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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended June 30, 2017

Commission file number: 000-55212

 

Modern Round Entertainment Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

7333 East Doubletree Ranch Road, Suite D-250

Scottsdale, Arizona 85258

(Address of Principal Executive Offices and Zip Code)

(480) 219-8439

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

At August 2, 2017, there were outstanding 36,112,641 shares of the registrant’s common stock, $0.001 par value.

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

MODERN ROUND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MODERN ROUND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MODERN ROUND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2017

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MODERN ROUND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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MODERN ROUND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1

The Company, Description of Business, and Liquidity

The accompanying condensed consolidated financial statements include the accounts of Modern Round Entertainment Corporation and its subsidiaries, Modern Round, Inc., MR Peoria, LLC, and MR Las Vegas, LLC (collectively, “we,” “us,” “our,” or “our company”).

Operations - Our principal operations focus on securing and developing suitable sites for implementing our combined dining and entertainment concept that centers around an indoor simulated shooting experience. We expect that we will continue to secure, develop, and operate sites for our entertainment concept, initially in North America. We opened our first, and currently only, location in Peoria, Arizona, on June 1, 2016.

Liquidity – We had working capital deficits of $ 4,852,445 and $2,955,132 at June 30, 2017 and December 31, 2016, respectively.  Net cash outflow from operations was $903,280 for the six months ended June 30, 2017. Major cash uses during the six months ended June 30, 2017 were operating costs for our Peoria, Arizona location and general and administrative expenses.

We anticipate incurring additional expenses to pursue our business operations for fiscal 2017. We anticipate incurring increased capital expenditures in relation to opening additional locations, incurring increased sales, marketing, and operating expenses in line with our operational growth, and incurring increased research and development costs to continue to develop our entertainment concept, products, and technology. Our plans will require substantially more cash to operate, depending upon how quickly we open additional entertainment facilities and the sales volume generated by those additional locations. However, we will adjust our strategy and business plans accordingly if funding is not obtained and sales generate insufficient cash flow.

To date, we have been highly dependent upon funding from related parties and convertible debt offerings to support our operations, and anticipate we will need additional funding to support our business for at least the next 12 to 24 months. Given our current operations, traditional debt financing from banking sources may be difficult to obtain, and we may have to continue to rely on equity or debt investments from non-banking sources. We will also need to obtain additional financing, which may come through private placement offerings or possibly from the public equity markets. There can be no assurance as to the availability or terms upon which such financing and capital might be available, if at all. We currently plan to meet future cash needs, beyond our cash reserves, through cash from operations, proceeds from our line of credit, and proceeds from selling debt and equity securities in the public and private securities markets.

Note 2

Summary of Significant Accounting Policies

Principles of Presentation and Consolidation

The condensed consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2016. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2017 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2016 condensed consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP.  All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year.

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Note 2

Summary of Significant Accounting Policies (continued)

Earnings (Loss) per Share

We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, to calculate earnings or loss per share. We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect for both 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes.

The following table sets forth the anti-dilutive securities excluded from diluted loss per share:

 

 

Revenue Recognition

We currently derive revenue from sales of food and beverages, membership fees, and simulated shooting lounge fees. We recognize revenue when all the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) seller price is fixed or determinable; and (iv) collectability is reasonably assured. We recognize food and beverage sales and simulated shooting lounge fees on the transaction date, as payment is required at the time of service.

Deferred revenue consists of membership fees, gift card sales, and banquet event deposits received.  Membership fees are due annually and are not refundable. We recognize membership fee revenue ratably over 12 months, starting in the month the fees are received. We record gift card sales and banquet event deposits as deferred revenue and recognize sales revenue when the gift cards and banquet event deposits are utilized by our guests. We did not record gift card breakage income at June 30, 2017, as we do not have sufficient purchase and utilization history to use as a basis for a breakage policy. Banquet event deposits are generally non-refundable, although guests can re-schedule their events with sufficient notice. We expect that our guests will utilize their deposits or that we will retain any unused deposits.  

Fair Values of Financial Assets and Liabilities

We measure and disclose certain financial assets and liabilities at fair value.  ASC Topic 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  

The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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Note 2

Summary of Significant Accounting Policies (continued)

Fair Values of Financial Assets and Liabilities (continued)

The following sets forth the classes of assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016 using the levels defined above:

 

 

Stock-Based Compensation

We expense all share-based payments to employees, including grants of employee stock options, based on their estimated fair values at the grant date, in accordance with ASC 718, Stock Compensation. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant as calculated using the Black-Scholes model.

We record compensation cost on a straight-line basis over the requisite service period for the entire award, unless vesting occurs earlier for awards with service only conditions that have graded vesting schedules. Significant inputs in this model include our company’s estimated market value per share, expected term, and expected volatility. We determine expected term under the simplified method using a weighted average of the contractual term and vesting period of the award. In estimating expected volatility, we utilize the historical information of a similar publicly traded entity, taking into consideration the industry, stage of life cycle, size, and other factors that are deemed relevant. We account for non-employee stock-based compensation based on the fair value of the related options or warrants using the Black-Scholes model, or the fair value of the goods or services on the grant date, whichever is more readily determinable.

Option holders must send an exercise notice to our corporate office, via certified mail or via hand delivery, to exercise their option to purchase shares of our common stock. The notice must include specific information and warranties as noted in the holder’s option agreement, along with payment of the exercise price. Options are considered exercised after (1) we receive the notice and the exercise price amount and (2) the option holder pays, or makes other arrangements that are satisfactory to our directors to pay, any applicable state or federal withholding requirements. Our directors approve the issuance of shares of common stock once the exercise requirements have been met.  We issue treasury shares if available at the time of exercise, otherwise we issue new shares of our common stock at the time of exercise.  

Investments

We determine the appropriate classification of our investments in equity securities at the time of acquisition and reevaluate such determinations at each balance sheet date. We classify investments in equity securities that are bought and held, principally for selling them in the near term, as trading securities. We report trading securities at fair value, with the unrealized gains and losses recognized in earnings. We had no trading securities at June 30, 2017 and December 31, 2016.

We classify investments in equity securities not classified as trading, as available for sale, and carry them at fair value, with any unrecognized gains and losses, net of tax, included in the determination of other comprehensive income (loss) and reported in stockholders’ deficit. We review our investments in equity securities classified as available for sale at each reporting period to determine if there has been a decline in fair value and, if warranted, whether the decline is other-than-temporary. This evaluation is based upon several factors, including stock price performance, financial condition, and near-term prospects of the issuer, as well as our intent and ability to retain the investment for a period sufficient to allow for any anticipated recovery in market value, and any subsequent sales. We recorded $480,000 in available for sale securities at June 30, 2017, based on the estimated fair value of our warrants to purchase VirTra, Inc. common stock shares using the Black-Scholes model. See the Collaborative Arrangement section of Note 2 to the Condensed Consolidated Financial Statements for further details.

We record other-than-temporary impairments of available for sale equity securities as impairment expense on the Condensed Consolidated Statement of Operations. We recorded $216,000 in impairment expense on the Consolidated Statement of Operations for other-than-temporary impairment during the year ended December 31, 2016. We sold our available for sale Bollente equity securities in March 2017 for proceeds of $84,000.

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Note 2

Summary of Significant Accounting Policies (continued)

Collaborative Arrangement

We entered into a Co-Venture Agreement with VirTra, Inc. (“VirTra”) in January 2015 in regards to the Modern Round operating concept.  We have evaluated the Co-Venture Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808 “Collaborative Arrangements” and that we are the principal participant.  As the principal participant, we record costs incurred and revenue generated from third parties on a gross basis in the Condensed Consolidated Financial Statements.  We will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate commercial success of the endeavor.

Under the Co-Venture Agreement, Affiliates of Modern Round received conditional warrants to purchase 1,838,760 shares of common stock (post one-for-ten reverse stock split) of VirTra, Inc. Warrants to purchase 919,380 shares of VirTra, Inc. common stock (post one for ten reverse stock split) became exercisable on June 1, 2017, upon the anniversary date of our first Modern Round location opening. We estimated the value of the warrants to purchase shares at $480,000 at June 30, 2017, using Level 2 inputs and the Black-Scholes model. The estimated fair value was calculated based on the following inputs: 0.13 year expected life, $1.36 exercise price, 25% volatility, zero dividend rate, and 0.94% risk free interest rate.  

Inventory

Inventory consists of products used for food and beverage sales, and are stated at the lower of cost (first-in, first-out) or net realizable value.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-9, Revenue from Contracts with Customers (Topic 606), superseding prior revenue recognition requirements. The effective date of the new standard was deferred by one year by ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of Effective Date. In January 2017, the FASB issued ASU 2017-03, which provides clarifications relating to the accounting standard updates noted above. We will adopt the amendments in these standards updates for the year ending December 31, 2018. In the fourth quarter of 2017, we will determine whether to show the changes retrospectively or through current-year retained earnings. We do not anticipate that the updates, once adopted, will have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments, which requires all equity investments to be measured at fair value with changes in fair value recognized through net income. We plan on adopting the amendments in this pronouncement for the first quarter of 2018 and do not anticipate that the adoption will have a material impact on our consolidated financial statements. We recorded available for sales securities in the current period and do not anticipate that adopting these provisions will have a material impact on their treatment.  

In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance on the classification of lease types and their presentation. In January 2017, the FASB issued ASU 2017-03, which contained refinements to the treatment called for under ASU 2016-02. We are currently evaluating the impact of this new guidance and are presently unable to determine if adoption of these amendments will have a material effect on our consolidated financial statements. Upon adoption, we anticipate that we will need to create right of use asset and operating lease liability accounts, reclassify our deferred rent balance, and update the presentation of certain rent costs on the Consolidated Statement of Operations and the Consolidated Statements of Cash Flows. We are considering early adoption of this update in late 2017 and will make our determination primarily based on the quantity of our leases and whether the impact on our consolidated financial statements is anticipated to be material.

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20) Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in this update prescribe that the sale of stored-value products are financial liabilities and provide a narrow scope exception to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606, Revenue from Contracts with Customers. We plan on adopting this update in the fourth quarter of 2017, once we have sufficient redemption history to use as a basis for significant estimates we anticipate utilizing in our breakage calculation methodology. We anticipate using redemption percentage and gift card balance aging. At June 30, 2017, we did not recognize any gift card breakage income.

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Note 2

Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements (continued)

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this update provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounts in Topic 718. The amendments in this update are effective for public business entities for financial statements issued for interim and fiscal years beginning after December 15, 2017. We will assess the impact of these amendments in the fourth quarter of 2017. We do not anticipate that the provisions of this pronouncement will have a material impact on our consolidated financial position or consolidated results of operations.  

Other than as noted above, we have not implemented any pronouncements that had a material impact on the consolidated financial statements, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our consolidated financial position or consolidated results of operations.

Note 3

Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, prepaid expenses, available for sale securities, accounts payable, accrued expenses, notes payable, and a secured revolving line of credit. The carrying values of these financial instruments approximate fair value, due to their short maturities, or for notes payable and the secured revolving line of credit, based on borrowing rates currently available to us for loans with similar terms and maturities, which represent Level 3 inputs.  We recorded our available for sale securities in Bollente, Inc. at the original cost basis and based the fair value of available for sale securities on an analysis of the stock’s trading volume and price as well as guidance from our efforts to sell the securities, which represent Level 2 and Level 3 inputs, respectively. We sold these available for sale securities in March 2017.  We recorded our available for sale warrants to purchase VirTra, Inc. common stock shares based on their estimated value using primarily Level 2 inputs and the Black-Scholes valuation method. Our balance at June 30, 2017 consists of the warrants to purchase VirTra common stock shares.

Activity of available for sale securities for the six months ended June 30, 2017 was as follows:

 

 

Note 4

Secured Revolving Line of Credit – Related Parties

We entered into a Loan and Security Agreement (the “Loan Agreement”) through our wholly owned subsidiary, Modern Round, Inc. (“Modern Round”), dated May 11, 2016, with related parties, (i) Black Powder Management, L.L.C., a Nevada limited liability company (“Black Powder”), and (ii) BK Entertainment LLC, an Arizona limited liability company (“BK Entertainment”), and together with Black Powder, each, a Lender and collectively, Lenders. The principal of Black Powder serves on our Board of Directors and is an indirect stockholder of more than 10% of our company. The principal of BK Entertainment also serves on our Board of Directors, and BK Entertainment is a stockholder of more than 10% of our company. Pursuant to the Loan Agreement, as amended, Lenders agreed to make a revolving credit loan to Modern Round during the Commitment Period (as defined below), in an aggregate principal amount at any one-time outstanding not to exceed $3,500,000.

The Loan Agreement calls for interest to be payable at 5% per annum on the outstanding unpaid principal amount. We are required to pay each Lender, in accordance with such Lender’s proportionate share of the outstanding advances, all accrued and unpaid interest in arrears commencing on June 1, 2016, and on the first day of each month thereafter until the principal amount outstanding is paid in full. The Lenders agreed to defer interest payments from the date of the Loan Agreement through December 31, 2017. The principal balance outstanding under the Loan Agreement, together with all accrued interest and other amounts payable thereunder, if not sooner paid as provided in the Loan Agreement, will be due and payable on the Termination Date.

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Note 4

Secured Revolving Line of Credit – Related Parties (continued)

As used in the Loan Agreement, as amended, “Commitment Period” means the period from and including the date of the first advance under the Loan Agreement to and including the Termination Date. “Termination Date” means June 30, 2019, or (i) such earlier date upon which the commitment shall terminate as provided in the Loan Agreement or (ii) such later date upon Modern Round’s election to extend the Termination Date in accordance with the Loan Agreement. Lenders may extend the Termination Date for successive one-year periods by providing written notice no later than 90 days prior to the Termination Date then being extended.

Pursuant to the Loan Agreement, we granted to the Lenders a security interest in substantially all the personal property assets of Modern Round. Modern Round will be subject to customary negative covenants as set forth in the Loan Agreement. Additionally, each of Modern Round’s wholly owned subsidiaries, MR Las Vegas, LLC and MR Peoria, LLC, entered into a Guaranty and Security Agreement for the benefit of Lenders to guarantee and secure the obligations of Modern Round under the Loan Agreement. We incurred $37,816 and $17,211 in interest expense for this debt for the three months ended June 30, 2017 and 2016, respectively. We incurred $70,595 and $17,211 in interest expense for the six months ended June 30, 2017 and 2016, respectively. We had an outstanding line of credit balance of $3,187,000 and an available balance of $313,000 at June 30, 2017.

 

Note 5

Notes Payable

Notes Payable – Other

We converted three vendor accounts payable balances into notes payable in December 2016 and January 2017, all with maturity dates of March 31, 2017.  In April 2017, the noteholders agreed to extended repayment terms. Two noteholders agreed to receive monthly payments through March 31, 2018, with the balance subject to 8% interest. The third noteholder agreed to receive monthly payments through December 2017 with 0% interest. We incurred $3,690 in interest expense on this debt for the three and six months ended June 30, 2017. We incurred no interest expense for the comparable quarter and period in the prior year. Notes payable – other of $275,348 and $235,920 were outstanding at June 30, 2017 and December 31, 2016, respectively.

Convertible Notes Payable

In November and December 2015, prior to the merger, our wholly owned subsidiary, Modern Round, Inc., issued 8% convertible promissory notes in a private placement in the aggregate principal amount of $1,275,000, of which $775,000 was issued to independent third parties and $500,000 was issued to certain related parties. In January 2016, we approved a private placement of up to $5,000,000 of 8% convertible promissory notes. On August 10, 2016, we closed our convertible debt offering, pursuant to which investors subscribed to $1,875,000 in aggregate principal amount of convertible promissory notes.

On April 3, 2017, we approved a private placement of up to $5,000,000 of 8% convertible promissory notes, (the “Series 2017 Notes”). At June 30, 2017, $125,000 had been subscribed under this offering.

Our convertible promissory notes mature between November 2017 and May 2019. Eight percent interest is accrued and compounds annually, and is due in one payment with the principal at the notes’ maturity. The holders have the right to convert their principal and accrued interest balance into common stock of our company at a post-merger adjusted price equal to $0.41 per share. At June 30, 2017, the notes and accrued interest were convertible into approximately 8,816,772 shares of our common stock.  We incurred $65,052 and $48,139 in interest expense on this debt for the three months ended June 30, 2017 and 2016, respectively.  We incurred $127,189 and $80,393 in interest expense on this debt for the six months ended June 30, 2017 and 2016, respectively.

Note 6

Inventory

 

 

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Note 7

Accrued Expenses

Accrued expenses consist of unit-level operating expense, corporate general and administrative expense, and interest expense. We determine the balances based on actual amounts billed or reasonable estimates calculated based on historical costs. Accrued expenses at June 30, 2017 and December 31, 2016 consisted of the following:

 

 

Note 8

Related Party Transactions

During the six months ended June 30, 2017 and 2016, we recorded expenses of $204,279 and $116,873, respectively, relating to our Co-Venture Agreement with VirTra, a public company in which certain of our officers and directors have a minority interest. We recorded $480,000 and $0 in other income for the three and six months ended June 30, 2017 and 2016, respectively. We recorded the estimated fair value of warrants to purchase common stock shares of VirTra to other income on the Condensed Consolidated Statement of Operations at June 30, 2017.  The warrants became earned and exercisable in the current quarter. We had the following balances with VirTra at June 30, 2017: $480,000 in available for sale securities, $27,714 in accounts payable, and $132,704 in accrued royalty expense.

We owed $29,009 and $17,209 in expense reimbursements to our officers and directors at June 30, 2017 and December 31, 2016, respectively.  The balances are recorded in accounts payable in our Condensed Consolidated Balance Sheets.

We recorded related party revenue of $0 and $24,000 for the six months ended June 30, 2017 and 2016, respectively.

Note 9

Subsequent Events

In June 2017, we entered into a game revenue sharing agreement to provide the use of several simulated shooting lounges at another entertainment company’s location. In July 2017, the simulated shooting lounges were placed into operation. Related revenues will be recorded in the period in which they are earned under Amusement and Other Revenue on the Consolidated Statements of Operations.

In July 2017, we entered into an Equipment Lease (the “Equipment Lease”) through our wholly owned subsidiary, Modern Round, Inc., with related parties, (i) Black Powder Management, L.L.C., and (ii) BK Entertainment LLC, each, a Lessor and collectively, Lessors. Pursuant to the Equipment Lease, we lease from the Lessors $39,500 in equipment related to the game revenue sharing agreement noted above. We lease such equipment for monthly payments of $1,408 over a 36-month term.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Our Business

We created and are rolling out nationally, an entertainment concept centered around a one-of-a-kind, safe, virtual interactive shooting experience utilizing laser technology-based replica firearms with the look, feel, and weight of real firearms and extensive food and beverage offerings, featuring popular menu items and a variety of liquors, beers, and wines in an upscale environment. As of August 2, 2017, we had approximately 45,000 members with a return rate of approximately 17%. Our entertainment concept is intended to appeal to a very broad customer base of male and female entertainment seekers of all ages, which may include friends, couples, and sponsors of corporate and other events regardless of their experience with shooting. Our entertainment concept is based on the “savor, sip, and shoot” experience of our guests. Guests can savor a broad menu of food items throughout our facilities, including in our virtual shooting lounges. Our menu features items designed to appeal to a very broad spectrum of guests and includes a wide variety of appetizers, soups, salads, flatbreads, sandwiches, pastas, steaks, seafood, burgers, and desserts.  Our menu items are intended to compare favorably with upscale casual restaurants. We also offer our guests the opportunity to experience a wide variety of domestic and imported, popular priced and premium liquors, beers, wines, and signature cocktails.  Beverages are available in each of our entertainment facilities at our main lounge bar, full service restaurant, and shooting lounges, allowing for multiple points of sale.

Virtual shooting is the centerpiece of our entertainment experience.  Our facilities generally will contain between 20 and 28 virtual shooting lounges.  Each virtual shooting lounge offers a relaxed environment for groups of two to six people in a semi-private space measuring approximately 12 feet by 16 feet.  Each virtual shooting lounge is anchored by a projection screen and is furnished with plush lounge seating and a table for sharing food and drinks.  Whether an expert marksman or first-time shooter, our upscale entertainment facilities offer guests the opportunity to test their skills in a wide variety of carefully designed scenarios in a completely safe environment.  Our guests can take aim in one of our interactive games, skills drills, or advanced training simulations using our state-of-the-art laser technology-based replica firearms.  These replica firearms cannot be converted into a traditional firearm.  The replica firearms contain a laser that is engaged with each trigger pull.  Hit detection cameras capture the laser beam strike on the screen and transmit the data to our scenario software.  Multiplayer modes allow guests to simultaneously compete against each other or work together as a team in a number of our interactive games and skills drills.  Our facilities can also accommodate corporate events, bachelor and bachelorette parties, birthday parties, and other events.  In addition, we use our entertainment platform as an opportunity to promote firearm safety and to offer training for our guests.

We were incorporated in Nevada in November 2013 under the name Nuvola, Inc.  Prior to November 24, 2014, we operated as a subsidiary of Bollente Companies, Inc., or Bollente, a company specializing in the manufacturing and sale of high-quality, whole-house, electric tankless water heaters.  On November 24, 2014, Bollente spun off our company by declaring a dividend of the shares of our common stock to the Bollente stockholders.  Because of the dividend, we became a company independent of Bollente.  On December 31, 2015, we closed a merger transaction, or the Merger, in which our newly formed, wholly owned subsidiary merged with and into Modern Round, L.L.C., a Nevada limited liability company, or Modern Round, pursuant to which (a) Modern Round survived the Merger and became our wholly owned subsidiary; (b) we ceased being a shell company; and (c) we experienced a change in control in which the former members of Modern Round acquired control of our company.  

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Concurrent with the Merger, Modern Round was converted into a Nevada corporation named Modern Round, Inc. For accounting purposes, the Merger was accounted for as a reverse acquisition, with Modern Round as the accounting acquirer. The condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2017, represent a continuation of the financial statements of Modern Round.

On February 11, 2016, we filed Amended and Restated Articles of Incorporation, or Restated Articles, with the Secretary of State of the State of Nevada.  Our Restated Articles (i) changed the name of our company to Modern Round Entertainment Corporation, (ii) increased the number of authorized shares of our common stock from 100,000,000 shares to 200,000,000 shares, (iii) created a classified Board of Directors, and (iv) opted into certain anti-takeover statutes under Nevada law.  We opened our first location in June 2016 in Peoria, Arizona.

Results of Operations for the three and six months ended June 30, 2017 compared with the three and six months ended June 30, 2016

Revenue, Net

Revenue, net increased $449,903 to $593,924 for the three months ended June 30, 2017, compared with $144,021 for the comparable quarter last year. The increase was due to our Peoria, Arizona location operating for the full quarter ended June 30, 2017 versus operating for only one month in the comparable quarter last year. The Peoria location opened in June 2016.  Revenue, net increased $1,048,402 to $1,204,423 for the six months ended June 30, 2017, compared with $156,021 for the comparable period last year. The increase for the six months ended June 30, 2017 was due to our Peoria location operating for six months in fiscal 2017 compared with one month in the comparable period last year. We anticipate a modest increase in revenue for the third and fourth quarters of fiscal 2017, compared with the comparable quarters last year. The potential increase is anticipated to be due to new games, our service performance generating greater customer awareness regarding our Peoria, Arizona location, and revenues from game revenue sharing agreements.

Cost of Products

Cost of products increased $68,799 to $99,735 for the three months ended June 30, 2017, compared with $30,936 for the comparable quarter last year. Our costs of products consisted mainly of food and beverage products that were purchased and used to generate sales revenue at our Peoria, Arizona location. The increase was related to being open three months for the quarter ended June 30, 2017, compared with one month in the comparable quarter last year. Cost of products increased $168,858 to $199,794 for the six months ended June 30, 2017, compared with $30,936 for the comparable period last year. The increase for the six months ended June 30, 2017 was due to our Peoria location operating for six months in fiscal 2017, compared with one month in the comparable period last year. We anticipate that our cost of products, as a percentage of revenue, will remain flat through the end of fiscal 2017, due to the impact of increased event sales at our Peoria, Arizona location and continued menu engineering.

Operating Payroll and Benefits

Operating payroll and benefits expense increased $151,824 to $304,586 for the three months ended June 30, 2017, compared with $152,762 for the comparable quarter last year. The increase was primarily driven by our Peoria, Arizona location operating for the entire quarter ended June 30, 2017, compared with one month in the comparable quarter last year. The increase in operating payroll and benefits expense was partially offset by high wages in June 2016 due to the first month of operations at our Peoria location. Operating payroll and benefits expense consisted of salaries, wages, taxes, and other benefit costs related to operating the Peoria, Arizona location. Operating payroll and benefits expense increased $479,864 to $632,626 for the six months ended June 30, 2017, compared with $152,762 for the comparable period last year. The increase for the six months ended June 30, 2017 was due to our Peoria location operating for six months in fiscal 2017, compared with one month for the comparable period last year. We anticipate that operating payroll and benefits expense, as a percentage of revenue, will decrease over the remaining quarters in fiscal 2017. The anticipated decrease is primarily due to our estimation that incremental sales gains will be greater than the additional variable labor costs incurred.

Other Store Operating Expense

Other store operating expense increased $123,480 to $202,456 for the three months ended June 30, 2017, compared with $78,976 for the comparable quarter last year. The increase was primarily related to the Peoria location operating longer for the current fiscal year, as noted under Revenue, Net above. Other store operating expense consisted primarily of marketing, occupancy, supplies, services, utilities and other general expenses related to operating the Peoria, Arizona location. Other store operating expense increased $305,981 to $384,957 for the six months ended June 30, 2017, compared with $78,976 for the comparable period last year. The increase for the six months ended June 30, 2017 was due to our Peoria location operating for six months in fiscal 2017, compared with one month in the comparable period last year. Other store operating expense is expected to remain relatively flat, as a percentage of revenue, over the remaining quarters in fiscal 2017, largely due to high margin sales being anticipated in the fourth quarter.

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General and Administrative Expense

General and administrative expense for the three months ended June 30, 2017 and 2016 was $807,151 and $848,098, respectively, or a decrease of $40,947. The decrease was driven primarily by a reduction in payroll costs of approximately $57,000, a reduction in software development and research and development costs of approximately $130,000, partially offset by an increase in royalty expense of approximately $150,000.

The decrease in payroll related cost was due primarily to a reduction in benefits expense for fiscal 2017, a reduction in bonus expense due to the comparable quarter last year including a one-time bonus, and reduced salaries due to lower corporate headcount for the three months ended June 30, 2017. Software development expenses were elevated for the comparable quarter and period last year, as we were using several third-party vendors to prepare for our June 2016 opening of the Peoria, Arizona location. There were no such additional costs for the comparable quarter and period this year. Lastly, royalty expense increased due to higher sales for the three months ended June 30, 2017, compared with the comparable quarter last year, and due to accruing a minimum royalty amount under the co-venture agreement.

General and administrative expense decreased $375,228 to $1,457,388 for the six months ended June 30, 2017, compared with $1,832,616 for the comparable period last year. The decrease was primarily due to an approximate $335,000 reduction in software development and research costs and an approximate $234,000 reduction in professional fees, partially offset by an approximate increase of $194,000 in royalty expense. The six-month changes were due to the same factors as described above for the three-month changes, except for the decrease in professional fees, which was primarily due to the comparable period last year, including professional fees expense related to the December 31, 2015 reverse merger.

Depreciation Expense

Depreciation expense for the three months ended June 30, 2017 was $131,211, compared with $41,310 for the comparable quarter last year, or an increase of $89,901.  The increase was due to the assets for the Peoria, Arizona location being placed in service in June 2016 and incurring three months of depreciation expense for the quarter ended June 30, 2017, compared with one month in the comparable quarter last year. Depreciation expense increased $217,197 to $260,951 for the six months ended June 30, 2017, compared with $43,754 for the comparable period last year. The increase for the six-month period in fiscal 2017 was due to our Peoria location operating for the full period ending June 30, 2017, compared with one month in the comparable period last year.

Interest Expense

Interest expense increased $41,512 to $106,862 for the three months ended June 30, 2017, compared with $65,350 for the comparable quarter last year. Interest expense was $201,778 and $97,604 for the six months ended June 30, 2017 and 2016, respectively, an increase of $104,174. The three-month and six-month increases were due to higher debt balances that were subject to interest in fiscal 2017, compared with the comparable quarter and period last year. The increased debt balances were primarily driven by increased subscriptions to our convertible note offerings and increased draws on our secured line of credit.

Other Income

Other income was $480,000 and $0 for the three and six months ended June 30, 2017 and 2016, respectively. We recorded the estimated fair value of warrants to purchase common stock shares of VirTra, Inc. at June 30, 2017, as the warrants became exercisable in June 2017.  There was no such transaction for the comparable quarter and period last year.

Net Loss

Net loss for the three months ended June 30, 2017 was ($578,077), compared with a net loss of ($1,327,062) for the comparable quarter last year, or a decreased loss of $748,985. Net loss for the six months ended June 30, 2017 and 2016 was ($1,453,071) and ($2,421,494), respectively, or a decreased loss of $968,423. Our losses decreased in the current periods primarily due to reduced general and administrative expenses and pre-opening expense, and increased revenues, as discussed above.

Non-GAAP Financial Measures

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America, or GAAP, we provide non-GAAP measures that present operating results on an adjusted basis.  EBITDA, Adjusted EBITDA, and Unit-Level EBITDA are supplemental measures of performance that are not required by or presented in accordance with GAAP. These non-GAAP measures do not represent and should not be considered as an alternative to net income or cash flows from operations, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly titled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Although we use these non-GAAP measures to assess the operating performance of our business, they have significant limitations as an analytical tool because they exclude certain material costs.

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For example, Adjusted EBITDA does not include several significant items, including our interest expense and depreciation and amortization expense, as applicable. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. In addition, Adjusted EBITDA excludes pre-opening expense, other non-cash expense, and other income because these amounts vary from period to period and do not directly relate to the ongoing operations of our current underlying business, and thus complicate comparison of the underlying business between periods. Because of the limitations described above, management does not view Adjusted EBITDA in isolation and also uses other measures, such as net sales, income (loss) from operations, and net income (loss), to measure operating performance.

EBITDA

We define “EBITDA” as earnings before interest, income tax, depreciation, and amortization.  We calculate this metric by adding interest, income tax, and depreciation and amortization costs, if applicable, to our net loss. We present EBITDA because we believe it provides useful information to investors regarding our performance. We believe that EBITDA is used by many investors as a measure of performance as it adjusts for non-cash and non-recurring items.  However, because this measure excludes significant items, the value of this measure is limited as a measure of our consolidated financial performance.

 

Adjusted EBITDA

Our definition of “Adjusted EBITDA” differs from EBITDA, as described above, as we further adjust net loss for pre-opening expense, other income, comprising the estimated fair value of warrants held as investments, and other non-cash expenses, which include deferred rent, stock option expense, amortization of equity-based prepayments, and impairment expense. We present Adjusted EBITDA because we believe it provides useful information to investors regarding our performance. We believe that Adjusted EBITDA is used by many investors as a measure of performance as it adjusts for non-cash and non-recurring items. However, because this measure excludes significant items, the value of this measure is limited as a measure of our consolidated financial performance.

 

 

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Unit-level EBITDA

Our definition of “Unit-level EBITDA” differs from EBITDA, as defined above, because we further adjust net loss to exclude licensing revenue, general and administrative expense, pre-opening expense, and non-cash deferred rent expense incurred for unit-level leases. We believe Unit-level EBITDA to be a useful measure of evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store-level, and the costs of opening new stores, which are non-recurring at the store-level. We also believe that Unit-level EBITDA is a useful measure in evaluating our operating performance within our industry as it permits the evaluation of unit-level productivity, efficiency, and performance.  However, because this measure excludes significant items, the value of this measure is limited as a measure of our consolidated financial performance.

 

Liquidity and Capital Resources

Our principal liquidity to date has come primarily from the following sources: sales of shares of common stock; subscriptions of convertible promissory notes; and a secured revolving line of credit. We sold 30,691,914 shares (as adjusted for the Merger conversion ratio) for aggregate proceeds of $2,500,000 for the year ended December 31, 2014.  Starting in November 2015, prior to the Merger, our wholly owned subsidiary, Modern Round, issued convertible promissory notes in the aggregate principal amount of $1,275,000 to independent third parties and certain related parties in a private placement. During fiscal 2016, an additional $1,875,000 of convertible promissory notes were subscribed, and we received $2,391,000 from our secured line of credit. During the six months ended June 30, 2017, $125,000 of Series 2017 Notes were subscribed, and we received $796,000 from our secured line of credit.

We had working capital deficiencies of $4,852,445 and $2,955,132 at June 30, 2017 and December 31, 2016, respectively.  Our working capital deficiency increased at June 30, 2017 primarily due to an increase in convertible promissory notes being reclassified to current liabilities as their remaining terms decreased below 12 months. Net operating losses, as described in the “Results of Operations” above, also contributed to the increased working capital deficit and were partially offset by the sale of our available for sale securities. Lastly, the decrease was partially offset by our other income in the current fiscal period, as described above.  

Our wholly owned subsidiary, MR Peoria, LLC, conducts operations for our first entertainment facility in Peoria, Arizona.  The lease commenced on November 1, 2015 and has a term of 10 years with an initial commitment of approximately $2,363,000. The facility opened in June 2016.

We anticipate incurring additional expenses for fiscal 2017 and 2018 to pursue our planned business operations, including additional sales and marketing expenditures as well as possible increases in expenditures for research and development of products and technology and the opening of entertainment facilities and licensed locations. The opening of future standalone facilities and game revenue sharing locations is anticipated to be funded primarily with proceeds from future debt and equity private placement offerings and equipment financing. Our ability to continue to execute our business depends upon our ability to generate additional cash from investment proceeds and sales from operations. If we are unable to raise the necessary funds, we will have to modify our current business. In addition, we may not be able to attract enough guests to generate positive income from operations, which may require us to modify our business plan to address our liquidity needs.

Our historical operating expenses and cash needs are not indicative of our current planned operations, as we continue to develop our eatertainment concept and focus on sales, marketing, and operations.  We will require substantially more cash to operate depending upon how quickly we open additional entertainment facilities and the sales volume at those entertainment facilities.  However, if funding is not obtained and sales do not generate sufficient cash flow, we will adjust our strategy accordingly.  

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To date, we have been highly dependent upon funding from related parties and convertible debt offerings to support our operations, and we anticipate that we will need additional funding to support our business for at least the next 12 to 24 months. Given our current operations, traditional debt financing from banking sources may be difficult to obtain, and we may have to continue to rely on equity or debt investments from non-banking sources.

As described in further detail elsewhere on this Quarterly Report on Form 10-Q, we raised $3,150,000 on our previous convertible debt offerings and have raised an additional $125,000 through our Series 2017 Notes to address our historical liquidity concerns. Our Series 2017 Notes offering is approved for subscriptions up to $5,000,000. We will also need to obtain additional financing, which may come from the public equity markets or through private placement offerings. There can be no assurance as to the availability or terms upon which such financing and capital might be available, if at all.

Cash Flows from Operating Activities

Cash used in operating activities was $903,280 and $1,491,362 for the six months ended June 30, 2017 and 2016, respectively. Cash used in operating activities for six months ended June 30, 2017 included a net loss of ($1,453,071) and net non-cash items of $117,844, partially offset by net cash provided by the change in operating assets and liabilities of $667,635. Cash used in operating activities for the comparable period last year included net loss of ($2,421,494) offset by non-cash items of $381,713 and the net change in operating assets and liabilities of $548,419. The non-cash items primarily reflected depreciation, amortization of deferred rent, amortization of equity awards and warrants, and stock-based compensation.  The net changes in operating assets and liabilities were primarily related to changes in accounts payable, accrued expenses, and deferred revenue. Our operating activities will likely require additional cash in the future from sources of debt and/or equity, depending on the ability of our operations to generate positive cash flow.

Cash Flows from Investing Activities

Net cash proceeds from investing activities was $81,602 for the six months ended June 30, 2017, compared with net cash used in investing activities of $2,261,244 for the same period in fiscal 2016. Net cash proceeds for the six months ended June 30, 2017 consisted of $84,000 in proceeds from the sale of available for sale equity securities offset by $2,398 used to acquire a capital asset. Cash used for investing activities in the comparable period last year included construction-in-progress payments related to the development of our Peoria, Arizona location, which opened in June 2016.

Cash Flows from Financing Activities

Cash provided by financing activities was $827,563 and $3,225,000 for the six months ended June 30, 2017 and 2016, respectively. Financing activities for the six months ended June 30, 2017 consisted of proceeds from the sale of $125,000 in convertible notes under a private placement and proceeds of $796,000 from our secured revolving line of credit with related parties, partially offset by $93,437 in cash used for principal payments on our notes payable – other balance.  We drew $1,500,000 from the secured revolving line of credit and received proceeds of $1,725,000 from convertible notes subscriptions in the comparable period last year.

Critical Accounting Estimates and Policies

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported expenses during the reporting periods.  We evaluate our estimates and judgments on an ongoing basis.  Actual results may differ materially from these estimates under different assumptions or conditions.

As an emerging growth company under the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.  Because of this election, our condensed consolidated financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards.

While our significant accounting policies are more fully described in the notes to our June 30, 2017 and December 31, 2016 consolidated financial statements, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

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Equity Based Compensation

We account for compensation for all arrangements under which employees, consultants, and others receive common stock or other equity instruments (including options and warrants) in accordance with FASB ASC Topic 718 “Compensation – Stock Compensation,” or ASC Topic 505-50 “Equity Based Payments to Non-Employees.”  Under ASC Topic 718, the fair value of each award is estimated and amortized as compensation expense over the requisite service period.  

The fair value of our share-based awards is estimated on the grant date using the Black-Scholes valuation model.  This valuation model requires the input of highly subjective assumptions, including our estimated market value per share, expected price volatility, and expected term.  As Modern Round was not operating as a public company prior to the Merger, we were unable to use actual price volatility and option life data as input assumptions within our Black-Scholes valuation model.  We have used expected volatilities based on the historical volatility of comparable public companies in the industry sector in which we operate in accordance with the guidance set forth in ASC Topic 718.  To estimate the expected term, we chose to utilize the “simplified” method for “plain vanilla” options as discussed in the SEC’s Staff Accounting Bulletin 107, or SAB 107.  We believe that all factors listed in SAB 107 as prerequisites for utilizing the simplified method are true for us and for our share-based payment arrangements.  We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available.

Our risk-free interest rates are based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the options and warrants to purchase shares of our common stock.  We have not paid and do not anticipate paying cash dividends on our shares.  Therefore, the expected dividend yield is assumed to be zero.  The fair value of share-based payments is generally amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

We believe there is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under ASC Topic 718.  Currently, there is not a market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.  Although the fair value of share-based options and warrant awards is determined in accordance with ASC Topic 718 using an option pricing model, that value may not be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller.  If factors change and we employ different assumptions in the application of ASC Topic 718 in future periods than those currently applied under ASC Topic 718, the compensation expense we record in future periods under ASC Topic 718 may differ significantly from what we have historically reported.

Revenue Recognition

We currently derive revenue from sales of food and beverages, membership fees, and simulated shooting lounge fees. We recognize revenue when all the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) seller price is fixed or determinable; and (iv) collectability is reasonably assured. We recognize food and beverage sales and simulated shooting lounge fees on the transaction date, as payment is required at the time of service.

Deferred revenue consists of membership fees, gift card sales, and banquet event deposits received.  Membership fees are due annually and are not refundable. We recognize membership fee revenue ratably over 12 months, starting in the month the fees are received. We record gift card sales and banquet event deposits as deferred revenue and recognize sales revenue when the gift cards and banquet event deposits are utilized by our guests. We did not record gift card breakage income at June 30, 2017, as we do not have sufficient purchase and utilization history to use as a basis for a breakage policy. Banquet event deposits are generally non-refundable, although guests can re-schedule their events with sufficient notice. We expect that our guests will utilize their deposits or that we will retain any unused deposits.   

Research and Development Costs

We charge expenses related to research, design, and development of products to research and development costs as incurred.  These expenditures include direct salary costs and/or consultant expenses for research and development personnel and contractors, costs for materials used in research and development activities, and costs for outside services. Research and development costs are included in general and administrative expense on the Condensed Consolidated Statement of Operations.

Software Development Costs

We expense software development costs as incurred until technological feasibility has been established, at which time we capitalize such costs until the product is available for general release to customers. At each balance sheet date, we compare the unamortized capitalized costs of a computer software product with the net realizable value of that product.  We write off the amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset. Our software development efforts primarily focus on building and expanding our virtual shooting concept scenarios and integrating the systems used at our locations. No software development costs have been capitalized since inception. We include software development costs in general and administrative expense on the Condensed Consolidated Statement of Operations.

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Collaborative Arrangement

We entered into a Co-Venture Agreement with VirTra in January 2015 in regards to the Modern Round operating concept.  We have evaluated the Co-Venture Agreement and have determined that it is a collaborative arrangement under FASB ASC Topic 808 “Collaborative Arrangements” and that we are the principal participant.  As the principal participant, we record costs incurred and revenue generated from third parties on a gross basis in the Condensed Consolidated Financial Statements. We will reevaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards, dependent upon the ultimate commercial success of the endeavor.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.  We have not entered into any derivative contracts that are indexed to our common stock or that are not reflected in our financial statements.  Furthermore, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our President and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2017.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate because of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We may be subject to legal proceedings in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any legal proceedings to which we are a party that we believe could have a material adverse effect on us.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Item 6. Exhibits

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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