iPic-Gold Class Entertainment, LLC – Movie and Dining Theater Group Stars in Chapter 11 Food/Film Double Feature Horror Show

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August 5, 2019 –  iPic-Gold Class Entertainment, LLC and five affiliated Debtors (“iPic” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-1739. The Debtors, which offer "casual dining in a luxury theater auditorium environment " at 16 locations in 9 states, are represented by Peter J. Keane of Pachulski Stang Ziehl & Jones LLP. Further board-authorized engagements include (i) Aurora Management Partners ("Aurora") as financial  advisor, (ii)  PJ Solomon (“Solomon”) as investment bankers and (iii) Stretto as claims agent. Debtor iPic Entertainment Inc. trades on the NASDAQ Capital Market under the symbol “IPIC.”

The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $100.0mn and $500.0mn (year end 2018: $158.7mn); and estimated liabilities between $100.0mn and $500.0mn (year end 2018: $277.9mn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Yetter Coleman LLP ($2.8mn professional services claim), (ii) Class Action Claimants ($1.5mn contingent settlement claim) and (iii) Walt Disney Studio Pictures ($1.3mn trade debt).

In a press release announcing the filing, iPic stated that: "it will seek approval of either a sale or a reorganization plan and emerge with a healthy balance sheet and new capital structure….Delays in development cycle combined with the high cost of capital depleted IPIC's available resources before the company was able to reach critical mass and become self-funded. Importantly, delays related to the Delray Beach location, resulted in unforeseen costs and a significant slowdown in circuit-wide development and new grand openings. The decision to commence a chapter 11 case to pursue a comprehensive restructuring was not taken lightly but is necessary to accomplish our long-term goals and secure the Company's future."

Chapter 11 Objectives

The Debtors are pursuing a dual track (ie recapitalization or sale) approach to their Chapter 11. In July 2019, the Debtors engaged Solomon as investment bankers to market either a recapitalization or sale and, as of the Petition date, Solomon had contacted 64 parties in total, of which 31 signed non-disclosure agreements. Concurrent with the sale process, the Debtors intend to operate their business in the ordinary course and maximize the value of their assets in accordance with terms of the agreed budget with the RSA.

Pre-Petition Capital Structure

The Debtors are party to a February 2018 term loan facility with TRSA, as administrative and collateral agent (together, the “Pre-Petition Agent”), and TRSA and ERSA, as lenders (the “Pre-Petition Lenders,” and collectively with the Pre-Petition Agent, the “Pre-Petition Credit Parties”) in an aggregate principal amount not to exceed $225,828,169. As at the Petition date, there was $205,340,772 outstanding under this facility.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Baker Declaration”) [Docket No. 4], David Baker, a Managing Director at financial advisor Aurora, detailed the events leading to the Debtors' Chapter 11 filing.

The Baker Declaration is a bit confusing, with much of it detailing reclining seats as somehow the root of the Debtors’ declining revenues (although perhaps that should read "declining seats and reclining revenues") before it launches into the ramifications of (i) out-of-control construction costs (although, somehow competitors were able to copy the Debtors' business model faster than they were able to build-out their own trailblazing reclining seat efforts); (ii) the impact of a lackluster IPO (apparently “the demand for the shares was strong” but “institutional investors were not able to fund their commitment”); (iii) high debt servicing costs as the Debtors' aggressive expansion required more than $200.0mn of borrowing; and (iv) strong competition from restaurants and theaters which don’t combine food and film (but don’t let that impact your view of “their underlying business model [which] remains strong, as it is bolstered by positive guest experience and loyalty). Who doesn't want "chef-driven" food (enjoy $12 truffle fries while you mull over the rest of the menu and watch the previews…or go retro with those $5 milk duds) served up while reclining back on leather chair and snuggling under someone else's blankets and pillows with 200 "signature" cocktail-drinking strangers doing likewise? 

Perhaps too much of the Declaration has been copied and pasted from the IPO roadshow slides, but it seems pretty hard to reconcile a visionary management and business model with “net [2018] losses before income tax expense of $56,765,000” and the fact of a Chapter 11 filing. Regardless, the Baker Declaration makes for an interesting read:

"The Debtors were formerly the only company nationwide that built luxury cinemas with recliner seats that offered restaurant quality food and drinks….The Company’s earlier Generation I locations offered two types of seating and services – Premium seats that were large, comfortable lectern covered seats with a large table [these apparently do not recline], and Premium Plus seats that reclined with pillows, blankets, and tableside food and beverage service. Several of the Debtors’ operational issues related to the proportion of Premium Plus to Premium Seats.

Initially, 60-65% of the seats were Premium seats, and the remaining seats were Premium Plus. After the successful opening and proven desirability of Premium Plus seats, along with the willingness of the attendees to pay a higher price for a premium service, the Debtors’ subsequent Generation II locations incorporated 60-65% Premium Plus seats and 35-45% Premium seats.

As the Debtors were the only theaters in the market that operated both Premium and Premium Plus seats in the markets in which they operated, the Debtors enjoyed double digit same store sale growth before other theaters took notice and began converting their existing theaters or building new locations with reclining seats. Even though the Company’s competitors’ overall experience did not compare to that of the Debtors, the availability of reclining seats used by competitors at a lower consumer price point proved to be a challenge, especially compared to the Premium seats in the Debtors’ theaters, which did not recline or include tableside service. This decline slowed the Company’s anticipated same store sale growth. 

Rising construction costs also negatively impacted the buildout of new locations. The Debtors’ construction costs increased significantly from 2010 to 2019 due to rising construction costs nationally. Additionally, the Debtors were negatively impacted by tightened liquidity due to the delays in the funding of their construction projects. For example, the Debtors often incurred additional costs for expedited shipping or accelerating construction time to meet lease deadlines due to the construction funding delays. Over time, the proportion of funding from the Prepetition Loan Agreement allocated towards construction decreased. The Debtors used working capital and contributed additional equity to fund construction projects on time and continue development. These constraints on working capital put additional pressure on the Debtors’ ability to timely pay their vendors. In many cases, the Debtors lost discounts and incurred penalties for late payments to creditors. This pattern of late payments resulted in increased operating costs and reduced profitability of the operating locations. 

While demand for the shares was strong, the institutional investors were not able to fund their commitment to the offering, and the total capital raised of $17 million from the IPO was not sufficient to fund continuing development. The public equity has also resulted in significantly increased operating costs relating to the Securities and Exchange Commission’s reporting and compliance requirements. 

In addition to the Debtors’ operational issues, the Debtors operate in both the motion picture industry and restaurant industry, each of which are highly competitive and fragmented with no significant barriers to entry. The U.S. motion picture industry has been subject to periodic short-term increases and decreases in attendance and box office revenues and is cyclical. The Debtors’ theaters are subject to varying degrees of competition in the geographic areas in which they operate. Competitors include national and regional circuits and smaller independent exhibitors. Moviegoers are not as brand conscious as other types of consumers and often choose a theater based on its location, the films showing there, showtimes and theater amenities. 

The Debtors rely on their food and beverage service for a majority of their revenues. Yet like the motion picture industry, the Debtors have substantial competition in the restaurant industry. The Debtors compete with multi-unit national, regional and locally-owned and/or operated restaurants. Many of the Debtors’ competitors offer multiple meal options as well as dine-in and carry-out delivery services. Several of the Debtors’ competitors have operated over a longer period of time and have a more established market presence, better locations, and greater national name recognition or in the local markets in which the Debtors operate. 

Currently, the Debtors have built 16 of their planned 20-25 locations. In addition to approximately $205 million of principal secured indebtedness as of the Petition Date, the high interest rate associated with this indebtedness has left the Debtors unable to make the interest payments as they come due. Prepetition, the Debtors engaged in negotiations with their secured lenders to restructure the Company’s debt and to continue to fund operations. Ultimately, the Debtors determined that the commencement of these chapter 11 cases and the potential sale or recapitalization of their business under chapter 11 of the Bankruptcy Code represented the best mechanism to maximize value to their economic constituents. Despite these obstacles, the Debtors believe that their underlying business model remains strong, as it is bolstered by positive guest experience and loyalty. To that end, the Debtors and their secured lenders have agreed on a budget to provide for a 90-day sale to market and either sell or recapitalize the Company pursuant to a restructuring transaction led by the Debtors’ proposed investment bankers, PJ Solomon (“Solomon”), as explained below.

Corporate Structure

Debtor iPic Entertainment Inc. (“iPic Entertainment”) is a Delaware corporation and owns 100% of the membership interests in Debtor iPic Gold Class Holdings LLC(“Holdings”), a Delaware limited liability company. Holdings holds all of the membership interests in Debtor iPic-Gold Class Entertainment, LLC (“Opco”), which is a Delaware limited liability company and the primary operating entity within the Debtors’ organizational structure. Opco also owns 100% of the membership interests in Debtors iPic Texas, LLC, a Texas limited liability company; iPic Media, LLC, a Florida limited liability company; and Delray Beach Holdings, LLC, a Florida limited liability company.

About the Debtors

The Debtors are “a leading provider of polished-casual dining in a luxury theater auditorium environment…one of the largest combined movie theater and restaurant entertainment destinations with locations that provide a luxurious movie-going experience at an affordable price [and… provide customers with high-quality, chef-driven culinary and mixology in unique destinations that include premium movie theaters, restaurants and lounges. 

iPic Entertainment Inc., which is now the ultimate parent company of the Debtors, was formed in 2017 for the purpose of completing an initial public offering, which occurred in 2018, and pursuant to which iPic Entertainment Inc. became a publicly traded company. iPic Entertainment Inc. is currently traded on the NASDAQ under the symbol “IPIC.” 

The Debtors currently operate 123 screens at 16 locations in 9 states, with an additional 2 locations under construction, and have executed leases for an additional 9 sites in California, Georgia, Virginia, Washington, Connecticut, New York, Texas and Florida. In addition, the Debtors applied for licenses to operate theaters in Saudi Arabia. 

The Debtors continue to pursue a disciplined new store growth strategy in both new and existing markets where they may achieve consistent high store revenues and attractive store-level cash-on-cash returns. As of the Petition Date, the Company employed approximately 240 full time and 1,770 part-time employees.

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