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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2017

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.

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:

	June 30,
	2017		2016
Anti-dilutive securities excluded from diluted loss per share:
Stock options		5,275,543		5,186,927
Warrants		—		1,676,747
Shares issuable upon conversion of convertible promissory notes including accrued interest		8,816,772		7,527,441
Total		14,092,315		14,391,115

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.

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:

Available for sale securities

Level 1:

Quoted

Prices in Active

Markets for

Identical Assets

Level 2:

Significant

Other

Observable

Inputs

Level 3:

Significant

Unobservable

Inputs

Total

At June 30, 2017:

—

480,000

—

480,000

At December 31, 2016:

—

84,000

—

84,000

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.

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.

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.