Bloomberg Tax
April 23, 2020, 8:46 AM

Dave & Buster’s ‘Going Concern’ Warning Signals Wave to Come

Amanda Iacone
Amanda Iacone

Dave & Buster’s Entertainment, Inc. warned investors this month that there was a substantial risk that the entertainment company would not survive the next 12 months.

The company’s going concern notice, typically a red flag for investors, was among several filed since mid-March related to the coronavirus pandemic. Most years, auditors issue such red flags in 400-plus annual reports. But those numbers are expected to rise this year as companies hit by the fallout from the pandemic take stock of their cash, debts coming due, and outlook for when customers might return.

Management disclosures of concern may show up mid-year, long before auditors have the chance to issue their own separate opinion. Under accounting rules that stem from the 2008 financial crisis, companies must inform investors when conditions raise substantial doubt that they will be able to continue as viable businesses over the next year.

Many companies, hammered by losses caused by the pandemic, are now giving what’s typically a check-the-box exercise a deeper look this quarter. Companies in the restaurant, entertainment, hospitality, and travel industries, whose revenues have disappeared amid stay-at-home orders and travel restrictions, may be more likely to file a going-concern disclosure.

“Every one of those companies is going to have to reassess where they find themselves,” said Phillip Austin, national assurance managing partner for BDO USA LLP, among the largest U.S. accounting firms.

Dave & Buster’s and SAExploration Holdings, Inc., an oil and gas company both delayed filing their annual reports this spring in part to provide more time to complete the required review of their business outlook.

In addition to plummeting oil prices and reduced demand during the pandemic, SAExploration also cited recurring losses, negative cash flows, and a steep drop in oil prices for its notice to investors as factors. The company has hired an outside adviser as it rethinks its capital structure. The company also hopes to renegotiate debt payments that are due starting in January 2021.

Dave & Buster’s referred requests for comment to its April 2 earnings call. CEO Brian Jenkins said that company was focused on re-opening its 137 stores and welcoming back 14,000 furloughed store employees. It has slashed planned capital spending by 70 percent, reduced the compensation of executives and its board, and was in talks with its landlords and vendors to lower or defer operating expenses - an effort to mitigate the risks to its longterm operations.

“To put us in the best position to achieve this goal and recognizing that all of our stores are temporary closed, we have had to make some very tough but necessary decisions,” Jenkins said. “Given the early stages of these discussions, we are not in a position today to project the benefit of these actions.”

No Guarantees

Pharmaceutical development company Proteo Inc. was also among the companies that have already warned investors that the outbreak posed a long-term threat to its business. The company has also delayed filing its 2019 annual report.

“We cannot predict the impact of Covid-19 on our ability to obtain financing necessary for the company to fund our working capital requirements,” Proteo said in a March 30 filing. “There are no assurances that the company will be successful in implementing a strategic plan in order to address its impending liquidity constraints. These conditions, among others, raise substantial doubt about the company’s ability to continue as a going concern.”

Proteo and SAExploration did not respond to requests for comment.

Steven Berger, a corporate and finance attorney with VedderPrice, expects to see disclosures pop up this spring where companies allude to similar uncertainties.

“You don’t want management being unduly pessimistic nor unduly rosy. So what’s the realistic disclosure? The realistic disclosures is ‘We just don’t know’,” Berger said.

Management should be transparent about the company’s cash flow—anything that could impact liquidity, like rent and payroll. They should also discuss any steps they’ve taken to strengthen their position, from furloughs to renegotiating debt or seeking debt-covenant waivers.

Still the accounting disclosure is a long-term measure and not a guarantee that the company will go out of business.

“It’s not a death knell; it’s a disclosure,” Berger said.

A Lower Bar

The bar to disclose substantial doubt, an accounting term, is normally high—changes in cash flow projections, changes in liquidity, or significant changes in operations could all indicate that a company might not be able to meet its obligations over the next year, and trigger the required notice to investors.

But in an age of pandemic, that threshold suddenly seems much lower. Businesses are shuttered and their employees laid off or furloughed. Dividends and bonuses have been slashed. Revenue has dried up or dropped precipitously. Rent payments are being skipped. How long can companies survive on the cash they have is a major question and those with debts coming due may find it hard to refinance.

“Companies now are frantically creating cash-flow models and all types of financial models to try and predict how long can we last with nobody buying our product. But those models are based on estimates. Nobody knows. We don’t know how long we’re going to be quarantined,” said Amal Shehata, an audit and accounting professor at New York University Stern School of Business.

Forward-looking Information

Even in the best economic times, estimates and forward-looking information are tricky to calculate. And going-concern assessments are heavily driven by that kind of prospective analysis, said Dennis Howell, a senior partner in Deloitte LLP’s National Office Accounting and Reporting Services Group.

But this economic downturn is unlike any other and the list of variables to consider is long: how long will the shutdowns last, how quickly does business resume and for which products or services, and how will government relief measures help the company’s balance sheet are all important issues.

“Trying to forecast the impact of that is very difficult for companies,“ Howell said.

The Securities and Exchange Commission acknowledged those practical struggles, but still has urged companies to provide detailed forward-looking disclosures for investors this quarter. In an April 8 note, SEC Chairman Jay Clayton and William Hinman, the director of the Division of Corporation Finance, told companies to steer clear of resorting to generic or boilerplate disclosures.

“The more investors know about how management is assessing, planning for, and taking steps to address, the effects of COVID-19, the better investment decisions investors will make,” their note reads.

To contact the reporter on this story: Amanda Iacone in Washington at

To contact the editors responsible for this story: Jeff Harrington at; John Dunbar at