NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The accompanying
condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that
date, but does not include all disclosures, including notes, required by GAAP.
In the opinion
of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments
contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily
indicative of fiscal year-end results.
Organization
The Company was
incorporated as Conceptualistics, Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its
name to Eat at Joe’s, Ltd. In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol
“SPYR” effective March 12, 2015.
Nature of Business
The primary focus
of SPYR, Inc. (the “Company”) is to act as a holding company and develop a portfolio of profitable subsidiaries, not
limited by any particular industry or business.
Through our wholly
owned subsidiary, SPYR APPS, LLC we operate our mobile games and applications business. The focus of the SPYR APPS subsidiary
is the development and publication of our own mobile games as well as the publication of games developed by third-party developers.
Through our other
wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April
2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and
liabilities of EAJ as well as the results of its operations were presented in these financial statements as discontinued operations.
Principles
of Consolidation
The consolidated
financial statements include the accounts of SPYR, Inc. and its wholly-owned subsidiaries, SPYR APPS, LLC, a Nevada Limited Liability
Company, E.A.J.: PHL, Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 7), and Branded Foods Concepts,
Inc., a Nevada corporation. Intercompany accounts and transactions have been eliminated.
Going Concern
The accompanying
financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and satisfaction of liabilities in the normal course of business, however, the issues described
below raise substantial doubt about the Company’s ability to do so.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
As shown in the
accompanying financial statements, for the nine months ended September 30, 2018, the Company recorded a net loss from continuing
operations of $5,946,000 and utilized cash in continuing operations of $1,700,000. As of September 30, 2018, our cash balance
was $42,000 and we had trading securities of $12,000. These issues raise substantial doubt about the Company’s ability to
continue as a going concern.
The Company plans
to expand its mobile games and application development and publishing activities, such as Pocket Starships and
Steven Universe
:
Tap Together, through acquisition and/or development of its own intellectual property and publishing agreements with developers.
Historically, we
have financed our operations primarily through private sales of our trading securities, through sales of our common stock, and
through related party loans. If our sales goals for our products do not materialize as planned, we believe that the Company can
reduce its operating and product development costs that would allow us to maintain sufficient cash levels to continue operations.
However, if we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital
to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development
plans.
The ability of
the Company to continue as a going concern is dependent upon the success of future capital offerings or alternative financing
arrangements and expansion of its operations. The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. Management is actively pursuing additional sources of
financing sufficient to generate enough cash flow to fund its operations through the next twelve months. However, management cannot
make any assurances that such financing will be secured.
Use of Estimates
The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates
and assumptions used by management affected impairment analysis for trading securities, fixed assets, intangible assets, capitalized
licensing rights, amounts of potential liabilities, and valuation of issuance of equity securities. Actual results could differ
from those estimates.
Earnings (Loss) Per Share
The Company’s
computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s
net income (loss) available to common stockholders by the weighted average number of common shares during the period. Diluted
EPS reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
net income (loss) of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants
are exercised, and the proceeds are used to purchase common stock at the average market price during the period. Shares of restricted
stock are included in the basic weighted average number of common shares outstanding from the time they vest.
The basic and fully
diluted shares for the nine months ended September 30, 2018 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 412,099, Options – 13,740,000, Warrants – 8,800,000) would have had an anti-dilutive
effect due to the Company generating a loss for the nine months ended September 30, 2018.
The basic and fully
diluted shares for the three months ended September 30, 2018 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 412.099, Options – 13,740,000, Warrants – 8,800,000) would have had an anti-dilutive
effect due to the Company generating a loss for the three months ended September 30, 2018.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
The basic and fully
diluted shares for the nine months ended September 30, 2017 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 318,654, Options – 6,270,000, Warrants – 1,200,000) would have had an anti-dilutive
effect due to the Company generating a loss for the nine months ended September 30, 2017.
The basic and fully
diluted shares for the three months ended September 30, 2017 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 318,654, Options – 6,270,000, Warrants – 1,200,000) would have had an anti-dilutive
effect due to the Company generating a loss for the three months ended September 30, 2017.
Capitalized Gaming Assets and
Licensing Rights
Capitalized
gaming assets and licensing rights represent costs to acquire trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may
obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single
product.
Significant management
judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of
capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional
costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which
could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if management
makes different judgments or utilizes different estimates in evaluating these qualitative factors.
On October 23,
2017, the Company completed the acquisition of all assets that refer, relate or pertain to the real—time cross-platform
MMO game commonly known and referred to as “Pocket Starships,” including but not limited to all intellectual property,
know how, “urls,” websites, game engines, game store accounts, prior versions, company names and trade names, business
plans, financial reports, financial data, employee data, customer lists, forecasts, strategies, and all other business information;
manufacturing or other technical or scientific know-how, specifications, technical drawings, drawings, artwork, music, diagrams,
schematics, technology, processes, and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials,
formulae, compositions, information, data, results, plans, surveys and/or reports of a technical nature; and software programs
(including all forms of code), software documentation, software development kits, game design documents, and formulae related
to the current, future and proposed products and services, including any additions, enhancements or modifications to the foregoing
or derivatives thereof after the date hereof.
As consideration
for the acquisition, the Company issued eight million shares of the Company’s restricted common stock valued at $3,200,000,
options to purchase up to eight million shares of the Company’s restricted common stock valued at $2,452,000 and assumed
liabilities of $210,000 for a total purchase price of $5,862,000. The options are fully vested, exercisable at a price per share
of $0.50 and will expire starting August 31, 2020. The acquisition of “Pocket Starships” was reported as part of capitalized
gaming assets and licensing rights valued at $481,000 based upon discounted cash flows. The difference between purchase price
and the capitalized value was recorded as loss on write down on assets during 4
th
quarter 2017. The Company amortizes
the capitalized cost on a straight-line basis over an estimated life of seven to ten years.
Further, the options
previously issued pursuant to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to
three million, seven hundred and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect
in accordance with the terms of the purchase option agreement.
During 2017, the
Company capitalized $175,000 pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual
property (IP) from various
STAR TREK
television series in to future updates to and expansions of the Pocket Starships game.
The Company estimates that the IP will have an estimated life of 1.6 years, which approximates the term of the license.
During the August
2018, the Company capitalized $25,000 pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain
intellectual property (IP) from
Steven Universe
, a popular animated television series on Cartoon Network into our game
Steven Universe
: Tap Together.
Steven Universe
: Tap Together was launched globally on the Google Play Store on August
2, 2018 and on the IOS App Store in August 9, 2018. The Company amortizes the capitalized cost on a straight-line basis over an
estimated life of 4.42 years, which approximates the term of the license.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
In addition, we
also acquired the game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer. Battlewack:
Idle Lords requires additional development before it can be released.
During the three
and nine months ended September 30, 2018, the Company recorded amortization expense of $19,000 and $53,000, respectively. As of
September 30, 2018 and December 31, 2017, the unamortized capitalized gaming assets and licensing rights amounted to $716,000
and $743,000 respectively.
Software Development Costs
Costs incurred
for software development are expensed as incurred. During the nine months ended September 30, 2018 and 2017, the Company incurred
$590,000 and $1,202,000 in software development costs paid to independent gaming software developers.
During the three
months ended September 30, 2018 and 2017, the Company incurred $137,000 and $542,000 in software development costs paid to independent
gaming software developers.
Revenue Recognition
In May 2014,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts
with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition
guidance under prior U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. The core principle
of the standard is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services.
We adopted this
new revenue recognition standard along with is related amendments on January 1, 2018 and have updated our accounting policy for
revenue recognition. As expected, at our current level of revenue, the adoption of this new standard did not impact our financial
position or results of operations operating cash flows.
We determine revenue
recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in
the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract;
and (5) recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.
Game
Revenues
Through our wholly
owned subsidiary SPYR APPS, LLC, d/b/a SPYR GAMES, we develop, publish and co-publish mobile games, and then generate revenue
through those games by way of advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be
downloaded through the app stores maintained by Apple and Google. The Company’s cross platform gaming application, which
can be played on personal computers, Facebook and mobile devices, can be downloaded from the internet and Facebook as well as
through the app stores maintained by Apple, Google and Amazon.
We operate our
games as live services that allow players to play for free. Within these games players can purchase virtual items to enhance their
game-playing experience. Our identified performance obligation is to display the virtual items within the game. Payment is required
at time of purchase and the purchase price is a fixed amount.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
Players can purchase
our virtual items through various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google
Play accounts, Facebook local currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable
and relate to non-cancellable contracts that specify our obligations.
For revenue earned
through app stores, players utilize the app store’s local currency-based payments program to purchase virtual items in our
games. For all payment transactions on these app store platforms, the app store remits to us 70% of the price we request to be
charged to the player for each transaction, which represents the transaction price. We recognize revenue net of the amounts retained
by the app stores for platform and payment processing fees.
Service Revenues
We recently offered
professional legal and accounting services to a related Limited Liability Company (see note 4). Our professional services arrangements
are either fixed-fee billing or time-and-material billing arrangements. In fixed-fee billing arrangements, we agree to a predetermined
fee for a predetermined set of professional services. We set the fee based upon our estimate of the time and costs necessary to
complete the engagements. Under time-and-materials billing arrangements, the fee is based on the number of hours worked at the
agreed upon billing rates. We recognized service revenue upon completion of the service and billing of the client.
Recent Accounting Standards
In February 2016,
the FASB issued Accounting Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right
of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02
is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified
retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In July 2017, the
FASB issued Accounting Standards Update (ASU) No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from
Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
(“ASU
2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument
is considered indexed to the entity’s own stock. As a result, financial instruments with down round features are no longer
classified as liabilities and embedded conversion options with down round features are no longer bifurcated. For equity-classified
freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered,
as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible
instruments with embedded conversion options that have down round features, an entity will recognize the intrinsic value of the
feature only when the feature becomes beneficial. The guidance in ASU 2017-11 is effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We early adopted ASU 2017-11 effective January
1, 2018 without a material impact on our consolidated financial statements.
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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
NOTE 2 - TRADING SECURITIES
Investments in
securities are summarized as follows:
|
|
Fair Value
at
|
|
Gain on
|
|
Unrealized
|
|
Fair Value
at
|
Year
|
|
Beginning
of Year
|
|
Sale
|
|
Loss
|
|
September
30, 2018
|
|
2018
|
|
|
$
|
48,000
|
|
|
$
|
—
|
|
|
$
|
(36,000
|
)
|
|
$
|
12,000
|
|
The following table
discloses the assets measured at fair value on a recurring basis and the methods used to determine fair value:
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in
Active
|
|
Other
|
|
Unobservable
|
|
|
Fair
Value at
|
|
Markets
|
|
Observable
Inputs
|
|
Inputs
|
|
|
September
30, 2018
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
Trading
securities
|
|
$ 12,000
|
|
$ 12,000
|
|
$ —
|
|
$ —
|
Money
market funds
|
|
1,000
|
|
1,000
|
|
—
|
|
—
|
Total
|
|
$ 13,000
|
|
$ 13,000
|
|
$ —
|
|
$ —
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in
Active
|
|
Other
|
|
Unobservable
|
|
|
Fair
Value at
|
|
Markets
|
|
Observable
Inputs
|
|
Inputs
|
|
|
December
31, 2017
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
Trading
securities
|
|
$ 48,000
|
|
$ 48,000
|
|
$ —
|
|
$ —
|
Money
market funds
|
|
36,000
|
|
36,000
|
|
—
|
|
—
|
Total
|
|
$ 84,000
|
|
$ 84,000
|
|
$ —
|
|
$
—
|
Generally, for
all trading securities and available-for-sale securities, fair value is determined by reference to quoted market prices (level
1).
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment
consisted of the following:
|
|
September
30, 2018
|
|
December
31, 2017
|
|
|
|
|
|
Equipment
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Furniture
& fixtures
|
|
|
114,000
|
|
|
|
114,000
|
|
Leasehold
improvements
|
|
|
107,000
|
|
|
|
107,000
|
|
|
|
|
249,000
|
|
|
|
249,000
|
|
Less:
accumulated depreciation and amortization
|
|
|
(146,000
|
)
|
|
|
(115,000
|
)
|
Property
and Equipment, Net
|
|
$
|
103,000
|
|
|
$
|
134,000
|
|
Depreciation expense
for the nine months ended September 30, 2018 and 2017 was $31,000 and $35,000, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
On September 5,
2017, the Company obtained a revolving line of credit from Berkshire Capital Management Co., Inc. Berkshire is controlled by Joseph
Fiore, majority shareholder and former chairman of the board of directors of the Company. The line of credit allows the Company
to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien on all the assets of the Company
and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019. As of September 30, 2018, the
Company has borrowed $1,000,000 and accrued interest of $52,000.
During the nine
months ended September 30, 2018, the Company received an additional $180,000 in the form of short-term advances from Berkshire
Capital Management Co., Inc. The $180,000 short-term advances are due upon demand.
During the nine
months ended September 30, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive officer
of the Company for cash of $50,000.
During the nine
months ended September 30, 2018, the Company, received $80,000 in revenue for professional services rendered to a related Limited
Liability Company whose mangers are also officers of SPYR, Inc. and whose majority owner is Berkshire Capital Management Co.,
Inc.
NOTE 5 – CONVERTIBLE NOTES
On April 20, 2018,
(modified May 22, 2018) the Company issued a $165,000 (originally $158,000) convertible note with original issue discount (OID)
of $15,000 and bearing interest at 8% per annum. The note matures on April 20, 2019 and is convertible on or after October 17,
2018 into the Company’s restricted common stock at $0.20 per share at the holder’s request. The OID is recorded as
a discount to the debt agreement. The Company has determined the note to contain a beneficial conversion feature valued as $104,000
based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount
to the debt agreement. The noteholder was also granted detachable 3-year warrants to purchase 200,000 shares of the company’s
restricted common stock at an exercise price of $0.375 per share, 200,000 shares of the company’s restricted common stock
at an exercise price of $0.50 per share, and 100,000 shares of the company’s restricted common stock at an exercise price
of $0.625 per share. The warrants were valued at $126,000 using the Black-Scholes pricing model and were recorded as a discount
to the debt agreement. The noteholder was also issued 116,000 shares of the company’s restricted common stock valued at
$34,000 based upon the closing price of the Company stock on the date of the modified agreement and recorded as a discount to
the debt agreement. During the nine months ended September 30, 2018 the Company has accrued interest for this note in the amount
of $6,000. At September 30, 2018, the principal balance together with total accrued interest of $6,000 is recorded on the Company’s
consolidated balance sheets net of discounts of $80,000.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
On May 22, 2018,
the Company issued a $275,000 convertible note with original issue discount (OID) of $25,000 and bearing a one-time interest charge
at 8%. The note matures on January 22, 2019 and is convertible into the Company’s restricted common stock at $0.25 per share
at the holder’s request. The OID is recorded as a discount to the debt agreement. The Company has determined the note to
contain a beneficial conversion feature valued as $40,000 based on the intrinsic per share value of the conversion feature. This
beneficial conversion feature is recorded as a discount to the debt agreement. The noteholder was also granted detachable 5-year
warrants to purchase 500,000 shares of the company’s restricted common stock at an exercise price of $2.00 per share. The
warrants were valued at $45,000 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement. The
noteholder was also issued 200,000 shares of the company’s restricted common stock valued at $58,000 based upon the closing
price of the Company stock on the date of the agreement and recorded as a discount to the debt agreement. During the nine months
ended September 30, 2018 the Company has accrued interest for this note in the amount of $12,000. At September 30, 2018, the principal
balance together with total accrued interest of $12,000 is recorded on the Company’s consolidated balance sheets net of
discounts of $222,000.
The following table
summarized the Company's convertible notes payable as of September 30, 2018 and December 31, 2017:
|
|
September
30, 2018
|
|
December
31, 2017
|
Beginning
Balance
|
|
$
|
—
|
|
|
$
|
—
|
|
Proceeds
from the issuance of convertible notes, net of issuance discounts
|
|
|
137,000
|
|
|
|
—
|
|
Repayments
|
|
|
—
|
|
|
|
—
|
|
Conversion
of notes payable into common stock
|
|
|
—
|
|
|
|
—
|
|
Amortization of discounts
|
|
|
147,000
|
|
|
|
—
|
|
Accrued
Interest
|
|
|
18,000
|
|
|
|
—
|
|
Ending
Balance
|
|
$
|
302,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes, short term
|
|
$
|
440,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt
discounts
|
|
$
|
156,000
|
|
|
$
|
—
|
|
NOTE 6 – 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. On July 12, 2018, the court approved a Joint Motion for Order
Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000,
warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares
at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000.
The total value of the settlement, $1,983,000 was computed using the Black-Scholes Option Pricing Model and was recorded as litigation
settlement liability on the accompanying consolidated balance sheet as of December 31, 2017 and recognized on the settlement date
as a reduction to the litigation settlement liability. There is no further litigation settlement liability on the accompanying
consolidated balance sheets as of September 30, 2018.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
On June 18, 2018
the Company was named as a defendant in a case filed in the United States District Court for the Southern District of New York:
Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management Co., Inc., and Eat at Joe’s, Ltd. n/k/a
SPYR, Inc. Joseph A. Fiore was the Chairman of our Board of Directors and is a significant shareholder. Mr. Fiore resigned from
his positions as Chairman of the Board and as a Director of the Company effective August 1, 2018. The suit alleges that Mr. Fiore,
during 2013 and 2014, while he was the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board
of Directors, engaged in improper conduct on behalf of the defendants named in the case related to the Company’s sales of
securities in Plandai Biotechnology, Inc. The Commission alleges that Mr. Fiore and the Company unlawfully benefited through the
sales of those securities. The Commission also alleges that from 2013 to 2014, the Company’s primary business was investing
and that it failed to register as an investment company, resulting in an alleged violation of Section 7(a) of the Investment Company
Act of 1940. The suit seeks to disgorge Joseph A. Fiore, Berkshire Capital Management Co., Inc., and the Company of alleged profits
on the sale of the securities and civil fines related to the Company’s failure to register as an investment company with
the Commission.
The Company vehemently
denies any wrongdoing. The allegations demonstrate a fundamental misunderstanding of existing precedent and a mischaracterization
of the facts and transactions at issue, which were not violative of any securities laws, rules or regulations.
On November 2,
2018, counsel for Defendants filed a joint motion to dismiss the SEC’s suit in its entirety, primarily on the basis that
the SEC’s complaint fails to allege facts sufficient to state viable causes of action. All three defendants assert that
the SEC has failed to satisfy its heightened pleadings requirement for stating viable claims for market manipulation. All three
Defendants also sought dismissal based upon the expiration of the applicable statute of limitations and based upon the SEC’s
alleged failure to file suit within the statutory deadline for doing so as codified under the Dodd-Frank Act of 2010. This failure,
Defendants argue, deprives the SEC of jurisdiction to pursue its claims against all Defendants. In addition to the foregoing,
the Company further moved for dismissal of the alleged Section 7(a) Investment Company Act violation based upon the SEC’s
failure to establish that the Company fit the statutory definition of an Investment Company, as that term is defined under the
Investment Company Act; i.e., the Company met one of the statutory exceptions to what is and is not an Investment Company for
purposes of having to register as such under the Act. The Company does not expect a decision on its motion to dismiss for at least
two to four months.
The Company is
being represented by Alex Spiro, Esq., a partner with the firm of Quinn Emmanuel, Urquhart & Sullivan, LLP and Marc S. Gottlieb,
Esq., a partner with the firm of Ortoli Rosenstadt LLP.
Employment Agreements
Pursuant to employment
agreements entered in December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the
aggregate of $450,000 per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant
these officers an aggregate of 1.55 million shares of common stock at the beginning of each employment year.
Game Development
Agreements
The Company is
party to various game development agreements. Payments are contingent upon the developer(s) meeting specified milestones and game
performance. Pursuant to these agreements, the Company has agreed to pay up to $265,000 during the period from October 2018 through
March 2019.
Common Stock
To Be Issued
The Company is
party to various third-party service agreements to be paid through the issuance of the company’s restricted common stock.
Contingent upon the third parties providing the agreed upon services, the Company will issue up to 725,000 restricted common shares
and 200,000 common stock warrants at various intervals during the period from October 2018 through October 2019. The shares will
be recorded at fair value on the date earned under the respective agreements.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
NOTE 7 – EQUITY TRANSACTIONS
Common Stock:
Nine Months
Ended September 30, 2018:
During the nine
months ended September 30, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive officer
of the Company for cash of $50,000.
During the nine
months ended September 30, 2018, the Company issued an aggregate of 6,200,000 shares of restricted common stock to third parties
for cash of $855,000.
During the nine
months ended September 30, 2018, the Company issued an aggregate of 1,250,000 shares of restricted common stock to employees with
a total fair value of $625,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As
a result, the Company expensed the entire $625,000 upon issuance. The shares issued were valued at the date earned under the respective
agreement based upon closing market price of the Company’s common stock.
During the nine
months ended September 30, 2018, the Company issued an aggregate of 6,608,781 shares of restricted common stock to consultants
with a total fair value of $2,350,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the
Company expensed the entire $2,350,000 upon issuance. The shares issued were valued at the date earned under the respective agreements
based upon closing market price of the Company’s common stock.
During the nine
months ended September 30, 2018, the Company cancelled an aggregate of 625,000 shares of restricted common stock on termination
of a third-party service agreement with a total fair value on the date of termination of $207,000. The Company recorded a gain
on cancellation of $113,000 for the portion of shares (375,000) issued during 2017 and reversed expenses of $94,000 for the portion
of shares (250,000) issued during 2018. The shares issued were valued at the termination date of the agreement based upon closing
market price of the Company’s common stock.
During the nine
months ended September 30, 2018, the Company cancelled an aggregate of 17,500 shares of restricted common stock due to the violation
of certain gating provisions of a third-party service agreement. The total fair value on the date of termination was $5,000 based
upon closing market price of the Company’s common stock. The Company recorded a gain on cancellation of $5,000.
On July 12, 2018,
the court approved a Joint Motion for Order Approving Settlement Agreement. Pursuant to the settlement, the Company issued 3,500,000
common shares valued at $1,050,000. The shares issued were valued at the July 12, 2018 court approval date based upon closing
market price of the Company’s common stock. Total fair value of the shares was computed using the Black-Scholes Option Pricing
Model and was fully recognized on the issuance date as a reduction to the litigation settlement liability on the accompanying
consolidated balance sheets as of September 30, 2018.
Options:
The following table
summarizes common stock options activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
December
31, 2017
|
|
|
|
13,320,000
|
|
|
$
|
1.74
|
|
|
Granted
|
|
|
|
420,000
|
|
|
|
1.00
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, September 30,
2018
|
|
|
|
13,740,000
|
|
|
$
|
1.72
|
|
|
Exercisable, September 30,
2018
|
|
|
|
13,065,000
|
|
|
$
|
1.60
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
During the year
ended December 31, 2017, the Company granted stock options to a consultant to purchase a total of 420,000 shares of common stock.
During the nine months ended September 30, 2018, the Company renewed the contract for an additional year and granted the consultant
an additional 420,000 stock options with a total fair value of $115,000. A total of 350,000 vested during 2017, 315,000 options
vested during the nine months ended September 30, 2018 while the remaining 175,000 options will vest through February 2019 at
a rate of 35,000 shares per month. The options are exercisable at $1.00 per share and will expire over 4 years. The fair values
of the options are recorded at their respective grant dates computed using the Black-Scholes Option Pricing Model. During the
nine months ended September 30, 2018, the Company recognized $109,000 in compensation expense based upon the vesting of outstanding
options. As of September 30, 2018, the unamortized compensation expense for unvested options was $48,000 which will be recognized
over the vesting period.
The weighted average
exercise prices, remaining lives for options granted, and exercisable as of September 30, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Options
|
|
|
|
Exercisable
Options
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per
Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.50
|
|
8,000,000
|
|
1.92
|
|
$0.50
|
|
8,000,000
|
|
$0.50
|
$1.00
|
|
1,490,000
|
|
1.07 – 3.36
|
|
$1.00
|
|
1,315,000
|
|
$1.00
|
$2.50
|
|
1,250,000
|
|
.25
|
|
$2.50
|
|
1,250,000
|
|
$2.50
|
$5.00
|
|
3,000,000
|
|
1.25
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
13,740,000
|
|
|
|
$1.72
|
|
13,065,000
|
|
$1.60
|
At September 30,
2018, the Company’s closing stock price was $0.24 per share. As all outstanding options had an exercise price greater than
$0.24 per share, there was no intrinsic value of the options outstanding at September 30, 2018.
The following table
summarizes options granted with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number
of
|
|
|
Grant
Date
|
|
|
Shares
|
|
|
Fair
Value
|
Non-vested,
December 31, 2017
|
70,000
|
|
$
|
1.00
|
|
Granted
|
420,000
|
|
|
1.00
|
|
Vested
|
(315,000)
|
|
|
1.00
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested,
September 30, 2018
|
175,000
|
|
$
|
1.00
|
Warrants:
The following table
summarizes common stock warrants activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
Outstanding,
December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
|
Granted
|
|
|
|
7,100,000
|
|
|
|
0.55
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, September 30,
2018
|
|
|
|
8,800,000
|
|
|
$
|
0.65
|
|
|
Exercisable, September 30,
2018
|
|
|
|
8,800,000
|
|
|
$
|
0.65
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
In January 2018,
pursuant to a services agreement, the Company granted warrants to purchase a total of 1,200,000 shares of restricted common stock
with an exercise price of $0.40 and will expire 36 months after date of grant. The warrants are fully vested and exercisable upon
grant. Total fair value of the warrants at grant date amounted to $383,000 computed using the Black-Scholes Option Pricing Model
and was fully recognized on the date of grant.
In March 2018,
pursuant to a stock purchase agreement, the Company granted warrants to purchase a total of 700,000 shares of restricted common
stock with an exercise price of $0.50 and will expire March 18, 2023. The warrants are fully vested and exercisable upon grant.
Total fair value of the options at grant date amounted to $234,000 computed using the Black-Scholes Option Pricing Model and was
fully recognized on the date of grant.
In April 2018,
in combination with a 12-month convertible promissory note, the Company granted warrants to purchase a total of 500,000 shares
of restricted common stock with exercise prices ranging from $0.375 to $0.625 and will expire April 20, 2021. The warrants are
fully vested and exercisable upon grant. The proceeds of the note were allocated between the note and the warrants based on the
relative fair values which resulted in proceeds of $61,000 allocated to the warrants and recorded as paid in capital and debt
discount. The debt discount will be amortized over the life of the note as interest expense. During the nine months ended September
30, 2018, the Company recognized $27,000 of debt discount interest. As of September 30, 2018, the unamortized debt discount was
$34,000 which will be recognized over the life of the note.
In May 2018, in
combination with an 8-month convertible promissory note, the Company granted warrants to purchase a total of 200,000 shares of
restricted common stock with an exercise prices of $2.00 and will expire May 22, 2023. The warrants are fully vested and exercisable
upon grant. The proceeds of the note were allocated between the note and the warrants based on the relative fair values which
resulted in proceeds of $32,000 allocated to the warrants and recorded as paid in capital and debt discount. The debt discount
will be amortized over the life of the note as interest expense. During the nine months ended September 30, 2018, the Company
recognized $17,000 of debt discount interest. As of September 30, 2018, the unamortized debt discount was $15,000 which will be
recognized over the life of the note.
In May 2018, pursuant
to a stock purchase agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock
with exercise prices ranging from $0.50 to $1.00 and will expire May 29, 2021. The warrants are fully vested and exercisable upon
grant. Total fair value of the options at grant date amounted to $184,000 computed using the Black-Scholes Option Pricing Model
and was fully recognized on the date of grant.
On July 12, 2018,
pursuant to a court approved Joint Motion for Order Approving Settlement Agreement, the Company issued warrants to purchase a
total of 3,500,000 shares of common stock with exercise prices ranging from $0.25 to $0.75 and will expire July 11, 2023. The
warrants are fully vested and exercisable upon grant. Total fair value of the options at grant date amounted to $933,000 computed
using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant as a reduction to the litigation settlement
liability on the accompanying consolidated balance sheets as of September 30, 2018.
The weighted average
exercise prices, remaining lives for warrants granted, and exercisable as of September 30, 2018, were as follows:
|
|
|
|
|
Outstanding
and Exercisable Warrants
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
Life
|
|
|
Per
Share
|
|
|
|
Shares
|
|
|
|
(Years)
|
|
$
|
0.01
|
|
|
|
600,000
|
|
|
|
2.25
|
|
$
|
0.25
|
|
|
|
1,000,000
|
|
|
|
4.78
|
|
$
|
0.375
|
|
|
|
200,000
|
|
|
|
2.56
|
|
$
|
0.40
|
|
|
|
1,200,000
|
|
|
|
2.28
|
|
$
|
0.50
|
|
|
|
3,000,000
|
|
|
|
0.08 – 4.78
|
|
$
|
0.625
|
|
|
|
100,000
|
|
|
|
2.56
|
|
$
|
0.75
|
|
|
|
1,250,000
|
|
|
|
2.66 – 4.78
|
|
$
|
1.00
|
|
|
|
250,000
|
|
|
|
2.66
|
|
$
|
1.50
|
|
|
|
500,000
|
|
|
|
0.25
|
|
$
|
2.00
|
|
|
|
700,000
|
|
|
|
0.25 – 4.64
|
|
|
|
|
|
|
8,800,000
|
|
|
|
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
At September 30,
2018, the Company’s closing stock price was $0.24 per share. The Company had 600,000 warrants outstanding with exercise
prices less than $0.24 with an intrinsic value of $138,000 at September 30, 2018.
The table below
represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2018:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2018
|
|
Expected life
in years
|
|
|
3.00
– 5.00
|
|
Stock price volatility
|
|
|
138%
- 153%
|
|
Risk free interest rate
|
|
|
2.12
% - 2.9%
|
|
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.
Shares Reserved:
At September 30,
2018, the Company has reserved 30,000,000 shares of common stock in connection with 2 convertible notes with detachable warrants
and 3,500,000 shares of common stock in connection with the court approves settlement agreement for a total of 33,500,000 reserved
shares of common stock.
NOTE 8 – DISCONTINUED OPERATIONS
Restaurant
Through our other
wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April
2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant
segment is reported as discontinued operations.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2018 and 2017
(Unaudited)
The following table
summarizes the assets and liabilities of our discontinued restaurant segment's discontinued operations as of September 30, 2018
and December 31, 2017:
|
|
September
30, 2018
|
|
December
31, 2017
|
Assets:
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
Total
Liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
The following table
summarizes the results of operations of our discontinued restaurant for the three and nine months ended September 30, 2018 and
2017 and is included in the consolidated statements of operations as discontinued operations:
|
|
For the Three
Months Ended September 30,
|
|
For the Nine
Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421,000
|
|
Cost
of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
134,000
|
|
Gross
Margin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
287,000
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and related expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
178,000
|
|
Rent
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
82,000
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
Professional
fees
|
|
|
—
|
|
|
|
23,000
|
|
|
|
—
|
|
|
|
26,000
|
|
Other
general and administrative
|
|
|
—
|
|
|
|
5,000
|
|
|
|
1,000
|
|
|
|
94,000
|
|
Total
Operating Expenses
|
|
|
—
|
|
|
|
28,000
|
|
|
|
2,000
|
|
|
|
400,000
|
|
Operating
Income (Loss)
|
|
|
—
|
|
|
|
(28,000
|
)
|
|
|
(2,000
|
)
|
|
|
(113,000
|
)
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,000
|
)
|
Income
(Loss) on discontinued operations
|
|
$
|
—
|
|
|
$
|
(28,000
|
)
|
|
$
|
(2,000
|
)
|
|
$
|
(132,000
|
)
|
NOTE 9 – SUBSEQUENT EVENTS
Subsequent to September
30, 2018, the Company issued 295,000 shares of common stock pursuant to various third-party service agreements.
On October 16,
2018, the Company issued 300,000 restricted common shares as part of the base salary pursuant to an employment contract with one
officer of the Company.