Overview
iPic Entertainment Inc.
(“iPic”, the “Company”, “we”, “our” or “us”) strives to be our
guests’ favorite local destination for a night out on the town. Our newest locations blend three distinct areas —
a polished-casual restaurant, a farm-to-glass full-service bar, and our world-class luxury theater auditoriums with
in-theater dining — into a one-of-a-kind experience. Our team endeavors to deliver world class hospitality in
innovative, one-of-a-kind theaters which we believe are among the finest in the world. Our chefs and mixologists create
craveable food and drink offerings that are outstanding on a standalone basis, but it is the interplay between our
movie-entertainment, dining and full-service bar areas that is the defining feature of a typical four-hour guest experience.
We thoughtfully design the layout, ambiance, and energy-flow of each unit to maximize the crossover between these activities.
With constantly changing movie content and menu offerings, each visit is different, providing our customers with a reason to
visit us repeatedly. We believe we deliver an experience that is innovative, unique and cannot be easily replicated at home
or elsewhere without the hassle of having to visit multiple destinations. Our locations also act as great venues for private
events, family and business functions and other corporate-sponsored events. We believe our concept is well-positioned within
today’s ever-increasing experiential economy.
We believe we pioneered the concept of polished-casual dining in a luxury theater auditorium and are one
of the largest combined movie theater and restaurant entertainment destinations with locations engineered from the ground up to
provide our guests with a luxurious movie-going experience at an affordable price. We currently operate 123 screens at 16 locations
in 9 states, with an additional 3 locations under construction, and a pipeline of an additional 12 sites that either have a signed
lease or are in lease negotiations.
Our iPic locations have three different
formats. In 2018, the Company closed one location and remodeled five locations.
Our Generation I locations:
We have two locations that are designated as our
First-Generation format (South Barrington, IL; and Bolingbrook, IL). These locations were built between 2007 and 2010, and do
not have a separate restaurant attached. These sites tested and validated the business-model for Premium Plus seating and service,
and, over time, began to showcase the synergistic opportunity of having a complementary restaurant and dining experience within
the facility. In 2018, these Generation I locations averaged approximately $4.5 million of revenues, or about $0.6 million per
screen. The Company closed its Glendale, WI location, an original Generation I location, effective March 8, 2018.
Our Generation II locations
:
Locations in our Second-Generation format (Boca Raton, FL; Bethesda, MD; Westwood, CA; and Miami, FL) were built in 2011 to 2014.
These Generation II locations feature a Tuck Hospitality Group signature restaurant (City Perch, Tanzy, or Tuck Room Tavern).
Among other things, these locations further expand the quality and quantity of our Premium Plus auditorium sections (which generally
sell out first, indicating growing consumer preference for added luxury and service), upgraded the in-theater dining experience
with our redesigned iPic Express offerings, and launched the iPic Life program, which is a 20-minute on screen lifestyle program.
In 2018, our Generation II locations averaged approximately $12.6 million of revenues, or about $1.7 million per screen.
Our Generation III locations:
The latest four iPic openings are representative
of our Third-Generation format (Houston, TX; Ft. Lee, NJ; Fulton Market, NY; and Dobbs Ferry, NY) and represent our go-forward
development design for the foreseeable future. These locations include our perfected auditorium layout (six to eight screens,
500 seats, and elevated ratio of Premium Plus seating) and introduced our patent-pending POD seating and patented chaise lounges.
In 2018, our Generation III locations averaged approximately $13.6 million of revenues, or about $1.7 million per screen.
Remodeled Locations:
Five iPic locations were remodeled in 2018. Four locations
previously considered as Generation I locations (Redmond, WA; Pasadena, CA; Austin, TX; and Fairview, TX) were remodeled to offer
exclusively Premium Plus seating and one unit previously considered as a Generation II location (Scottsdale, AZ) was remodeled
to offer predominantly Premium Plus seating. In 2018, these locations averaged approximately $6.7 million of revenues, or about
$0.9 million per screen. These figures include significant screen closure periods during remodeling projects, ranging from 6 to
8 weeks with at least 2 auditoriums closing at a time.
Growth Strategies and Outlook
Opening new iPic locations
.
This is our greatest immediate opportunity for growth. We believe that we are still in the very nascent stage of our growth story.
We currently operate 123 screens at 16 locations in 9 states with an additional 3 locations under construction and a pipeline
of an additional 12 sites that either have a signed lease or are in lease negotiation. We believe we currently control less than
0.5% market share of the theater business in the United States, based on data provided by the National Association of Theatre
Owners and our financial results. We believe there is tremendous whitespace opportunity to expand in both existing and new U.S.
markets, as well as overseas, and we have invested in our infrastructure through new hires at our home office to enable us to
continue to grow with discipline. We upgraded four of our six Generation I locations in 2018 and plan to open at least two new
domestic locations in 2019.
We will continue to pursue a disciplined
new store growth strategy in both new and existing markets where we can achieve consistent high store revenues and attractive
store-level cash-on-cash returns.
Pursuing international growth opportunities
.
We are actively exploring the potential to expand the iPic brand internationally through licensed or asset-light partnerships.
We signed a non-binding Memorandum of Understanding with BAS Global Investments to develop luxurious restaurant-and-theater iPic
locations throughout The Kingdom of Saudi Arabia. As of November 6, 2018, we were cleared to receive a license to operate theaters
in the Kingdom of Saudi Arabia, and should receive the license once the required final documents are processed.
Growing our comparable-store sales
.
We intend to grow our comparable-store sales by continuing to differentiate the iPic brand from other food and entertainment
alternatives, through the following strategies:
Differentiate our food and
beverage offering
. We frequently test new menu items and seek to improve our food offering to offer up-to-date culinary options
and to best align with our customers’ evolving preferences and increasing sense of experimentation with new tastes.
Relentless efforts on hospitality
.
We strive to provide an engaging and differentiated guest experience that includes standards of excellence in hospitality. We
believe there are opportunities to increase our sales and average check through continuous improvement of the server experience,
including the dual-track effort of introducing new do-it-yourself technology, such as our order-and-pay app and boosting speed
and accuracy of our Ninja service model to include a new tablet ordering system.
Grow usage of alternative
content
. While Hollywood studios will remain our primary content providers for the foreseeable future, we are nevertheless
focused on providing our customers with new and creative alternative content, including: live shows (including magic acts), Netflix
programming, eSporting events (such as Minecraft gaming), concerts, educational and personal events, as well as corporate conferences
and seminars.
Enhance brand awareness and
drive incremental visits to our locations through innovative marketing and promotions.
We plan to continue investing
a significant portion of our marketing spend in social-media advertising. We have recently launched customized local store marketing
programs to increase new visits and repeat visits to individual locations. Our guest loyalty program currently has approximately
2 million members, and we are aggressively improving our search engine and social marketing efforts. Our loyalty program and digital
efforts allow us to communicate promotional offers directly to our most passionate brand fans. We also leverage our investments
in technology across our marketing platform, including in-store marketing initiatives to drive incremental sales throughout the
iPic location.
Grow our special events
usage.
We plan to continue to leverage and add resources to our special events sales effort to grow our corporate and
personal event business. In addition to driving revenue, we believe our special events business is an important sampling
opportunity for these guests because many are experiencing iPic for the first time.
Improving profitability from existing
locations
. A significant revenue driver will be the remodeling of the Company’s Generation I legacy locations into
Generation III designs that, among other things, will include the installation of predominately Premium Plus seating, including
iPic’s latest patent pending pod seats and patented chaise lounges
.
Our Generation III designs, which contain significantly
more Premium Plus seating, generate significantly higher revenue per screen than our Generation I locations. We completed five
remodels in 2018; four Generation I sites were remodeled and one Generation II site was remodeled.
Improving our margins.
We believe
we are well-positioned to increase margins and believe we have additional opportunities to reduce costs. We also believe that
improved labor scheduling technology will allow us to increase labor productivity in the future. We believe that our continued
focus on operating margins at individual locations and the deployment of best practices across our store base is expected to yield
incremental margin improvements.
Increasing digital growth options
(membership and sponsorship).
The Company plans to leverage its growing membership network as the brand expands and increases
its market presence. In 2018, iPic’s members that have visited a location over the past year accounted for approximately
48% of revenue. In 2018, the Company earned $3.3 million from corporate sponsorships and believes that it has the opportunity to
significantly grow its local and national sponsorship revenue.
Site Selection Process
iPic is focused on clustered growth in
predominantly the top 50 metropolitan statistical areas including the densest urban areas as well as high population or high growth
affluent suburban markets. Potential locations are sourced both internally through target market searches and relationships with
hundreds of developers, and externally through our network of top retail brokers in each target region. In order to optimize new
location productivity, we systematically screen potential sites based on the size and quality of the local population. We utilize
multiple data platforms that provide sophisticated demographic analyses allowing us to evaluate not only population and income,
but also spending patterns and psychographics of the markets surrounding each potential location.
Marketing, Advertising and Promotions
Our corporate marketing department manages
all consumer outreach initiatives for iPic with the goal of driving sales through expanding our customer reach (guest base) and
frequency. Our key areas of focus include:
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Marketing
and Advertising: Public-relations, media, social media, promotions, in-store merchandising, pricing, and digital programs;
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Food
and Beverage: Continuous menu and product development and relentless focus on in-store execution; and
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Guest
insights: Ongoing research into brand health and guest tracking.
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We have improved marketing effectiveness
in 2018 through a number of initiatives designed to improve our local marketing plans, in-store promotions, digital loyalty programs
and digital interfaces with consumers that included:
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Performing
research to better understand our guest base and fine-tune the brand positioning;
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Refining our marketing
strategy to better reach our target audience of 21-54 year-olds;
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Creating a new advertising
campaign;
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Investing in menu
research and development to differentiate our food offerings from our competition and improve execution;
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Developing product/promotional
strategies to attract new guests and increase spending/length of stay;
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Leveraging our loyalty
database to engage and motivate guests, including a newly formatted Membership Program;
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Investing more in
digital social media to create stronger relationships with consumers; and
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Defining a consistent
brand identity that reflects our unique positioning.
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Operations — Food and Beverage and Cinema
Our Restaurant Brands
Our Tuck Hospitality Group operates five
different and distinct restaurant brands under the leadership of 3-time James Beard Award winning chef and FoodTV personality Sherry
Yard. Each future iPic location will consist of one of our fine polished-casual dining concepts.
City Perch Kitchen + Bar
is a social seasonal American dining destination concept featuring locally-sourced ingredients.
Tanzy
offers artisanal
Italian cuisine is focused on garden-fresh modern Italian flavors in a social environment to share with friends, family, and colleagues.
The Tuck Room
is
a spirited drinking and dining den concept with a vibrant social destination with an inviting and intimate atmosphere.
The Tuck Room Tavern
is a neighborhood place where you can eat and drink with enthusiasm and pleasure featuring American cuisine.
iPic Express
is
our answer to a theater concession stand that features a chef-driven menu from our in-house and guest chefs, prepared to order
for our Premium Plus customers to be carried to their seats by our Ninja servers or for our Premium-Level guests to carry into
the cinema
Management. Food and Beverage management
is headed by our Chief Operating Officer. Supported by the National Beverage Director and the Vice President of Restaurant Operations,
the Food and Beverage management team is responsible for developing and operating all of iPic’s food service operations.
Operational Tools and Programs
.
We utilize a customized food and beverage analysis program that determines the theoretical food and beverage costs for each store
and provides additional tools and reports to help us identify opportunities, including waste management. Consolidated business
intelligence and reporting tools are utilized by Regional Operations Directors and Senior General Managers to be able to identify
issues, forecast more efficiently, and glean quicker insights for improved decision-making.
Management Information Systems
.
We utilize a number of proprietary and third party management information systems. These systems are designed to improve operating
efficiencies, provide us with timely access to financial and enterprise data, and reduce store and corporate administrative time
and expense.
Training.
We strive to maintain
quality and consistency in each of our stores through the careful training and supervision of our team members and the establishment
of, and adherence to, high standards relating to personnel performance, food and beverage preparation, and maintenance of our restaurants
and cinemas. Team members are certified by us for their positions by passing a series of tests, including alcohol awareness training.
We require our new store managers to complete an 8-week training program that includes front of the house service, kitchen, amusements,
and management responsibilities.
Management Development.
We place
a high priority on our continuing management development programs in order to ensure that qualified managers are available for
our future openings. We believe this additional investment in our new stores is important, because it helps us provide our guests
with a quality experience from day one. After a store opens and is operating smoothly, the managers supervise the training of new
team members.
Recruiting and Retention
. We seek
to hire experienced General Managers and team members, and we believe we offer competitive wage and benefit programs. Our store
managers all participate in a performance-based incentive program that is based on sales, profit and employee retention goals.
In addition, our salaried employees are also eligible to participate in a 401(k) plan, medical/dental/vision insurance plans and
also receive vacation/paid time off based on tenure.
Food Preparation, Quality Control and
Purchasing
. We strive to maintain high food quality standards. To ensure our quality standards are met, we negotiate directly
with independent producers of food products. We provide detailed quality and yield specifications to suppliers for our purchases.
Our systems are designed to protect the safety and quality of our food supply throughout the procurement and preparation process.
Information Technology
Information Technology is focused on the
customer experience and supporting the efficient operation of our restaurants and theaters, as well as the management of our business.
We have implemented software and hardware solutions which provide for enhanced capabilities and efficiency within our restaurant
and theater operations. We continue to focus on improving the customer experience of purchasing tickets by expanding our ability
to sell tickets remotely via the web and our mobile application, while also offering self-service alternatives such as ticketing
kiosks. Customers can choose their preferred ticketing option, which in many cases means they can pre-purchase tickets, scan their
mobile device and proceed directly to their reserved seat without waiting in line. These solutions align with our goal of delivering
a first-class customer experience and will drive incremental revenues and cash flows in a more cost-effective manner. In addition,
we continue to strategically pursue technologies to improve the services we provide to our patrons and to provide information
to our management allowing them to operate our sites efficiently. The sales and attendance information collected by our point-of-sale
system is used directly for film booking and settlement as well as provides the primary source of data for our financial systems.
We also use best-in-class inventory management systems to control costs, streamline operations, and reduce waste across our foodservice
operations.
Intellectual Property
We rely on patent, trademark, service
mark, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and confidentiality and other
contractual provisions to protect our intellectual property. We have registered and applied to register trademarks and service
marks in the United States. We also have certain trade secrets, such as our recipes, processes, proprietary information and certain
software programs.
We have thirty one utility and design
patents issued, as well as several pending patent applications in the United States. Such patent applications are subject to the
review and normal course prosecution before the U.S. Patent and Trademark Office, which may result in the application’s
revision or non-approval. We also have registered or applied for utility and design patents in various foreign countries. 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 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. 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.
Competition
The out-of-home entertainment and dining
markets are highly competitive. We compete for guests’ discretionary entertainment and dining dollars with theme parks,
as well as with providers of out-of-home entertainment, including localized attraction facilities such as movie theaters, sporting
events, bowling alleys, nightclubs and restaurants. We also face competition from local establishments that offer entertainment
experiences similar to ours and restaurants that are highly competitive with respect to price, quality of service, location, ambience
and type and quality of food.
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 not as brand conscious as certain other
types of consumers and usually choose a theater based on its location, the films showing there, showtimes and its amenities. We
also face competition from increasingly sophisticated home-based and on-the-go forms of entertainment, such as video-on-demand,
video streaming services — such as Netflix, Amazon Prime and Hulu — internet and video gaming.
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. In most cases,
these 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.
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 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. 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 blockbuster
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 affect the demographic base of moviegoers. In certain periods, there are
a higher percentage of children’s or animated films that do not generally appeal to our more adult clientele. For example,
in 2016, industry reports noted that approximately 50% of industry sales for the 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). In periods with a higher percentage of children’s or animated films, our results of operations are likely
to be materially adversely affected. As a result of the foregoing factors, our results of operations may vary significantly from
quarter to quarter and from year to year.
Government Regulation
We are subject to various federal, state
and local laws, regulations and administrative practices affecting our business, and we must comply with provisions regulating
antitrust, health and sanitation standards, employment, environmental, and licensing for the sale of food and 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. We do not expect to incur any material costs as a result of complying 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 government 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 are required
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 are subject to the environmental laws
and regulations of the respective 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.
Employees
As of December 31, 2018, we employed a
total of 250 full time and 2,003 part time employees. None of our employees are represented by a labor union, and we consider
our company culture and employee relations to be strong.
Available Information
The Company was formed as a Delaware corporation on October 18, 2017. Our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d)
of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), are filed with the Securities and Exchange
Commission (the “
SEC
”). We are subject to the informational requirements of the Exchange Act and file or furnish
reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents
of these websites are not incorporated into this Annual Report. Further, our references to the URLs for these websites are intended
to be inactive textual references only. We also make the documents listed above available without charge through the Investors
Section of our website at
www.ipictheaters.com
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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 locations opened during any given period may be negatively impacted by a
number of factors including, without limitation:
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the cost and availability of capital to fund
construction costs and pre-opening expenses;
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the substantial doubt of the company to continue as a going concern;
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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 locations;
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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; and
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anticipated
commercial, residential and infrastructure development near our new iPic locations.
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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, including potential international locations. Our existing management systems, financial and management
controls and information systems may not be adequate, as we have identified material weaknesses in our internal control framework,
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 locations. If we experience
a decline in financial performance, we may decrease the number of or discontinue new openings, or we may decide to close locations
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 not as brand conscious as certain other
types of consumers 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. Should any of our existing principal competitive factors change, the performance of our theaters may be significantly
and negatively impacted.
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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
locations. 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 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.
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 locations. 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 locations 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 locations. Accordingly, the volume and timing of new openings may have a material adverse
impact on our profitability.
Although we target specified operating and financial metrics, new locations 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 locations, 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.
From time to time we evaluate 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 our lender would consent to any proposed acquisition, and even if
it did consent to such acquisition, 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 87% of the U.S. box office in 2018, 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. In addition, changes to our licensing
terms may cause the performance of our theaters to be significantly and negatively impacted.
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 1.31 billion during 2018, 1.24 billion
during 2017, and 1.32 billion during 2016. 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 1.24 billion in 2017. 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 video streaming and downloads via the Internet, network, syndicated cable and satellite television and DVDs, as well
as video-on-demand and pay-per-view services. 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 subscription based video streaming services, DVD or similar on-demand release to an important downstream market,
has decreased from approximately six months to approximately three 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 locations. 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 locations. 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 filed against us in California state court
in December 2017 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. On February 6, 2019, the parties reached a preliminary
agreement to settle the lawsuit for $1.5 million. The parties are in the process of negotiating a settlement agreement for
submission to the court for preliminary approval of the settlement. See Note 15 to our consolidated financial statements for
further discussion of the settlement.
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 locations,
and the ongoing need for capital expenditures at our existing locations, require us to expend capital.
Our growth strategy depends on opening new locations, which will require us to use cash flows from operations
and raise additional capital. We cannot assure you that we will have sufficient capital to implement our growth strategy. If our
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 locations mature, our business will require capital expenditures for the maintenance,
renovation and improvement of existing locations to remain competitive and maintain the value of our brand standard. For example,
in 2018 we invested $10.9 million to upgrade our Generation I theaters to Generation III theaters. 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 locations 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 locations 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 locations in desirable locations.
As of December 31, 2018, we were a party to operating leases associated with our iPic locations and administrative
offices requiring future minimum lease payments of approximately $499 million, which minimum lease commitments are not reflected
as liabilities on our balance sheet. The future minimum lease payments associated with locations that are under development as
at December 31, 2018 is approximately $48.2 million. 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 December 31, 2018, we had outstanding $188 million of indebtedness under our Non-Revolving Credit Facility. As of December
31, 2018, we also had approximately $499 million of undiscounted rental payments under operating leases (with initial base terms
generally between 15 to 25 years). 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.
Limitations on the availability
of capital may prevent deployment of strategic initiatives.
Our key strategic initiatives, including future
upgrades of our Generation II locations into our latest Generation III furniture, fixture and equipment, require significant capital
expenditures to implement. Our net capital expenditures aggregated approximately $23.2 million for the year ended December 31,
2018 and $16.5 million for the year ended December 31, 2017. For calendar year 2019, we estimate that our gross cash outflows
for capital expenditures will be approximately $37.0 million to $39.0 million, inclusive of $11.0 million to $13.0 million expected
to be supplied in the form of tenant improvement financing. 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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incur liens;
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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 3 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, 2018 and 2017, we reported
net losses of $56.8 million and $44.5 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, a non-GAAP measure, 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, we typically incur capital expenditures
related to new iPic locations in the year prior to opening. 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 six months
ended December 31, 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.
In the event of our expected international
expansion, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt
our business.
In the future, we expect to open up iPic
locations outside of the United States, including in the Kingdom of Saudi Arabia. If we expand internationally, we will become
subject to the risks of doing business outside the United States, including:
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Our business model is unproven outside the United
States;
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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, Saudi Arabia, where the Company expects to open its first international iPic location, is a volatile region that
is subject to geopolitical and sociopolitical factors that pose risk to our business operations. In addition, developing theaters
in Saudi Arabia would require us to partner with a local developer with whom we have not done business before. Partnering with
a local developer entails numerous risks and we would be reliant on such partner in our development efforts. Moreover, we rely
on food and beverage sales to generate a majority of our revenue, and given the strict laws in Saudi Arabia governing the sale
and consumption of alcohol, our theaters in Saudi Arabia would be reliant on theater revenue and food sales. Stricter censorship
standards over film content will also impact the type of film genres that we can exhibit.
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, negative operating cash flows 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 stockholders’
/ members’ deficit, and a working capital deficit at December 31, 2018 and December 31, 2017 and negative operating cash
flows for the year ended December 31, 2018, 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 the consolidated
financial statements, our continuation as a going concern is dependent on refinancing of existing debt or obtaining additional
equity. 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 investors. We received capital contributions in April 2017, November
2017 and January 2018 that provided capital in the form of equity of approximately $12 million, $4 million and $2.5 million, respectively.
We completed the IPO on February 1, 2018, raising approximately $13.6 million in proceeds, net of selling agent discounts and commission,
but before offering expenses of approximately $1.5 million.
Management has concluded that there
is 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, 2018, included herein.
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. These uncertainties cast significant doubt upon our
ability to continue as a going concern.
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 operational performance improvements.
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. 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 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. In the year ended December 31,
2018, impairment of property and equipment was $4.4 million, this was due to (i) a $1.8 million impairment charge taken at our
Scottsdale, AZ location; and (ii) a $2.6 million impairment charge related to our South Barrington, IL location.
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, in the event we 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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Sony Pictures
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20
th
Century
Fox
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Universal Film Exchanges
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Walt Disney Studio
Pictures
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Warner Brothers
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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. Continued
increases in the minimum wage 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. 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 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 amended and restated limited
liability company agreement of Holdings (“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-Gold 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.
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 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 a small group of
affiliates, whose interests may differ from those of our public stockholders.
As
of March 1, 2019, our directors, officers and 10% or greater stockholders control approximately 87.7% of the combined voting power
of all classes of our common stock through their ownership of Class A and Class B Common Stock. Such stockholders 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. Such stockholders 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 such stockholders may in some circumstances conflict
with our interests and the interests of our other stockholders, including you. For example, such stockholders that are also holders
of LLC Interests 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 holders of LLC Interests’ tax or other considerations,
which may differ from the considerations of us or our other stockholders.
In addition, certain of such stockholders
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 such stockholders 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. Such stockholders 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 being required to pay cash taxes or Holdings’
being required to make tax distributions in earlier years than previously anticipated. 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’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 would otherwise have been subject or the amount of tax distributions
Holdings would otherwise be required to make in a particular taxable year.
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 $2.02 through March 1, 2019. The following
factors, in addition to other factors described in this “Risk Factors” section and elsewhere in this Annual Report
on Form 10-K, 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;
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actual or perceived
risks that our Class A Common Stock will be delisted; 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 have received delisting notices
from NASDAQ in the past and our stock is subject to delisting risk in the future.
On December 28, 2018, we received a letter
from the Listing Qualifications Department of The Nasdaq Stock Market stating that for the 30 consecutive business days prior to
the date of the letter, we did not meet the minimum market value of listed securities of $35,000,000 required for continued listing
on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(C),
Nasdaq provided us with 180 calendar days to regain compliance. On March 12, 2019, we received notice from NASDAQ that for ten
consecutive business days, the Company’s market value of listed securities had been $35,000,000 or greater and therefore
the Company regained compliance with Nasdaq Listing Rule 5550(b)(2). In addition, we transferred our Class A common stock from
The Nasdaq Global Select Market to The Nasdaq Capital Market effective August 10, 2018. As previously disclosed in a Form 8-K filing
dated as of May 9, 2018, this transfer followed a letter from the Listing Qualifications Department of The Nasdaq Stock Market
dated May 9, 2018 notifying us that for the past 30 consecutive business days prior to the date of the letter, the Company did
not meet the minimum market value of publicly held shares of $15,000,000 required for continued listing on The Nasdaq Global Select
Market pursuant to Nasdaq Listing Rule 5450(b)(3)(C).
There is no assurance that the Company will meet the minimum market value of listed securities for continued
listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2) in the future or that we will continue to comply
with other Nasdaq listing requirements. If our Class A Common Stock were to be delisted from the NASDAQ Capital Market, the liquidity
of our Class A Common Stock would be materially impacted.
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 holders of LLC Interests have
the right to have their LLC Interests redeemed pursuant to the terms of the Holdings LLC Agreement.
As of March 1, 2019, we have an aggregate
of 92,855,867 shares of Class A Common Stock authorized but unissued. The holders of our Class B Common Stock are generally entitled
to have their corresponding LLC Interests redeemed for shares of our Class A Common Stock, subject to certain restrictions contained
in the Holdings LLC Agreement. 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.
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 Restricted Stock Units. 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, 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.
Stockholders must rely on appreciation
of the value of our common stock, if any, for any return on their investment because we do not intend to declare cash dividends
on our shares of common stock in the foreseeable future.
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 Exchange Act, 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 have had difficulty and paid significantly
more to obtain directors’ and officers’ liability insurance. Going forward 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 financial
statements will not be prevented or detected on a timely basis. Specifically, we have identified the following material weaknesses
in internal control:
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We do not have an effective control environment
because we do not have formalized internal control policies and procedures. Specifically, the Company has not yet designed an effective
system of internal control over financial reporting.
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We also identified material weaknesses
related to our lack of adequate review of complex accounting matters. Specifically, we have not yet designed precise enough review
controls in order to identify material misstatements relating to complex accounting matters, including review controls over the
preparation of our long-lived asset impairment evaluation and other areas.
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We also identified material weaknesses
relating to improperly designed period end financial reporting controls. Specifically, we have not yet designed suitable review
controls governing the review of financial statements and accounting records. Additionally, the Company does not have adequate
review controls over our periodic financial reporting including maintaining sufficient monitoring controls over the recording of
journal entries and maintaining sufficient segregation of duties.
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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 have implemented processes to
perform the evaluation required to comply with Section 404; however, 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 financial statements or cause us to fail to meet our reporting obligations.
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 or 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.