See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
NOTE
1 — Organization and Summary of Significant Accounting Policies
Organization
iPic Entertainment Inc. (“iPic”)
was formed as a Delaware corporation on October 18, 2017. iPic was formed for the purpose of completing an initial public offering
(“IPO”) and related transactions in order to carry on the business of iPic-Gold Class Entertainment, LLC (“iPic-Gold
Class”) and its subsidiaries. The IPO occurred on February 1, 2018; refer to Note 2 “Initial Public Offering”
for details of the IPO and the related transactions. Additionally, iPic-Gold Class Holdings LLC (“Holdings”) was formed
as a Delaware limited liability company on December 22, 2017, to hold the equity interests in iPic-Gold Class. As of the completion
of the IPO and related transactions, iPic is the sole managing member of Holdings, and Holdings is the sole managing member of
iPic-Gold Class and its subsidiaries. iPic-Gold Class and its subsidiaries continue to conduct the business conducted by these
subsidiaries prior to the IPO and related transactions. Prior to the consummation of the IPO, iPic had no operations or activities.
Holdings is considered a variable interest
entity (“VIE”) of iPic Entertainment Inc. iPic is the primary beneficiary due to the following factors: it has an economic
interest in Holdings, it is the sole managing member, and it has decision-making authority that significantly affects the economic
performance of the entity, while the non-controlling interest holders have no substantive kick-out or participating rights. As
a result, Holdings is consolidated as part of iPic. The assets and liabilities of Holdings represent all of our consolidated assets
and liabilities.
As a result of the IPO and the related
transactions on February 1, 2018, iPic consolidates the financial results of Holdings and iPic-Gold Class and its subsidiaries
with its financial results and reports non-controlling interests to reflect the interests of Common Units (as defined below in
Note 2 “Initial Public Offering”) of Holdings held by parties other than iPic. iPic-Gold Class has been determined
to be the predecessor for accounting purposes and, accordingly, the unaudited condensed consolidated financial statements for periods
prior to the IPO and Organizational Transactions (as defined below in Note 2 “Initial Public Offering”) have been adjusted
to combine the previously separate entities for presentation purposes. Amounts as of December 31, 2017, for the period from January
1, 2018 to January 31, 2018, and for the three and six months ended June 30, 2017 presented in the unaudited condensed consolidated
financial statements and notes to unaudited condensed consolidated financial statements herein represent the historical operations
of iPic-Gold Class. The amounts for the period from February 1, 2018 through June 30, 2018 reflect the consolidated operations
of the Company. iPic and its subsidiaries are collectively referred to throughout the unaudited condensed consolidated financial
statements and related notes as the “Company”, “we”, “our” or “us”.
Principles of Consolidation
The accompanying (a) unaudited condensed
consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements that included explanatory
going concern language in the independent registered public accounting firm’s report accompanying those statements, and (b)
the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in accordance with the instructions to Form 10–Q.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial
statements.
In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for
the fair presentation of the financial position of the Company as of June 30, 2018, the results of operations for the three and
six month periods ended June 30, 2018 and 2017 and the cash flows for the six month periods ended June 30, 2018 and 2017, and should
be read in conjunction with the Company’s Annual Report on Form 10–K for the year ended December 31, 2017.
All significant intercompany balances and
transactions have been eliminated in consolidation. Due to the seasonal nature of the Company’s business, results for the
periods presented are not necessarily indicative of the results to be expected for a full year. The accompanying unaudited condensed
consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have
been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading.
Seasonality
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 season. Therefore, our business is subject to significant seasonal fluctuations, with higher attendance and revenues
generally occurring during the summer months and year-end holiday season. As a result, our results of operations may vary significantly
from quarter to quarter and from year to year.
Use of Estimates
The preparation of the unaudited condensed
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed
consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates
include assessing the collectability of accounts receivable, breakage on gift cards and the useful life and impairment of long-lived
assets. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
During the three months ended June 30, 2018,
the Company recorded a reversal of a prior bonus accrual of $1,265 which is included in operating payroll and benefits in the unaudited
condensed consolidated statements of operations.
Locations
At June 30, 2018 and 2017, the Company
operated a total of fifteen and sixteen cinemas, respectively, in the following locations throughout the United States:
● Glendale, Wisconsin
1
|
● Scottsdale, Arizona
|
● Pasadena, California
|
● Bolingbrook, Illinois
|
● Austin, Texas
|
● South Barrington, Illinois
|
● Fairview, Texas
|
● Los Angeles, California
|
● Boca Raton, Florida
|
● Houston, Texas
|
● Bethesda, Maryland
|
● Fort Lee, New Jersey
|
● North Miami, Florida
|
● New York, New York
|
● Redmond, Washington
|
● Dobbs Ferry, New
York
2
|
1
Location was closed in the
first quarter of 2018. Refer to Note 3 “Property and Equipment”.
2
Location was opened in the
second quarter of 2017.
Fair Value of Financial Instruments
The fair value of accounts receivable and
accounts payable approximate their respective carrying values due to the short-term nature of those instruments. The Company believes
it is not practicable to determine the fair value of its debt without incurring excessive costs because interest rates and other
terms for similar debt are not readily available.
New Accounting Pronouncements
As an emerging growth company, the Company
has elected the option to defer the effective date for adoption of new or revised accounting guidance. This option allows the Company
to adopt new guidance on the effective date for entities that are not public business entities.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods
or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective.
ASU No. 2014-09 permits the use of either the retrospective or modified retrospective transition method. The original effective
date for ASU No. 2014-09 has been deferred and is now effective for public business entities, certain non-for-profit entities,
and certain employee benefit plans for annual reporting periods beginning after December 15, 2017, including interim reporting
periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU
No. 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting
periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual
reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other
entities also may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016,
and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the
entity first applies the guidance in ASU No. 2014-09. The Company believes that the adoption of ASU No. 2014-09 will primarily
impact its accounting for its membership program, gift cards, customer incentives and amounts recorded as deferred revenue. The
Company is continuing to further evaluate the full impact that ASU No. 2014-09 will have on its unaudited condensed consolidated
financial statements and related disclosures. To that end, the Company has begun conducting initial analyses to determine necessary
adjustments to existing accounting policies and to support an evaluation of the impact of ASU No. 2014-09 on the Company’s
unaudited condensed consolidated results of operations and financial position.
In 2016, the FASB issued various amendments
to ASU No. 2014-09, including ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenues Gross versus Net)
, ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing,
ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
and ASU No. 2016-20,
Revenue from Contracts with Customers (Topic 606): Technical Corrections and
Improvements
. The purpose of this additional guidance is to clarify the implementation of ASU No. 2014-09. This guidance is
effective concurrent with ASU No. 2014-09.
In February 2016, the FASB codified Accounting
Standards Codification (“ASC”) Topic No. 842,
Leases
, which requires companies to present substantially all
leases on their balance sheets but continue to recognize expenses on their income statements in a manner similar to today’s
accounting. The new guidance also will result in enhanced quantitative and qualitative disclosures, including significant judgments
made by management, to provide greater insight into the extent of expenses expected to be recognized from existing leases. The
new guidance requires companies to adopt its provisions by modified retrospective adoption and will be effective for public business
entities for years beginning after December 15, 2018, including interim periods within those years. Nonpublic business entities
should apply the amendments for years beginning after December 15, 2019, and interim periods within years beginning after December
15, 2020. Early application is permitted for all entities upon issuance. In January 2018, the FASB issued ASU No. 2018-01, as
an amendment to ASC Topic No. 842,
Leases
, which is a land easement practical expedient. If the Company elects to use this
practical expedient, the Company would evaluate new or modified land easements under this ASU beginning at the date of adoption.
The Company is currently evaluating the impacts this new guidance will have on its unaudited condensed consolidated financial
statements. The Company currently expects that the majority of its operating lease commitments will be recognized as operating
lease liabilities and right-of-use assets upon adoption of the new guidance. The Company expects that adoption will result in
a material increase in the assets and liabilities presented in its unaudited condensed consolidated balance sheets. In July 2018,
the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842. The amendments in ASU No. 2018-10 provide additional
clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic 842), and
have the same effective and transition requirements as ASU No. 2016-02.
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The purpose of
ASU No. 2016-15 is to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. ASU No. 2016-15 is effective for public business entities for years beginning after December 15,
2017, and interim periods within those years. For all other entities, the amendments are effective for years beginning after December
15, 2018, and interim periods within years beginning after December 15, 2019. Early application is permitted, including adoption
in an interim period. The Company is evaluating the impact that ASU No. 2016-15 will have on its unaudited condensed consolidated
financial statements.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
ASU No. 2017-01 provides new guidance
clarifying the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU No. 2017-01 is effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning
after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted.
Amendments in this ASU are applied prospectively and no disclosures are required at transition. Upon adoption, the Company will
apply the provisions of this ASU in evaluating future acquisitions (or disposals).
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718),
to provide guidance on determining which changes to the terms or conditions
of share-based payment awards require an entity to apply modification accounting under Topic 718. This pronouncement is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted,
and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company
adopted this pronouncement for the fiscal year beginning January 1, 2018. The adoption of ASU 2017-09 did not have a material
impact on the Company’s unaudited condensed consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480) And Derivatives And Hedging (Topic 815).
The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities
or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is
indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260,
Earnings
Per Share
, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and
as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options
that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20,
Debt-Debt with Conversion and Other Options
), including related EPS guidance (in Topic 260). The amendments in Part
II of ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480) And Derivatives And
Hedging (Topic 815)
recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities,
the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. For all other entities, the amendments in Part I of the ASU are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all
entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is evaluating the impact
that ASU No. 2017-11 will have on its unaudited condensed consolidated financial statements.
In June 2018, FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718)
, to expand the scope of ASC Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. ASU No. 2018-07 is effective for public business entities for years beginning
after December 15, 2018, and interim periods within those years. For all other entities, the amendments are effective for years
beginning after December 15, 2019, and interim periods within years beginning after December 15, 2020. Early application is permitted,
but the provisions of this ASU are not to be adopted before an entity adopts ASC Topic 606. The Company is evaluating the effects
of adoption of ASU No. 2018-07will have on its unaudited condensed consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09,
Codification Improvements
. This standard does not prescribe any new accounting guidance but makes changes to a variety
of topics to clarify, correct errors in, or make minor improvements to several different FASB Accounting Standards Codification
areas. The majority of the amendments in ASU No. 2018-09 will be effective for public companies in annual periods beginning after
December 15, 2018. For all other entities, the majority of the amendments are effective for years beginning after December 15,
2019. The Company is currently evaluating the effects the adoption of ASU No. 2018-09 will have on its unaudited condensed consolidated
financial statements.
Note
2 — Initial public offering
Initial Public Offering
On February 1, 2018, iPic Entertainment
Inc. completed its IPO of 818,429 shares of Class A Common Stock at a price of $18.50 per share. iPic Entertainment Inc. received
approximately $13,600 in proceeds, net of underwriting discounts and commission, but before offering expenses of approximately
$1,500. iPic Entertainment Inc. used the proceeds to purchase 7.32% of newly issued common units of iPic-Gold Class Holdings LLC
(“Common Units”), which became the sole managing member of iPic-Gold Class in a series of related transactions that
occurred concurrently with the IPO, at a price per Common Unit equal to the IPO price per share of Class A Common Stock, less underwriting
discounts and commissions. As a result of the IPO, the continuing owners of iPic-Gold Class Holdings LLC control approximately
92.68% of the combined voting power of all classes of iPic Entertainment Inc.’s common stock as a result of their ownership
of 429,730 shares of iPic Entertainment Inc.’s Class A Common Stock and all of the outstanding shares of iPic Entertainment
Inc.’s Class B Common Stock, each share of which is entitled to one vote on all matters submitted to a vote of iPic Entertainment
Inc.’s stockholders.
Subsequent to the IPO and the
Organizational Transactions (as defined below) our sole asset is Common Units of Holdings.
Organizational Transactions
Immediately prior to or in connection with
the closing of our IPO on February 1, 2018, we and the pre-IPO owners of iPic-Gold Class (the “Original iPic Equity Owners ”)
consummated the following organizational transactions (the “Organizational Transactions”):
|
●
|
All of the membership interests in iPic-Gold Class were contributed by the Original iPic Equity Owners to Holdings in exchange for all of the membership interests in Holdings (the “LLC Interests”), following which iPic-Gold Class became 100% owned and controlled by Holdings;
|
|
●
|
We amended and restated the limited liability company agreement of Holdings (the “Holdings LLC Agreement”), to, among other things, provide for the organizational structure described below under “Organizational Structure Following the IPO”;
|
|
●
|
We amended and restated the limited liability company agreement of iPic-Gold Class to appoint Holdings as the sole managing member of iPic-Gold Class and to reflect iPic-Gold Class’s status as a wholly-owned subsidiary of Holdings;
|
|
●
|
Certain of the Original iPic Equity Owners transferred the LLC Interests that they held in Holdings to certain direct or indirect members of such Original iPic Equity Owners. The recipients of these LLC Interests, together with the Original iPic Equity Owners that did not transfer any of the LLC Interests that they held in Holdings, are collectively referred to herein as the “Continuing iPic Equity Owners”;
|
|
●
|
We amended and
restated iPic’s Certificate of Incorporation to, among other things, (i) provide for Class A Common Stock and Class B
Common Stock and (ii) issue shares of Class B Common Stock to the Continuing iPic Equity Owners, on a one-to-one basis
with the number of LLC Interests they owned, for nominal consideration;
|
|
●
|
We issued 818,429 shares of our Class A Common Stock to the purchasers in the IPO in exchange for net proceeds of approximately $13,600 at $18.50 per share, after deducting selling agents’ discounts and commissions but before offering expenses payable by us.;
|
|
●
|
We used all of the net proceeds from the IPO to purchase newly-issued LLC Interests from Holdings at a purchase price per interest equal to the net proceeds, before expenses, to us per share of Class A Common Stock, collectively representing 7.32% of Holdings’ outstanding LLC Interests; and
|
|
●
|
We issued 429,730 shares of our Class A Common Stock to certain Continuing iPic Equity Owners in exchange for an equivalent number our Class B Common Stock and LLC Interests they owned.
|
Organizational Structure Following the IPO
Immediately following the completion of
the IPO:
|
●
|
iPic is the sole manager of Holdings, and Holdings is the sole managing member of iPic-Gold Class. iPic, therefore, directly or indirectly controls the business and affairs of, and conducts its day-to-day business through, iPic-Gold Class and its subsidiaries;
|
|
●
|
iPic’s Amended and Restated Certificate of Incorporation and the Holdings LLC Agreement require that (i) we at all times maintain a ratio of one LLC Interest owned by us for each share of Class A Common Stock issued by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities), and (ii) Holdings at all times maintain (x) a one-to-one ratio between the number of shares of Class A Common Stock issued by us and the number of LLC Interests owned by us and (y) a one-to-one ratio between the number of shares of Class B Common Stock owned by the Continuing iPic Equity Owners and the number of LLC Interests owned by the Continuing iPic Equity Owners;
|
|
●
|
Class A Common Stockholders own 1,248,159 shares of Class A Common Stock, representing approximately 11.17% of the combined voting power of our Class A and Class B Common Stock, and participate in approximately 11.17% of the economic interest in Holdings; and
|
|
●
|
The Continuing iPic Equity Owners own (i) LLC Interests, representing 88.83% of the economic interest in Holdings, and (ii) through their ownership of Class A and Class B Common Stock, approximately 92.68% of the combined voting power of our Class A and Class B Common Stock. Following the IPO, each LLC Interest held by the Continuing iPic Equity Owners is redeemable, at the election of such members, for, at our option, newly-issued shares of Class A Common Stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A Common Stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications). In the event of such election by a Continuing iPic Equity Owner, we may, at our option, instead effect a direct exchange of cash or Class A Common Stock for such LLC Interests in lieu of such a redemption. Any such redemption or exchange is required to be in accordance with the terms of the Holdings LLC Agreement. When a Continuing iPic Equity Owner’s LLC Interests are redeemed or exchanged, we will cancel the number of shares of Class B Common Stock held by such Continuing iPic Equity Owner equal to the number of LLC Interests of such Continuing iPic Equity Owner that were redeemed or exchanged. The decisions made by us are made by our board of directors, which currently includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include additional directors with similar affiliations in the future.
|
Although we own a minority economic interest
in Holdings, we have the sole voting interest in, and control the management of Holdings and, indirectly, iPic-Gold Class. As a
result, we consolidated on February 1, 2018 both Holdings and iPic-Gold Class in our unaudited condensed consolidated financial
statements and will report non-controlling interests related to the LLC Interests held by the Continuing iPic Equity Owners on
our unaudited condensed consolidated financial statements.
Issuance of Warrants
On February 1, 2018, upon the closing of
the IPO, the Company issued certain warrants to the selling agents (the “Selling Agents’ Warrants”) to purchase
a number of shares of the Common Stock equal to 2.2% of the total shares of the Common Stock sold in the IPO. This equated to a
total of 18,005 shares. The Selling Agents’ Warrants are exercisable commencing approximately 13 months after the date of
the applicable closing, and be exercisable for three and a half years after such date. The Selling Agents’ Warrants are not
redeemable by the Company. The exercise price for the Selling Agents’ Warrants is $23.125 which equals 125% of the public
offering price of $18.50. The fair value of the warrants of $90 was offset against the proceeds received from the IPO.
Note
3 — VARIABLE INTEREST ENTITIES
In May 2017, certain members of the Company
established a limited liability company, iPic-Delray Investment, LLC (“Delray”) which has a 50% ownership in a joint
venture, Delray Beach 4th and 5th Avenue Developer, LLC (Developer”). Developer owns 8% of a limited liability company, Delray
Beach 4th and 5th Avenue Holdings, LLC (“4th and 5th Avenue Holdings”) that is developing an area in Delray Beach,
Florida to include a theater complex, office space, retail shops and parking garages. The Company will be the lessee of the theater
and a portion of the office space, which will serve as the Company’s new headquarters. In total, the Company will lease approximately
65% of the available property.
In May 2017, the Company distributed construction
in progress with a cost basis of approximately $2,300, primarily consisting of pre-development costs that had been incurred to
date, to certain of its members (the owners of Delray). Those members in turn contributed those assets to Delray in exchange for
their ownership interest. Delray then contributed those assets to Developer and 4th and 5th Avenue Holdings in exchange for its
ownership interests in those entities. These capital contributions were determined to have an estimated fair value of approximately
$6,400. As the fair value exceeded the contribution required to acquire Delray’s ownership in Developer and 4th and 5th Avenue
Holdings, cash totaling approximately $4,000 was paid by the 92% owners of 4th and 5th Avenue Holdings to Developer as an initial
distribution upon formation of the respective entities. Of this amount, approximately $3,400 was distributed by Developer to Delray,
which Delray distributed to its owners. Delray’s owners then contributed this cash back to the Company. The distribution
of assets was accounted for by the Company at carryover basis with a resulting increase in equity resulting from the difference
between the cash received from its members and the cost basis of the assets distributed.
Delray is not a business and was established
to participate in the development of the theater and office space. The Company has a shared services agreement with Delray to provide
Delray with employees, technical services, administrative and support services. Under this agreement the Company agreed to assume
operating responsibility for Developer under the ultimate supervision and control of Delray pursuant to a development management
agreement that Developer has with 4th and 5th Avenue Holdings to provide these services. These agreements will end upon completion
of the development of the project, which is anticipated to occur in January 2019. The Company will be paid an annual fee for these
services under the shared services agreement that equates to 50% of the fee paid to Developer under the development management
agreement. The other 50% will be paid to the other 50% owner of Developer. In addition, the Company is obligated to cover certain
losses or additional capital calls that may arise related to a completion guaranty on the development project. The Company has
also signed an indemnification agreement, along with an affiliate of the other 50% owner of Developer, to indemnify 4th and 5th
Avenue Holdings for certain conditions and to maintain a minimum aggregate net worth, on a combined basis, of $15,000 which shall
include $1,650, on a combined basis, of liquid assets through the completion of the development of the project. Should the combined
net worth of the Company and the affiliate of the other 50% owner in Developer fall below $15,000, the parties must provide additional
collateral to 4th and 5th Avenue Holdings subject to their review and consent.
Delray was determined to be a VIE because
its total equity at risk is not sufficient to finance its activities without additional subordinated financial support from any
entities. Based on the Company’s qualitative analysis, the Company made the determination that while it has the obligation
to absorb losses of Delray that may be significant pursuant to the completion guaranty, it does not have the power to direct the
activities of Delray that most significantly impact its economic performance. Therefore, consolidation of Delray by the Company
is not required because the Company is not the primary beneficiary of Delray.
Developer and 4th and 5th Avenue Holdings
were also determined by the Company to be VIE’s because their total equity at risk is not sufficient to finance their activities
without additional subordinated financial support from any entities. The Company’s involvement with these entities consists
of assisting in the formation and financing of the entities, providing recourse and/or liquidity support if necessary, and receiving
fees for services provided under the shared services agreement through the development management agreement. Based on the Company’s
qualitative analysis, including consideration of the related party nature of the entities involved, the Company is not required
to consolidate Developer because power is shared 50/50 under the terms of the joint venture agreement. In addition, based on the
Company’s qualitative analysis, the Company is not required to consolidate 4th and 5th Avenue Holdings because the nature
of the Company’s involvement with the activities of 4th and 5th Avenue Holdings does not give it the power over decisions
that most significantly impact 4th and 5th Avenue Holdings’ economic performance.
The Company’s largest exposure to
any single unconsolidated VIE is its responsibility to act under the completion guaranty whereby the Company is obligated to cover
certain losses or additional capital calls required by Delray until the completion of the development of the project related to
its ownership in Developer. Of this amount, the Company would be responsible for half with the other half being guaranteed by an
affiliate of the other 50% owner of Developer. As of June 30, 2018 and December 31, 2017, the value of this potential guarantee
was determined to be nominal, as the probability of the Company’s requirement to act under the guarantee was determined to
be remote. The Company did not hold any assets or liabilities in any of the unconsolidated VIEs as of June 30, 2018 and December
31, 2017. The Company will continue to evaluate its relationships to these VIEs on an ongoing basis.
Note
4 — Property And Equipment
Property and equipment, net consists of
the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Leasehold improvements
|
|
$
|
138,630
|
|
|
$
|
137,675
|
|
Furniture, fixtures and office equipment
|
|
|
57,912
|
|
|
|
53,888
|
|
Construction in progress (site development)
|
|
|
2,580
|
|
|
|
2,124
|
|
Projection equipment and screens
|
|
|
12,705
|
|
|
|
12,330
|
|
Computer hardware and software
|
|
|
7,260
|
|
|
|
6,983
|
|
|
|
|
219,087
|
|
|
|
213,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(80,953
|
)
|
|
|
(71,834
|
)
|
Total
|
|
$
|
138,134
|
|
|
$
|
141,166
|
|
After a detailed review of all seven locations
with Generation I auditoriums, the Company decided against reinvestment at its Glendale, Wisconsin location, where the Bayshore
Mall was placed into receivership. The Company instead announced the closing of this location effective March 8, 2018. The
decision to close the location was made during an all-hands conference call on March 5, 2018. The events giving rise to that decision
include the mall entering receivership during the last quarter of 2017 and the underperformance of the site during the first quarter
of 2018. The Company evaluated the long-lived assets at its Glendale location at December 31, 2017 and determined that the long-lived
assets with a carrying value of $428 were no longer recoverable. Consequently, the assets were written down to $0.
The remaining minimum lease obligation
at the date of closure was approximately $4,100 over the next seven years.
The Company has established a
liability of $1,839 for the remaining lease obligation associated with the Glendale location in the accompanying
unaudited condensed consolidated balance sheets. The current portion of the lease liability is included with “Accrued
expenses” and the long-term portion is included in “Other long-term liabilities”. As of June 30, 2018, the
future lease obligation was recorded at present value and discounted at an annual rate of 13%. Sublease payments were
anticipated to be received 24 months from the abandonment date. The sublease payments were estimated to be 50% less than the
Company’s lease payment obligation through the remainder of the lease.
The Company capitalizes interest costs
on borrowings incurred during the new construction or upgrade of qualifying assets. During the six months ended June 30, 2018
and 2017, the Company incurred interest costs totaling $8,512 and $7,977 respectively, of which $0 and $195 was capitalized, respectively.
For the three months ended June 31, 2018 and 2017, the Company incurred interest costs totaling $3,897 and $4,070, respectively,
of which $0 and $59 was capitalized, respectively.
NOTE 5 — BORROWINGS
Notes Payable to Related Parties
Notes payable to related parties consist
of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
5.00% VR iPic Finance, LLC notes
|
|
$
|
--
|
|
|
$
|
16,125
|
|
5.00% VR iPic Finance, LLC demand notes
|
|
|
--
|
|
|
|
14,461
|
|
10.50% Village Roadshow Attractions USA, Inc. notes
|
|
|
--
|
|
|
|
15,000
|
|
5.00% Village Roadshow Attractions USA, Inc. notes
|
|
|
--
|
|
|
|
1,071
|
|
5.00% iPic Holdings, LLC notes
|
|
|
--
|
|
|
|
547
|
|
5.00% Regal/Atom Holdings, LLC note
|
|
|
--
|
|
|
|
3,038
|
|
Total
|
|
$
|
--
|
|
|
$
|
50,242
|
|
On February 1, 2018, the 5% notes plus
accrued interest totaling $37,157 were converted to equity to satisfy the holders’ capital call in accordance with the iPic-Gold
Class LLC Agreement prior to the IPO.
The 10.50% Village Roadshow Attractions
USA, Inc note for $15,000 plus the minimum interest payable of $3,000 was refinanced through additional borrowings under the Non-revolving
Credit Facility.
Long-Term Debt — Related Party
The Company has a $225,828 non-revolving
credit facility (the “Non-revolving Credit Facility”) with the Teachers’ Retirement System of Alabama (the “TRSA”)
and The Employees’ Retirement System of Alabama (the “ERSA”) (the TRSA and the ERSA are known collectively as
the “RSA”). The terms of the facility provide that the Company can borrow under the facility for a thirteen-year period
commencing September 30, 2010 in three tranches (hereinafter, “Tranche 1”, “Tranche 2”, and
“Tranche 3”). Proceeds of the loans were initially to be used for up to 80% of eligible construction costs. As a condition
to any advance, the Company was required to provide funding for the applicable project costs in an amount equal to 25% of such
advance, with the proceeds of either (x) contributions to the Company from certain shareholders (other than RSA) or (y) subordinated
loans to the Company from certain shareholders (other than RSA) (the “Matching Requirement”). In addition, the remaining
availability required the Company to achieve certain operating targets to continue borrowing (the “Operating Target Requirement”).
On June 22, 2018 the Non-revolving Credit Facility was modified to permit us to borrow up to $17,923 on five planned remodeling
projects. An amount equal to eighty percent (80%) of the total costs to develop each project constitutes a “Project Tranche”.
Any changes to the amount of a Project Tranche (either increases or decreases) are subject to prior written consent from the lender.
On June 29, 2018 the Non-revolving Credit Facility was further modified to permit us to borrow funds up to $8,233 for working
capital expenses (including, among other things, accrued interest on the Non-revolving Credit Facility, which may be paid in kind),
in addition to the borrowing for planned 2018 remodeling projects. On June 22, 2018, the Non-revolving Credit Facility was amended
to remove the Matching Requirement, on June 29, 2018 to remove the Operating Target Requirement for planned remodeling and working
capital advances.
The Tranche 1 and Tranche 2 commitment
amounts of $15,828 and $24,000 respectively, were fully borrowed against as of June 30, 2018 and December 31, 2017. Of the total
commitment amounts of $186,000 available in Tranche 3, $128,551 and $102,775 were borrowed as of June 30, 2018 and December 31,
2017, respectively.
The effective interest rate on Tranche
1 and Tranche 2 borrowings is approximately 6.95% per annum. The cumulative difference between the interest computed using the
stated interest rates (8.00% at June 30, 2018 and December 31, 2017) and the effective interest rate of 6.95% is $798 and $976
at June 30, 2018 and December 31, 2017, respectively, and is recorded in “Accrued interest - long-term” in the accompanying
unaudited condensed consolidated balance sheets. The interest rate on Tranche 3 borrowings is fixed at 10.50% per annum.
Accrued interest of $7,776 was not paid to the RSA on June 30, 2018, but treated as payment-in-kind interest
and added to Tranche 3.
Short-Term Financing
The Company periodically enters into short-term
financing arrangements to finance the costs of its property and casualty insurance premiums. The loans are due in equal monthly
installments of principal and interest, generally paid over a period of less than one year. Interest accrues on the unpaid principal
at 3.63% per annum. At June 30, 2018 and December 31, 2017, the Company’s obligation under premium financing arrangements
was $585 and $1,214, respectively, and is included in accrued insurance in the accompanying unaudited condensed consolidated balance
sheets.
NOTE 6 — EQUITY
Redeemable Non-controlling Interests
Immediately following the IPO, each LLC
Interest held by the Continuing iPic Equity Owners is redeemable, at the election of such members, for, at the option of the majority
of the Company’s Board of Directors, newly-issued shares of Class A Common Stock on a one-for-one basis or a cash payment
equal to a volume weighted average market price of one share of Class A Common Stock for each LLC Interest redeemed (subject to
customary adjustments, including for stock splits, stock dividends and reclassifications). If iPic decides to make a cash payment,
the Continuing iPic Equity Owners have the option to rescind the redemption request within a specified time period. Upon the exercise
of the redemption right, the redeeming member will surrender its LLC Interests to Holdings for cancellation. If iPic does not make
an election between share or cash settlement within a prescribed period, then it is deemed to have elected share settlement. Holders
of the Class B Common Stock are not entitled to distributions or dividends, whether cash or stock, and have no economic interest
in iPic Entertainment Inc. Holders of Class B Common Stock are entitled to cast one vote per share, with the number of shares of
Class B Common Stock held by each Continuing iPic Equity Owner equivalent to the number of LLC Interests held by such Continuing
iPic Equity Owner.
As of June 30, 2018, the non-controlling
interests were considered to be redeemable, and therefore as of the balance sheet date, the Company adjusted the value of the interests
to the full redemption amount. As noted in the Holdings LLC agreement, the redemption amount is based on the volume weighted average
market price (“VWAMP”) of the Class A shares of iPic Entertainment Inc. for the last five days of the period prior
to redemption. At June 30, 2018, the VWAMP was approximately $7.99 resulting in a redemption amount of approximately $79,315. The
Company has recorded the difference between the carrying amount of non-controlling interests and the current redeemable
value, $162,624, as an increase to redeemable non-controlling interests and a corresponding decrease to additional paid-in capital.
Private Placement
On February 1, 2018, the Company closed
a private placement of $2,500 from an affiliate of one of its existing investors, Regal Cinemas, which had previously invested
$12,000 in April 2017.
2017 Equity Incentive Plan
In connection with the IPO and related
transactions, the iPic-Gold Class Entertainment, LLC 2017 Equity Incentive Plan (or the “2017 Equity Incentive Plan”),
was migrated to iPic Entertainment Inc. and any awards granted under the 2017 Equity Incentive Plan were converted into options
to acquire Class A Common Stock of iPic. Under the plan, equity awards may be made in respect of 1,600,000 iPic shares, and the
number of authorized shares is subject to automatic increases which begin in fiscal year 2019. Under the 2017 Equity Incentive
Plan, awards may be granted in the form of options, restricted stock, restricted stock units, stock appreciation rights, performance
awards, dividend equivalent rights and share awards. As of June 30, 2018, iPic Entertainment Inc had granted 955,300 Non-Qualified
Options with an exercise price of $18.13 per share. The migration of the 2017 Equity Incentive Plan did not result in any changes
to the terms and conditions, therefore no modification was deemed to have occurred.
Each Incentive Option and Non-Qualified
Option (as defined by Section 422 of the Internal Revenue Code of 1986, collectively “Options”) contains the following
material terms:
(i)
|
the exercise price, which shall be determined by the Committee at the time of grant, shall not be less than the greater of (i) the par value of the stock and (ii) 100% of the Fair Market Value (defined as the closing price at the close of the primary trading session of the units on the date immediately prior to the date of the grant on the principal national security exchange on which the common stock is listed or quoted, as applicable) of the common stock of the Company,
provided
that if there is a grant of an incentive option to a recipient of the owns more than ten percent (10%) of the total combined voting power of all classes of securities of the Company, the exercise price shall be at least 110% of the Fair Market Value;
|
(ii)
|
the term of each Option shall be fixed by the Committee,
provided
that such Option shall not be exercisable more than ten (10) years after the date such Option is granted, and
provided further
that with respect to an Incentive Option, if the recipient owns more than ten percent (10%) of the total combined voting power of the Company, the Incentive Option shall not be exercisable more than five (5) years after the date such Incentive Option is granted;
|
(iii)
|
subject to acceleration in the event of a Change of Control of the Company (as further described in the Plan), the period during which the Options vest shall be designated by the Committee;
|
(iv)
|
no Option is transferable and each is exercisable only by the recipient of such Option except in the event of the death of the recipient;
|
(v)
|
to the extent that the aggregate Fair Market Value of Incentive Options granted under the Plan are exercisable by a participant for the first time during any calendar year exceeds $100, such Incentive Options shall be treated as Non-Qualified Options; and
|
(vi)
|
with respect to Options granted to a director, the aggregate number of shares that may be issued under the Plan in any calendar year to an individual Director may not exceed that number of shares representing a Fair Market Value equal to the positive difference, if any, between $300, and the aggregate value of any annual cash retainer paid to the director.
|
Incentive stock options
The following is a summary of the Company’s
Non-Qualified Options (as defined by Section 422 of the Internal Revenue Code of 1986, “Options”) activity:
|
|
Options
|
|
|
Weighted Average
Grant Date Fair Value Per Option
|
|
|
Weighted Average Exercise Price per Option
|
|
Outstanding - December 31, 2017
|
|
|
955,300
|
|
|
$
|
4.58
|
|
|
$
|
18.13
|
|
Exercisable - December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding – June 30, 2018
|
|
|
955,300
|
|
|
$
|
4.58
|
|
|
$
|
18.13
|
|
Exercisable – June 30, 2018
|
|
|
10,300
|
|
|
$
|
4.58
|
|
|
$
|
18.13
|
|
As at June 30, 2018, the weighted average
remaining contractual term of Options outstanding was 9.75 years.
At June 30, 2018, the total intrinsic value
of the Options outstanding was $0. A total of 10,300 Options were vested as of June 30, 2018.
The Company recognized an aggregate of
$602 and $0 in compensation expense during the six months ended June 30, 2018 and 2017, respectively, related to the Options. For
the three months ended June 30, 2018 and 2017 the Company recognized an aggregate of $269 and $0 in compensation expense, respectively,
related to the Option awards. At June 30, 2018, unrecognized stock-based compensation was $3,794 for the Options.
The fair value of the Options issued during
the year ended December 31, 2017 were estimated using a Black-Scholes Options Pricing Model. For clarity, the Company does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited
period of time its equity shares have been publicly traded and therefore the expected option term is calculated based on the simplified
method, which results in an expected term based on the midpoint between the vesting date and the contractual term of the option.
Restricted stock units
On December 6, 2017 iPic granted 483,864
Restricted Stock Units (“RSUs”) to our named executive officers and certain other employees. The awards contained no
future service requirement and fully vested when the IPO occurred. Therefore, on February 1, 2018, the Company recognized compensation
expense related to these RSUs of approximately $8,235. The average grant date fair value of the RSUs was $17.02. At June 30, 2018
there was no unrecognized compensation costs related to the RSUs.
The RSUs will remain outstanding until the issuance of Class A shares on the different settlement dates.
On May 15, 2018 247,755 of the RSUs were exchanged for Class A shares. On June 29, 2018 14,770 of the RSUs were exchanged for Class
A shares. The remaining 221,339 RSUs will be exchanged for Class A shares on May 15, 2019.
Stock issuance
On June 29, 2018, the Company issued 45,849
unrestricted Class A common stock to the independent directors for director fees. The fair value of the award was $370, of which
50% of this amount has been recognized as director fees for the past 6 months of service. The remaining deferred portion will be
recognized over the next six months of the year.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Operating Leases
At June 30, 2018, future minimum payments
under non-cancelable operating leases are as follows.
2018 – 2019
|
|
$
|
20,176
|
|
2019 – 2020
|
|
|
22,330
|
|
2020 – 2021
|
|
|
23,035
|
|
2021 – 2022
|
|
|
23,570
|
|
2022 – 2023
|
|
|
23,790
|
|
Thereafter
|
|
|
251,973
|
|
|
|
|
|
|
|
|
$
|
364,874
|
|
Certain operating leases require contingent
rental payments based on a percentage of sales in excess of stipulated amounts. Rent expense during the six months ended June 30
was as follows:
|
|
2018
|
|
|
2017
|
|
Minimum rentals
|
|
$
|
8,187
|
|
|
$
|
7,130
|
|
Contingent rentals
|
|
|
--
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,187
|
|
|
$
|
7,086
|
|
Rent expense during the three months ended
June 30 was as follows:
|
|
2018
|
|
|
2017
|
|
Minimum rentals
|
|
$
|
4,051
|
|
|
$
|
3,389
|
|
Contingent rentals
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,051
|
|
|
$
|
3,364
|
|
Litigation
The Company is exposed to litigation in
the normal course of business.
From time to time, the Company may become
involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s
business.
The Company currently is a defendant in
a class action lawsuit captioned Mary Ryan and Johanna Nielson v. iPic-Gold Class Entertainment, LLC, Case # BC 688633, which was
filed in Superior Court of the State of California, County of Los Angeles, on December 29, 2017. This lawsuit asserts failure to
pay minimum wage, pay overtime wages, provide meal breaks and rest periods, and provide accurate itemized wage statements with
respect to certain workers.
The Company reserves for costs related
to contingencies when a loss is probable and the amount is reasonably estimable. As of this date, the Company has not made a provision
for the claim described above, due to the fact that it is currently not probable nor reasonably estimable. However, the outcome
of the legal proceeding described above is uncertain, and depending upon what the facts reveal once the Company has had a chance
to investigate the claim, it may choose to contest the suit or settle this claim. In either scenario, the Company could be subject
to paying an amount that could have a material adverse impact on its results of operations in any given future reporting period.
Other than the lawsuit described above,
where it is premature to determine what effect the claim will have on the business, the Company is currently not aware of any such
legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business,
financial condition, operating results or cash flows. However, lawsuits or any other legal or administrative proceeding, regardless
of the outcome, may result in diversion of resources, including management’s time and attention.
NOTE 8 — INCOME TAXES
|
|
Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
Pre-tax book loss
|
|
$
|
(30,281
|
)
|
|
$
|
(22,383
|
)
|
Less: net loss prior to the Organizational Transactions
|
|
|
4,442
|
|
|
|
—
|
|
Less: net loss attributable to non-controlling interests
|
|
|
22,862
|
|
|
|
—
|
|
Net loss attributable to iPic before income taxes
|
|
$
|
(2,977
|
)
|
|
$
|
(22,383
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes at U.S. federal statutory rate
|
|
$
|
(717
|
)
|
|
$
|
(7,834
|
)
|
State and local income taxes, net of federal benefit
|
|
|
(161
|
)
|
|
|
(787
|
)
|
Increase in valuation allowance
|
|
|
921
|
|
|
|
—
|
|
LLC flow-through structure
|
|
|
—
|
|
|
|
8,664
|
|
Income tax expense
|
|
$
|
43
|
|
|
$
|
43
|
|
|
|
Three Months Ended
June 30,
|
|
|
2018
|
|
2017
|
Pre-tax book loss
|
|
$
|
(8,539
|
)
|
|
$
|
(12,573
|
)
|
Less: net loss prior to the Organizational Transactions
|
|
|
—
|
|
|
|
—
|
|
Less: net loss attributable to non-controlling interests
|
|
|
7,534
|
|
|
|
—
|
|
Net loss attributable to iPic before income taxes
|
|
$
|
(1,005
|
)
|
|
$
|
(12,573
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes at U.S. federal statutory rate
|
|
$
|
(211
|
)
|
|
$
|
(4,401
|
)
|
State and local income taxes, net of federal benefit
|
|
|
(31
|
)
|
|
|
(444
|
)
|
Increase in valuation allowance
|
|
|
264
|
|
|
|
—
|
|
LLC flow-through structure
|
|
|
—
|
|
|
|
4,867
|
|
Income tax expense
|
|
$
|
22
|
|
|
$
|
22
|
|
We file U.S federal and state income tax
returns in jurisdictions with varying statutes of limitations. As of June 30, 2018, the 2014 through 2016 tax years generally remain
subject to examination by federal and most state tax authorities. The use of net operating losses generated in tax years prior
to 2013 may also subject returns for those years to examination. The Company currently does not have any income tax audits in process.
Upon completion of the IPO on February
1, 2018, iPic Entertainment Inc. is subject to U.S. federal income taxes, as well as state and local taxes, which will be an allocable
share of any net taxable income of Holdings (the sole managing member of iPic-Gold Class and 100% economic owner). Prior to this
date, and as noted in Note 1 “Organization and Summary of Significant Accounting Policies”, iPic-Gold Class was a limited
liability company. Accordingly, pursuant to its election under Section 701 of the Internal Revenue Code, each item of income, gain,
loss, deduction or credit of iPic-Gold Class was ultimately reportable by its members in their individual tax returns, except in
certain states and local jurisdictions where iPic-Gold Class was subject to income taxes.