ITEM 1. FINANCIAL STATEMENTS
SPYR, INC., AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
December 31, 2015
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,865,074
|
|
|
$
|
6,903,887
|
|
Accounts receivable, net
|
|
|
22,018
|
|
|
|
7,701
|
|
Inventory
|
|
|
10,228
|
|
|
|
12,957
|
|
Prepaid expenses
|
|
|
82,021
|
|
|
|
55,533
|
|
Trading securities, at market value
|
|
|
330,631
|
|
|
|
324,444
|
|
Total Current Assets
|
|
|
4,309,972
|
|
|
|
7,304,522
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
237,290
|
|
|
|
274,886
|
|
Intangible assets, net
|
|
|
18,606
|
|
|
|
21,307
|
|
Capitalized licensing rights, net
|
|
|
267,500
|
|
|
|
80,000
|
|
Deposit on acquisition
|
|
|
471,574
|
|
|
|
—
|
|
Other assets
|
|
|
22,299
|
|
|
|
22,299
|
|
TOTAL ASSETS
|
|
$
|
5,327,241
|
|
|
$
|
7,703,014
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
183,028
|
|
|
$
|
104,871
|
|
Related party accounts payable
|
|
|
—
|
|
|
|
7,506
|
|
Total Current Liabilities
|
|
|
183,028
|
|
|
|
112,377
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
107,636 Class A shares issued and outstanding
|
|
|
|
|
|
|
|
|
as of September 30, 2016 and 2015
|
|
|
11
|
|
|
|
11
|
|
20,000 Class E shares issued and outstanding
|
|
|
|
|
|
|
|
|
as of September 30, 2016 and 2015
|
|
|
2
|
|
|
|
2
|
|
Common Stock, $0.0001 par value, 250,000,000 shares authorized
|
|
|
|
|
|
|
|
|
154,708,712 and 151,508,127 shares issued and outstanding
|
|
|
|
|
|
|
|
|
as of September 30, 2016 and 2015
|
|
|
15,470
|
|
|
|
15,151
|
|
Additional paid-in capital
|
|
|
32,798,442
|
|
|
|
31,269,822
|
|
Accumulated deficit
|
|
|
(27,669,712
|
)
|
|
|
(23,694,349
|
)
|
Total Stockholders’ Equity
|
|
|
5,144,213
|
|
|
|
7,590,637
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,327,241
|
|
|
$
|
7,703,014
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
SPYR, INC., AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
431,242
|
|
|
$
|
450,547
|
|
|
$
|
1,137,974
|
|
|
$
|
1,223,675
|
|
Cost of sales
|
|
|
131,210
|
|
|
|
155,083
|
|
|
|
323,830
|
|
|
|
358,248
|
|
Gross Margin
|
|
|
300,032
|
|
|
|
295,464
|
|
|
|
814,144
|
|
|
|
865,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and related expenses
|
|
|
411,639
|
|
|
|
270,583
|
|
|
|
1,301,897
|
|
|
|
1,303,417
|
|
Rent
|
|
|
98,938
|
|
|
|
101,327
|
|
|
|
295,169
|
|
|
|
242,504
|
|
Depreciation and amortization
|
|
|
34,872
|
|
|
|
24,828
|
|
|
|
110,617
|
|
|
|
66,812
|
|
Professional fees
|
|
|
952,222
|
|
|
|
166,474
|
|
|
|
1,493,006
|
|
|
|
2,288,397
|
|
Other general and administrative
|
|
|
619,778
|
|
|
|
238,781
|
|
|
|
1,378,023
|
|
|
|
608,661
|
|
Total Operating Expenses
|
|
|
2,117,449
|
|
|
|
801,993
|
|
|
|
4,578,712
|
|
|
|
4,509,791
|
|
Operating Loss
|
|
|
(1,817,417
|
)
|
|
|
(506,529
|
)
|
|
|
(3,764,568
|
)
|
|
|
(3,644,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
4,442
|
|
|
|
5,712
|
|
|
|
14,257
|
|
|
|
16,699
|
|
Unrealized gain (loss) on trading securities
|
|
|
(210,877
|
)
|
|
|
(227,554
|
)
|
|
|
(295,270
|
)
|
|
|
(1,314,931
|
)
|
Gain (loss) on sale of marketable securities
|
|
|
302
|
|
|
|
(485,928
|
)
|
|
|
74,712
|
|
|
|
(971,257
|
)
|
Total Other Expense
|
|
|
(206,133
|
)
|
|
|
(707,770
|
)
|
|
|
(206,301
|
)
|
|
|
(2,269,489
|
)
|
Loss from continuing operations
|
|
|
(2,023,550
|
)
|
|
|
(1,214,299
|
)
|
|
|
(3,970,869
|
)
|
|
|
(5,913,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(377,222
|
)
|
|
|
(4,494
|
)
|
|
|
(603,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,023,550
|
)
|
|
$
|
(1,591,521
|
)
|
|
$
|
(3,975,363
|
)
|
|
$
|
(6,517,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
154,466,661
|
|
|
|
153,241,052
|
|
|
|
153,202,982
|
|
|
|
151,840,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
SPYR, INC., AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
NINE MONTHS ENDED SEPTEMBER 30, 2016
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Class A
|
|
Class E
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balance at December 31, 2015
|
|
|
107,636
|
|
|
$
|
11
|
|
|
|
20,000
|
|
|
$
|
2
|
|
|
|
151,508,127
|
|
|
$
|
15,151
|
|
|
$
|
31,269,822
|
|
|
$
|
(23,694,349
|
)
|
|
$
|
7,590,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for employee compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,443,987
|
|
|
|
144
|
|
|
|
231,868
|
|
|
|
—
|
|
|
|
232,012
|
|
Fair value of common stock issued for professional fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,981,598
|
|
|
|
198
|
|
|
|
533,635
|
|
|
|
—
|
|
|
|
533,833
|
|
Common stock issued for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
10
|
|
|
|
18,990
|
|
|
|
—
|
|
|
|
19,000
|
|
Fair value of options granted for acquisition option
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
471,574
|
|
|
|
—
|
|
|
|
471,574
|
|
Fair value of options granted to employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,020
|
|
|
|
—
|
|
|
|
25,020
|
|
Common stock cancelled upon employee resignation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(325,000
|
)
|
|
|
(33
|
)
|
|
|
33
|
|
|
|
—
|
|
|
|
—
|
|
Vesting of shares of common stock issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,917
|
|
|
|
—
|
|
|
|
225,917
|
|
Vesting of shares of common stock issued to employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,583
|
|
|
|
—
|
|
|
|
21,583
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,975,363
|
)
|
|
|
(3,975,363
|
)
|
Balance at September 30, 2016
|
|
|
107,636
|
|
|
$
|
11
|
|
|
|
20,000
|
|
|
$
|
2
|
|
|
|
154,708,712
|
|
|
$
|
15,470
|
|
|
$
|
32,798,442
|
|
|
$
|
(27,669,712
|
)
|
|
$
|
5,144,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
SPYR, INC., AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(3,975,363
|
)
|
|
$
|
(6,517,162
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on discontinued operations
|
|
|
4,494
|
|
|
|
603,309
|
|
Depreciation and amortization
|
|
|
110,618
|
|
|
|
66,812
|
|
Fair value of vesting warrants and options
|
|
|
25,020
|
|
|
|
16,564
|
|
Common stock issued for employee compensation
|
|
|
253,595
|
|
|
|
879,183
|
|
Common stock issued for professional fees
|
|
|
537,833
|
|
|
|
1,280,550
|
|
Vesting of shares of common stock issued for services
|
|
|
225,917
|
|
|
|
47,850
|
|
Unrealized loss on trading securities
|
|
|
295,270
|
|
|
|
1,314,931
|
|
(Gain) loss on sale of trading securities
|
|
|
(74,712
|
)
|
|
|
971,257
|
|
(Increase) decrease in accounts receivables
|
|
|
(14,317
|
)
|
|
|
(2,614
|
)
|
Decrease in inventory
|
|
|
2,729
|
|
|
|
3,414
|
|
(Increase) decrease in prepaid expenses
|
|
|
(26,488
|
)
|
|
|
(553
|
)
|
Increase in other assets
|
|
|
—
|
|
|
|
(7,299
|
)
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
78,157
|
|
|
|
84,702
|
|
Decrease in related party accounts payable
|
|
|
(7,506
|
)
|
|
|
(270,000
|
)
|
Net Cash Used in Operating Activities from Continuing Operations
|
|
|
(2,564,753
|
)
|
|
|
(1,529,056
|
)
|
Net Cash Used in Operating Activities from Discontinued Operations
|
|
|
(4,494
|
)
|
|
|
(601,157
|
)
|
Net Cash Used in Operating Activities
|
|
|
(2,569,247
|
)
|
|
|
(2,130,213
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of licensing rights
|
|
|
(210,000
|
)
|
|
|
—
|
|
Purchases of trading securities
|
|
|
(510,000
|
)
|
|
|
—
|
|
Proceeds from sale of trading securities
|
|
|
283,255
|
|
|
|
2,576,667
|
|
Purchase of property and equipment
|
|
|
(47,821
|
)
|
|
|
(163,995
|
)
|
Purchase of intangible assets
|
|
|
—
|
|
|
|
(20,202
|
)
|
Net Cash (Used in) Provided by Investing Activities
|
|
|
(484,566
|
)
|
|
|
2,392,470
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
15,000
|
|
|
|
—
|
|
Net Cash Provided by Financing Activities
|
|
|
15,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in Cash
|
|
|
(3,038,813
|
)
|
|
|
262,257
|
|
Cash and cash equivalents at beginning of period
|
|
|
6,903,887
|
|
|
|
6,994,180
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,865,074
|
|
|
$
|
7,256,437
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Interest and Income Taxes Paid:
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes paid during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Common stock options granted for acquisition option
|
|
$
|
471,574
|
|
|
$
|
—
|
|
Common stock issued for acquisition of Franklin Networks, Inc.
|
|
$
|
—
|
|
|
$
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2016 and 2015
(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, 2015 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2015 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.
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.
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.
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 and 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, Options – 11,250,000) would have had an anti-dilutive effect
due to the Company generating a loss for the three and nine months ended September 30, 2016.
The basic and fully diluted shares for the
three and nine months ended September 30, 2015 are the same because the inclusion of the potential shares (Non-vested Common –
416,666, Class A – 26,909,028, Class E – 436,681, Warrants – 250,000) would have had an anti-dilutive effect
due to the Company generating a loss for the three and nine months ended September 30, 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.
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, 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 Costs
Software licensing 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 costs were $760,000
for the nine months ended September 30, 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 nine months ended September
30, 2016, the Company capitalized an additional $210,000 and amortized $22,500. As of September 30, 2016, the unamortized capitalized
licensing rights amounted to $267,500. The Company estimates that the two gaming applications will have an estimated life ranging
from two to five years, which approximates the term of the respective licenses.
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:
Year
|
|
Fair Value at
Beginning of
Year
|
|
Purchases
|
|
Proceeds from
Sale
|
|
Gain on
Sale
|
|
Unrealized
Loss
|
|
Fair Value at
September 30,
2016
|
|
2016
|
|
|
$
|
324,444
|
|
|
$
|
510,000
|
|
|
$
|
(283,255
|
)
|
|
$
|
74,712
|
|
|
$
|
(295,270
|
)
|
|
$
|
330,631
|
|
Realized gains and losses are determined on
the basis of specific identification. During the nine months ended September 30, 2016 and 2015, sales proceeds and gross realized
gains and losses on trading securities were:
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
|
|
|
|
|
|
Sales proceeds
|
|
$ 283,255
|
|
$ 2,576,667
|
Gross realized (losses)
|
|
$ -
|
|
$ (971,257)
|
Gross realized gains
|
|
74,712
|
|
-
|
Gain (loss) on sale of trading securities
|
|
$ 74,712
|
|
$ (971,257)
|
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, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 330,631
|
|
$ 330,631
|
|
$ -
|
|
$ -
|
Money market funds
|
|
36,255
|
|
36,255
|
|
-
|
|
-
|
Total
|
|
$ 366,886
|
|
$ 366,886
|
|
$ -
|
|
$ -
|
|
|
|
|
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
|
|
$ 324,444
|
|
$ 324,444
|
|
$ -
|
|
$ -
|
Money market funds
|
|
332,706
|
|
332,706
|
|
-
|
|
-
|
Total
|
|
$ 657,150
|
|
$ 657,150
|
|
$ -
|
|
$ -
|
|
|
|
|
|
|
|
|
|
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:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Equipment
|
|
$
|
151,082
|
|
|
$
|
131,821
|
|
Furniture & fixtures
|
|
|
115,503
|
|
|
|
86,943
|
|
Leasehold improvements
|
|
|
381,450
|
|
|
|
381,450
|
|
|
|
|
648,035
|
|
|
|
600,214
|
|
Less: accumulated depreciation and amortization
|
|
|
(410,745
|
)
|
|
|
(325,328
|
)
|
Property and Equipment, Net
|
|
$
|
237,290
|
|
|
$
|
274,886
|
|
Depreciation and amortization expense for the
nine months ended September 30, 2016 and 2015 was $85,417 and $66,812, respectively.
NOTE 4 – DEPOSIT ON ACQUISITION
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 know 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 $471,574 using the Black-Scholes Option Pricing Model.
The Company accounted for the entire fair value
of $471,574 at grant date as a deposit on acquisition based upon the Company’s determination that the acquisition of MMOJoe
will occur on or before June 30, 2017, otherwise, the amount will be reflected as an expense if the acquisition will not occur.
NOTE 5 – EQUITY TRANSACTIONS
Common Stock:
During the nine months ended September 30,
2016, the Company issued an aggregate of 1,443,987 shares of common stock to employees with a total fair value of $232,012 for
services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the
entire $232,012 upon issuance. The shares issued were valued at the date of the respective agreements.
During the nine months ended September 30,
2016, the Company issued an aggregate of 1,981,598 shares of restricted common stock to consultants with a total fair value of
$533,833. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $533,833
upon issuance. The shares issued were valued at the date of the respective agreements.
During the nine months ended September 30,
2016, the Company issued an aggregate of 100,000 shares of restricted common stock to consultants for cash of $15,000. The common
shares had a fair value of $19,000 at the date of grant, and as a result, the Company reflected an expense of $4,000 upon issuance.
The shares issued were valued at the date of the respective agreements.
Common Stock with Vesting Terms:
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.
As of December 31, 2015, 270,833 of these
shares had vested. During the nine months ended September 30, 2016, another 245,834 of these shares vested and as a result,
the Company recognized compensation cost of $247,500. As of September 30, 2016, total unvested shares totaled 83,333
shares with unearned compensation costs of $54,350 which will be recognized in the remainder of fiscal year 2016 and in
fiscal 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.
The following table summarizes common stock
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, December 31, 2015
|
329,167
|
|
$
|
0.47
|
|
Granted
|
-
|
|
|
-
|
|
Vested
|
(245,834)
|
|
|
0..47
|
|
Forfeited
|
-
|
|
|
-
|
Non-vested, September 30, 2016
|
83,333
|
|
$
|
0.50
|
|
|
|
|
|
|
Options
In June 2016, the Company granted options to
purchase 3.75 million shares of common stock pursuant to the planned acquisition of MMOJoe (see Note 4). 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.
In August 2016, the Company granted an employee
option to purchase a total of 7.5 million shares of common stock with an exercise price 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. These options will
expire starting in December 2017 through December 2019.
Total fair value of the options at grant date
amounted to $200,575 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 period ended September 30, 2016, the Company recognized compensation expense of $25,020. As of September 30, 2016, future unamortized
costs amounted to approximately $176,000.
The following table summarizes common stock
options activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Options
|
|
|
Exercise Price
|
December 31, 2015
|
-
|
|
$
|
-
|
|
Granted
|
11,250,000
|
|
|
3.97
|
|
Exercised
|
-
|
|
|
-
|
|
Forfeited
|
-
|
|
|
-
|
Outstanding September 30, 2016
|
11,250,000
|
|
|
3.97
|
Exercisable, September 30, 2016
|
3,750,000
|
|
$
|
3.97
|
|
|
|
|
|
|
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of September 30, 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
|
|
1,500,000
|
|
1.42 - 1.5
|
|
$1.00
|
|
500,000
|
|
$1.00
|
$2.50
|
|
2,250,000
|
|
2.42 - 2.5
|
|
$2.50
|
|
750,000
|
|
$2.50
|
$5.00
|
|
7,500,000
|
|
3.42 - 3.5
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
11,250,000
|
|
|
|
$3.97
|
|
3,750,000
|
|
$3.97
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016, the Company’s
closing stock price was $0.65 per share. As all outstanding options had an exercise price greater than $0.65 per share, the aggregate
intrinsic value of the options outstanding at September 30, 2016 was $0.
The table below represents the average assumptions
used in valuing the stock options granted in fiscal 2016:
|
|
Nine-Months Ended September 30,
|
|
|
|
2016
|
|
|
|
|
|
Expected life in years
|
0.71 – 3.5
|
|
|
|
|
|
Stock price volatility
|
132 - 141%
|
|
|
|
|
|
Risk free interest rate
|
0.64 % - 1.08%
|
|
|
|
|
|
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 – 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.
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
|
NINE MONTHS ENDED SEPTEMBER 30, 2016
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
88,232
|
|
|
$
|
1,049,742
|
|
|
$
|
—
|
|
|
$
|
1,137,974
|
|
Cost of sales
|
|
|
—
|
|
|
|
323,830
|
|
|
|
—
|
|
|
|
323,830
|
|
General and administrative
|
|
|
1,522,486
|
|
|
|
703,359
|
|
|
|
2,242,250
|
|
|
|
4,468,095
|
|
Depreciation and amortization
|
|
|
22,986
|
|
|
|
52,165
|
|
|
|
35,466
|
|
|
|
110,617
|
|
Operating loss
|
|
$
|
(1,457,240
|
)
|
|
$
|
(29,612
|
)
|
|
$
|
(2,277,716
|
)
|
|
$
|
(3,764,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
78,950
|
|
|
$
|
327,253
|
|
|
$
|
3,903,769
|
|
|
$
|
4,309,972
|
|
Property and equipment, net
|
|
|
6,096
|
|
|
|
44,559
|
|
|
|
186,635
|
|
|
|
237,290
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
18,606
|
|
|
|
18,606
|
|
Deposit on acquisition
|
|
|
471,574
|
|
|
|
—
|
|
|
|
—
|
|
|
|
471,574
|
|
Other non-current assets
|
|
|
267,500
|
|
|
|
16,610
|
|
|
|
5,689
|
|
|
|
289,799
|
|
Total assets
|
|
$
|
824,120
|
|
|
$
|
388,422
|
|
|
$
|
4,114,699
|
|
|
$
|
5,327,241
|
|
REPORTABLE SEGMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2015
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,040
|
|
|
$
|
1,217,635
|
|
|
$
|
—
|
|
|
$
|
1,223,675
|
|
Cost of sales
|
|
|
—
|
|
|
|
358,248
|
|
|
|
—
|
|
|
|
358,248
|
|
General and administrative
|
|
|
237,950
|
|
|
|
676,125
|
|
|
|
3,528,904
|
|
|
|
4,442,979
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
55,720
|
|
|
|
11,092
|
|
|
|
66,812
|
|
Operating income (loss)
|
|
$
|
(231,910
|
)
|
|
$
|
127,542
|
|
|
$
|
(3,539,996
|
)
|
|
$
|
(3,644,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
28,374
|
|
|
$
|
271,126
|
|
|
$
|
8,185,228
|
|
|
$
|
8,484,728
|
|
Property and equipment, net
|
|
|
6,715
|
|
|
|
115,445
|
|
|
|
129,826
|
|
|
|
251,986
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
25,202
|
|
|
|
25,202
|
|
Other non-current assets
|
|
|
—
|
|
|
|
16,610
|
|
|
|
5,689
|
|
|
|
22,299
|
|
Total assets
|
|
$
|
35,089
|
|
|
$
|
403,181
|
|
|
$
|
8,345,945
|
|
|
$
|
8,784,215
|
|
REPORTABLE SEGMENTS
|
THREE MONTHS ENDED SEPTEMBER 30, 2016
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,313
|
|
|
|
407,929
|
|
|
$
|
—
|
|
|
$
|
431,242
|
|
Cost of sales
|
|
|
—
|
|
|
|
131,210
|
|
|
|
—
|
|
|
|
131,210
|
|
General and administrative
|
|
|
698,900
|
|
|
|
235,192
|
|
|
|
1,148,485
|
|
|
|
2,082,577
|
|
Depreciation and amortization
|
|
|
7,693
|
|
|
|
15,164
|
|
|
|
12,015
|
|
|
|
34,872
|
|
Operating income (loss)
|
|
$
|
(683,280
|
)
|
|
$
|
26,363
|
|
|
$
|
(1,160,500
|
)
|
|
$
|
(1,817,417
|
)
|
REPORTABLE SEGMENTS
|
THREE MONTHS ENDED SEPTEMBER 30, 2015
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
Restaurants
|
|
|
|
Corporate
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,040
|
|
|
$
|
444,507
|
|
|
$
|
—
|
|
|
$
|
450,547
|
|
Cost of sales
|
|
|
—
|
|
|
|
155,083
|
|
|
|
—
|
|
|
|
155,083
|
|
General and administrative
|
|
|
143,379
|
|
|
|
254,207
|
|
|
|
379,579
|
|
|
|
777,165
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
19,146
|
|
|
|
5,682
|
|
|
|
24,828
|
|
Operating income (loss)
|
|
$
|
(137,339
|
)
|
|
$
|
16,071
|
|
|
$
|
(385,261
|
)
|
|
$
|
(506,529
|
)
|
NOTE 7 – 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 $671,131, deferred tax liability of $117,741
and goodwill of $1,146,610, 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 nine months ended September 30,
2016, the Company incurred additional expenses of $4,494 related to the winding-up of Franklin. During the nine months ended September
30, 2015, Franklin generated a loss from operations of $603,309. The following table provides additional detail of these losses
which are reflected as a loss on discontinued operations.
|
|
September 30, 2016
|
|
September 30, 2015
|
Revenues
|
|
$
|
—
|
|
|
$
|
386,513
|
|
General and administrative
|
|
|
4,494
|
|
|
|
989,822
|
|
Loss from discontinued operations
|
|
$
|
(4,494
|
)
|
|
$
|
(603,309
|
)
|
NOTE 8 – 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 January
8, 2018. Based upon available information at this very early stage of litigation, it is still the opinion of management and belief
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.
NOTE 9 – SUBSEQUENT EVENTS
Subsequent to September 30, 2016, the Company
issued an aggregate of 1,479,147 shares of common stock to consultants and employees with a total fair value of $872,918 for services
rendered. The shares issued are non-refundable and deemed earned upon issuance.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER
30, 2016 TO 2015
The consolidated results of continuing operations
for the nine months ended September 30, 2016 and 2015 are as follows:
|
|
Digital Media
|
|
Restaurants
|
|
Corporate
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
88,232
|
|
|
$
|
1,049,742
|
|
|
$
|
—
|
|
|
$
|
1,137,974
|
|
Cost of sales
|
|
|
—
|
|
|
|
323,830
|
|
|
|
—
|
|
|
|
323,830
|
|
Labor and related expenses
|
|
|
317,945
|
|
|
|
352,923
|
|
|
|
631,029
|
|
|
|
1,301,897
|
|
Rent
|
|
|
1,672
|
|
|
|
190,776
|
|
|
|
102,721
|
|
|
|
295,169
|
|
Depreciation and amortization
|
|
|
22,986
|
|
|
|
52,165
|
|
|
|
35,466
|
|
|
|
110,617
|
|
Professional fees
|
|
|
166,173
|
|
|
|
4,869
|
|
|
|
1,321,964
|
|
|
|
1,493,006
|
|
Other general and administrative
|
|
|
1,036,696
|
|
|
|
154,791
|
|
|
|
186,536
|
|
|
|
1,378,023
|
|
Operating loss
|
|
|
(1,457,240
|
)
|
|
|
(29,612
|
)
|
|
|
(2,277,716
|
)
|
|
|
(3,764,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
—
|
|
|
|
75
|
|
|
|
(206,376
|
)
|
|
|
(206,301
|
)
|
Loss from continuing operations
|
|
$
|
(1,457,240
|
)
|
|
$
|
(29,537
|
)
|
|
$
|
(2,484,092
|
)
|
|
$
|
(3,970,869
|
)
|
Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,040
|
|
|
$
|
1,217,635
|
|
|
$
|
—
|
|
|
$
|
1,223,675
|
|
Cost of sales
|
|
|
—
|
|
|
|
358,248
|
|
|
|
—
|
|
|
|
358,248
|
|
Labor and related expenses
|
|
|
36,183
|
|
|
|
322,522
|
|
|
|
944,712
|
|
|
|
1,303,417
|
|
Rent
|
|
|
—
|
|
|
|
214,997
|
|
|
|
27,507
|
|
|
|
242,504
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
55,720
|
|
|
|
11,092
|
|
|
|
66,812
|
|
Professional fees
|
|
|
19,500
|
|
|
|
6,772
|
|
|
|
2,262,125
|
|
|
|
2,288,397
|
|
Other general and administrative
|
|
|
182,267
|
|
|
|
131,834
|
|
|
|
294,560
|
|
|
|
608,661
|
|
Operating income (loss)
|
|
|
(231,910
|
)
|
|
|
127,542
|
|
|
|
(3,539,996
|
)
|
|
|
(3,644,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
—
|
|
|
|
41
|
|
|
|
(2,269,530
|
)
|
|
|
(2,269,489
|
)
|
Income (loss) from continuing operations
|
|
$
|
(231,910
|
)
|
|
$
|
127,583
|
|
|
$
|
(5,809,526
|
)
|
|
|
(5,913,853
|
)
|
Results of Operations
- For the nine
months ended September 30, 2016 the Company had a loss from continuing operations of approximately $3,971,000 compared to a loss
from continuing operations of approximately $5,914,000 for the nine months ended September 30, 2015. This change is due primarily
to decreases in the amount of realized and unrealized losses on the sale of marketable securities of approximately $2,066,000,
in labor and related costs of approximately $1,000 and in professional fees of approximately $795,000, partially offset by increases
in rent of approximately $52,000, in depreciation and amortization of approximately $44,000, and in other general and administrative
expenses of approximately $769,000. The 2016 and 2015 losses are due to the Company’s change of focus and investment into
the digital media business. Management believes that its plans for the digital media operations will be successful and start to
generate meaningful income from operations within the next 12-24 months.
More detailed explanation of the nine months
ended September 30, 2016 and 2015 changes are included in the applicable segment discussions following.
Total Revenues - Total revenues decreased $86,000,
to $1,138,000 from $1,224,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
This change is primarily the due to fluctuations in airport traffic resulting in lower restaurant revenues. For the nine months
ended September 30, 2016, revenues included approximately $88,000 in revenues from our Digital Media Mobile Games Publishing and
Advertising segment and approximately $1,050,000 in restaurant revenues. For the nine months ended September 30, 2015, revenues
included approximately $6,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and approximately
$1,218,000 in restaurant revenues. Management plans to expand its mobile application and game development and monetization efforts
and expects increased revenues in this segment in the coming months. We believe restaurant revenues will continue to fluctuate
in the future as airport traffic fluctuates.
Costs and Expenses - Costs of sales, include
the costs of food, beverage, and kitchen supplies and relates solely to our restaurant business.
The cost of labor decreased approximately $1,000
to $1,302,000 from $1,303,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
This decrease is primarily due to restricted stock awards granted to executive officers recorded at fair value of approximately
$278,000 for the nine months ended September 30, 2016 compared to approximately $732,000 in restricted stock awards granted to
executive officers recorded at fair value for the nine months ended September 30, 2015. The cost of labor increased in our Digital
Media Mobile Games Publishing and Advertising segment by approximately $282,000 due to hiring additional employees for our digital
media operations. Of this amount, approximately $203,000 was settled
in cash and $79,000 was paid in restricted stock recorded at fair value. The remaining difference is attributed to hiring dates
and changes in pay rates and the overall number of employees. The cost of labor is expected to increase in conjunction with expansion
of the digital media operations.
The cost of rent increased approximately $52,000
from 2015 to 2016. The Company’s wholly owned subsidiary, E.A.J.: PHL, Airport, pays $14,000 per month basic rent plus percentage
rent equal to 20% of gross revenues above $1,200,000 under the lease based on sales for the 12 month period from July to June of
each year. Basic rent is a fixed cost and percentage rent is variable, so the total rent paid is expected to vary from year to
year in conjunction with restaurant sales. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado
and began recording lease expense of $5,000 per month pursuant to this lease agreement. On October 1, 2015, we added additional
square footage that more than doubled our administrative office space in Denver and further increased our corporate rent expense
to $12,000 per month. Beginning September 1, 2016, the company began leasing 25 square meters of office space, at Rosenstrasse
17, 10178 Berlin, Germany. The lease in on a month to month basis at a cost of EUR 250 plus 19% tax per person up to a maximum
of 10 people. For the month of September 2016 we accrued $1,672 in rent pursuant to this lease agreement.
Depreciation and amortization expenses increased
by approximately $44,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. This
is attributable to depreciation and amortization expenses on the purchase of office equipment, furniture and fixtures and leasehold
improvements for the new corporate headquarters in Denver Colorado of approximately $243,000, new restaurant equipment of approximately
$16,000, new digital media equipment of approximately $7,000 and amortization of our capitalized licensing rights of $23,000.
Professional fees decreased approximately $795,000
from approximately $2,288,000 in 2015 to approximately $1,493,000 in 2016. Professional fees during 2016 included $393,000 for
investor and public relations, $79,000 for accounting and auditing services, $68,000 for legal fees, $166,000 for consulting and
professional fees related to our digital media segment, $27,000 for other professional service needs and 492,500 shares of restricted
common stock issued to third parties for consulting services recorded at fair value of $760,000. Professional fees during 2015
included $574,000 for investor and public relations, $131,000 for accounting and auditing services, $61,000 for legal fees, $30,000
for other professional service needs, and the issuance of 3,170,000 shares of restricted common stock issued for consulting services
and employee signing bonuses recorded at fair value of $1,492,000.
Other general and administrative expenses increased
approximately $769,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase
can be attributed primarily to software licensing costs of approximately $760,000, and increases in various other general and administrative
costs of $9,000.
Other income (loss) - The Company had unrealized
losses on trading securities of approximately $295,000 for the nine months ended September 30, 2016 compared to unrealized losses
of $1,315,000 for the nine months ended September 30, 2015. Unrealized gains and losses are the result of fluctuations in the quoted
market price of the underlying securities at the respective reporting dates. The Company realized gains from the sale of trading
securities of approximately $75,000 for the nine months ended September 30, 2016, compared to realized losses of approximately
$971,000 for the nine months ended September 30, 2015. Realized gains and losses are the difference between the selling prices
and the underlying fair value of these securities at the corresponding reporting date prior to sale.
Digital Media Segment:
|
|
2016
|
|
2015
|
|
Difference
|
|
%
|
Revenues
|
|
$
|
88,232
|
|
|
$
|
(6,040
|
)
|
|
$
|
94,272
|
|
|
|
100
|
%
|
General and administrative
|
|
|
1,522,486
|
|
|
|
237,950
|
|
|
|
1,284,536
|
|
|
|
540
|
%
|
Depreciation and amortization
|
|
|
22,986
|
|
|
|
—
|
|
|
|
22,986
|
|
|
|
100
|
%
|
Operating Loss
|
|
$
|
(1,457,240
|
)
|
|
$
|
(243,990
|
)
|
|
$
|
(1,213,250
|
)
|
|
|
497
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
– For the
nine months ended September 30, 2016 the Digital Media segment had a net loss from continuing operations of approximately $1,457,000.
During the period since the incorporation of SPYR APPS, LLC on March 24, 2015 to September 30, 2015, the Digital
Media segment had a net loss from continuing operations of approximately $244,000.
Revenues – For the nine months ended
to September 30, 2016, the Digital Media segment had total sales of approximately $88,000. Management plans to expand its mobile
games and application development activities by developing and/or publishing mobile games and/or applications through acquisition
and/or development of its own intellectual property and publishing agreements with developers.
General and Administrative Expenses –
For the nine months ended September 30, 2016, the Digital Media segment had total selling, general and administrative expenses
of approximately $1,522,000, which included Labor and related expenses of approximately $318,000, of which approximately $239,000
was paid in cash and $79,000 was paid in restricted stock recorded at fair value, professional expenses of approximately $166,000,
marketing and promotional expenses of approximately $187,000, software licensing costs of approximately $760,000, and other general
and administrative costs of approximately $91,000.
Depreciation and Amortization Expenses –
For the nine months ended September 30, 2016 the Digital Media segment had total depreciation and amortization expense of approximately
$23,000 relating to its capitalized licensing rights. The capitalized licensing rights are being amortized of the estimated useful
life of the related games of 2-5 years.
Restaurant Segment:
|
|
2016
|
|
2015
|
|
Difference
|
|
%
|
Revenues
|
|
$
|
1,049,742
|
|
|
$
|
1,217,635
|
|
|
$
|
(167,893
|
)
|
|
|
-14
|
%
|
Cost of sales
|
|
|
323,830
|
|
|
|
358,248
|
|
|
|
(34,418
|
)
|
|
|
-10
|
%
|
General and administrative
|
|
|
703,359
|
|
|
|
676,125
|
|
|
|
27,234
|
|
|
|
4
|
%
|
Depreciation and amortization
|
|
|
52,165
|
|
|
|
55,720
|
|
|
|
(3,555
|
)
|
|
|
-6
|
%
|
Operating income (loss)
|
|
$
|
(29,612
|
)
|
|
$
|
127,542
|
|
|
$
|
(157,154
|
)
|
|
|
-123
|
%
|
Results of Operations
– For the
nine months ended September 30, 2016 the Restaurant segment had a net loss from continuing operations of approximately $30,000
compared to net operating income of approximately $128,000 for the nine months ended September 30, 2015 This change is due primarily
to a decrease in revenues of approximately $168,000 and a decreased in cost of sales of approximately $34,000 and increased operating
costs (general and administrative costs including depreciation and amortization) of approximately $23,000.
Revenues – For the nine months ended
September 30, 2016 and 2015, the Restaurant segment had sales of approximately $1,050,000 and $1,218,000, respectively, for a decrease
of approximately $168,000 or 14%. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.
Costs of Sales – For the nine months
ended September 30, 2016 and 2015, the Restaurant segment had costs of sales of approximately $324,000 and $358,000, respectively,
for a decrease of approximately $34,000 or 10%. Costs of sales include the costs of food, beverage, and kitchen supplies.
General and Administrative Expenses –
For the nine months ended September 30, 2016 and 2015, the Restaurant segment had general and administrative expenses of approximately
$703,000 compared to approximately $676,000 for the nine months ended September 30, 2015.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER
30, 2016 TO 2015
The consolidated results of continuing operations
for the three months ended September 30, 2016 and 2015 are as follows:
|
|
Digital Media
|
|
Restaurants
|
|
Corporate
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,313
|
|
|
$
|
407,929
|
|
|
$
|
—
|
|
|
$
|
431,242
|
|
Cost of sales
|
|
|
—
|
|
|
|
131,210
|
|
|
|
—
|
|
|
|
131,210
|
|
Labor and related expenses
|
|
|
160,738
|
|
|
|
118,456
|
|
|
|
132,445
|
|
|
|
411,639
|
|
Rent
|
|
|
1,672
|
|
|
|
62,090
|
|
|
|
35,176
|
|
|
|
98,938
|
|
Depreciation and amortization
|
|
|
7,693
|
|
|
|
15,164
|
|
|
|
12,015
|
|
|
|
34,872
|
|
Professional fees
|
|
|
27,756
|
|
|
|
2,100
|
|
|
|
922,366
|
|
|
|
952,222
|
|
Other general and administrative
|
|
|
508,734
|
|
|
|
52,546
|
|
|
|
58,498
|
|
|
|
619,778
|
|
Operating income (loss)
|
|
|
(683,280
|
)
|
|
|
26,363
|
|
|
|
(1,160,500
|
)
|
|
|
(1,817,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
—
|
|
|
|
25
|
|
|
|
(206,158
|
)
|
|
|
(206,133
|
)
|
Income (loss) from continuing operations
|
|
$
|
(683,280
|
)
|
|
$
|
26,388
|
|
|
$
|
(1,366,658
|
)
|
|
$
|
(2,023,550
|
)
|
Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,040
|
|
|
$
|
444,507
|
|
|
$
|
—
|
|
|
$
|
450,547
|
|
Cost of sales
|
|
|
—
|
|
|
|
155,083
|
|
|
|
—
|
|
|
|
155,083
|
|
Labor and related expenses
|
|
|
36,183
|
|
|
|
121,129
|
|
|
|
113,271
|
|
|
|
270,583
|
|
Rent
|
|
|
—
|
|
|
|
84,794
|
|
|
|
16,533
|
|
|
|
101,327
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
19,146
|
|
|
|
5,682
|
|
|
|
24,828
|
|
Professional fees
|
|
|
19,500
|
|
|
|
59,702
|
|
|
|
87,272
|
|
|
|
166,474
|
|
Other general and administrative
|
|
|
87,696
|
|
|
|
62,095
|
|
|
|
88,990
|
|
|
|
238,781
|
|
Operating income (loss)
|
|
|
(137,339
|
)
|
|
|
(57,442
|
)
|
|
|
(311,748
|
)
|
|
|
(506,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
—
|
|
|
|
21
|
|
|
|
(707,791
|
)
|
|
|
(707,770
|
)
|
Loss from continuing operations
|
|
$
|
(137,339
|
)
|
|
$
|
(57,421
|
)
|
|
$
|
(1,019,539
|
)
|
|
$
|
(1,214,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
- For the three
months ended September 30, 2016 the Company had a loss from continuing operations of approximately $2,024,000 compared to a loss
from continuing operations of approximately $1,214,000 for the three months ended September 30, 2015. This change is due primarily
to increases in labor and related costs of approximately $141,000, in depreciation and amortization of approximately $10,000, in
professional fees of approximately $786,000, and in other general and administrative expenses of
approximately $381,000, partially offset by decreases in rent of approximately $2,000, in the amount of realized and unrealized
losses on the sale of marketable securities of approximately $503,000.
More detailed explanation of the three months
ended September 30, 2016 and 2015 changes are included in the applicable segment discussions following.
Total Revenues - Total revenues decreased $20,000,
to $431,000 from $451,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.
This change is primarily the due to fluctuations in airport traffic resulting in lower restaurant revenues. For the three months
ended September 30, 2016, revenues included approximately $23,000 in revenues from our Digital Media Mobile Games Publishing and
Advertising segment and approximately $408,000 in restaurant revenues. For the three months ended September 30, 2015, revenues
included approximately $6,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and approximately
$445,000 in restaurant revenues. Management plans to expand its mobile application and game development and monetization efforts
and expects increased revenues in this segment in the coming months. We believe restaurant revenues will continue to fluctuate
in the future as airport traffic fluctuates.
Costs and Expenses - Costs of sales, include
the costs of food, beverage, and kitchen supplies and relates solely to our restaurant business.
The cost of labor increased approximately $141,000
to $412,000 from $271,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.
This increase is primarily due to hiring additional employees for our digital media operations. During the three months ended September
30, 2016, our Digital Media Mobile Games Publishing and Advertising segment incurred labor and related expenses of approximately
$161,000, compared to $36,000 for the three months ended September 30, 2015. Of this amount, approximately $101,000 was paid in
cash and $60,000 was paid in restricted stock recorded at fair value. The remaining difference is attributed to hiring dates and
changes in pay rates and the overall number of employees. The cost of labor is expected to increase in conjunction with expansion
of the digital media operations.
The cost of rent decreased approximately $2,000
from 2015 to 2016. The Company’s wholly owned subsidiary, E.A.J.: PHL, Airport, pays $14,000 per month basic rent plus percentage
rent equal to 20% of gross revenues above $1,200,000 under the lease based on sales for the 12 month period from July to June of
each year. Basic rent is a fixed cost and percentage rent is variable, so the total rent paid is expected to vary from year to
year in conjunction with restaurant sales. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado
and began recording lease expense of $5,000 per month pursuant to this lease agreement. On October 1, 2015, we added additional
square footage that more than doubled our administrative office space in Denver and further increased our corporate rent expense
to $12,000 per month. Beginning September 1, 2016, the company began leasing 25 square meters of office space, at Rosenstrasse
17, 10178 Berlin, Germany. The lease in on a month to month basis at a cost of EUR 250 plus 19% tax per person up to a maximum
of 10 people. For the month of September 2016 we accrued $1,672 in rent pursuant to this lease agreement.
Depreciation and amortization expenses increased
by approximately $10,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. This
is attributable to depreciation and amortization expenses on the purchase of office equipment, furniture and fixtures and leasehold
improvements for the new corporate headquarters in Denver Colorado of approximately $243,000, new restaurant equipment of approximately
$16,000, new digital media equipment of approximately $7,000 and amortization of our capitalized licensing rights of $23,000.
Professional fees increased approximately $786,000
from approximately $166,000 in 2015 to approximately $952,000 in 2016. Professional fees during 2016 included $224,000 for investor
and public relations, $15,000 for accounting and auditing services, $35,000 for legal fees, $28,000 for consulting and professional
fees related to our digital media segment, $6,000 for other professional service needs and 1,589,098 shares of restricted common
stock issued to third parties for consulting services recorded at fair value of $644,000. Professional fees during 2015 included
$126,000 for investor and public relations, $37,000 for accounting and auditing services, $10,000 for legal fees, $11,000 for other
professional service needs, and a decrease of $18,000 in the recorded fair value of 500,000 vesting shares of restricted common
stock issued previously on February 1, 2015 for consulting services.
Other general and administrative expenses increased
approximately $381,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The
increase can be attributed primarily to software licensing costs of approximately $390,000, and decreases in various other general
and administrative costs of $9,000.
The Company had unrealized losses on trading
securities of approximately $211,000 for the three months ended September 30, 2016 compared to unrealized losses of $228,000 for
the three months ended September 30, 2015. Unrealized gains and losses are the result of fluctuations in the quoted market price
of the underlying securities at the respective reporting dates.
The Company realized gains from the sale of
trading securities of approximately $0 for the three months ended September 30, 2016, compared to realized losses of approximately
$486,000 for the three months ended September 30, 2015. Realized gains and losses are the difference between the selling prices
and the underlying fair value of these securities at the corresponding reporting date prior to sale.
Digital Media Segment:
|
|
2016
|
|
2015
|
|
Difference
|
|
%
|
Revenues
|
|
$
|
23,313
|
|
|
$
|
(6,040
|
)
|
|
$
|
29,353
|
|
|
|
100
|
%
|
General and administrative
|
|
|
698,900
|
|
|
|
143,379
|
|
|
|
555,521
|
|
|
|
387
|
%
|
Depreciation and amortization
|
|
|
7,693
|
|
|
|
—
|
|
|
|
7,693
|
|
|
|
100
|
%
|
Operating Loss
|
|
$
|
(683,280
|
)
|
|
$
|
(149,419
|
)
|
|
$
|
(533,861
|
)
|
|
|
357
|
%
|
Results of Operations
– For the
three months ended September 30, 2016 the Digital Media segment had a net loss from continuing operations of approximately $683,000
compared to a net loss from continuing operations of approximately $149,000 for the three months ended September 30, 2015.
Revenues – For the three months ended
to September 30, 2016, the Digital Media segment had total sales of approximately $23,000. Management plans to expand its mobile
games and application development activities by developing and/or publishing mobile games and/or applications through acquisition
and/or development of its own intellectual property and publishing agreements with developers.
General and Administrative Expenses –
For the three months ended September 30, 2016, the Digital Media segment had total selling, general and administrative expenses
of approximately $699,000, which included Labor and related expenses of approximately $161,000, of which approximately $101,000
was paid in cash and $60,000 was paid in restricted stock recorded at fair value, professional expenses of approximately $28,000,
marketing and promotional expenses of approximately $69,000, software licensing costs of approximately $390,000, and other general
and administrative costs of approximately $51,000.
Depreciation and Amortization Expenses –
For the three months ended September 30, 2016 the Digital Media segment had total depreciation and amortization expense of approximately
$8,000 relating to its capitalized licensing rights. The capitalized licensing rights are being amortized of the estimated useful
life of the related games of 2-5 years.
Restaurant Segment:
|
|
2016
|
|
2015
|
|
Difference
|
|
%
|
Revenues
|
|
$
|
407,929
|
|
|
$
|
444,507
|
|
|
$
|
(36,578
|
)
|
|
|
-8
|
%
|
Cost of sales
|
|
|
131,210
|
|
|
|
155,083
|
|
|
|
(23,873
|
)
|
|
|
-15
|
%
|
General and administrative
|
|
|
235,192
|
|
|
|
327,720
|
|
|
|
(92,528
|
)
|
|
|
-28
|
%
|
Depreciation and amortization
|
|
|
15,164
|
|
|
|
19,146
|
|
|
|
(3,982
|
)
|
|
|
-21
|
%
|
Operating income (loss)
|
|
$
|
26,363
|
|
|
$
|
(57,442
|
)
|
|
$
|
83,805
|
|
|
|
-146
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
– For the
three months ended September 30, 2016 the Restaurant segment had income from continuing operations of approximately $26,000 compared
to a loss from continuing operations of approximately $57,000 for the three months ended September 30, 2015 This change is due
primarily to a decrease in revenues of approximately $37,000 and a decreased in cost of sales of approximately $24,000 and increased
operating costs (general and administrative costs including depreciation and amortization) of approximately $97,000.
Revenues – For the three months ended
September 30, 2016 and 2015, the Restaurant segment had sales of approximately $408,000 and $445,000, respectively, for a decrease
of approximately $37,000 or 8%. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.
Costs of Sales – For the three months
ended September 30, 2016 and 2015, the Restaurant segment had costs of sales of approximately $131,000 and $155,000, respectively,
for a decrease of approximately $24,000 or 15%. Costs of sales include the costs of food, beverage, and kitchen supplies.
General and Administrative Expenses –
For the three months ended September 30, 2016 and 2015, the Restaurant segment had general and administrative expenses of approximately
$235,000 compared to approximately $328,000 for the three months ended September 30, 2015.
The decrease in revenue is attributed to changes
in the timing and flow of airport traffic.
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 consists of intangible assets of $671,131, deferred tax liability of $117,741
and goodwill of $1,146,610, 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. The Company
reported the gain (loss) from operations from Franklin 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 nine months ended September 30,
2016, the Company incurred expenses of $4,494 related to Franklin. During the nine months ended September 30, 2015, Franklin generated
a loss from operations of $603,309.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated a net loss from continuing
operations for the nine months ended September 30, 2016 of approximately $3,975,000. As of September 30, 2016, the Company had
current assets of approximately $4,577,000, which included cash and cash equivalents of approximately $3,865,000, and trading securities
of approximately $331,000. While the Company believes it has sufficient cash and cash equivalents to carry out its operating plans
for the next twelve to twenty-four months, there can be no assurance the Company will be able to successfully execute its plans
at the anticipated level or that additional debt or equity financing will not be needed, or will be available on terms acceptable
to the Company.
During the nine months ended September 30,
2016 and 2015, the Company has met its capital requirements through a combination of collection of revenues, the sale of its trading
securities, and utilization of cash reserves.
Operating Activities
- For the nine
months ended September 30, 2016, the Company used cash in operating activities of $2,569,247. For the nine months ended September
30, 2015, the Company used cash in operating activities of $2,130,213. This increase is due primarily to our expansion efforts
into the digital media publishing, advertising and gaming industry, the addition of new management and operations personnel and
the resulting increases in operating expenses.
Investing Activities
- During the nine
months ended September 30, 2016
, the Company used $510,000 in cash to purchase trading securities,
$210,000 to purchase software licensing rights, $47,821 for the purchase of property plant and equipment, and received $283,255
in cash proceeds from sales of trading securities. During the nine months ended September 30, 2015, the Company received $2,576,667
in cash proceeds from sales of trading securities, and used cash of $184,197 for the purchase of property plant and equipment
and domain names. As of September 30, 2016, the Company owns trading securities valued at $330,631.
Financing
Activities
- During the nine months ended
September 30, 2016 and 2016, the Company sold 100,000 shares of restricted
common stock to a service provider for $15,000. The shares were recorded at fair value of $19,000 with the remaining $4,000 recorded
as professional fees.
The Company expects future development and
expansion will be financed through cash flows from operations and other forms of financing such as the sale of additional equity
and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available
on terms acceptable or favorable to the Company.
Government Regulations -
The Company
is subject to all pertinent Federal, State, and Local laws governing its business. Each subsidiary is subject to licensing and
regulation by a number of authorities in its State or municipality. These may include health, safety, and fire regulations. The
Company's operations are also subject to Federal and State minimum wage laws governing such matters as working conditions, overtime
and tip credits.
Critical Accounting Policies
- The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation
of the Consolidated Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could
differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions,
and estimates used in the preparation of the Consolidated Financial Statements.
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’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.
The Company receives revenue from sale of advertising provided with games and through in-app purchases. The Company also receives
revenue from publishing agreements entered into during 2015 for one mobile game and one cross platform game. 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.
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.
Recent Accounting Pronouncements
See Note 1 of the condensed consolidated financial
statements for discussion of recent accounting pronouncements.