SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2018 and 2017
(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, 2017 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2017 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.
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 subsidiary, SPYR APPS,
LLC we operate our mobile games and applications business. The focus of the SPYR APPS subsidiary 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 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 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, 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.
Going Concern
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, however, the issues described below raise substantial
doubt about the Company’s ability to do so.
As shown in the accompanying financial statements,
for the three months ended March 31, 2018, the Company recorded a net loss from continuing operations of $3,951,000 and utilized
cash in continuing operations of $816,000. As of March 31, 2018, our cash balance was $78,000 and we had trading securities of
$37,000. These issues raise substantial doubt about the Company’s ability to continue as a going concern.
The Company plans to expand its mobile games
and application development and publishing activities, such as Pocket Starships and Steven Universe Tap Together, through acquisition
and/or development of its own intellectual property and publishing agreements with developers.
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.
The ability of the Company to continue as a
going concern is dependent upon the success of future capital offerings or alternative financing arrangements and expansion of
its operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate
enough cash flow to fund its operations through calendar year 2018. However, management cannot make any assurances that such financing
will be secured.
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
three months ended March 31, 2018 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class
E – 253,678, Options – 13,740,000, Warrants – 3,600,000) would have had an anti-dilutive effect due to the Company
generating a loss for the three months ended March 31, 2018.
The basic and fully diluted shares for the
three months ended March 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class
E – 150,775, Options – 5,970,000, Warrants – 1,200,000) would have had an anti-dilutive effect due to the Company
generating a loss for the three months ended March 31, 2017.
Capitalized Gaming Assets and Licensing Rights
Capitalized gaming
assets and licensing rights represent costs to acquire 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.
On October 23, 2017, the Company completed
the acquisition of all assets that refer, relate or pertain to the real—time cross-platform MMO game commonly known and referred
to as “Pocket Starships,” including but not limited to all intellectual property, know how, “urls,” websites,
game engines, game store accounts, prior versions, company names and trade names, business plans, financial reports, financial
data, employee data, customer lists, forecasts, strategies, and all other business information; manufacturing or other technical
or scientific know-how, specifications, technical drawings, drawings, artwork, music, diagrams, schematics, technology, processes,
and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials, formulae, compositions, information,
data, results, plans, surveys and/or reports of a technical nature; and software programs (including all forms of code), software
documentation, software development kits, game design documents, and formulae related to the current, future and proposed products
and services, including any additions, enhancements or modifications to the foregoing or derivatives thereof after the date hereof.
As consideration for the acquisition, the Company
issued eight million shares of the Company’s restricted common stock valued at $3,200,000, options to purchase up to eight
million shares of the Company’s restricted common stock valued at $2,452,000 and assumed liabilities of $210,000 for a total
purchase price of $5,862,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting
August 31, 2020. The acquisition of “Pocket Starships” was reported as part of capitalized gaming assets and licensing
rights valued at $481,000 based upon discounted cash flows. The difference between purchase price and the capitalized value was
recorded as loss on write down on assets during 4
th
quarter 2017. The Company amortizes the capitalized cost on a straight-line
basis over an estimated life of seven to ten years.
Further, the options previously issued pursuant
to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to three million, seven hundred
and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect in accordance with the terms
of the purchase option agreement.
Also 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.
During the three months ended March 31, 2018,
the Company recorded amortization expense of $18,000. As of March 31, 2018 and December, 2017, the unamortized capitalized gaming
assets and licensing rights amounted to $726,000 and $743,000 respectively.
Software Development Costs
Costs incurred for software development are
expensed as incurred. During the three months ended March 31, 2018 and 2017, the Company incurred $299,000 and $113,000 in software
development costs paid to
independent gaming software developers.
Revenue Recognition
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 superseded nearly all existing revenue recognition guidance under
prior U.S. GAAP and replace it with a principle based approach for determining revenue recognition. The core principle of the standard
is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services.
We adopted this new revenue recognition standard
along with is related amendments on January 1, 2018 and have updated our accounting policy for revenue recognition. As expected,
at our current level of revenue, the adoption of this new standard did not impact our financial position or results of operations
operating cash flows.
We determine revenue recognition by: (1)
identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3)
determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5)
recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.
Through our wholly owned subsidiary SPYR APPS,
LLC, d/b/a SPYR GAMES, 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’s dedicated mobile gaming applications can be downloaded through the app stores
maintained by Apple and Google. The Company’s cross platform gaming application, which can be played on personal computers,
Facebook and mobile devices, can be downloaded from the internet and Facebook as well as through the app stores maintained by Apple,
Google and Amazon.
We operate our games as live services that
allow players to play for free. Within these games players can purchase virtual items to enhance their game-playing experience.
Our identified performance obligation is to display the virtual items within the game. Payment is required at time of purchase
and the purchase price is a fixed amount.
Players can purchase our virtual items through
various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google Play accounts, Facebook local
currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable and relate to non-cancellable
contracts that specify our obligations.
For revenue earned through app stores, players
utilize the app store’s local currency-based payments program to purchase virtual items in our games. For all payment transactions
on these app store platforms, the app store remits to us 70% of the price we request to be charged to the player for each transaction,
which represents the transaction price. We recognize revenue net of the amounts retained by the app stores for platform and payment
processing fees.
Recent Accounting Standards
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
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
|
|
Gain on
|
|
Unrealized
|
|
Fair Value at
|
Year
|
|
Beginning of Year
|
|
Sale
|
|
Loss
|
|
March 31, 2018
|
|
2018
|
|
|
$
|
48,000
|
|
|
$
|
—
|
|
|
$
|
(11,000
|
)
|
|
$
|
37,000
|
|
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
|
|
|
March 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$
|
37,000
|
|
|
$
|
37,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
|
36,000
|
|
|
|
36,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
73,000
|
|
|
$
|
73,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$
|
48,000
|
|
|
$
|
48,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
|
36,000
|
|
|
|
36,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
84,000
|
|
|
$
|
84,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
March 31,
2018
|
|
December 31,
2017
|
|
|
|
|
|
Equipment
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Furniture & fixtures
|
|
|
114,000
|
|
|
|
114,000
|
|
Leasehold improvements
|
|
|
107,000
|
|
|
|
107,000
|
|
|
|
|
249,000
|
|
|
|
249,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(126,000
|
)
|
|
|
(115,000
|
)
|
Property and Equipment, Net
|
|
$
|
123,000
|
|
|
$
|
134,000
|
|
Depreciation expense for the three months ended
March 31, 2018 and 2017 was $11,000 and $12,000, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
On
September 5, 2017, the Company obtained a revolving line of credit from Berkshire
Capital Management Co., Inc.
The
line of credit allows the Company to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien
on all the assets of the Company and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019.
As of March 31, 2018, the Company has borrowed $1,000,000 and accrued interest of $21,000.
During
the three months ended March 31, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive
officer of the Company for cash of $50,000.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
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 October 30, 2018 and
the Company has recorded anticipated litigation and court costs in accrued expenses. Based upon available information at this stage
of litigation, it is still the belief of management and opinion of in-house counsel that the Company will obtain a favorable ruling.
Management does not expect any loss resulting from this lawsuit to be material.
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.
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 $585,000 during the period from April 2018 through January 2019.
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 980,116 restricted common shares at various intervals during the
period from April 2018 through February 2019. The shares will be recorded at fair value on the date earned under the respective
agreements.
NOTE 6 – EQUITY TRANSACTIONS
Common Stock:
Three Months Ended March 31, 2018:
During the three months ended March 31, 2018,
the Company issued an aggregate of 4,200,000 shares of restricted common stock to third parties for cash of $555,000.
During the three months ended March 31, 2018,
the Company issued 500,000 shares of restricted common stock to the father of an executive officer of the Company for cash of $50,000.
During the three months ended March 31, 2018,
the Company issued an aggregate of 1,250,000 shares of restricted common stock to employees with a total fair value of $625,000
for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed
the entire $625,000 upon issuance. The shares issued were valued at the date earned under the respective agreement based upon closing
market price of the Company’s common stock.
During the three months ended March 31, 2018,
the Company issued an aggregate of 4,441,942 shares of restricted common stock to consultants with a total fair value of $1,712,000.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,712,000 upon
issuance. The shares issued were valued at the date earned under the respective agreements based upon closing market price of the
Company’s common stock.
Options:
The following table summarizes common stock
options activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
December 31, 2017
|
|
|
|
13,320,000
|
|
|
$
|
1.74
|
|
|
Granted
|
|
|
|
420,000
|
|
|
|
1.00
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, March 31, 2018
|
|
|
|
13,740,000
|
|
|
$
|
1.72
|
|
|
Exercisable, March 31, 2018
|
|
|
|
12,855,000
|
|
|
$
|
1.61
|
|
During the year ended December 31, 2017, the
Company granted stock options to a consultant to purchase a total of 420,000 shares of common stock. During the three months ended
March 31, 2018, the Company renewed the contract for an additional year and granted the consultant an additional 420,000 stock
options with a total fair value of $115,000. A total of 105,000 options vested during three months ended March 31, 2018 while the
remaining 385,000 options will vest through February 2019 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 three months ended March 31, 2018, the Company recognized $52,000 in compensation
expense based upon the vesting of outstanding options. As of March 31, 2018, the unamortized compensation expense for unvested
options was $106,000 which will be over the vesting period.
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of March 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Exercisable Options
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.50
|
|
8,000,000
|
|
2.42
|
|
$0.50
|
|
8,000,000
|
|
$0.50
|
$1.00
|
|
1,490,000
|
|
1.57 – 3.93
|
|
$1.00
|
|
1,105,000
|
|
$1.00
|
$2.50
|
|
1,250,000
|
|
.75
|
|
$2.50
|
|
1,250,000
|
|
$2.50
|
$5.00
|
|
3,000,000
|
|
1.75
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
13,740,000
|
|
|
|
$1.72
|
|
12,855,000
|
|
$1.61
|
At March 31, 2018, the Company’s closing
stock price was $0.395 per share. As all outstanding options had an exercise price greater than $0.395 per share, there was no
intrinsic value of the options outstanding at March 31, 2018.
The following table summarizes options granted
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, December 31, 2017
|
70,000
|
|
$
|
1.00
|
|
Granted
|
420,000
|
|
|
1.00
|
|
Vested
|
(105,000)
|
|
|
1.00
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, March 31, 2018
|
385,000
|
|
$
|
1.00
|
Warrants:
The following table summarizes common stock
warrants activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
Outstanding, December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
|
Granted
|
|
|
|
1,900,000
|
|
|
|
0.44
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, March 31, 2018
|
|
|
|
3,600,000
|
|
|
$
|
0.73
|
|
|
Exercisable, March 31, 2018
|
|
|
|
3,600,000
|
|
|
$
|
0.73
|
|
In January 2018, pursuant to a services agreement,
the Company granted warrants to purchase a total of 1,200,000 shares of restricted common stock with an exercise price of $0.40
and will expire 36 months after date of grant. The warrants are fully vested and exercisable upon grant. Total fair value of the
warrants at grant date amounted to $383,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the
date of grant.
In March 2018, pursuant to a stock purchase
agreement, the Company granted warrants to purchase a total of 700,000 shares of restricted common stock with an exercise price
of $0.50 and will expire March 18, 2023. The warrants are fully vested and exercisable upon grant. Total fair value of the options
at grant date amounted to $234,000 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 March 31, 2018, were as follows:
|
|
Outstanding and Exercisable Warrants
|
|
Warrants
|
|
|
|
|
|
Exercise Price
|
|
|
|
Life
|
|
Per Share
|
|
Shares
|
|
(Years)
|
|
$0.01
|
|
600,000
|
|
2.76
|
|
$0.40
|
|
1,200,000
|
|
2.79
|
|
$0.50
|
|
800,000
|
|
0.58 – 4.97
|
|
$1.50
|
|
500,000
|
|
0.75
|
|
$2.00
|
|
500,000
|
|
0.75
|
|
|
|
3,600,000
|
|
|
|
At March 31, 2018, the Company’s closing
stock price was $0.395 per share. As all outstanding warrants had an exercise price greater than $0.395 per share, there was no
intrinsic value of the warrants outstanding at March 31, 2018.
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2018:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2018
|
|
Expected life in years
|
|
|
3.00 – 5.00
|
|
Stock price volatility
|
|
|
138% - 153%
|
|
Risk free interest rate
|
|
|
2.12 % - 2.65%
|
|
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 7 – DISCONTINUED OPERATIONS
Restaurant
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 discontinued
operations.
The following table summarizes the assets and
liabilities of our discontinued restaurant segment's discontinued operations as of March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
December 31,
2017
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Inventory
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
Property and equipment, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
Total Liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
The following table summarizes the results
of operations of our discontinued restaurant for the three months ended March 31, 2018 and 2017 and is included in the consolidated
statements of operations as discontinued operations:
|
|
For the Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
312,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
99,000
|
|
Gross Margin
|
|
|
—
|
|
|
|
213,000
|
|
Expenses
|
|
|
|
|
|
|
|
|
Labor and related expenses
|
|
|
—
|
|
|
|
123,000
|
|
Rent
|
|
|
1,000
|
|
|
|
61,000
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
15,000
|
|
Professional fees
|
|
|
—
|
|
|
|
—
|
|
Other general and administrative
|
|
|
1,000
|
|
|
|
49,000
|
|
Total Operating Expenses
|
|
|
2,000
|
|
|
|
248,000
|
|
Operating Income (Loss)
|
|
|
(2,000
|
)
|
|
|
(35,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
—
|
|
|
|
—
|
|
Income (Loss) on discontinued operations
|
|
$
|
(2,000
|
)
|
|
$
|
(35,000
|
)
|
NOTE 8 – SUBSEQUENT EVENTS
Subsequent to March 31, 2018, the Company issued
an aggregate of 272,506 shares of common stock to consultants with a total fair value of $104,000 for services rendered. The shares
issued are non-refundable and deemed earned upon issuance.
Subsequent to March 31, 2018, on April 20,
2018. the Company signed a convertible promissory note with a third party lender for up to $475,000 (net of original issue discount
of $25,000). The note is for 12 months with interest at 8% per annum on the unpaid principal amount. The note holder has the right,
at any time on or after 181 calendar days after the date of the note, to convert all or any portion of the outstanding principal
and interest into the Company’s restricted common stock at $0.20 per share. On April 26, 2018 the Company borrowed $150,000
on this note.