Annual report pursuant to Section 13 and 15(d)

Commitments And Contingencies

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Commitments And Contingencies
12 Months Ended
Dec. 31, 2016
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Rent

 

The Company leases approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015 and expiring on December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $142,000 to $152,000.

 

The Company’s wholly-owned subsidiary E.A.J.: PHL, Airport Inc. leases approximately 845 square feet in the Philadelphia Airport, Philadelphia, Pennsylvania, pursuant to a lease dated July 6, 2010. E.A.J.: PHL, Airport Inc. pays $14,000 per month basic rent, plus percentage rent equal to 20% of gross revenues above $1,200,000, under the lease, which expires April 30, 2017.

 

The minimum future lease payments under these leases for the next five years are:

 

Year Ended December 31,   Amount
2017    $                  201,000
2018                        147,000
2019                        150,000
2020                        152,000
2021                                 -   
Thereafter                                 -   
Total Five Year Minimum Lease Payments    $                  650,000

 

Rent expense for the years ended December 31, 2016 and 2015 was $424,000 and $358,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately $5,000 per month for other items charged by the landlord in connection with rent.

 

Legal Proceedings

 

We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. A material legal proceeding that is currently pending is as follows:

 

On October 14, 2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together with accrued interest and unspecified damages. The Company believes the claim is not a valid debt and is vigorously defending this lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment, which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on January 8, 2018. Based upon available information at this very early stage of litigation, it is still the belief of management and opinion of in-house counsel that the Company will obtain a favorable ruling and no amount will be awarded to the plaintiff in this action. Accordingly, Management believes the likelihood of material loss resulting from this lawsuit to be remote.

 

Employment Agreements

 

Pursuant to employment agreements entered in December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the aggregate of $450,000 per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant these officers an aggregate of 1.55 million shares of common stock at the beginning of each employment year.

 

Acquisition Option

 

In January 2016, the Company started publishing an electronic game called Pocket Starships through an exclusive publishing agreement (the “Publishing Agreement”) with Spectacle Games Publishing (“Spectacle”). The exclusive Publishing Agreement runs for a term of five years, expiring on December 17, 2020. Spectacle is a California corporation, holding the exclusive rights to publish and market Pocket Starships, including the ability to sublicense these rights to other parties, pursuant to an agreement with MMOJoe UG. MMOJoe UG, a German limited liability company (“MMOJoe”) is the owner and developer of all intellectual property that relates or pertains to the real-time, cross-platform, massively multiplayer on-line electronic game known as Pocket Starships.

 

In June 2016, the Company obtained an exclusive option to purchase all of MMOJoe’s assets including but not limited to all assets pertaining to Pocket Starships (the “Option”). Should the Company decide to exercise the Option, it will purchase MMOJoe for cash of $5,000,000 plus $10,000,000 worth of shares of the Company’s common stock, valued at the time of closing of the purchase. This exclusive Option is exercisable by the Company at any time, in the Company’s sole discretion, through December 31, 2020.

 

In exchange for the Option, the Company granted MMOJoe stock options to purchase an aggregate of 3.75 million shares of the Company’s common stock. The stock options are fully vested, exercisable at a price per share of $1.00, $2.50 and $5.00 and will expire starting in December 31, 2017 through December 31, 2019. Total fair value of the options amounted to $472,000 using the Black-Scholes Option Pricing Model. Total fair value of the options of $472,000 has been recorded as an expense in 2016 due to the uncertainty of such acquisition occurring in the near future.

 

Publishing Agreement

 

Since December 17, 2015, the Company has been publishing an electronic game called Pocket Starships through an exclusive 5 year publishing agreement in signed in December 2015. As part of the agreement, the Company agreed to provide Spectacle monthly advances of $30,000 to cover development expenses related to Pocket Starships. In April 2016, the agreement was amended and the advance amount was increased to $120,000 per month starting in May 2016. In May 2016, the agreement was further amended to increase the monthly amount to $130,000 starting in June 2016. As a result, the Company recorded a total of $1,151,000 during the year ended December 31, 2016, of which, $734,000 was reported as part of Other General and Administrative expenses and $416,000 as part of Research and Development expenses in the accompanying statements of operations. The monthly advance is non-refundable but is recoupable from future revenues generated from Pocket Starships. The agreement also provides that the Company provide appropriate marketing, promotional and user acquisition funds for the purpose of marketing Pocket Starships. These amounts are based upon the Company’s reasonable discretion determined by analysis of the various metrics and performance indicators. During 2016, the Company recorded a total of $350,000 in marketing and another $116,000 in travel costs. The Company can unilaterally terminate this agreement within 30 days of the one year anniversary of the agreement and each six-month period thereafter by providing written notice to Spectacle. Either party may terminate the agreement in the event of a material breach by the other party that remains uncured after receipt of thirty days written notice.