result of these health concerns or negative publicity could materially harm our brand, reputation, business, financial
condition and results of operations.
Furthermore,
our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused
by factors outside of our control and that multiple iPic locations would be affected. We cannot ensure that all food items will
be properly maintained during transport throughout the supply chain and that our employees will identify all products that may
be spoiled and should not be used. If our guests become ill from food-borne illnesses, we could be forced to temporarily close
some units. Furthermore, any instances of food contamination, whether or not at iPic, could subject us or our suppliers to a food
recall pursuant to the United States Food and Drug Administration’s recently enacted Food Safety Modernization Act.
Restaurant
companies have been the target of class action lawsuits and other proceedings that are costly, divert management attention and,
if successful, could result in our payment of substantial damages or settlement costs.
Our
business is subject to the risk of litigation by employees, guests, suppliers, licensees, stockholders or others through private
actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly
class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies have been subject
to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment
matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by
the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage
and hour laws regarding, among other things, employee meal deductions, overtime eligibility and failure to pay for all hours worked.
Along those lines, a class action lawsuit was recently filed against us in California state court asserting 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. Because the case is new and we are not yet even due to respond to the complaint in the lawsuit, it is premature
to determine whether this particular case would have a material impact on our business or results of operations. See Note 6–Commitments
and Contingencies of the Notes to the Unaudited Condensed Consolidated Financial Statements of iPic Gold-Class.
Occasionally,
our guests file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at
or after a visit to one of our locations, including actions seeking damages resulting from food-borne illness or accidents at
our locations. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business,
including contract claims.
Regardless
of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and
money away from our operations. In addition, they may generate negative publicity, which could reduce guest traffic and sales.
Although we maintain what we believe to be adequate levels of insurance to cover any of these liabilities, insurance may not be
available at all or in sufficient amounts with respect to these or other matters. A judgment or other liability in excess of our
insurance coverage for any claims or any adverse publicity resulting from claims could materially adversely affect our business
and results of operations.
Our
plans to open new units, and the ongoing need for capital expenditures at our existing units, require us to expend capital.
Our growth strategy depends on opening
new units, which will require us to use cash flows from operations and a portion of the net proceeds from our IPO. We cannot assure
you that cash flows from operations and the net proceeds from our IPO will be sufficient to allow us to implement our growth strategy.
If this cash is not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful,
we may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned openings,
which could have a material adverse effect on our business, financial condition, results of operations and the price of our Class
A Common Stock.
In
addition, as our units mature, our business will require capital expenditures for the maintenance, renovation and improvement
of existing units to remain competitive and maintain the value of our brand standard. This creates an ongoing need for capital,
and, to the extent we cannot fund capital expenditures from cash flows from operations, funds will need to be borrowed or otherwise
obtained. If we cannot access the capital we need, we may not be able to execute on our growth strategy, take advantage of future
opportunities or respond to competitive pressures.
If
the costs of funding new units or renovations or enhancements at existing iPic locations exceed budgeted amounts, and/or the time
for building or renovation is longer than anticipated, our financial condition and results of operations could be materially adversely
affected.
We
are subject to risks associated with leasing property subject to long-term non-cancelable leases.
We
do not own any real property and all of our iPic locations are located in leased premises. The leases for our units generally
have initial terms of 15 to 25 years and typically provide for two to four renewal options in five-year increments as well as
for rent escalations.
Generally,
our leases are net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses,
insurance and other charges in addition to rent. We generally cannot cancel these leases. Additional sites that we lease are likely
to be subject to similar long-term non-cancelable leases. If we close a unit, we nonetheless may be obligated to perform our monetary
obligations under the applicable lease, including, among other things, payment of the base rent for the balance of the lease term.
In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all,
which could cause us to close units in desirable locations.
As
of September 30, 2017, we were a party to operating leases associated with our iPic locations and administrative offices requiring
future minimum lease payments of $4.2 million for the remainder of 2017 and approximately $363.9 million thereafter, which minimum
lease commitments are not reflected as liabilities on our consolidated balance sheet. We depend on cash flows from operations
to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating
activities and sufficient funds are not otherwise available to us from borrowings under the non-revolving credit facility (the
“Non-Revolving Credit Facility”) with RSA or other sources, we may not be able to service our lease expenses or fund
our other liquidity and capital needs, which would have a material adverse effect on our business, our results of operations and
our financial condition.
Our
substantial debt could materially adversely affect our operations and prevent us from satisfying those debt obligations.
We
have a significant amount of debt. As of September 30, 2017, we had outstanding $188.6 million of indebtedness, which consisted
of $138.2 million under our Non-Revolving Credit Facility and $50.4 million of unsecured subordinated notes to related parties.
As of September 30, 2017, we also had approximately $368.1 million of undiscounted rental payments under operating leases (with
initial base terms generally between 15 to 25 years). While all of the unsecured subordinated notes to related parties were repaid
or cancelled in connection with the IPO, the amount of our remaining indebtedness and lease and other financial obligations could
have important consequences to you. For example, it could:
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increase
our vulnerability to general adverse economic and industry conditions;
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limit
our ability to obtain additional financing in the future for working capital, capital
expenditures, dividend payments, acquisitions, general corporate purposes or other purposes;
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require
us to dedicate a substantial portion of our cash flow from operations to the payment
of lease rentals and principal and interest on our indebtedness, thereby reducing the
funds available to us for operations and any future growth or other business opportunities;
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limit
our planning flexibility for, or ability to react to, changes in our business and the
industry; and
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place
us at a competitive disadvantage with competitors who may have less indebtedness and
other obligations or greater access to financing.
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If
we fail to make any required payment under our Non-Revolving Credit Facility or to comply with any of the financial and operating
covenants contained therein, we would be in default. Lenders under our Non-Revolving Credit Facility could then vote to accelerate
the maturity of the indebtedness under the Non-Revolving Credit Facility and foreclose upon the property that is pledged to secure
the Non-Revolving Credit Facility, which property includes substantially all the assets of iPic-Gold Class and its wholly-owned
subsidiaries, together with 100% of the equity interests of iPic-Gold Class. Other creditors might then accelerate other indebtedness.
If the lenders under the Non-Revolving Credit Facility accelerate the maturity of the indebtedness thereunder, we might not have
sufficient assets to satisfy our obligations under the Non-Revolving Credit Facility or our other indebtedness. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
Limitations
on the availability of capital may prevent deployment of strategic initiatives.
Our
key strategic initiatives, including future upgrades of our Generation I and Generation II locations into our latest Generation
III furniture, fixture and equipment, require significant capital expenditures to implement. Our net capital expenditures aggregated
approximately $57.9 million for the year ended December 31, 2016 and $11.4 million for the year ended December 31, 2017. For calendar
year 2018, we estimate that our gross cash outflows for capital expenditures will be approximately $15 million to $20 million,
inclusive of $1 million to $5 million expected to be supplied in the form of tenant improvement financing. Over the subsequent
three years, we estimate that our gross cash outflows for capital expenditures will be approximately $75 million to $85 million,
inclusive of $30 million to $35 million expected to be supplied in the form of tenant improvement financing. Actual capital expenditures
for calendar year 2018 and for the subsequent years may differ materially from our estimates. The lack of available capital resources
due to business performance or other financial commitments could prevent or delay the deployment of innovations in our theaters
and restaurants. We may have to seek additional financing or issue additional securities to fully implement our growth strategy.
We cannot be certain that we will be able to obtain new financing on favorable terms, or at all. In addition, covenants under
our existing indebtedness limit our ability to incur additional indebtedness, and the performance of any additional or improved
theaters and restaurants may not be sufficient to service the related indebtedness that we are permitted to incur.
The
agreements governing our indebtedness contain covenants that may limit our ability to take advantage of certain business opportunities
advantageous to us.
The
agreements governing our indebtedness contain various covenants that limit our ability to, among other things:
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incur
or guarantee additional indebtedness;
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pay
dividends or make other distributions to our stockholders;
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make
restricted payments;
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engage
in transactions with affiliates; and
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enter
into business combinations.
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These
restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand economic
downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities
that may arise.
We
have a limited operating history which provides limited reference for you to evaluate our ability to achieve our business objectives.
We
were formed in September 2010. Since we have a limited operating history, we are subject to the risks and uncertainties associated
with early stage companies and have historically operated at a loss. Accordingly, you will have a limited basis on which to evaluate
our ability to achieve our business objectives. As of the date hereof, we have 16 locations and have an additional four locations
under construction. Our financial condition, results of operations and our future success will, to a significant extent, depend
on our ability to continue to open restaurants and theaters throughout the United States and internationally and to achieve economies
of scale. We cannot assure you that more restaurants and theaters can be opened on terms favorable to us or at all, or that if
we open those restaurants and theaters, we will be able to operate our expanded business profitably. If we fail to achieve our
business objectives, then we may not be able to realize our expected revenue growth, maintain our existing revenue levels or operate
at a profit. Even if we do realize our business objectives, our business may not be profitable in the future.
We
have had significant financial losses in previous years.
Historically,
we have had operating losses, negative cash flows from operations and working capital deficiencies. For the years ended December
31, 2015 and 2016, and for the nine months ended September 30, 2017, we reported net losses of $24.7 million, $34.2 million and
$34.0 million, respectively. We expect to have significant net losses and negative cash flow for at least the next several years,
as we incur additional costs and expenses for the continued development of new iPic locations. Whether, and when, the Company
can attain profitability and positive cash flows from operations is uncertain. If we experience losses in the future, we may be
unable to meet our payment obligations on our existing indebtedness, while attempting to expand our theater circuit and withstand
competitive pressures or adverse economic conditions.
Our
sales growth and ability to achieve profitability could be adversely affected if comparable-store sales decline or are less than
we expect.
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. The level of comparable-store sales will affect
our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin
on comparable-store sales is generally higher than the profit margin on new store sales. Our ability to increase comparable-store
sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives
will not be successful, and that we will not achieve our target comparable-store sales growth or that our comparable-store sales
could decline, which may cause a decrease in sales growth and ability to achieve profitability that could materially adversely
affect our business, financial condition and results of operations.
Our
results of operations are subject to fluctuations due to the timing of new iPic location openings and the relatively small number
of iPic locations currently in operation.
The
timing of new iPic location openings may result in significant fluctuations in our quarterly performance. We typically incur most
cash pre-opening expenses for a new iPic within the six months immediately preceding, and the month of, the iPic’s opening.
In addition, the labor and operating costs for a newly opened iPic during the first three to six months of operation are materially
greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Additionally, a
portion of a current year new location capital expenditures is related to iPic locations that are not expected to open until the
following year. Due to these substantial up-front financial requirements to open new iPic locations, the investment risk related
to any single iPic is much larger than that associated with many other restaurants or entertainment venues.
Similarly,
with respect to revenues, there is some ramp-up time following the opening of a new iPic during which time revenues from that
particular location have not yet achieved what is to be expected once the location has been open for a period of three years.
This will affect our revenues during periods when we open up one or more new iPic locations.
Furthermore,
because we currently operate at only 16 locations, a problem at any one location may have a significant impact on our results
of operations from period to period. For example, Hurricane Harvey negatively impacted our location in Houston, TX and Hurricane
Irma negatively impacted our locations in Miami, FL and Boca Raton, FL, during the three months ended September 30, 2017.
The
impact that general economic, political and social conditions in the United States have on consumer discretionary spending could
materially adversely affect our business and financial performance.
Our
success depends on general economic, political and social conditions and the willingness of consumers to spend money at restaurants
and movie theaters. Any significant decrease in consumer confidence, or periods of economic slowdown or recession, could lead
to a curtailing of discretionary spending, which in turn could reduce our revenues and results of operations and materially adversely
affect our financial position. Our business is dependent upon consumer discretionary spending and therefore is affected by consumer
confidence as well as the future performance of the United States economy. As a result, our results of operations are susceptible
to economic slowdowns and recessions. Increases in job losses, home foreclosures, energy prices, investment losses in the financial
markets, personal bankruptcies, credit card debt and home mortgage and other borrowing costs, declines in housing values and reduced
access to credit, among other factors, may result in lower levels of customer traffic to our iPic locations, a decline in consumer
confidence and a curtailing of consumer discretionary spending. We believe that consumers generally are more willing to make discretionary
purchases during periods in which favorable economic conditions prevail. If economic conditions worsen, whether in the United
States or in the communities in which our iPic locations are located, we could see deterioration in customer traffic or a reduction
in the average amount customers spend in our iPic locations.
Geopolitical
events, including the threat of domestic terrorism, gun violence or cyber-attacks, could cause people to avoid our theaters or
other public places where large crowds are in attendance. For example, in the United States over the past several years, there
have been several high-profile incidents involving shootings at movie theaters. In addition, due to our concentration in certain
markets, natural or man-made disasters such as hurricanes, earthquakes, severe weather conditions, local strikes or increases
in energy prices in those markets could adversely affect our overall results of operations.
Should
we choose to expand internationally, the risks of doing business internationally could lower our revenues, increase our costs,
reduce our profits or disrupt our business.
In
the future, we may choose to open up iPic locations outside of the United States. If we should decide to expand internationally,
we will become subject to the risks of doing business outside the United States, including:
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changes
in foreign currency exchange rates or currency restructurings and hyperinflation or deflation
in the countries in which we choose to operate;
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the
imposition of restrictions on currency conversion or the transfer of funds or limitations
on our ability to repatriate non-U.S. earnings in a tax effective manner;
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the
presence and acceptance of varying levels of business corruption in international markets;
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the
ability to comply with, or impact of complying with, complex and changing laws, regulations
and policies of foreign governments that may affect investments or operations, including
foreign ownership restrictions, import and export controls, tariffs, embargoes, intellectual
property, licensing requirements and regulations, increases in taxes paid and other changes
in applicable tax laws;
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the
difficulties involved in managing an organization doing business in many different countries;
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the
ability to comply with, or impact of complying with, complex and changing laws, regulations
and economic and political policies of the U.S. government, including U.S. laws and regulations
relating to economic sanctions, export controls and anti-boycott requirements;
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increases
in anti-American sentiment and the identification of the licensed brand as an American
brand;
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the
effect of disruptions caused by severe weather, natural disasters, outbreak of disease
or other events that make travel to a particular region less attractive or more difficult;
and
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political
and economic instability.
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Any
or all of these factors may materially adversely affect the performance of our iPic locations located in international markets.
In particular, a potential international iPic location may be located in a volatile region that is subject to geopolitical and
sociopolitical factors that pose risk to our business operations. In addition, the economy of any region in which our iPic locations
are located may be adversely affected to a greater degree than that of other areas of the country or the world by certain developments
affecting industries concentrated in that region or country. While these factors and the impact of these factors are difficult
to predict, any one or more of them could materially lower our revenues, increase our costs, reduce our profits or disrupt our
business.
Our
recurring operating losses, members’ deficit, and working capital deficit have raised substantial doubt regarding our ability
to continue as a going concern.
We
have sustained recurring operating losses since our inception. In addition, we had a members’ deficit, and a working capital
deficit at December 31, 2016 and September 30, 2017, which raise substantial doubt about our ability to continue as a going concern.
The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation
of our operations and could result in the loss of confidence by investors, suppliers and employees. Our consolidated financial
statements for all periods have been prepared assuming we will continue as a going concern. As discussed in the notes to those
consolidated financial statements, our continuation as a going concern is dependent upon our ability to generate sufficient cash
from operations, which is subject to achieving our operating plans, and the continued availability of funding sources. Historically,
our main sources of funding have been the Non-Revolving Credit Facility, financing provided by the landlords at certain of our
newly-developed locations, and funding from members. To date, we have not generated sufficient cash flows from operations to further
access the Non-Revolving Credit Facility without additional equity infusions. We admitted new members in April 2017 and November
2017 that provided capital in the form of equity and debt of approximately $12,000,000 and $4,000,000, respectively. [Add description
of January 2018 equity infusions.]
As
of September 30, 2017 and December 31, 2016, management has concluded that there was substantial doubt about our ability to continue
as a going concern. Our independent registered public accounting firm also included explanatory going concern language in their
report accompanying our audited consolidated financial statements for the year ended December 31, 2016, included in the Offering
Circular, dated January 30, 2018, which formed part of the Offering Statement on Form 1-A (File No. 001-38380024-10773) (the “Offering
Circular”).
It is not possible at this time for us
to predict with assurance the potential success of our business. The revenue and income potential of our business and operations
are unknown. We are uncertain whether the proceeds from the IPO will be sufficient to fund our operations to achieve profitability
and positive cash flows. These uncertainties cast doubt upon our ability to continue as a going concern. If we cannot continue
as a viable entity, we may be unable to continue our operations and you may lose some or all of your investment in our Class A
Common Stock.
If
our cash flows prove inadequate to service our debt and provide for our other obligations, we may be required to refinance all
or a portion of our existing debt or future debt at terms unfavorable to us.
Our
ability to make payments on and refinance our debt and other financial obligations and to fund our capital expenditures and acquisitions
will depend on our ability to generate substantial operating cash flow. This will depend on our future performance, which will
be subject to prevailing economic conditions and to financial, business and other factors beyond our control. In addition, our
notes require us to repay or refinance those notes when they come due. If our cash flows were to prove inadequate to meet our
debt service, rental and other obligations in the future, we may be required to refinance all or a portion of our existing or
future debt, on or before maturity, to sell assets or to obtain additional financing. We cannot assure you that we will be able
to refinance any of our indebtedness, including our Non-Revolving Credit Facility, sell any such assets or obtain additional financing
on commercially reasonable terms or at all. The terms of the agreements governing our indebtedness restrict, but do not prohibit
us from incurring additional indebtedness. If we are in compliance with the financial covenants set forth in the Non-Revolving
Credit Facility and our other outstanding debt instruments, we may be able to incur substantial additional indebtedness. If we
incur additional indebtedness, the related risks that we face may intensify.
We
may suffer future impairment losses and theater and other closure charges.
The
opening of new theaters by certain of our competitors has drawn audiences away from some of our older theaters. In addition, demographic
changes and competitive pressures have caused some of our theaters to become unprofitable. Since not all theaters are appropriate
for our new initiatives, we may have to close certain theaters or recognize impairment losses related to the decrease in value
of particular theaters. We review long-lived assets, including intangibles, for impairment as part of an ongoing process and whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Deterioration
in the performance of our theaters could require us to recognize additional impairment losses and close additional theaters, which
could have a material adverse effect on the results of our operations. We continually monitor the performance of our theaters,
and factors such as changing consumer preferences for filmed entertainment and our inability to sublease vacant retail space could
negatively impact operating results and result in future closures, sales, dispositions and significant theater and other closure
charges prior to expiration of underlying lease agreements.
We
may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely
affect our business.
Our
ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our
trademarks, service marks, trade dress, proprietary information and other intellectual property, including our name and logos
and the unique character and atmosphere of our iPic locations. We rely on trademark, copyright, and trade secret laws, as well
as license agreements, nondisclosure agreements, and confidentiality and other contractual provisions to protect our intellectual
property. Nevertheless, our competitors may develop a similar character and atmosphere, menu items and concepts, and adequate
remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and other intellectual property.
The
success of our business depends on our continued ability to use our existing trademarks and service marks to increase brand awareness
and further develop our brand in the markets in which we operate. We have registered and applied to register trademarks and service
marks in the United States. We may not be able to adequately protect our trademarks and service marks, and our competitors and
others may successfully challenge the validity and/or enforceability of our trademarks and service marks and other intellectual
property. We have several patents issued, as well as several pending patent applications in the United States. Such patent applications
are subject to the review by and normal course prosecution before the U.S. Patent and Trademark Office, which may result in the
application’s revision or non-approval. As a result, we may not be able to adequately protect the inventions covered by
these patent applications, and our competitors and others may benefit as a result of their publication. The steps we have taken
to protect our intellectual property in the United States may not be adequate. In addition, should we choose to expand internationally,
the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States.
If
our efforts to maintain and protect our intellectual property are inadequate, or if any third party misappropriates, dilutes or
infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our
business and might prevent our brands from achieving or maintaining market acceptance.
We
may also from time to time be required to institute litigation to enforce our trademarks, service marks and other intellectual
property. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales,
profitability and prospects regardless of whether we are able to successfully enforce our rights.
Third
parties may assert that we infringe, misappropriate or otherwise violate their intellectual property and may sue us for intellectual
property infringement. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention
of our management and other personnel may be diverted in pursuing these proceedings. If a court finds that we infringe a third
party’s intellectual property, we may be required to pay damages and/or be subject to an injunction. With respect to any
third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation),
we may not be able to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable
cost or on reasonable terms.
Our
business could be adversely affected if we incur legal liability.
We
are subject to, and in the future may become a party to, a variety of litigation or other claims and suits that arise from time
to time in the ordinary course of our business. Regardless of the merits of the claims, the cost to defend current and future
litigation may be significant, and such matters can be time-consuming and divert management’s attention and resources. The
results of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in some or all
of these legal disputes may result in materially adverse monetary damages, penalties or injunctive relief against us. Any claims
or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively
or to obtain adequate insurance in the future.
While
we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities
and is subject to various exclusions as well as caps on amounts recoverable. Even if we believe a claim is covered by insurance,
insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and, if they
prevail, the amount of our recovery.
Our
business is subject to risks related to our sale of alcoholic beverages.
We
serve alcoholic beverages at all of our locations. Alcoholic beverage control regulations generally require our locations to apply
to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and
may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily
operations of our locations, including minimum age of patrons and employees, hours of operation, advertising, trade practices,
wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling,
storage and dispensing of alcoholic beverages. Any future failure to comply with these regulations and obtain or retain licenses
could materially adversely affect our business, financial condition and results of operations.
We
are also subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated
person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
We carry liquor liability coverage as part of our existing comprehensive general liability insurance. Recent litigation against
restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek
punitive damages, which may not be covered by insurance, such litigation could have a material adverse impact on our business,
results of operations or financial condition. Regardless of whether any claims against us are valid or whether we are liable,
claims may be expensive to defend and may divert time and resources away from operations and hurt our financial performance. A
judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on
our business, results of operations or financial condition.
Shortages
or interruptions in the supply or delivery of food products could adversely affect our operating results.
We
are dependent on frequent deliveries of food products that meet our exact specifications. Shortages or interruptions in the supply
of food products caused by problems in production or distribution, inclement weather, unanticipated demand or other conditions
could adversely affect the availability, quality and cost of ingredients, which would adversely affect our operating results.
Disruption
of our relationships with various vendors could substantially harm our business.
We
rely on our relationships with several key studios in the operations of our business. These relationships include:
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Paramount
Pictures/Dreamworks
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Universal
Film Exchanges
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Walt
Disney Studio Pictures
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Although
our senior management has long-standing relationships with each of these vendors, we could experience deterioration or loss of
any of our vendor relationships, which would significantly disrupt our operations until an alternative source is secured.
We
are subject to substantial government regulation, which could entail significant cost.
We
are subject to various federal, state and local laws, regulations and administrative practices affecting our business, and we
must comply with provisions regulating health and sanitation standards, equal employment, environmental, and licensing for the
sale of food and, in some theaters, alcoholic beverages. Our new theater openings could be delayed or prevented or our existing
theaters could be impacted by difficulties or failures in our ability to obtain or maintain required approvals or licenses. Changes
in existing laws or implementation of new laws, regulations and practices could have a significant impact on our business. A significant
portion of our theater level employees are part time workers who are paid at or near the applicable minimum wage in the theater’s
jurisdiction. Increases in the minimum wage, such as those that occurred in 18 states on January 1, 2018, and implementation of
reforms requiring the provision of additional benefits will increase our labor costs.
The
restaurant industry is subject to extensive federal, state, local and international laws and regulations. The development and
operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject
to building, zoning, land use, environmental, traffic and other regulations and requirements. We are subject to licensing and
regulation by state and local authorities relating to health, sanitation, safety and fire standards and the sale of alcoholic
beverages. We are subject to laws and regulations relating to the preparation and sale of food, including regulations regarding
product safety, nutritional content and menu labeling. We are subject to federal, state, and local laws governing employment practices
and working conditions. These laws cover wage and hour practices, labor relations, paid and family leave, workplace safety, and
immigration, among others. The myriad of laws and regulations being passed at the state and local level creates unique challenges
for a multi-state employer as different standards apply to different locations, sometimes with conflicting requirements. We must
continue to monitor and adapt our employment practices to comply with these various laws and regulations.
Provisions
in the Affordable Care Act require restaurant companies such as ours to disclose calorie information on their menus and to make
available more detailed nutrition information upon request; however, regulations implementing those statutory provisions have
been delayed until May 2018. We do not expect to incur any material costs from compliance with these provisions, but cannot anticipate
any changes to guest behavior resulting from the implementation of this portion of the law, which could have an adverse effect
on our sales or results of operations.
We
are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An
increasing number of governments and industry groups have established data privacy laws and standards for the protection of personal
information, including social security numbers, financial information (including credit card numbers), and health information.
Compliance with these laws and regulations can be costly, and any failure or perceived failure to comply with those laws or any
breach of our systems could harm our reputation or lead to litigation, which could adversely affect our financial condition.
Our
theaters that sell alcohol require each location to apply to a state authority and, in certain locations, county or municipal
authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage
control regulations relate to numerous aspects of daily operations of our locations, including the minimum age of patrons and
employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers,
wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. We are also subject
in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right
to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We may decide not
to obtain liquor licenses in certain jurisdictions due to the high costs associated with obtaining liquor licenses in such jurisdictions.
We
operate locations throughout the United States and are subject to the environmental laws and regulations of those jurisdictions,
particularly laws governing the cleanup of hazardous materials and the management of properties. We might in the future be required
to participate in the cleanup of a property that we lease, or at which we have been alleged to have disposed of hazardous materials
from one of our locations. In certain circumstances, we might be solely responsible for any such liability under environmental
laws, and such claims could be material.
Our
theaters must comply with Title III of the Americans with Disabilities Act of 1990 (“ADA”). Compliance with the ADA
requires that public accommodations “reasonably accommodate” individuals with disabilities and that new construction
or alterations made to “commercial facilities” conform to accessibility guidelines unless “structurally impracticable”
for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of
injunctive relief, fines, and an award of damages to private litigants or additional capital expenditures to remedy such noncompliance,
any of which could have a material adverse effect on our operations and financial condition.
The
impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements
and the consequences of litigation relating to current or future laws and regulations, or an insufficient or ineffective response
to significant regulatory or public policy issues, could negatively impact our cost structure, operational efficiencies and talent
availability, and therefore have a material adverse effect on our results of operations. Failure to comply with the laws and regulatory
requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative
enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can
increase our exposure to litigation or governmental investigations or proceedings.
We
depend on key personnel for our current and future performance.
Our
current and future performance depends to a significant degree upon the retention of our senior management team and other key
personnel. The loss or unavailability to us, or damage to the reputation, of any member of our senior management team or a key
employee — including, without limitation, Mr. Hamid Hashemi, our founder, President and CEO — could have a material
adverse effect on our business, financial condition and results of operations. We believe that our future success will depend
on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for
experienced, successful personnel in our industry. We cannot assure you that we would be able to locate or employ qualified replacements
for senior management or key employees on acceptable terms.
We
rely on our information systems to conduct our business, and any failure to protect these systems against security breaches or
failure of these systems themselves could materially adversely affect our business, results of operations and liquidity and could
result in litigation and penalties. Additionally, if these systems fail or become unavailable for any significant period of time,
our business could be materially harmed.
The
efficient operation of our business is dependent on computer hardware and software systems. Among other things, these systems
collect and store certain personal information from customers, vendors and employees and process customer payment information.
Our mobile application allows patrons to purchase tickets, select seats and order food and beverage. Our information systems and
the sensitive data they are designed to protect are vulnerable to security breaches by computer hackers, cyber terrorists and
other cyber attackers, and employees exceeding their authorized access. We rely on security measures and technology typical of
our industry to securely maintain confidential and proprietary information maintained on our information systems, and we rely
on our third party vendors to take appropriate measures to protect the confidentiality of the information on those information
systems. However, these measures and technology may not adequately prevent security breaches. Our information systems may become
unavailable or fail to perform as anticipated for any reason, including viruses, loss of power or human error. Any significant
interruption or failure of our information systems or those maintained by our third party vendors or any significant breach of
security could materially adversely affect (i) our reputation with our customers, vendors and employees, (ii) our brand name,
and (iii) our business, results of operations and financial condition. Any of the foregoing could result in litigation against
us or the imposition of penalties. A significant interruption, failure or breach of the security of our information systems or
those of our third party vendors could also require us to expend significant resources to upgrade the security measures and technology
that guard sensitive data against computer hackers, cyber terrorists and other cyber attackers. We maintain cyber risk insurance
coverage to protect against such risks, however, there can be no assurance that such coverage will be adequate.
Changes
in privacy laws could adversely affect our ability to market our products effectively.
Our
cinemas rely on a variety of direct marketing techniques, including email marketing. Any expansion on existing and/or new laws
and regulations regarding marketing, solicitation or data protection could adversely affect the continuing effectiveness of our
email and other marketing techniques and could result in changes to our marketing strategy which could adversely impact our attendance
levels and revenues.
Risks
Relating to Our Organizational Structure
Our
principal asset is our interest in Holdings, and Holdings’ principal asset is its interest in iPic-Gold Class, and, accordingly,
we depend on distributions that iPic-Gold Class makes to Holdings and that Holdings makes to us to pay our taxes and expenses.
iPic-Gold Class’s ability to make such distributions may be subject to various limitations and restrictions.
We
are a holding company and have no material assets other than our ownership of LLC Interests of Holdings, which is itself a holding
company that has no material assets other than its ownership of limited liability company interests of iPic-Gold Class. As such,
we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare
and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of iPic-Gold Class and its
subsidiaries and distributions we receive indirectly from iPic-Gold Class. There can be no assurance that our subsidiaries will
generate sufficient cash flow to directly or indirectly distribute funds to us or that applicable state law and contractual restrictions,
including negative covenants in our debt instruments, will permit such distributions.
Both
Holdings and iPic-Gold Class are treated as pass-through entities for U.S. federal income tax purposes and, as such, will not
be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of LLC Interests,
including us. Accordingly, we incur income taxes on our allocable share of any net taxable income of Holdings. Under the terms
of the Holdings LLC Agreement, Holdings is obligated to make tax distributions to holders of LLC Interests, including us. In addition
to tax expenses, we also incur expenses related to our operations, which we expect could be significant. We intend, as the sole
manager of Holdings, which is itself the sole managing member of iPic-Gold Class, to cause iPic-Gold Class to make cash distributions
to Holdings out of which (i) Holdings will make cash distributions to the owners of LLC Interests, in an amount sufficient to
fund all or part of their tax obligations in respect of taxable income allocated to them and (ii) Holdings will make cash payments
to us in an amount sufficient to cover our other expenses. However, Holdings’ and iPic-Glass Class’s ability to make
such distributions and payments may be subject to various limitations and restrictions, such as restrictions on distributions
that would either violate any contract or agreement to which Holdings or iPic-Gold Class is then a party, including debt agreements,
or any applicable law, or that would have the effect of rendering either Holdings or iPic-Gold Class insolvent. If we do not have
sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially
adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. In
addition, if neither Holdings nor iPic-Gold Class has sufficient funds to make distributions, our ability to declare and pay cash
dividends will also be restricted or impaired.
Unanticipated
changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely
affect our results of operations and financial condition.
We
are subject to taxation by U.S. federal, state and local tax authorities, and we may in the future be subject to taxation by foreign
tax authorities. As a result, our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our
future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
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changes
in the valuation of our deferred tax assets and liabilities;
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expected
timing and amount of the release of any tax valuation allowances;
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tax
effects of stock-based compensation;
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changes
in tax laws, regulations or interpretations thereof; or
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future
earnings being lower than anticipated in countries where we have lower statutory tax
rates and higher than anticipated earnings in countries where we have higher statutory
tax rates.
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In
addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state and local taxing
authorities, and we may in the future be subject to audits by foreign taxing authorities. Outcomes from these audits could have
an adverse effect on our operating results and financial condition.
If
we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”),
as a result of our direct ownership of Holdings and our indirect ownership of iPic-Gold Class, applicable restrictions could make
it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Under
Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for
purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the
business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing,
reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value
exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
We do not believe that we are an “investment company,” as such term is defined in either of those sections of the
1940 Act.
iPic
Entertainment is the sole manager of Holdings, and Holdings is the sole managing member of iPic-Gold Class. As a result, we will
indirectly control and operate iPic-Gold Class. On that basis, we believe that our interest in iPic-Gold Class is not an “investment
security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of iPic-Gold
Class, our interest in iPic-Gold Class could be deemed an “investment security” for purposes of the 1940 Act.
We,
Holdings and iPic-Gold Class intend to conduct our operations so that we will not be deemed an investment company. However, if
we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure
and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could
have a material adverse effect on our business.
iPic
is controlled by the Continuing iPic Equity Owners, whose interests may differ from those of our public stockholders.
As of March 1, 2018, the Continuing iPic
Equity Owners control approximately 92.68% of the combined voting power of all classes of our common stock through their ownership
of Class A and Class B Common Stock. The Continuing iPic Equity Owners will, for the foreseeable future, have significant influence
over our corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. The
Continuing iPic Equity Owners are able to, subject to applicable law, elect a majority of the members of our board of directors
and control actions to be taken by us and our board of directors, including amendments to our Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws and approval of significant corporate transactions, including mergers and sales
of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness
and applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make
other decisions. It is possible that the interests of the Continuing iPic Equity Owners may in some circumstances conflict with
our interests and the interests of our other stockholders, including you. For example, the Continuing iPic Equity Owners may have
different tax positions from us that could influence their decisions regarding whether and when to dispose of assets, and whether
and when to incur new or refinance existing indebtedness. In addition, the determination of future tax reporting positions, the
structuring of future transactions and the handling of any future challenges by any taxing authority to our tax reporting positions
may take into consideration these Continuing iPic Equity Owners’ tax or other considerations, which may differ from the considerations
of us or our other stockholders.
In
addition, certain of the Continuing iPic Equity Owners are in the business of making or advising on investments in companies and
hold, and may from time to time in the future acquire, interests in or provide advice to businesses that directly or indirectly
compete with certain portions of our business or the business of our suppliers. Our Amended and Restated Certificate of Incorporation
provides that, to the fullest extent permitted by law, none of the Continuing iPic Equity Owners or any director who is not employed
by us or his or her affiliates will have any duty to refrain from engaging in a corporate opportunity in the same or similar lines
of business as us. The Continuing iPic Equity Owners may also pursue acquisitions that may be complementary to our business, and,
as a result, those acquisition opportunities may not be available to us.
Fluctuations
in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our operating
results.
We
are subject to income taxes in various U.S. jurisdictions. We record tax expense based on our estimates of future payments, which
may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net
deferred tax assets. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these
audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout
the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.
In
addition, our effective tax rate in a given financial statement period may be materially impacted by a variety of factors including
but not limited to changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate,
fluctuations in the valuation allowance or by changes to existing accounting rules or regulations. Further, tax legislation may
be enacted in the future which could negatively impact our current or future tax structure and effective tax rates.
We
are subject to complex taxation and could be subject to changes in our tax rates, the adoption of new U.S. or international tax
legislation or exposure to additional tax liabilities.
We
are subject to many different forms of taxation in the U.S. and, should we expand internationally, we will also be subject to
different forms of taxation in those foreign jurisdictions where we operate. The tax authorities may not agree with the determinations
that we made and such disagreements could result in lengthy legal disputes and, ultimately, in the payment of substantial amounts
for tax, interest and penalties, which could have a material impact on our results. Additionally, current economic and political
conditions make tax rates in any jurisdiction, including the U.S., subject to significant change. Our future effective tax rates
could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation
of deferred tax assets and liabilities, or changes in tax laws or their interpretation. If the Company’s effective tax rates
were to increase, or if the ultimate determination of the Company’s taxes owed in the U.S. or foreign jurisdictions is for
an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition
could be adversely affected.
Recently
enacted changes to the U.S. tax laws may have a material adverse impact on our business or financial condition.
On
December 20, 2017, the U.S. House of Representatives and the U.S. Senate each voted to approve the Tax Cut and Jobs Act and, on
December 22, 2017, President Trump signed the Tax Cut and Jobs Act into law. The Tax Cut and Jobs Act includes provisions that,
among other things, reduce the U.S. corporate tax rate, introduce a deduction for certain income earned through pass-through entities,
introduce a capital investment deduction, limit the interest deduction, limit the use of net operating losses to offset future
taxable income, and make extensive changes to the U.S. international tax system, including the taxation of the accumulated foreign
earnings. The limitation on the use of net operating losses to offset future taxable income could result in iPic Entertainment’s
being required to pay cash taxes or Holdings’ being required to make tax distributions in an earlier year than would be
the case under existing law. In addition, the limitation on the interest deduction could result in the deferral of interest deductions
on a portion of our indebtedness to subsequent years (in which our interest deductions would also be subject to limitation and
potential deferral), which could materially increase iPic Entertainment’s liability for taxes or the amount of tax distributions
Holdings would be required to make in any affected years. Other provisions of the Tax Cut and Jobs Act, such as the reduction
in the U.S. corporate tax rate and the capital investment deduction, could have the effect of reducing the amount of taxes to
which iPic Entertainment would otherwise have been subject or the amount of tax distributions Holdings would otherwise be required
to make in a particular taxable year. The Tax Cut and Jobs Act is complex and far-reaching and we cannot predict the resulting
impact its enactment will have on us.
Risks
Relating to Ownership of Our Class A Common Stock
The
market price of our Class A common stock may be highly volatile, and the value of your investment may decline.
The trading price of our Class A Common
Stock has been volatile since our IPO. Since shares of our Class A Common Stock began trading on Nasdaq in February 2018, the reported
high and low sales prices of our Class A Common Stock have ranged from $17.00 to $10.50 through March 1, 2018. The following factors,
in addition to other factors described in this “Risk Factors” section and elsewhere in this Quarterly Report, may have
a significant impact on the market price of our Class A Common Stock:
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announcements of innovations or new services by us or our competitors;
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any adverse changes to our relationship with our customers or suppliers;
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variations in the costs of products that we use in our restaurants or theaters;
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announcements concerning our competitors or the restaurant and movie theater industry in general;
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achievement of expected sales and profitability;
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supply or distribution shortages;
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adverse actions taken by regulatory agencies with respect to our services or the products we use;
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actual or anticipated fluctuations in our quarterly or annual operating results;
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changes in financial estimates or recommendations by securities analysts;
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trading volume of our Class A Common Stock;
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sales of our Class A Common Stock by us, our executive officers and directors or our stockholders in the future;
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general economic and market conditions and overall fluctuations in the U.S. equity markets; and
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changes in accounting principles.
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In addition, broad market and industry
factors may negatively affect the market price of our Class A Common Stock, regardless of our actual operating performance, and
factors beyond our control may cause our stock price to decline rapidly and unexpectedly.
We
may be subject to securities litigation, which is expensive and could divert management attention.
Our
share price may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have
been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation
of this type could result in substantial costs and diversion of management’s attention and resources, which could adversely
impact our business. Any adverse determination in litigation could also subject us to significant liabilities.
The
Continuing iPic Equity Owners have the right to have their LLC Interests redeemed pursuant to the terms of the Holdings LLC Agreement.
As
of March 1, 2018, we have an aggregate of 87,614,371 shares of Class A Common Stock authorized but unissued, including approximately
10,220,629 shares of Class A Common Stock issuable upon redemption of LLC Interests that will be held by the Continuing iPic Equity
Owners. The Continuing iPic Equity Owners are generally entitled to have their LLC Interests redeemed for shares of our Class
A Common Stock, subject to certain restrictions contained in the limited liability company agreement of Holdings . We cannot predict
the size of future issuances of our Class A Common Stock or the effect, if any, that future issuances and sales of shares of our
Class A Common Stock may have on the market price of our Class A Common Stock. Sales or distributions of substantial amounts of
our Class A Common Stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions
could occur, may cause the market price of our Class A Common Stock to decline.
Sales of a substantial number of
shares of our Class A Common Stock in the public market by our existing stockholders could cause our stock price to fall.
Sales of a substantial number of shares of our Class A Common Stock in the public market or the perception
that these sales might occur, could depress the market price of our Class A Common Stock and could impair our ability to raise
capital through the sale of additional equity securities. The shares of Class A Common Stock issued in our IPO are freely tradable
without restriction under the Securities Act, except for any shares of our Class A Common Stock that may be held or acquired by
our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted
securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under
the Securities Act or an exemption from registration is available.
We and each of our directors, executive
officers and holders of substantially all of our outstanding common stock as of the date of our IPO, which collectively hold 92.68%
of all classes of our outstanding common stock, have agreed with the selling agents in our IPO, subject to certain exceptions,
not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for, or that represent the
right to receive, shares of common stock during the period from the date of the Offering Circular continuing through 180 days after
February 1, 2018, except with the prior written consent of TriPoint, and except, in our case, that we will be allowed to take the
actions described above after 120 days in the event that the closing price of the shares of Class A Common Stock exceeds $18.50
for each of at least 10 consecutive trading days. In addition, shares issued or issuable upon exercise of options or warrants vested
as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have
a material adverse effect on the trading price of our Class A Common Stock.
In
addition, on February 1, 2018, we filed a registration statement on Form S-8 under the Securities Act to register all shares of
Class A Common Stock issued or issuable upon exercise of outstanding options under our stock plans and outstanding IPO RSUs. Accordingly,
shares registered under such registration statement will be available for sale in the open market following the expiration of
the applicable lock-up period, upon exercise of options vested at such time.
Moreover,
holders of an aggregate of 7,432,377 shares of our common stock have rights, subject to certain conditions such as the 180-day
lock-up arrangement described above, to require us to file registration statements covering their shares or to include their shares
in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities
Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by
our affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our
common stock.
In
the future, we may also issue additional securities if we need to raise capital, which could constitute a material portion of
our then-outstanding shares of common stock.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our markets,
or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price
and trading volume could decline.
The
trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts
may publish about us, our business, our markets or our competitors. We do not have any control over these analysts and we cannot
provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely
change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our
stock price could decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume
to decline.
Because
we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, stockholders must rely on
appreciation of the value of our common stock, if any, for any return on their investment.
We
currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not
anticipate declaring or paying any cash dividends in the foreseeable future. As a result, we expect that only appreciation of
the price of our common stock, if any, will provide a return to investors in our common stock for the foreseeable future.
The
requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements
of the Sarbanes-Oxley Act and NASDAQ, may strain our resources, increase our costs and distract management, and we may be unable
to comply with these requirements in a timely or cost-effective manner.
As
a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and the corporate governance standards of the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”),
and NASDAQ. As a result, we will incur significant legal, accounting and other costs that we did not incur as a private company.
These requirements will place a strain on our management, systems and resources and we will incur significant legal, accounting,
insurance and other expenses that we have not incurred as a private company. The Exchange Act requires us to file annual, quarterly
and current reports with respect to our business and financial condition within specified time periods and to prepare a proxy
statement with respect to our annual meeting of stockholders. The Sarbanes-Oxley Act requires that we maintain effective disclosure
controls and procedures and internal controls over financial reporting. NASDAQ requires that we comply with various corporate
governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls
over financial reporting and comply with the Exchange Act and NASDAQ requirements, significant resources and management oversight
will be required. This may divert management’s attention from other business concerns and lead to significant costs associated
with compliance, which could have a material adverse effect on us and the price of our Class A common stock.
We
also expect that it could be difficult and will be significantly more expensive to obtain directors’ and officers’
liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve
on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more
changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or
the timing of these costs.
We
have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses
in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements
of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
We
have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely
basis. Specifically, we do not have an effective control environment because we do not have formalized internal control policies
and procedures. We have also identified material weaknesses related to our lack of adequate review of complex accounting matters,
improperly designed period end financial reporting controls, and improperly designed information technology controls.
We
are implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses,
including controls designed to require reviews of complex areas in a timely manner. In addition, we are designing and implementing
improved processes and internal controls throughout the organization, including enhancing our control environment and redesigning
and implementing controls over information technology and our period end financial reporting process such as formalizing our internal
control documentation and strengthening supervisory reviews by our management. While we are designing, documenting and implementing
improved processes and internal controls, we cannot predict the success of such measures or the outcome of our assessment of these
measures at this time. We can give no assurance that additional material weaknesses or significant deficiencies in our internal
control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal
control over financial reporting could result in errors in our financial statements that could result in a restatement of our
consolidated financial statements or cause us to fail to meet our reporting obligations.
We
will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things,
the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date
of our IPO. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal
control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness
of our internal control over financial reporting until our first annual report required to be filed with the SEC following the
date which is the later of the date we are an accelerated filer or a large accelerated filer, and the date we are no longer an
“emerging growth company,” as defined in the JOBS Act. We will be required to disclose changes made in our internal
control and procedures on a quarterly basis. To comply with the requirements of being a public company, we may need to undertake
various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. We have
begun the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation
needed to comply with Section 404, when applicable, and we may not be able to complete our evaluation, testing and any required
remediation in a timely fashion.
Our
Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws contain provisions that make it more difficult
to effect a change in control of the company.
Our
Amended and Restated Certificate of Incorporation and our Amended and Restated contain provisions that could have the effect of
rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance
documents include provisions that:
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authorize
blank check preferred stock, which could be issued with voting, liquidation, dividend
and other rights superior to our common stock;
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limit
the liability of, and provide indemnification to, our directors and officers;
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limit
the ability of our stockholders to call and bring business before special meetings and
to take action by written consent in lieu of a meeting;
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require
advance notice of stockholder proposals and the nomination of candidates for election
to our board of directors;
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require
that directors only be removed from office for cause; and
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limit
the determination of the number of directors on our board and the filling of vacancies
or newly created seats on the board to our board of directors then in office.
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Further,
we are subject to the anti-takeover provisions of section 203 of the Delaware General Corporation Law, which prohibits us from
engaging in a “business combination” with an “interested stockholder” for a period of three years after
the date of the transaction in which the person became an interested stockholder, unless the business combination is approved
in a prescribed manner. The application of section 203 could have the effect of delaying or preventing a change of control that
could be advantageous to the stockholders.
These
provisions of our charter documents and Delaware law, alone or together, could delay or deter hostile takeovers and changes in
control or changes in our management. Any provision of our Amended and Restated Certificate of Incorporation or Amended and Restated
Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders
to receive a premium for their shares of our common stock. Even in the absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the
future.
Our
Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum
for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain
a favorable judicial forum for disputes with us.
Our
Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the sole
and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach
of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting
a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs
doctrine. Holders of our common stock are deemed to have notice of and have consented to the provisions of our Amended and Restated
Certificate of Incorporation related to choice of forum. The choice of forum provision in our Amended and Restated Certificate
of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.