SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2017 and 2016
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial
statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations
of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note
disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant
to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2016 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2016 included
herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including
notes, required by GAAP.
In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial
position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of
a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal
year-end results.
The condensed consolidated financial statements
and all relevant footnotes have been adjusted as of the earliest period presented to reflect the discontinued operations of our
Eat at Joe’s restaurant (see Note 7).
Organization
The Company was incorporated as Conceptualistics,
Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its name to Eat at Joe’s, Ltd.
In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March
12, 2015.
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.
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.
As of October 5, 2016, SPYR APPS, Oy ceased business activities and completed the dissolution process on October 18, 2017.
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Our plan is to complete a tax free exchange of our intellectual property related to our restaurant
operations, including the registered trademark: “Eat at Joe’s
®
,” and related furniture, fixtures
and equipment to our wholly owned subsidiary, Branded Foods Concepts, Inc. (“Branded Foods”), in exchange for common
shares of Branded Foods. We expect Branded Foods will register its common stock under Section 12g of the Securities Act on Form
10 and thereafter become a fully reporting independent company. Pursuant to current accounting guidelines, the assets and liabilities
of EAJ as well as the results of its operations were presented in these financial statements as discontinued operations.
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 (dissolved October 18, 2017), E.A.J.: PHL, Airport Inc., a Pennsylvania
corporation (discontinued operations, see Note 7), and Branded Foods Concepts, Inc., a Nevada corporation. Intercompany
accounts and transactions have been eliminated.
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 nine months ended September 30, 2017, the Company recorded
a net loss from continuing operations of $8,735,000 and utilized cash in continuing operations of $3,385,000. As of September 30,
2017, our cash balance was $285,000 and we had trading securities of $22,000.
The
Company’s restaurant, Eat At Joes closed 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.
On September 5, 2017, we negotiated a revolving line
of credit loan agreement with a company controlled by our Chairman and majority shareholder. The line of credit allows the Company
to borrow up to $500,000 with interest at 6% per annum. Repayment on the loan is due February 28, 2018. As of September 30, 2017,
we have borrowed $200,000.
We estimate the Company currently has sufficient
cash and liquidity to meet its working capital needs for its fiscal year 2017. 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.
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 trading securities, fixed assets, intangible assets, capitalized licensing rights, amounts of potential
liabilities and valuation of issuance of equity securities. Actual results could differ from those estimates.
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
nine months ended September 30, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class
E – 318,654, Options – 6,270,000, Warrants – 1,200,000) would have had an anti-dilutive effect due to the Company
generating a loss for the nine months ended September 30, 2017.
The basic and fully diluted shares for the
nine months ended September 30, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 83,333,
Class A – 26,909,028, Class E – 163,415) would have had an anti-dilutive effect due to the Company generating a loss
for the nine months ended September 30, 2016.
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.
During 2017, the Company capitalized $175,000
pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual property (IP) from various
STAR TREK
television series in to future updates to and expansions of the Pocket Starships game. The Company estimates that
the IP will have an estimated life of 1.6 years, which approximates the term of the license. In addition, we also acquired the
game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer. Battlewack: Idle Lords
requires additional development before it can be released.
In a prior period, the Company capitalized
$50,000 as a result of the acquisition of licensing rights of one gaming application. The Company estimates that the gaming application
will have an estimated life of five years, which approximates the term of the license.
During the period ended September 30, 2017,
the Company recorded amortization expense of $50,000 pursuant to the terms of these licensing rights. As of September 30, 2017
and December 31, 2016, the unamortized capitalized licensing rights amounted to $166,000 and $268,000 respectively.
Software Development Costs
Costs incurred for software development are
expensed as incurred. During the nine months ended September 30, 2017 and 2016, the Company incurred $1,202,000 and $760,000 in
software development costs paid to
independent gaming software developers.
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.
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
The Company’s securities investments
are bought and held principally for the purpose of selling them in the short term and are classified as trading securities. Trading
securities are recorded at fair value based on quoted market prices (level 1) on the balance sheet in current assets, with the
change in fair value during the period included in earnings as unrealized gains or losses in the statement of operations. Gains
from the sales of such 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 software development costs and implementation
of the Company’s business plans generally.
Investments in securities are summarized as
follows:
|
|
Fair Value at
|
|
|
|
Proceeds from
|
|
Gain on
|
|
Unrealized
|
|
Fair Value at
|
Year
|
|
Beginning of Year
|
|
Purchases
|
|
Sale
|
|
Sale
|
|
Loss
|
|
September 30, 2017
|
|
2017
|
|
|
$
|
59,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(37,000
|
)
|
|
$
|
22,000
|
|
Realized gains and losses are determined on
the basis of specific identification. During the nine months ended September 30, 2017 and 2016, sales proceeds and gross realized
gains and losses on trading securities were:
|
|
|
September 30, 2017
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Sales proceeds
|
|
$
|
—
|
|
|
$
|
283,000
|
|
Gross realized (losses)
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross realized gains
|
|
|
—
|
|
|
|
75,000
|
|
Gain (loss) on sale of trading securities
|
|
$
|
—
|
|
|
$
|
75,000
|
|
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
|
|
|
September 30, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 22,000
|
|
$ 22,000
|
|
$ —
|
|
$ —
|
Money market funds
|
|
36,000
|
|
36,000
|
|
—
|
|
—
|
Total
|
|
$ 58,000
|
|
$ 58,000
|
|
$ —
|
|
$ —
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 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
|
|
$ —
|
|
$
—
|
The fair value of the Company’s trading
securities is determined by reference to quoted market prices (level 1). During the nine months ended September 30, 2017, the Company
recorded $37,000 in unrealized losses to account for the changes in fair value of its trading securities. During the nine months
ended September 30, 2016, the Company recorded $295,000 in unrealized gains to account for the changes in fair value of its trading
securities.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Equipment
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Furniture & fixtures
|
|
|
115,000
|
|
|
|
115,000
|
|
Leasehold improvements
|
|
|
106,000
|
|
|
|
106,000
|
|
|
|
|
249,000
|
|
|
|
249,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(103,000
|
)
|
|
|
(68,000
|
)
|
Property and Equipment, Net
|
|
$
|
146,000
|
|
|
$
|
181,000
|
|
Depreciation and amortization expense for the
nine months ended September 30, 2017 and 2016 was $35,000 and $33,000, respectively.
NOTE 4 – LOAN PAYABLE –
RELATED PARTY
On September 5, 2017, the Company obtained a revolving
line of credit from a company controlled by our Chairman and majority shareholder. The line of credit allows the Company to borrow
up to $500,000 with interest at 6% per annum. Repayment on the loan is due February 28, 2018. As of September 30, 2017, we have
borrowed $200,000.
NOTE 5 – EQUITY TRANSACTIONS
Common Stock:
During the nine months ended September 30,
2017, the Company issued an aggregate of 750,000 shares of restricted common stock to an existing shareholder and former officer/employee
for cash of $300,000. The common shares had a fair value of $510,000 at the date of sale, and as a result, the Company reflected
an additional expense of $210,000 to account the difference between the sale price and the fair market value of common shares sold.
During the nine months ended September 30,
2017, the Company issued an aggregate of 1,750,000 shares of restricted common stock to employees with a total fair value of $999,000
for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed
the entire $999,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.
During the nine months ended September 30,
2017, the Company issued an aggregate of 11,854,833 shares of restricted common stock to consultants with a total fair value of
$3,308,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire
$3,308,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.
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, 2016
|
20,833
|
|
$
|
0.50
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(20,833)
|
|
|
0.50
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, September 30, 2017
|
—
|
|
$
|
—
|
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. As of December 31, 2016, 479,167 of these shares had vested and 20,833 common shares unvested. During
the nine months ended September 30, 2017, the remaining 20,833 of these shares vested and as a result, the Company recognized compensation
cost of $46,000. As of September 30, 2017, there were no unvested shares and no unearned compensation costs to be recorded.
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
|
|
|
Options
|
|
|
Exercise Price
|
December 31, 2016
|
12,900,000
|
|
$
|
2.83
|
|
Granted
|
870,000
|
|
|
1.00
|
|
Exercised
|
-
|
|
|
-
|
|
Cancelled
|
-
|
|
|
-
|
|
Forfeited
|
(7,500,000)
|
|
|
3.97
|
Outstanding, September 30, 2017
|
6,270,000
|
|
|
3.21
|
Exercisable, September 30, 2017
|
5,095,000
|
|
$
|
3.18
|
During the period ended September 30, 2017,
the Company granted stock options to consultants to purchase a total of 870,000 shares of common stock. A total of 695,000 options
vested upon grant while the remaining 175,000 options will vest through February 2018 at a rate of 35,000 shares per month. The
options are exercisable at $1.00 per share and will expire over 4 years. The fair values of the options are recorded at their respective
grant dates computed using the Black-Scholes Option Pricing Model. During the nine months ended September 30, 2017, the Company
recognized $357,000 in compensation expense based upon the vesting of outstanding options. As of September 30, 2017, the unamortized
compensation expense for unvested options was $105,000 which will be recognized over the vesting period.
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of September 30, 2017, 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
|
|
2,020,000
|
|
0.25 – 3.36
|
|
$1.00
|
|
1,845,000
|
|
$1.00
|
$2.50
|
|
1,250,000
|
|
1.50
|
|
$2.50
|
|
750,000
|
|
$2.50
|
$5.00
|
|
3,000,000
|
|
2.50
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
6,270,000
|
|
|
|
$3.27
|
|
5,095,000
|
|
$3.30
|
At September 30, 2017, the Company’s
closing stock price was $0.31 per share. As all outstanding options had an exercise price greater than $0.31 per share, there was
no intrinsic value of the options outstanding at September 30, 2017.
Warrants:
The following table summarizes common stock
warrants activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
December 31, 2016
|
|
|
|
200,000
|
|
|
$
|
1.00
|
|
|
Granted
|
|
|
|
1,000,000
|
|
|
|
1.75
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding September 30, 2017
|
|
|
|
1,200,000
|
|
|
$
|
1.54
|
|
|
Exercisable September 30, 2017
|
|
|
|
1,200,000
|
|
|
$
|
1.54
|
|
In March 2017, pursuant to an employee separation
agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock with an exercise price
of $1.50 and $2.00 which will expire December 31, 2018. The warrants are fully vested and exercisable upon grant. Total fair value
of the warrants at grant date amounted to $290,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
The weighted average exercise prices, remaining
lives for warrants granted, and exercisable as of September 30, 2017, were as follows:
|
|
Outstanding and Exercisable Warrants
|
|
Warrants
|
|
|
|
|
|
Exercise Price
|
|
|
|
Life
|
|
Per Share
|
|
Shares
|
|
(Years)
|
|
$0.50
|
|
200,000
|
|
0.08
|
|
$1.50
|
|
500,000
|
|
1.25
|
|
$2.00
|
|
500,000
|
|
1.25
|
|
|
|
1,200,000
|
|
|
|
At September 30, 2017, the Company’s
closing stock price was $0.31 per share. As all outstanding warrants had an exercise price greater than $0.31 per share, there
was no intrinsic value of the warrants outstanding at September 30, 2017.
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2017:
|
|
|
Nine-Months Ended
|
|
|
|
|
September 30, 2017
|
|
Expected life in years
|
|
|
1.75 – 3.92
|
|
Stock price volatility
|
|
|
127% - 158%
|
|
Risk free interest rate
|
|
|
1.26 % - 1.60%
|
|
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 6 – COMMITMENTS AND CONTINGENCIES
LITIGATION
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 July 16, 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.
GAME DEVELOPMENT AGREEMENTS
The Company is party to various game development
agreements. Payments are contingent upon the developer(s) meeting specified milestones and game performance. Pursuant to these
agreements, the Company has agreed to pay up to $723,000 during the period from November 2017 through December 2018.
COMMON STOCK TO BE ISSUED
The Company is party to various
third-party service agreements to be paid through the issuance of the company’s restricted common stock. Contingent
upon the third parties providing the agreed upon services, the Company will issue up to 4,523,500 restricted common shares at
various intervals during the period from November 2017 through August 2018. The shares will be recorded at fair value on the
date earned under the respective agreements.
NOTE 7 – DISCONTINUED OPERATIONS
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported as a discontinued
operations.
The following table summarizes the assets
and liabilities of our discontinued restaurant segment's discontinued operations as of September 30, 2017 and December 31,
2016:
|
|
September 30, 2017
|
|
December 31, 2016
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
13,000
|
|
Inventory
|
|
|
—
|
|
|
|
12,000
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
25,000
|
|
Property and equipment, net
|
|
|
6,000
|
|
|
|
30,000
|
|
Other assets
|
|
|
2,000
|
|
|
|
17,000
|
|
Total Assets
|
|
$
|
8,000
|
|
|
$
|
97,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
35,000
|
|
|
|
58,000
|
|
Total Liabilities
|
|
$
|
35,000
|
|
|
$
|
58,000
|
|
The following table summarizes the results
of operations of our discontinued restaurant segment for the three and nine months ended September 30, 2017 and 2016 and is included
in the condensed consolidated statements of operations as discontinued operations:
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
408,000
|
|
|
$
|
421,000
|
|
|
$
|
1,050,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
131,000
|
|
|
|
134,000
|
|
|
|
324,000
|
|
Gross Margin
|
|
|
—
|
|
|
|
277,000
|
|
|
|
287,000
|
|
|
|
726,000
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and related expenses
|
|
|
—
|
|
|
|
119,000
|
|
|
|
178,000
|
|
|
|
353,000
|
|
Rent
|
|
|
—
|
|
|
|
62,000
|
|
|
|
82,000
|
|
|
|
191,000
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
15,000
|
|
|
|
20,000
|
|
|
|
52,000
|
|
Professional fees
|
|
|
23,000
|
|
|
|
2,000
|
|
|
|
26,000
|
|
|
|
5,000
|
|
Other general and administrative
|
|
|
5,000
|
|
|
|
53,000
|
|
|
|
94,000
|
|
|
|
155,000
|
|
Total Operating Expenses
|
|
|
28,000
|
|
|
|
251,000
|
|
|
|
400,000
|
|
|
|
756,000
|
|
Operating Income (Loss)
|
|
|
(28,000
|
)
|
|
|
26,000
|
|
|
|
(113,000
|
)
|
|
|
(30,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,000
|
)
|
|
|
—
|
|
Income (Loss) on discontinued operations
|
|
$
|
(28,000
|
)
|
|
$
|
26,000
|
|
|
$
|
(132,000
|
)
|
|
$
|
(30,000
|
)
|
NOTE 8 – SUBSEQUENT EVENTS
Subsequent to September 30, 2017, the Company
issued an aggregate of 395,000 shares of common stock to an employee and third-party service providers with a total fair value
of $146,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance.
On October 23, 2017, we restructured and exercised
a game purchase option by entering into a definitive agreement with the game owner MMOJoe pursuant to which SPYR will own all of
the game related assets of Pocket Starships, in a cashless transaction, and the publishing agreement with Spectacle as well as
the original terms of the Option will be terminated, which means that SPYR will now be able to retain 100% of the revenue generated
from the game and will be the sole owner of all of the assets related to the game. The acquisition includes, among other assets,
all Pocket Starships related intellectual property, the userbase, artwork, software, internet domains, game store accounts (such
as App Store, Play Store, Amazon, and Facebook Gameroom), web portal accounts (Facebook, VK.com, Kongregate, etc.) and internet
domains (www.pocketstarships.com). Under the terms of the agreement, the game's owner will receive 8,000,000 restricted shares
of SPYR stock (subject to resale gating provisions) with a fair value of $3.2 million and 8,000,000 three-year cash-based options
exercisable at $0.50 per share with a fair value of $2,452,000. The Company is currently in the process of determining the accounting
for the acquisition.