ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General:
Where this Form 10-Q includes “forward-looking” statements within the meaning of Section 27A of the Securities Act, we desire to take advantage of the “safe harbor” provisions thereof. Therefore, FullCircle Registry, Inc., is including this statement for the express purpose of availing itself of the protections of such safe harbor provisions with respect to all such forward-looking statements. The forward-looking statements in this Form 10-Q reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ from those anticipated. In this Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that may arise after the date hereof. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. We have based these forward-looking statements on our current expectations and projections about future events, including, among other things:
Attracting new financing to fund theater operations improvements and investments in new business development targeted at increasing revenue;
Focusing on increasing traditional movie sales and concession items with higher gross profit;
Increased revenue from food and beverage sales related to our new food menu;
Closely managing operational costs, balancing these new revenues to achieve and exceed ongoing breakeven operation;
Better serving our target market through scheduling of Spanish language Hollywood movies, Indian films for our Hindi, and Telugu and Tamil community;
Improving the number of new Hollywood releases the theater receives by operating all 14 theaters at full capacity and through the increased success of our film booking agency; and
Improving the overall attractiveness and service of the theater to better deliver on customer expectations;
Current Mission Statement
Our mission is to build shareholder value through new business development within the parent Company and by maximizing the potential of the Company’s movie theater holdings. The CEO and Board are presently evaluating new business and investment concepts which may allow FullCircle Registry to add another dimension to the Company in addition to its theater business.
History
Our initial business began in 2000 with the formation of FullCircle Registry, Inc (“FullCircle” or the “Company”). At that time, FullCircle was a technology-based business that provided emergency document and health record retrieval services.
The Company’s records retrieval technology was sound, but our marketing strategy targeted individuals as our potential customers, not health-based companies. As the records and documents retrieval business model emerged, competitors seized upon the opportunity to provide retrieval services to businesses. Because of these industry trends, the Company’s individual-based records retrieval solution became unmarketable.
The Company then initiated a series of new business models intended to provide value for the Company’s shareholders. Since 2008, the Company has created four subsidiaries to focus on additional business opportunities in the distribution of insurance agency, prescription assistance services, medical supplies, and movie theater entertainment.
FullCircle Entertainment, Inc.
The Company’s entertainment subsidiary, FullCircle Entertainment, Inc. (“FullCircle Entertainment”), was established in 2010 for acquiring movie theaters and other entertainment venues. On December 31, 2010, FullCircle Entertainment purchased Georgetown 14 Cinemas, a fourteen-theater movie complex located on eight acres at 3898 Lafayette Road, Indianapolis, IN 46254 for a purchase price of $5.5 million. Currently, the operation of this theater (and the lease of a grocery store within the structure) is the Company’s sole business and source of revenue.
8
Movie Theater Entertainment
The motion picture exhibition industry is fragmented and highly competitive. Our theaters compete against regional and independent operators as well as the larger theatre circuit operators.
Our operations are subject to varying degrees of competition with respect to film licensing, attracting customers, and obtaining new theater sites. In those areas where real estate is readily available, there are few barriers preventing competing companies from opening theaters near our existing theater, which may have a material adverse effect on our revenues. Demographic changes and competitive pressures can also lead to a theater location becoming impaired.
In addition to competition with other motion picture exhibitors, our theaters face competition from several alternative motion picture exhibition delivery systems, such as cable television, satellite and pay-per-view services and home video systems. The expansion of such delivery systems could have a material adverse effect upon our business and results of operations. We also compete for the public’s leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants.
The movie theater industry is dependent upon the timely release of first run movies. Ticket sales and concession sales are influenced by the availability of top producing movies. At times, our revenues are impacted by the shortage of first run movies. Through each year, we experience fewer hit film releases from the movie companies, especially between January through March and then again during the late summer between August and October.
Generally, however, the theater is seeing periodic growth in ticket sales – again, tied directly to the strength and appeal of the films we schedule. Certain films that appeal to our target African-American and Hispanic markets have been doing extremely well. Capitalizing on this growth trend, the Company’s new “Dine-In Lite” business model should fine-tune the proven dine-in cinema success model that is the future of movie theater entertainment – greater comfort with greater food selection.
Mortgage Debt Payment Reduction
In late 2016, the Company began negotiations with Kirkland Financial, holder of the real estate mortgage and the equipment note to combine the property mortgage and the equipment note into a more affordable single monthly payment. Prior to the end of December, Kirkland Financial responded with a restructured finance agreement which reduced the combined property and equipment note monthly payment from $46,094 to $15,223. As of September 30, 2017, the Company’s new capital commitments on the combined property and equipment loan to FullCircle Entertainment, Inc are $4,582,514. As a result of this loan modification, the Company recorded a $114,821 gain on forgiveness of prior accrued interest associated with the former mortgage and equipment note. The new mortgage has a balloon payment of all unpaid principal and interest on July 15, 2020. Finally, after the theater is again cash flowing to expectations, the Company plans to refinance the mortgage to maintain an acceptable monthly payment.
Potential Sale of Property
In conjunction with the debt restructuring plan, a property appraisal of both the leased property and the theater property was obtained. The appraisal estimated the value of our 40,910 square-foot theater building at $2,850,000 and the 18,000 square-foot leased property at $1,450,000. The Company has completed a survey in preparation for the sale of the leased property and is discussing terms of sale with several potential buyers.
It is the Company’s intent to sell the 18,000-square foot leased property, with a target sales price of $1,200,000, which is currently classified as an asset held for sale, net of estimated selling costs.
Other Debt
We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business. As of September 30, 2017, we have approximately $190,000 in unsecured notes payable, $149,000 of unsecured advances from a related party and $1,544,129 of unsecured notes payable from related parties. Most unsecured notes and advances are with shareholders of the company and does not require any debt maintenance now, as interest is accrued.
We have a combined property mortgage and equipment note of approximately $4,582,514, which is secured.
9
Our amount of indebtedness could have important consequences. For example, it could:
increase our vulnerability to adverse economic, industry or competitive developments;
require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our mortgage indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
increase our cost of borrowing;
restrict us from making strategic acquisitions;
limit our ability to service our indebtedness;
limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage to less highly leveraged competitors who may be able to take advantage of opportunities that our leverage prevents us from exploiting.
Employees
FullCircle Registry, Inc., and its subsidiaries have employee levels generally ranging between 18 and 28 employees/officers depending on seasonal needs. We have never experienced employment-related work stoppages and focus on good relations with our personnel and are continuing to attract stronger talent.
Our Corporate Information
Our principal executive offices are located at 417 W Peck Street, Meridian, Idaho, 83646, and our telephone number is (208) 803-1509. The FullCircle Registry website is www.fullcircleregistry.com, which has links to all SEC filings, updates on the theaters continued conversion to our new Dine-In Cinema LITE business model and information on the Company’s other business developments. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this report.
RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016
Revenues during the three months ended September 30, 2017 were $281,128 with a cost of sales of $82,120, yielding a gross profit of $199,008 or 70.8%. This compares to $261,568 in revenues for the same period in 2016, with a cost of sales of $81,378, yielding a gross profit of $180,190 or 68.9%. Revenues during the nine months ended September 30, 2017 were $895,329 with a cost of sales of $312,755, yielding a gross profit of $582,574 or 65.1%. This compares to $820,667 in revenues for the same period in 2016, with a cost of sales of $236,658, yielding a gross profit of $584,009 or 71.2%. The increased cost of sales in the nine months ended September 30, 2017 included additional food costs associated with the theater’s Dine-In Cinema LITE food service, while sales from the new food service menu items failed to cover the food expense. The theater also incurred additional film rental costs from Hollywood studios, including advances on certain new releases, while these films did not increase attendance commensurate to the advanced expense.
Selling, general, and administrative expenses during the current three-month period ended September 30, 2017 were $254,358, resulting in loss before depreciation of $55,350, compared to selling, general and administrative expenses during the three-month period ended September 30, 2016 of $194,250, resulting in an operating loss before depreciation of $14,060. Selling, general, and administrative expenses during the nine-month period ended September 30, 2017 were $799,327, resulting in loss before depreciation of $216,753, compared to selling, general and administrative expenses during the nine-month period ended September 30, 2016 of $488,401, resulting in an operating income before depreciation of $95,608. Operating expenses have increased due to marketing efforts, launch of Dine-In Cinema LITE food services, Funny Friday’s Comedy Shows, increases in contract labor, increase in the number of employees, pay increases for management and staff, HVAC repairs, projector repairs & parts, roofing repairs, etc.
Depreciation expense totaled $73,130 resulting in operating loss of $128,480 for the three-month period ended September 30, 2017. Depreciation expense in the same period in 2016 was $75,126 resulting in an operating loss of $89,186. Depreciation expense during the nine-month period ended September 30, 2017 was $224,720, resulting in an operating loss of $441,473. Depreciation expense in the same period in 2016 was $225,378, resulting in an operating loss of $129,770.
Interest expense for the three months ended September 30, 2017 was $73,250, producing a net loss for the period of 201,730, compared to interest expense of $78,275, resulting in a net loss of $167,461 during the same period in 2016. Interest expense during the nine months ended September 30, 2017 was $239,014, producing a net loss for the period of $565,666 compared to interest expense of $255,949, resulting in a net loss of $385,719 during the same period in 2016.
10
Outside the direct theater operation expenses of FullCircle Entertainment, Inc., depreciation, interest expense, SEC compliance cost for auditors, accountants, consultants and attorneys continue to be the major part of our expenses.
The theater industry typically does well during the May and June months because local schools are out during these months. The month of July is considered our high season. However, April and May of this year, Hollywood films had a disappointing box office performance nationally, which impacted the theater’s ticket sales in our market as well.
Liquidity and Capital Resources
At September 30, 2017, the Company had total assets of $4,578,135 compared to $4,552,458 on December 31, 2016. The Company had total assets consisting of $130,770 in cash, $29,243 of other current assets, and $4,407,252 of net fixed assets in Georgetown 14, which includes accumulated depreciation of $2,155,332. Total assets of $4,552,458 as of December 31, 2016 consisted of $20,112 in cash, $24,796 of other current assets and $4,467,664 of net fixed assets in Georgetown 14, which includes accumulated depreciation of $1,930,612.
At September 30, 2017, the Company had $7,260,516 in total liabilities. Total liabilities include $235,270 in accounts payable, $99,204 in accrued expenses, $460,399 in accrued interest, $190,000 in notes payable, $1,544,129 of notes payable-related party, $63,734 of current portion of long-term debt and $4,518,780 of the long-term portion of our long-term debt.
Total liabilities at December 31, 2016 were $6,669,173, which was comprised of $101,407 in accounts payable, $175,343 in accrued expenses, $470,640 in accrued interest, $80,000 in notes payable, $1,226,332 of notes payable-related party, $55,688 of current portion of long-term debt and $4,320,238 of the long-term portion of our long-term debt.
Net cash used by operating activities ending September 30, 2017 was $268,894 compared to net cash provided by operating activities for the nine months ended September 30, 2016 of $21,472. During the nine months ended September 30, 2017, $156,150 was used on investing activities, and $535,702 was provided by financing activities. For the same period in 2016, $11,331 was used in investing activities and $27,454 was used by financing activities.
Our auditors have expressed concern that the Company has experienced losses from operations and negative cash flows from operations since inception. We have negative working capital and a capital deficiency at September 30, 2017. As of September 30, 2017, the stockholder’s deficit is $2,682,381 compared to a deficit of $2,116,715 on December 31, 2016. These conditions raise substantial doubt about our ability to continue as a going concern.
We are currently focused on increasing revenues from our operations and reducing debt through converting notes payable to common stock. We may also seek funding from securities purchases or from lenders offering favorable terms. No assurance can be given that we will be able to obtain the total capital necessary to fund our new business plans. In such an event, this may have a materially adverse effect on our business, operating results and financial condition.
Factors That May Impact Future Results
At the time of this report, we had insufficient cash reserves and receivables necessary to meet forecasted operating requirements for FullCircle Registry, Inc.
The current expansion of the Company’s business demands that significant financial resources be raised to fund capital expenditures, working capital needs, conversion of the theater into a restaurant with entertainment and debt service. Current cash balances and the realization of accounts receivable will not be sufficient to fund the Company’s current business plan for the next twelve months. Consequently, the Company is currently seeking funds to provide the necessary capital to meet the Company’s expansion needs. Management continues to negotiate with existing shareholders, financial institutions, new investors, and other accredited investors to obtain working capital necessary to meet current and future obligations and commitments.
Management is confident that these efforts will produce financing to further the growth of the Company. Nevertheless, there can be no assurance that the Company will be able to raise additional capital on satisfactory terms or at all.
11
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements may have required the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates estimates, including those related to bad debts, inventories, fixed assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances; the results of which form the basis of the Company’s judgments on the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.