SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2016 AND 2015
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
This summary of accounting policies for SPYR,
Inc. and subsidiaries (the “Company”) is presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
The Company was incorporated as Conceptualistics,
Inc. on January 6, 1988 in Delaware.
From 1997 to present, the Company has owned
and operated an American grill, 1950’s themed restaurant called “Eat at Joe’s® located in the Philadelphia
International Airport.
On December 16, 2014, the Company amended it
articles of incorporation and changed its domicile to Nevada.
In February 2015, the Company changed its name
from Eat at Joe’s, Ltd. to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March 12, 2015.
On March 24, 2015, the Company organized its
wholly owned subsidiary SPYR APPS, LLC, (“Apps”) a Nevada Limited Liability Company for the purpose of expanding the
Company’s digital media presence into the mobile app industry.
Our lease in the Philadelphia Airport is scheduled
to expire in April 2017 and will not be renewed, and concurrent with expiration of the lease the restaurant the will close. The
Company’s plan is to divest itself from its restaurant division and is considering spinning off the business, and issuing
a stock dividend to its shareholders of record as of May 19, 2017, however, there is no assurance this can be completed. The Company
is also exploring opportunities to license or franchise the name “Eat at Joe’s” as well as merger and acquisition
targets of other businesses in the food service industries.
Nature of Business
The primary focus of SPYR, Inc. (the “Company”)
is to act as a holding company and develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.
We currently own three operating subsidiaries,
two in the digital technology industry and, one in the restaurant industry, each having their own particular focus.
Through our wholly owned subsidiaries, SPYR
APPS, LLC and SPYR APPS Oy, we operate our mobile games and applications business. The focus of the SPYR APPS subsidiaries is the
development and publication of our own mobile games as well as the publication of games developed by third-party developers.
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we own and operate the restaurant “Eat at Joe’s” ®, which is located in the Philadelphia
International Airport and has been in operations since 1997.
Liquidity
The accompanying financial statements have been prepared
under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2016, the Company recorded a
net loss from continuing operations of $7,386,000 and utilized cash in continuing operations of $3,925,000. As of December 31,
2016, our cash balance was $3,204,000 and we had trading securities of 59,000.
The
Company’s restaurant, Eat At Joes is scheduled to close in April 2017, concurrent with the expiration of the lease.
However,
the Company plans to expand its mobile games and application development and publishing activities, such as Pocket Starships, through
acquisition and/or development of its own intellectual property and publishing agreements with developers.
We estimate the Company currently has sufficient
cash and liquidity to meet its anticipated working capital for the next twelve months. Historically, we have financed our
operations primarily through private sales of our trading securities or through sales of our common stock. If our sales goals
for our products do not materialize as planned, we believe that the Company can reduce its operating and product development
costs that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able to achieve
profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we
presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no
assurance that we will be able to obtain such financing on acceptable terms, or at all.
Principles of Consolidation
The consolidated financial statements include
the accounts of SPYR, Inc. and its wholly-owned subsidiaries, SPYR APPS, LLC, a Nevada Limited Liability Company, and SPYR APPS,
Oy, a Finnish Limited Liability Company, and E.A.J.: PHL, Airport Inc., a Pennsylvania corporation. Intercompany accounts and transactions
have been eliminated.
Revenue Recognition
The Company generates revenues from its wholly
owned subsidiaries, which operate separate and distinct businesses. The following is a summary of our revenue recognition policies.
Through our wholly owned subsidiary SPYR APPS,
LLC, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app
purchases. The Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability
is reasonably assured, which is typically after receipt of payment and delivery.
Though our wholly owned subsidiary E.A.J.:
PHL, Airport, Inc. we generate revenue from the sale of food and beverage products through our restaurant. Revenue from the restaurant
is recognized upon sale to a customer and receipt of payment.
Income Taxes
The Company accounts for income taxes under
the provisions of ASC 740 “Accounting for Income Taxes,” which requires a company to first determine whether it is
more likely than not (which is defined as a likelihood of more than fifty percent) that a tax position will be sustained based
on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge
of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the
largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Deferred income taxes are recognized for the
tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes at each year end, based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized when, based on
the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets
will not be realized. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances
change and cause a change in management's judgment about the recoverability of deferred tax assets, the impact of the change on
the valuation is reflected in current income. Income tax expense is the sum of current income tax plus the change in deferred tax
assets and liabilities.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management affected
impairment analysis for fixed assets, intangible assets, amounts of potential liabilities and valuation of issuance of equity securities.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held
for investment purposes.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation or amortization. Depreciation is recorded at the time property and equipment is placed in service using
the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold
improvements are amortized over the shorter of the expected useful lives of the related assets or the lease term. The estimated
economic useful lives of the related assets as follows:
Furniture and fixtures
|
5-10 years
|
Equipment
|
5- 7 years
|
Computer equipment
|
3 years
|
Leasehold improvements
|
6 years
|
Maintenance and repairs are charged to operations;
betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation and amortization
thereon are eliminated from the property and related accumulated depreciation and amortization accounts, and any resulting gain
or loss is credited or charged to operations.
Intangible Assets
The Company accounts for its intangible assets
in accordance with the authoritative guidance issued by the ASC Topic 350 –
Goodwill and Other
. Intangibles are valued
at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected
period of benefit. The Company evaluates intangible assets, at a minimum, on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash flows.
The cost of internally developing, maintaining
and restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in
a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset with a definite useful
life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be
no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine
whether events and circumstances continue to support an indefinite useful life. As of December 31, 2015, total intangible assets
amounted to $21,000.
During the year ended December 31, 2016, the
Company recorded amortization expense of $3,000. As of December 31, 2016, total intangible assets amounted to $18,000 which consist
of website development costs. There were no indications of impairment based on management’s assessment of these assets at
December 31, 2016. Factors we consider important that could trigger an impairment review include significant underperformance relative
to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy
for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased
revenues and increased costs, we may have to record impairment to our intangible assets.
Earnings (Loss) Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Diluted EPS reflects the potential
dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.
In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds
are used to purchase common stock at the average market price during the period. Shares of restricted stock are included in the
basic weighted average number of common shares outstanding from the time they vest.
The basic and fully diluted shares for the
year ended December 31, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 20,833, Class
A – 26,909,028, Class E – 161,108, Options – 12,900,000, and Warrants – 200,000) would have had an anti-dilutive
effect as the Company generated a net loss for the year ended December 31, 2016.
The basic and fully diluted shares for the
year ended December 31, 2015 are the same because the inclusion of the potential shares (Non-vested Common – 329,167, Class
A – 26,909,028, Class E – 452,489) would have had an anti-dilutive effect as the Company generated a net loss for the
year ended December 31, 2015.
Stock-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over
the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option
grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company's stock option
and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense
is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions
used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.
The Company also issues restricted shares of
its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost
with respect to restricted shares to employees based upon the estimated fair value at the date of the grant, and is recognized
as expense over the period which an employee is required to provide services in exchange for the award. For non-employees, the
Company measures the compensation cost with respect to restricted shares based upon the estimated fair value at measurement date
which is either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance
to earn the equity instruments is complete.
Concentration of Credit Risk
The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The
Company maintains the majority of its cash balances with financial institutions, in the form of demand deposits. At December 31,
2016, the Company had cash deposits in one financial institutions that were above FDIC limits of $250,000. The Company believes
that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness
and financial viability of this financial institution.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10
of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37
of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted
in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and
comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs.
The three (3) levels of fair value hierarchy
defined by Paragraph 820-10-35-37 are described below:
Level 1: Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2: Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of
the reporting date.
Level 3: Pricing
inputs that are generally observable inputs and not corroborated by market data.
The carrying amount of the Company’s
financial assets and liabilities, such as cash and cash equivalents, accounts receivable, other receivable, inventory, prepaid
expenses, and accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.
The Company’s trading securities are measured at fair value
using level 1 fair values.
Software Licensing and Publishing Costs
Software licensing and publishing costs pertain
to non-refundable
payments made to independent gaming software developers
pursuant to licensing agreements. The payments are intended to assist gaming software developers in the marketing and further development
of two gaming software applications.
Software licensing and publishing costs were
$734,000 for the year ended December 31, 2016 and was reflected as part of Other General and Administrative expenses on the accompanying
consolidated statements of operations. There were no such costs in 2015.
Capitalized Licensing Rights
Capitalized licensing
rights represent fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology,
music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with
the rights holder, we may obtain the right to use the intellectual property in multiple products over a number of years, or alternatively,
for a single product.
Significant
management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability
of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional
costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which
could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if management
makes different judgments or utilizes different estimates in evaluating these qualitative factors.
As of December 31, 2015,
the Company capitalized $80,000 as a result of the acquisition of licensing rights for two gaming applications.
During the year ended December 31, 2016, the
Company capitalized an additional $10,000 and amortized $50,000. As of December 31, 2016, the unamortized capitalized licensing
rights amounted to $40,000 relating to one gaming application with an estimated life of five years, which approximates the term
of the license.
Advertising Costs
Advertising, marketing and promotional costs are expensed as incurred
and included in general and administrative expenses.
Advertising, marketing and promotional expense
was $350,000 and $125,000 for the years ended December 31, 2016, and 2015, respectively and was reflected as part of Other General
and Administrative Expenses on the accompanying consolidated statements of operations.
Research and Development Costs
Costs incurred for research and development
are expensed as incurred. During the year ended December 31, 2016, the Company incurred $416,000 in research and development costs
paid to an
independent gaming software developer for the Pocket Starships
game. There was no such expense in 2015.
Recent Accounting Standards
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 is
a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current
U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies
recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in
annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition
to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process
of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018.
Early adoption is permitted. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company
is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In March 2016, the FASB issued the ASU
2016-09,
Compensation - Stock Compensation (Topic 718)
: Improvements to Employee Share-Based Payment Accounting. The amendments
in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards
vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding
purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those
fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the
expected impact that the standard could have on its financial statements and related disclosures.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.
NOTE 2 - TRADING SECURITIES
Trading securities are purchased with the intent
of selling them in the short term. Trading securities are recorded at market value and the difference between market value and
cost of the securities is recorded as an unrealized gain or loss in the statement of operations. Gains from the sales of such marketable
securities will be utilized to fund payment of obligations and to provide working capital for operations and to finance future
growth, including, but not limited to: conducting our ongoing business, conducting strategic business development, marketing analysis,
due diligence investigations into possible acquisitions, and research and development and implementation of the Company’s
business plans generally.
The Company’s securities investments
that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value based on quoted market price (level 1) on the balance sheet in current assets, with the change
in fair value during the period included in earnings.
Investments in securities are summarized as
follows:
|
|
Fair Value at Beginning
|
|
|
|
Proceeds from
|
|
Loss on
|
|
Contributed
|
|
Unrealized
|
|
Fair Value at
December 31,
|
Year
|
|
of Year
|
|
Purchases
|
|
Sale
|
|
Sale
|
|
Capital
|
|
Loss
|
|
2016
|
|
2016
|
|
|
$
|
324,000
|
|
|
$
|
510,000
|
|
|
$
|
(783,000
|
)
|
|
$
|
(95,000
|
)
|
|
$
|
160,000
|
|
|
$
|
(57,000
|
)
|
|
$
|
59,000
|
|
|
2015
|
|
|
$
|
6,026,000
|
|
|
$
|
—
|
|
|
$
|
(3,061,000
|
)
|
|
$
|
(1,460,000
|
)
|
|
$
|
—
|
|
|
$
|
(1,181,000
|
)
|
|
$
|
324,000
|
|
Realized gains and losses are determined on
the basis of specific identification. During the years ended December 31, 2016 and 2015, sales proceeds and gross realized gains
and losses on securities classified as available-for-sale securities and trading securities were:
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
|
Sales proceeds
|
|
|
|
$783,000
|
|
$3,061,000
|
Gross realized (losses)
|
|
|
|
$(95,000)
|
|
$(1,460,000)
|
Gross realized gains
|
|
|
|
—
|
|
—
|
Loss on sale of trading securities
|
|
|
|
$(95,000)
|
|
$(1,460,000)
|
The following table discloses the assets measured
at fair value on a recurring basis and the methods used to determine fair value:
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 59,000
|
|
$ 59,000
|
|
$ -
|
|
$ -
|
Money market funds
|
|
36,000
|
|
36,000
|
|
-
|
|
-
|
Total
|
|
$ 95,000
|
|
$ 95,000
|
|
$ -
|
|
$ -
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 2015
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 324,000
|
|
$ 324,000
|
|
$ -
|
|
$ -
|
Money market funds
|
|
333,000
|
|
333,000
|
|
-
|
|
-
|
Total
|
|
$ 657,000
|
|
$ 657,000
|
|
$ -
|
|
$ -
|
Generally, for all trading securities and available-for-sale
securities, fair value is determined by reference to quoted market prices (level 1).
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Equipment
|
|
$
|
151,000
|
|
|
$
|
131,000
|
|
Furniture and fixtures
|
|
|
116,000
|
|
|
|
87,000
|
|
Leasehold improvements
|
|
|
381,000
|
|
|
|
381,000
|
|
|
|
|
648,000
|
|
|
|
599,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(437,000
|
)
|
|
|
(324,000
|
)
|
Property and Equipment, Net
|
|
$
|
211,000
|
|
|
$
|
275,000
|
|
Depreciation and amortization expense for the
years ended December 31, 2016 and 2015 was $113,000 and, $98,000 respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
On February 23, 2015, the Company acquired
Franklin Networks, Inc. (Franklin) from Mark McGarrity and another minority shareholder. Subsequently, on March 2, 2015, Mr. McGarrity
was hired as Chief Information Officer of the Company. See Note 9.
During the months of April, May and June, 2015
all activities of Franklin were conducted from shared business offices of an officer of the Company. The Company paid $2,500 per
month for the use of these facilities for a total of $7,500 and was reflected as part of Loss from discontinued operations on the
accompanying consolidated statements of operations. As of December 31, 2015, the Company owed this officer a total of $7,000 in
unpaid rent and other fees which was reported as related party accounts payable on the accompanying balance sheet.
During the months of April, May, June and July
2015, the Company used consulting services of a company owned by an officer of the Company in the amount of $38,000, of which $30,000
was reflected as part of Other General and Administrative Expenses on the accompanying consolidated statements of operations and
$8,000 was reflected as part of Loss from discontinued operations on the accompanying consolidated statements of operations.
On October 3, 2016, the Company sold trading
securities valued at $340,000 to Berkshire Capital Management Co., Inc. (“Berkshire”) for $500,000. Berkshire is controlled
by Joseph Fiore, majority shareholder and chairman of the board of directors of the Company. The Company reported the $160,000
difference between the value of the trading securities and cash sale price as contributed capital.
The Company paid a total of $60,000 during
the years ended December 31, 2016 and 2015 to a management and consulting firm owned by Mr. Joseph Fiore, majority shareholder
and chairman of the board of directors of the Company. The payment pertains to services rendered for the Company’s restaurant
business, Eat at Joes.
NOTE 5 - INCOME TAXES
The Company did not provide any Federal and State income tax for
the years ended December 31, 2016 and 2015 due to the Company’s net losses.
A reconciliation of the provision for income taxes computed using
the US statutory federal income tax rate is as follows:
|
|
December 31,
|
|
|
2016
|
|
2015
|
Tax provision at US statutory federal income tax rate
|
|
$
|
(2,320,000
|
)
|
|
$
|
(837,000
|
)
|
State income tax, net of federal benefit
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowances
|
|
|
2,320,000
|
|
|
|
837,000
|
|
Provision for Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The significant components of the Company’s
deferred tax assets were:
|
|
December 31,
|
|
|
2016
|
|
2015
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
3,746,000
|
|
|
$
|
1,381,000
|
|
Unrealized losses on marketable securities
|
|
|
251,000
|
|
|
|
518,000
|
|
Stock
based compensation
|
|
|
197,000
|
|
|
|
—
|
|
Depreciation and other
|
|
|
31,000
|
|
|
|
6,000
|
|
|
|
|
4,225,000
|
|
|
|
1,905,000
|
|
Less valuation allowance
|
|
|
(4,225,000
|
)
|
|
|
(1,905,000
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax assets and liabilities reflect
the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax
rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
As of December 31, 2016, the Company recorded
a valuation allowance of $4,225,000 for its deferred tax assets. The Company believes that such assets did not meet the more likely
than not criteria to be recoverable through projected future profitable operations in the foreseeable future.
Effective January 1, 2007, the Company adopted
FASB guidance that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should
be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The FASB also provides
guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. As of December 31, 2016 and 2015, the Company does not have a liability for unrecognized tax benefits.
The Company’s net operating loss carry
forward for income tax purposes as of December 31, 2016 was approximately $9,900,000 and may be offset against future taxable income
through 2036. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial
change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
Uncertain Tax Positions
ASC 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken
in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. In many cases the Company’s uncertain tax positions are related to tax years that remain subject to
examination by relevant tax authorities. The Company is generally no longer subject to U.S. federal, state or local income tax
examinations by tax authorities for years before 2013. However, as of December 31, 2016, the years subsequent to 2013 remain open
and could be subject to examination by tax authorities including the U.S. Internal Revenue Service and major state and local tax
jurisdictions in the United States.
Interest costs related to unrecognized tax
benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties,
if any, would be recognized as a component of “General and administrative expenses.”
As of December 31, 2016, the Company had no
liability for unrecognized tax benefits and no accrual for the payment of related interest and penalties, nor did the Company recognized
any interest or penalties expense related to unrecognized tax benefits during the years ended December 31, 2016 or 2015.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Rent
The Company leases approximately 5,169 square
feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015 and expiring on December 31,
2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $142,000 to $152,000.
The Company’s wholly-owned subsidiary
E.A.J.: PHL, Airport Inc. leases approximately 845 square feet in the Philadelphia Airport, Philadelphia, Pennsylvania, pursuant
to a lease dated July 6, 2010. E.A.J.: PHL, Airport Inc. pays $14,000 per month basic rent, plus percentage rent equal to 20% of
gross revenues above $1,200,000, under the lease, which expires April 30, 2017.
The minimum future lease payments under these leases for the next
five years are:
Year Ended December 31,
|
|
Amount
|
2017
|
|
$ 201,000
|
2018
|
|
147,000
|
2019
|
|
150,000
|
2020
|
|
152,000
|
2021
|
|
-
|
Thereafter
|
|
-
|
Total Five Year Minimum Lease Payments
|
|
$ 650,000
|
Rent expense for the years ended December 31,
2016 and 2015 was $424,000 and $358,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately
$5,000 per month for other items charged by the landlord in connection with rent.
Legal Proceedings
We are involved in certain legal
proceedings that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we
record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the
related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
A material legal proceeding that is currently pending is as follows:
On October 14, 2015, the Company was named
as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc.,
f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate
principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together
with accrued interest and unspecified damages. The Company believes the claim is not a valid debt and is vigorously defending this
lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating
a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents
referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents
in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements
to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final
determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company
elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment,
which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If
that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which
Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on January 8, 2018. Based
upon available information at this very early stage of litigation, it is still the belief of management and opinion of in-house
counsel that the Company will obtain a favorable ruling and no amount will be awarded to the plaintiff in this action. Accordingly,
Management believes the likelihood of material loss resulting from this lawsuit to be remote.
Employment Agreements
Pursuant to employment agreements entered in
December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the aggregate of $450,000
per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant these officers an aggregate
of 1.55 million shares of common stock at the beginning of each employment year.
Acquisition Option
In January 2016, the Company started publishing
an electronic game called Pocket Starships through an exclusive publishing agreement (the “Publishing Agreement”) with
Spectacle Games Publishing (“Spectacle”). The exclusive Publishing Agreement runs for a term of five years, expiring
on December 17, 2020. Spectacle is a California corporation, holding the exclusive rights to publish and market Pocket Starships,
including the ability to sublicense these rights to other parties, pursuant to an agreement with MMOJoe UG. MMOJoe UG, a German
limited liability company (“MMOJoe”) is the owner and developer of all intellectual property that relates or pertains
to the real-time, cross-platform, massively multiplayer on-line electronic game known as Pocket Starships.
In June 2016, the Company obtained an exclusive
option to purchase all of MMOJoe’s assets including but not limited to all assets pertaining to Pocket Starships (the “Option”).
Should the Company decide to exercise the Option, it will purchase MMOJoe for cash of $5,000,000 plus $10,000,000 worth of shares
of the Company’s common stock, valued at the time of closing of the purchase. This exclusive Option is exercisable by the
Company at any time, in the Company’s sole discretion, through December 31, 2020.
In exchange for the Option, the Company granted
MMOJoe stock options to purchase an aggregate of 3.75 million shares of the Company’s common stock. The stock options are
fully vested, exercisable at a price per share of $1.00, $2.50 and $5.00 and will expire starting in December 31, 2017 through
December 31, 2019. Total fair value of the options amounted to $472,000 using the Black-Scholes Option Pricing Model. Total fair
value of the options of $472,000 has been recorded as an expense in 2016 due to the uncertainty of such acquisition occurring in
the near future.
Publishing Agreement
Since December 17, 2015, the Company has
been publishing an electronic game called Pocket Starships through an exclusive 5 year publishing agreement in signed in
December 2015. As part of the agreement, the Company agreed to provide Spectacle monthly advances of $30,000 to cover
development expenses related to Pocket Starships. In April 2016, the agreement was amended and the advance amount was
increased to $120,000 per month starting in May 2016. In May 2016, the agreement was further amended to increase the monthly
amount to $130,000 starting in June 2016. As a result, the Company recorded a total of $1,151,000 during the year ended
December 31, 2016, of which, $734,000 was reported as part of Other General and Administrative expenses and $416,000 as part
of Research and Development expenses in the accompanying statements of operations. The monthly advance is non-refundable but
is recoupable from future revenues generated from Pocket Starships. The agreement also provides that the Company provide
appropriate marketing, promotional and user acquisition funds for the purpose of marketing Pocket Starships. These amounts
are based upon the Company’s reasonable discretion determined by analysis of the various metrics and performance
indicators. During 2016, the Company recorded a total of $350,000 in marketing and another $116,000 in travel costs. The
Company can unilaterally terminate this agreement within 30 days of the one year anniversary of the agreement and each
six-month period thereafter by providing written notice to Spectacle. Either party may terminate the agreement in the event
of a material breach by the other party that remains uncured after receipt of thirty days written notice.
NOTE 7 – EQUITY TRANSACTIONS
Common Stock:
Year Ended December 31, 2015:
In December 2014 the Company agreed to issue
a total of 5,500,000 shares of the Company’s restricted common stock as a form of signing bonus to two employees with a fair
value of $987,500. The entire fair value of $987,500 was expensed in 2014 and the 5.5 million common shares were subsequently issued
in 2015.
During the year ended December 31, 2015, the
Company issued an aggregate of 4,780,417 shares of common stock to employees and consultants with a total fair value of $2,341,000
for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed
the entire $2,341,000 upon issuance. The shares issued were valued at the date of the respective agreements.
In February 2015, the Company issued 2,500,000
shares of the its restricted common stock in exchange for all of the issued and outstanding shares of Franklin Networks, Inc.,
a Tennessee corporation. In December 2015, the Company cancelled 2,500,000 shares of its restricted common stock due to rescission
and unwinding of the acquisition agreement. The value of the shares on the issuance date was $1,700,000 and the value of the shares
on the rescission date was $500,000, resulting in a net charge to additional paid in capital of $1,200,000.
Year Ended December 31, 2016:
During the year ended December 31, 2016, the
Company issued an aggregate of 1,843,987 shares of common stock to employees with a total fair value of $413,000 for services rendered.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $413,000 upon
issuance. The shares issued were valued at the date of the respective agreements.
During the year ended December 31, 2016, the
Company issued an aggregate of 4,509,912 shares of restricted common stock to consultants with a total fair value of $1,951,000.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,951,000 upon
issuance. The shares issued were valued at the date of the respective agreements.
During the year ended December 31, 2016, the
Company issued an aggregate of 100,000 shares of restricted common stock to consultants for cash of $15,000.
In April 2016, the Company cancelled a total
of 325,000 shares of common stock issued to an employee pursuant to a settlement and termination agreement. Pursuant to current
accounting guidelines, no further accounting was necessary for the cancellation of the 325,000 shares of common stock other than
to remove the par value amounting to $33.00.
Common Stock with Vesting Terms:
The following table summarizes common stock
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, December 31, 2014
|
-
|
|
$
|
-
|
|
Granted
|
600,000
|
|
|
0.61
|
|
Vested
|
(270,833)
|
|
|
0.57
|
|
Forfeited
|
-
|
|
|
-
|
Non-vested, December 31, 2015
|
329,167
|
|
$
|
0.47
|
|
Granted
|
-
|
|
|
-
|
|
Vested
|
(308,334)
|
|
|
0.47
|
|
Forfeited
|
-
|
|
|
-
|
Non-vested, December 31, 2016
|
20,833
|
|
$
|
0.50
|
In August 2015, the Company granted and issued
100,000 shares of its restricted common stock to an employee pursuant to an employment agreement. The 100,000 shares vest over
a period of one year with a fair value of $37,000 at the date of grant.
In February 2015, the Company granted and issued
500,000 shares of its restricted common stock to a consultant pursuant to a consulting agreement. The 500,000 shares are forfeitable
and are deemed earned upon completion of service over a period of twenty-four months. The Company recognizes the fair value of
these shares as they vest.
During the year ended December 31, 2015, 270,833
of these shares vested and as a result, the Company recognized compensation cost of $61,000.
During the year ended December 31, 2016, another
308,334 of these shares vested and as a result, the Company recognized compensation cost of $273,000. As of December 31, 2016,
total unvested shares totaled 20,833 shares with unearned compensation costs of $13,000 which will be recognized in 2017.
When calculating basic net income (loss) per
share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted
net income per share, these shares are included in weighted average common shares outstanding as of their grant date.
Options:
The following table summarizes common stock
options activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
December 31, 2015
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
12,900,000
|
|
|
|
2.83
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, December 31, 2016
|
|
|
|
12,900,000
|
|
|
$
|
2.83
|
|
|
Exercisable, December 31, 2016
|
|
|
|
4,400,000
|
|
|
$
|
2.83
|
|
In June 2016, the Company granted options to
purchase 3.75 million shares of common stock valued at $472,000 pursuant to the planned acquisition of MMOJoe (see Note 6). The
stock options are fully vested, exercisable at a price per share of $1.00, $2.50 and $5.00 and will expire starting December 31,
2017 through December 31, 2019.
In August 2016, the Company granted an
employee options to purchase a total of 7.5 million shares of common stock with an exercise price per share of $1.00, $2.50
and $5.00. The options are fully vested upon grant but are only exercisable in three tranches starting in January 2017, 2018
and 2019. Total fair value of the options at grant date amounted to $201,000 computed using the Black-Scholes Option Pricing
Model. The Company determined the appropriate treatment is to recognize the fair value of the options over the service
period, which would be when the options are fully exercisable. The first tranche of 1 million shares became exercisable on
January 1, 2017 with a fair value of the options at grant date of $28,000 computed using the Black-Scholes Option Pricing
Model. During the year ended December 31, 2016, the Company recognized compensation expense of $28,000. Subsequent to
December 31, 2016, the employment agreement was terminated, all options cancelled, and no further compensation expense for
these options will be recognized.
In October 2016, the Company granted an employee
options to purchase a total of 1.5 million shares of common stock with an exercise price per share of $1.00, $2.50 and $5.00 and
will expire starting December 31, 2017 through December 31, 2019. The options are fully vested upon grant but are only exercisable
in three tranches starting in October 2016 and January 2018 and 2019. Total fair value of the options at grant date amounted to
$145,000 computed using the Black-Scholes Option Pricing Model. The Company determined the appropriate treatment is to recognize
the fair value of the options over the service period, which would be when the options are fully exercisable. During the year ended
December 31, 2016, the Company recognized compensation expense of $62,000. As of December 31, 2016, future unamortized costs amounted
to approximately $82,000.
In October, 2016, the Company signed and investor
relations consulting agreement with a third party granting options to purchase 50,000 shares of restricted common stock per month
beginning October 24, 2016 through October 24, 2017 with an exercise price of $1.00 per share that will expire 36 months from date
of grant. The options are granted monthly and fully vested and exercisable upon grant. As of December 31, 2016, 150,000 options
were granted. Total fair value of the options at their respective grant dates amounted to $59,000 computed using the Black-Scholes
Option Pricing Model. During the year ended December 31, 2016, the Company fully recognized the $59,000 compensation expense.
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of December 31, 2016, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Exercisable Options
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
$1.00
|
|
2,150,000
|
|
1.21 - 3
|
|
$1.00
|
|
1,150,000
|
|
$1.00
|
$2.50
|
|
2,750,000
|
|
2.21 - 2.5
|
|
$2.50
|
|
750,000
|
|
$2.50
|
$5.00
|
|
8,000,000
|
|
3.21 - 3.5
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
12,900,000
|
|
|
|
$3.97
|
|
4,400,000
|
|
$3.40
|
At December 31, 2016, the Company’s closing
stock price was $0.62 per share and the aggregate intrinsic value of the options outstanding at December 31, 2016 was $0. There
were no stock options issued or outstanding during the year ended December 31, 2015.
Warrants:
The following table summarizes common stock
warrants activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
December 31, 2015
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
200,000
|
|
|
|
0.50
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, December 31, 2016
|
|
|
|
200,000
|
|
|
$
|
0.50
|
|
|
Exercisable, December 31, 2016
|
|
|
|
200,000
|
|
|
$
|
0.50
|
|
In October and November 2016, pursuant to advisory
services agreement, the Company granted warrants to purchase a total of 200,000 shares of restricted common stock with an exercise
price of $1.00 and will expire 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair
value of the options at grant date amounted to $50,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
|
|
Outstanding Warrants
|
|
|
|
Exercisable Warrants
|
Warrants
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.50
|
|
200,000
|
|
1
|
|
$0.50
|
|
200,000
|
|
$0.50
|
|
|
200,000
|
|
|
|
$0.50
|
|
200,000
|
|
$0.50
|
At December 31, 2016, the Company’s closing
stock price was $0.62 per share and the aggregate intrinsic value of the warrants outstanding at December 31, 2016 was $24,000.
There were no stock warrants issued or outstanding during the year ended December 31, 2015.
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2016:
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
Expected life in years
|
|
0.61 – 3.5
|
|
Stock price volatility
|
|
132% - 156%
|
|
Risk free interest rate
|
|
0.62 % - 1.54%
|
|
Expected dividends
|
|
-
|
|
Forfeiture rate
|
|
-
|
The assumptions used in the Black Scholes models
referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options is the expected
life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period
of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock
price volatility was based upon the Company’s historical stock price over the expected term of the option. (3) The risk free
interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4)
The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and
does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical
forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.
NOTE 8 – SEGMENT REPORTING
The Company operated in one segment as of the
beginning of 2015, but concurrent with the organization of SPYR APPS, LLC on March 24, 2015, it operates in two segments: Digital
Media and Restaurant, which provide different products or services.
Digital Media Segment
- Through our
wholly owned subsidiaries SPYR APPS, LLC and SPYR APPS Oy, we develop, publish and co-publish mobile games, and then generate revenue
through those games by way of advertising and in-app purchases. The Company also recognizes revenues from fees received pursuant
to licensing rights acquired during 2015 for two gaming applications.
Restaurant Segment -
Through our wholly
owned subsidiary E.A.J.: PHL, Airport, Inc. we own and operate one “American Diner” theme restaurant called “Eat
at Joe’s ® located in the Philadelphia International Airport. Eat at Joe’s menu includes a variety of dishes including
omelets, waffles and hotcakes, sandwiches, hot dogs, burgers, traditional Philly Steak sandwiches, custom wraps, fresh salads and
a full complement of beverages and deserts, all made with top quality, fresh ingredients and all prepared to order.
Our lease in the Philadelphia Airport is scheduled
to expire in April 2017 and will not be renewed, and concurrent with expiration of the lease the restaurant the will close. The
Company’s plan is to divest itself from its restaurant division and is considering spinning off the business, and issuing
a stock dividend to its shareholders of record as of May 19, 2017, however, there is no assurance this can be completed. The Company
is also exploring opportunities to license or franchise the name “Eat at Joe’s” as well as merger and acquisition
targets of other businesses in the food service industries.
Revenue and expenses earned and charged between
segments are eliminated in consolidation. Corporate expenses, interest income, interest expense, gains and losses on trading or
marketable securities and income taxes are managed on a total company basis.
Information related to these segments is as
follows:
REPORTABLE SEGMENTS
|
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
139,000
|
|
|
$
|
1,413,000
|
|
|
$
|
—
|
|
|
$
|
1,552,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
421,000
|
|
|
|
—
|
|
|
|
421,000
|
|
Research and Development
|
|
|
416,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416,000
|
|
General and administrative
|
|
|
2,519,000
|
|
|
|
949,000
|
|
|
|
4,333,000
|
|
|
|
7,801,000
|
|
Depreciation and amortization
|
|
|
51,000
|
|
|
|
68,000
|
|
|
|
47,000
|
|
|
|
166,000
|
|
Operating loss
|
|
$
|
(2,847,000
|
)
|
|
$
|
(25,000
|
)
|
|
$
|
(4,380,000
|
)
|
|
$
|
(7,252,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
290,000
|
|
|
$
|
387,000
|
|
|
$
|
2,892,000
|
|
|
$
|
3,569,000
|
|
Property and equipment, net
|
|
|
8,000
|
|
|
|
30,000
|
|
|
|
173,000
|
|
|
|
211,000
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000
|
|
|
|
18,000
|
|
Other non-current assets
|
|
|
40,000
|
|
|
|
17,000
|
|
|
|
5,000
|
|
|
|
62,000
|
|
Total assets
|
|
$
|
338,000
|
|
|
$
|
434,000
|
|
|
$
|
3,088,000
|
|
|
$
|
3,860,000
|
|
REPORTABLE SEGMENTS
|
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,000
|
|
|
$
|
1,591,000
|
|
|
$
|
—
|
|
|
$
|
1,597,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
473,000
|
|
|
|
—
|
|
|
|
473,000
|
|
General and administrative
|
|
|
414,000
|
|
|
|
918,000
|
|
|
|
3,675,000
|
|
|
|
5,007,000
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
74,000
|
|
|
|
24,000
|
|
|
|
98,000
|
|
Operating income (loss)
|
|
$
|
(408,000
|
)
|
|
$
|
126,000
|
|
|
$
|
(3,699,000
|
)
|
|
$
|
(3,981,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
29,000
|
|
|
$
|
284,000
|
|
|
$
|
6,992,000
|
|
|
$
|
7,305,000
|
|
Property and equipment, net
|
|
|
6,000
|
|
|
|
97,000
|
|
|
|
172,000
|
|
|
|
275,000
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
21,000
|
|
|
|
21,000
|
|
Other non-current assets
|
|
|
80,000
|
|
|
|
17,000
|
|
|
|
5,000
|
|
|
|
102,000
|
|
Total assets
|
|
$
|
115,000
|
|
|
$
|
398,000
|
|
|
$
|
7,190,000
|
|
|
$
|
7,703,000
|
|
NOTE 9 – DISCONTINUED OPERATIONS
On February 23, 2015 the Company entered into
an agreement whereby, the Company issued an aggregate of 2.5 million shares of its restricted common stock valued at $1,700,000,
in exchange for all of the issued and outstanding shares of Franklin Networks, Inc., a Tennessee corporation (“Franklin”),
an internet company that began operations in September 2014. The acquisition of Franklin had been accounted for as a purchase and
the operations of Franklin have been consolidated since the date of the acquisition. The $1.7 million purchase price was allocated
based upon the fair value of the acquired assets which consisted of intangible assets of $671,000, deferred tax liability of $118,000
and goodwill of $1,147,000, as determined by management with the assistance of an independent valuation firm.
On December 31, 2015, the Company and
the former owners of Franklin agreed to unwind the agreement and return the original consideration exchanged in the contract.
Pursuant to ASC 2014-08, Reporting of Discontinued Operations, the Company reported the gain (loss) from operations as a gain
(loss) from discontinued operations in the accompanying statements of operations since the Company considered its decision to
rescind the Franklin acquisition as a strategic shift that has a major effect in the Company’s operations and financial
results.
During the year ended December 31, 2016, the
Company incurred additional expenses of $4,494 related to the winding-up of Franklin. During the year ended December 31, 2015,
Franklin generated a loss from operations of $2,344,000. The following table provides additional detail of these losses which are
reflected as a loss on discontinued operations.
|
|
December 31,
2016
|
|
December 31,
2015
|
Revenues
|
|
$
|
—
|
|
|
$
|
388,000
|
|
General and administrative
|
|
|
4,000
|
|
|
|
2,732,000
|
|
Loss from discontinued operations
|
|
$
|
(4,000
|
)
|
|
$
|
(2,344,000
|
)
|