SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
This summary of accounting policies for SPYR,
Inc. and subsidiaries (the “Company”) is presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
Organization
The Company was incorporated as Conceptualistics,
Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its name to Eat at Joe’s, Ltd.
In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March
12, 2015.
Nature of Business
The primary focus of SPYR, Inc. (the “Company”)
is to act as a holding company and develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.
Through our wholly owned subsidiaries, SPYR
APPS, LLC we operate our mobile games and applications business. The focus of the SPYR APPS subsidiary is the development and publication
of electronic games that are downloaded for free by users of mobile devices such as cellular telephones and tablets, including
those using Apple’s iOS and Google’s Android mobile operating systems.
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and liabilities of EAJ as well as the
results of its operations were presented in these financial statements as discontinued operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of SPYR, Inc. and its wholly-owned subsidiaries, SPYR APPS, LLC, a Nevada Limited Liability Company, E.A.J.: PHL,
Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 7), and Branded Foods Concepts, Inc., a Nevada corporation.
Intercompany accounts and transactions have been eliminated.
Going Concern
The accompanying financial statements have
been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization
of assets and satisfaction of liabilities in the normal course of business, however, the issues described below raise substantial
doubt about the Company’s ability to do so.
As shown in the accompanying financial statements,
for the year ended December 31, 2018, the Company recorded a net loss from continuing operations of $7,110,000 and utilized cash
in operations of $1,831,000. As of December 31, 2018, our cash balance was $24,000 and we had trading securities of $4,000. 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 sales of our common stock and debt financing.
The Company will
continue to seek additional capital through the sale of its common stock, debt financing and through expansion of its
existing and new products.
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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
The ability of the Company to continue as a
going concern is dependent upon the success of future capital offerings or alternative financing arrangements and expansion of
its operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate
enough cash flow to fund its operations through calendar year 2019. 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
year ended December 31, 2018 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E –
1,445,504, Options – 12,449,900 and Warrants – 9,000,000) would have had an anti-dilutive effect due to the Company
generating a loss for the year ended December 31, 2018.
The basic and fully diluted shares for the
year ended December 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E –
415,559, Options – 13,320,000, Warrants – 1,700,000) would have had an anti-dilutive effect due to the Company generating
a loss for the year ended December 31, 2017.
Capitalized Gaming Assets and Licensing
Rights
Capitalized gaming
assets and licensing rights represent costs to acquire trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may
obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single product.
Significant management judgments and estimates
are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment
of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised
forecasted or actual product sales are less than the originally forecasted amounts utilized in the initial recoverability analysis,
the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.
Material differences may result in the amount and timing of expenses for any period if management makes different judgments or
utilizes different estimates in evaluating these qualitative factors.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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 8,000,000 shares of the Company’s restricted common stock valued at $3,200,000, options to purchase up to 8,000,000
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 as of December 31, 2017. The difference between purchase price and the capitalized
value was recorded as loss on write down on assets of $5,381,000 during the year ended December 31, 2017. As of December 31, 2018,
the unamortized balance of $400,000 was recorded as a loss on write down of assets during the year ended December 31, 2018.
Further, 2,500,000 of the 3,750,000 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 through December 31, 2019.
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. As of December 31, 2018,
the company has not met certain development milestones, is in default and has recognized an impairment loss of $175,000 recorded
as a loss on write down of assets in the consolidated statement of operations for the year ended December 31, 2018. The Company
is seeking an extension of time to meet these milestones and cure the default.
In addition, during 2017 we also acquired the
game titled Battlewack: Idle Lords for cash of $100,000, pursuant to settlement with the game owner and developer. Battlewack:
Idle Lords requires additional development before it can be released.
During 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.
During the year ended December 31, 2018, the
Company recorded amortization expense of $71,000. As of December 31, 2018 and December 31, 2017, the accumulated amortization was
$84,000 and $52,000, respectively and the unamortized capitalized gaming assets and licensing rights amounted to $122,000 and $743,000
respectively.
The expected annual amortization expense related
to capitalized gaming assets and licensing rights as of December 31, 2018, is as follows:
|
2019
|
|
|
$
|
6,000
|
|
|
2020
|
|
|
|
6,000
|
|
|
2021
|
|
|
|
6,000
|
|
|
2022
|
|
|
|
6,000
|
|
|
2023
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
24,000
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
Software Development Costs
Costs incurred for software development are
expensed as incurred. During the years ended December 31, 2018 and 2017, the Company incurred $746,000 and $1,666,000 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.
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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
Accounts Receivable
The following is a summary of receivables at
December 31, 2018 and 2017:
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Game revenue due from in app purchases, net of app store fees
|
|
$
|
51,000
|
|
|
$
|
4,000
|
|
Game revenue due from in app advertising
|
|
|
10,000
|
|
|
|
—
|
|
Other Receivables
|
|
|
1,000
|
|
|
|
—
|
|
Total Accounts Receivable
|
|
$
|
62,000
|
|
|
$
|
4,000
|
|
Accounts receivable are carried at their estimated
collectible amounts and are not subject to any interest or finance charges.
Allowance for Doubtful Accounts
The Company evaluates the collectability of
accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair
a specific customer's ability to meet its financial obligations subsequent to the original sale, the Company will recognize an
allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will
be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the
receivables are past due and consideration of other factors such as industry conditions, the current business environment and the
Company's historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred
through a provision for bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are
susceptible to significant revisions as more information becomes available.
As of both December 31, 2018 and 2017, management
has determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
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.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held
for investment purposes.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation or amortization. Depreciation is recorded at the time property and equipment is placed in service using
the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold
improvements are amortized over the shorter of the expected useful lives of the related assets or the lease term. The estimated
economic useful lives of the related assets as follows:
Furniture and fixtures
|
5-10 years
|
Equipment
|
5-7 years
|
Computer equipment
|
3 years
|
Leasehold improvements
|
5-6 years
|
Maintenance and repairs are charged to operations;
betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation and amortization
thereon are eliminated from the property and related accumulated depreciation and amortization accounts, and any resulting gain
or loss is credited or charged to operations.
Intangible Assets
The Company accounts for its intangible assets
in accordance with the authoritative guidance issued by the ASC Topic 350 –
Goodwill and Other
. Intangibles are valued
at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected
period of benefit. The Company evaluates non-amortizing intangible assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable from its estimated undiscounted future cash flows.
The cost of internally developing, maintaining
and restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in
a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset with a definite useful
life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be
no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine
whether events and circumstances continue to support an indefinite useful life.
During the year ended December 31, 2018, the
Company recorded amortization expense of $3,000. As of December 31, 2018, total intangible assets amounted to $20,000 which consist
of website development costs. There were no indications of impairment based on management’s assessment of these assets at
December 31, 2018. Factors we consider important that could trigger an impairment review include significant underperformance relative
to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy
for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased
revenues and increased costs, we may have to record impairment to our intangible assets.
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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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.
Concentration of Credit Risk
The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The
Company maintains the majority of its cash balances with financial institutions, in the form of demand deposits. The Company believes
that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness
and financial viability of this financial institution.
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, prepaid expenses, accounts payable and
accrued expenses, related party short-term advances, related party line of credit and convertible notes payable approximate their
fair value because of the short maturity of those instruments.
The Company’s trading securities and money market funds are
measured at fair value using level 1 fair values.
Advertising Costs
Advertising, marketing and promotional costs are expensed as incurred
and included in general and administrative expenses.
Advertising, marketing and promotional expense
was $79,000 and $195,000 for the years ended December 31, 2018, and 2017, respectively and was reflected as part of Other General
and Administrative Expenses on the accompanying consolidated statements of operations.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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 August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows” which was issued to improve uniformity in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The amendments in ASU 2016-15 were effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance effective January
1, 2018, and it did not have any impact on the Company’s consolidated statements of cash flows.
The Company adopted ASU 2016-18, “Statement
of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (ASU 2016-18), effective
January 1, 2018. This update clarified that transfers between cash and restricted cash are not reported as cash flow activities
in the statements of cash flows. As such, restricted cash amounts are included with cash and cash equivalents in the beginning-of-period
and end-of-period total amounts on the statements of cash flows. The Company adopted this guidance effective January 1, 2018, and
it did not have any impact on the Company’s consolidated statements of cash flows.
In June 2018, the FASB issued ASU 2018-07,
“Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which expands
the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU
2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services
to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does
not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under ASC 606. The amendments in ASU 2018-07 are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
is currently assessing the impact of this guidance on its consolidated financial statements.
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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
NOTE 2 - TRADING SECURITIES
Investments in securities are summarized as
follows:
|
|
Fair Value at
|
|
|
|
Proceeds
|
|
Loss
|
|
|
|
|
|
Fair Value at
|
Year
|
|
Beginning of Year
|
|
Purchases
|
|
from
Sale
|
|
on
Sale
|
|
Contributed
Capital
|
|
Unrealized
Loss
|
|
December 31, 2018
|
|
2018
|
|
|
$
|
48,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(44,000
|
)
|
|
$
|
4,000
|
|
|
2017
|
|
|
$
|
59,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,000
|
)
|
|
$
|
48,000
|
|
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
|
|
|
December 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 4,000
|
|
$ 4,000
|
|
$ —
|
|
$ —
|
Money market funds
|
|
1,196
|
|
1,196
|
|
—
|
|
—
|
Total
|
|
$ 5,196
|
|
$ 5,196
|
|
$ —
|
|
$ —
|
|
|
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Equipment
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Furniture & fixtures
|
|
|
112,000
|
|
|
|
114,000
|
|
Leasehold improvements
|
|
|
107,000
|
|
|
|
107,000
|
|
|
|
|
247,000
|
|
|
|
249,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(153,000
|
)
|
|
|
(115,000
|
)
|
Property and Equipment, Net
|
|
$
|
94,000
|
|
|
$
|
134,000
|
|
Depreciation and amortization expense for the
years ended December 31, 2018 and 2017 was $40,000 and $105,000, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
During May 2017, the Company sold 750,000 restricted
common shares to a former officer/employee of the company for cash of $300,000. These shares were recorded at fair value of $510,000
with $210,000 being recorded in the statement of operations and comprehensive income as part of professional fees for the year
ended December 31, 2017.
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 July 1, 2019. As of December 31, 2018, the Company has borrowed $1,000,000 and accrued
interest of $68,000.
During January 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 year ended December 31, 2018, the
Company received an additional $313,000 in the form of short-term advances from Berkshire Capital Management Co., Inc. The $313,000
short-term advances are due upon demand.
During the year ended December 31, 2018, the
Company, received $130,000 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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
NOTE 5 - INCOME TAXES
The Company did not provide any Federal and State income tax for
the years ended December 31, 2018 and 2017 due to the Company’s net losses.
A reconciliation of the provision for income taxes computed using
the US statutory federal income tax rate is as follows:
|
|
December 31,
|
|
|
2018
|
|
2017
|
Tax provision at US statutory federal income tax rate
|
|
$
|
(558,000
|
)
|
|
$
|
(468,000
|
)
|
State income tax, net of federal benefit
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowances
|
|
|
558,000
|
|
|
|
468,000
|
|
Provision for Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The significant components of the Company’s
deferred tax assets were:
|
|
December 31,
|
|
|
2018
|
|
2017
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
4,376,000
|
|
|
$
|
3,849,000
|
|
Capital loss carry over
|
|
|
630,000
|
|
|
|
630,000
|
|
Accrued expenses
|
|
|
16,000
|
|
|
|
—
|
|
Unrealized losses on marketable securities
|
|
|
9,000
|
|
|
|
2,000
|
|
Depreciation and other
|
|
|
(26,000
|
)
|
|
|
434,000
|
|
|
|
|
5,005,000
|
|
|
|
4,915,000
|
|
Less valuation allowance
|
|
|
(5,005,000
|
)
|
|
|
(4,915,000
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax assets and liabilities reflect
the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax
rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
As of December 31, 2018, the Company recorded
a valuation allowance of $5,005,000 for its deferred tax assets. The Company believes that such assets did not meet the more likely
than not criteria to be recoverable through projected future profitable operations in the foreseeable future.
Effective January 1, 2007, the Company
adopted FASB guidance that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement. The FASB also provides guidance on de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2018 and 2017, the Company does
not have a liability for unrecognized tax benefits.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDING DECEMBER
31, 2018 AND 2017
The Company’s net operating loss carry
forward for income tax purposes as of December 31, 2018 was approximately $20,800,000, of which $18,300,000 and may be offset against
future taxable income through 2037 and $2,500,000 can be carried forward indefinitely. Utilization of the Company’s net operating
losses may be subject to substantial annual limitation if the Company experiences a 50% change in ownership, as provided by the
Internal Revenue Code and similar state provisions. Such an ownership change would substantially increase the possibility of net
operating losses expiring before complete utilization.
In December 2017, new tax known as Tax
Cut and Jobs Act of 2017 was enacted. The new tax law includes significant changes to the U.S. corporate tax systems including
a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward, a deemed
repatriation transition tax, and changes to allow net operating losses to be carried forward indefinitely. In addition, net operating
losses arising after December 31, 2017 will be limited to the lesser of the available net operating loss or 80% of the pre-net
operating loss taxable income.
In accordance with ASC 740, the impact
of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a non-cash,
change in its net deferred tax balances of approximately $2,429,000 related to the tax rate change. The Company estimates that
its deemed repatriation liability will not be material due to its limited international operations.
Uncertain Tax Positions
ASC 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken
in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. In many cases the Company’s uncertain tax positions are related to tax years that remain subject to
examination by relevant tax authorities. The Company is generally no longer subject to U.S. federal, state or local income tax
examinations by tax authorities for years before 2015. However, as of December 31, 2018, the years subsequent to 2014 remain open
and could be subject to examination by tax authorities including the U.S. Internal Revenue Service and major state and local tax
jurisdictions in the United States.
Interest costs related to unrecognized tax
benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties,
if any, would be recognized as a component of “General and administrative expenses.”
As of December 31, 2018, the Company had no
liability for unrecognized tax benefits and no accrual for the payment of related interest and penalties, nor did the Company recognized
any interest or penalties expense related to unrecognized tax benefits during the years ended December 31, 2018 or 2017.
NOTE 6 – 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 year ended December 31, 2018 the Company has accrued
interest for this note in the amount of $9,000. At December 31, 2018, the principal balance together with total accrued
interest is recorded on the Company’s consolidated balance sheets net of discounts at $124,000. The note holder has
responded to an audit confirmation that he believes the note is in default, which the Company disputes. If it is determined
that the note is in default, the amount of additional interest and damages would approximate $87,000. The Company has
established a contingent liability of $87,000 which is included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2018 and reported as interest expense on the accompanying
consolidated statement of operations for the year ended December 31, 2018.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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 matured on
February 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 year ended December 31, 2018 the Company has
accrued interest for this note in the amount of $20,000. At December 31, 2018, the principal balance together with total accrued
interest of $20,000 and liquidated damages of $25,000 is recorded on the Company’s consolidated balance sheets net of discounts
at $308,000.
The following table summarized the Company's
convertible notes payable as of December 31, 2018 and December 31, 2017:
|
|
December 31, 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
|
|
|
241,000
|
|
|
|
—
|
|
Liquidated damages
|
|
|
25,000
|
|
|
|
|
|
Accrued Interest
|
|
|
29,000
|
|
|
|
—
|
|
Ending Balance
|
|
$
|
432,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible notes, short term
|
|
$
|
440,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt discounts
|
|
$
|
62,000
|
|
|
$
|
—
|
|
NOTE 7 – 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 $143,000 to $152,000.
Beginning September 1, 2016, we began
leasing office space in Berlin, Germany on a month to month basis at a cost of EUR 250 ($271) plus 19% tax per person up to a
maximum of 10 people. On June 29, 2017, we signed a new lease for the Berlin office space for EUR 3,570 ($4,190) per month
beginning July 2017 through March 31, 2018. The Berlin office was used by leased employees hired by the Company for the
marketing and user acquisition for the Pocket Starships game.
Beginning October 17, 2016, we began leasing
shared office for one employee in Redmond, Washington on a month to month basis at a cost of $225 per month per desk, increasing
to $275 per month starting in December 2016 and $325 per month July 2018 through February 2019.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
The minimum future lease payments under these leases for the next
five years are:
Year Ended December 31,
|
|
Amount
|
|
2019
|
|
|
$
|
150,000
|
|
|
2020
|
|
|
|
152,000
|
|
|
2021
|
|
|
|
—
|
|
|
2022
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
Total Five Year Minimum Lease Payments
|
|
|
$
|
302,000
|
|
Rent expense for the years ended December 31,
2018 and 2017 was $163,000 and $186,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately
$200 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. Material settled and pending
legal proceedings are as follows:
Settlements
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
December 31, 2018.
Pending
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.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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. Based upon available information at this very
early stage of litigation, management believes that the Company will obtain a favorable ruling. Accordingly, Management believes
the likelihood of material loss resulting from this lawsuit to be remote.
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 agreements, 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.
NOTE 8 – EQUITY TRANSACTIONS
Common Stock:
Year Ended December 31, 2017
During the year ended December 31, 2017, the
Company issued an aggregate of 750,000 shares of restricted common stock to an existing shareholder and former officer/employee
for cash of $300,000. The common shares had a fair value of $510,000 at the date of sale, and as a result, the Company reflected
an additional expense of $210,000 to account the difference between the sale price and the fair market value of common shares sold.
During the year ended December 31, 2017, the
Company issued an aggregate of 2,050,000 shares of restricted common stock to employees with a total fair value of $1,109,000 for
services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the
entire $1,109,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.
During year ended December 31, 2017, the Company
issued an aggregate of 12,691,924 shares of restricted common stock to consultants with a total fair value of $3,758,000. The shares
issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,758,000 upon issuance.
The shares issued were valued at the date earned under the respective agreements.
During year ended December 31, 2017, the Company
issued an aggregate of 8,000,000 shares of restricted common stock to third parties with a total fair value of $3,320,000. The
shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,320,000 upon
issuance. The shares issued were valued at the date earned under the respective agreements. (See Note 1 “Capitalized Gaming
Assets and Licensing Rights”).
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
Year Ended December 31, 2018
During the year ended December 31, 2018, the
Company issued 500,000 shares of restricted common stock to the father of an executive officer of the Company for cash of $50,000.
During the year ended December 31, 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 year ended December 31, 2018, the
Company issued an aggregate of 1,550,000 shares of restricted common stock to employees with a total fair value of $673,000 for
services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the
entire $673,000 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 year ended December 31, 2018, the
Company issued an aggregate of 6,068,681 shares of restricted common stock to consultants with a total fair value of $1,968,000.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,968,000 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 year ended December 31, 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 year ended December 31, 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 $1,983,000 reduction to the litigation settlement liability on the accompanying consolidated balance
sheets as of December 31, 2018.
Common Stock with Vesting Terms:
The following table summarizes common stock
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, January 1, 2017
|
20,833
|
|
$
|
0.47
|
|
Granted
|
-
|
|
|
-
|
|
Vested
|
(20,833)
|
|
|
0.47
|
|
Forfeited
|
-
|
|
|
-
|
Non-vested, December 31, 2017
|
-
|
|
$
|
-
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
In During 2015, the Company granted and issued
600,000 shares of its restricted common stock to employees and third-party service providers. The 600,000 shares were forfeitable
and deemed earned upon completion of service over a period of twelve to twenty-four months. The Company recognized the fair value
of these shares as they vested. As of January 1, 2017, 579,167 of these shares had vested and 20,833 common shares were unvested.
During the year ended December 31, 2017, the remaining 20,833 of these shares vested and as a result, the Company recognized compensation
cost of $46,000. As of December 31, 2017, there were no unvested shares and no unearned compensation costs to be recorded.
When calculating basic net income (loss) per
share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted
net income per share, these shares, if dilutive, are included in weighted average common shares outstanding as of their grant date.
Options:
The following table summarizes common stock
options activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
Outstanding, January 1, 2017
|
|
|
|
12,900,000
|
|
|
$
|
2.94
|
|
|
Granted
|
|
|
|
8,920,000
|
|
|
|
0.55
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(1,000,000
|
)
|
|
|
1.00
|
|
|
Forfeited
|
|
|
|
(7,500,000
|
)
|
|
|
3.97
|
|
|
Outstanding, December 31, 2017
|
|
|
|
13,320,000
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
420,000
|
|
|
|
1.00
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(1,250,000
|
)
|
|
|
2.50
|
|
|
Forfeited
|
|
|
|
(40,100
|
)
|
|
|
1.00
|
|
|
Outstanding, December 31, 2018
|
|
|
|
12,449,900
|
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
12,250,000
|
|
|
$
|
1.58
|
|
|
Exercisable, December 31, 2018
|
|
|
|
11,949,900
|
|
|
$
|
1.50
|
|
The weighted average grant date fair value
of options granted during the years ended December 31, 2018 and 2017, was $1.00 and $0.55 respectively.
During the year ended December 31, 2017, the
Company granted stock options to consultants to purchase a total of 420,000 shares of common stock. A total of 350,000 options
vested during 2017 while the remaining 70,000 options vested through February 2018 at a rate of 35,000 shares per month. The options
are exercisable at $1.00 per share and will expire over 4 years. The fair values of the options are recorded at their respective
grant dates computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2017, the Company recognized
$210,000 in compensation expense based upon the vesting of outstanding options. As of December 31, 2017, the unamortized compensation
expense for unvested options was $42,000 which was recognized during 2018.
During year ended December 31, 2017, the Company
granted stock options to purchase up to 8,000,000 shares of the Company’s restricted common stock to third parties valued
at $2,452,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting August 31, 2020.
The fair values of the options were computed using the Black-Scholes Option Pricing Model and recorded at the date of grant. (See
Note 1 “Capitalized Gaming Assets and Licensing Rights”)
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
During the year ended December 31, 2018, the
Company granted stock options to consultants to purchase a total of 420,000 shares of common stock. A total of 379,900 options
vested during 2017 while the remaining 40,100 options were forfeited concurrent with the termination of the consulting agreement.
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 year ended December 31, 2018, the Company
recognized $104,000 in compensation expense based upon the vesting of outstanding options. As of December 31, 2018, there was no
additional unearned compensation costs to be recorded.
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Exercisable Options
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.50
|
|
8,000,000
|
|
1.67
|
|
$0.50
|
|
8,000,000
|
|
$0.50
|
$1.00
|
|
1,449,900
|
|
0.81 – 3.10
|
|
$1.00
|
|
1,449,900
|
|
$1.00
|
$5.00
|
|
3,000,000
|
|
1
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
12,449,900
|
|
|
|
$1.64
|
|
11,949,900
|
|
$1.50
|
At December 31, 2018, the Company’s closing
stock price was $0.08 per share. As all outstanding options had an exercise price greater than $0.08 per share, there was no intrinsic
value of the options outstanding at December 31, 2018.
The following table summarizes options granted
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, January 1, 2017
|
-
|
|
$
|
-
|
|
Granted
|
420,000
|
|
|
1.00
|
|
Vested
|
(350,000)
|
|
|
1.00
|
|
Forfeited
|
-
|
|
|
-
|
Non-vested, December 31, 2017
|
70,000
|
|
$
|
-
|
|
Granted
|
420,000
|
|
|
1.00
|
|
Vested
|
(449,900)
|
|
|
1.00
|
|
Forfeited
|
(40,100)
|
|
|
1.00
|
Non-vested, December 31, 2018
|
-
|
|
$
|
-
|
Warrants:
The following table summarizes common stock
warrants activity:
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDING DECEMBER
31, 2018 AND 2017
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
Outstanding, January 1, 2017
|
|
|
|
200,000
|
|
|
$
|
0.50
|
|
|
Granted
|
|
|
|
1,700,000
|
|
|
|
1.06
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(200,000
|
)
|
|
|
0.50
|
|
|
Outstanding, December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
8,400,000
|
|
|
|
0.49
|
|
|
Exercised
|
|
|
|
0
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(1,100,000
|
)
|
|
|
1.64
|
|
|
Outstanding, December 31, 2018
|
|
|
|
9,000,000
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
|
Exercisable, December 31, 2018
|
|
|
|
9,000,000
|
|
|
$
|
0.46
|
|
In March 2017, pursuant to an employee separation
agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock with an exercise price
of $1.50 and $2.00 which expired December 31, 2018. The warrants are fully vested and exercisable upon grant. Total fair value
of the warrants at grant date amounted to $290,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
In October 2017, pursuant to advisory services
agreement, the Company granted warrants to purchase a total of 100,000 shares of restricted common stock with an exercise price
of $0.50 and expired 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair value of
the options at grant date amounted to $20,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on
the date of grant.
In October 2017, pursuant to a services agreement,
the Company granted warrants to purchase a total of 600,000 shares of restricted common stock with an exercise price of $0.01 and
will expire December 31, 2020. The options are fully vested and exercisable upon grant. Total fair value of the options at grant
date amounted to $188,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.
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 year ended December 31, 2018, the Company recognized $43,000 of debt
discount interest. As of December 31, 2018, the unamortized debt discount was $18,000 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 year ended December 31, 2018, the
Company recognized $29,000 of debt discount interest. As of December 31, 2018, the unamortized debt discount was $3,000 which
will be recognized over the life of the note.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
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
warrants 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 warrants 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 December 31, 2018.
In October 2018, pursuant to advisory services
agreement, the Company granted warrants to purchase a total of 100,000 shares of restricted common stock with an exercise price
of $0.50 and will expire January 11, 2021. The warrants are fully vested and exercisable upon grant. Total fair value of the options
at grant date amounted to $4,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of
grant.
In December 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 $0.15
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 $58,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the
date of grant.
The weighted average exercise prices, remaining
lives for warrants granted, and exercisable as of December 31, 2018, were as follows:
|
|
Outstanding and Exercisable Warrants
|
|
Warrants
|
|
|
|
|
|
Exercise Price
|
|
|
|
Life
|
|
Per Share
|
|
Shares
|
|
(Years)
|
|
$0.01
|
|
600,000
|
|
2.00
|
|
$0.15
|
|
1,200,000
|
|
2.03
|
|
$0.25
|
|
1,000,000
|
|
4.53
|
|
$0.375
|
|
200,000
|
|
2.30
|
|
$0.40
|
|
1,200,000
|
|
2.03
|
|
$0.50
|
|
3,000,000
|
|
0.83 – 4.53
|
|
$0.625
|
|
100,000
|
|
2.30
|
|
$0.75
|
|
1,250,000
|
|
2.41 – 4.53
|
|
$1.00
|
|
250,000
|
|
2.41
|
|
$2.00
|
|
200,000
|
|
4.39
|
|
|
|
9,000,000
|
|
|
|
At December 31, 2018, the Company’s closing
stock price was $0.08 per share. The Company had 600,000 warrants outstanding with exercise prices less than $0.08 with an intrinsic
value of $42,000 at December 31, 2018.
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2017:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2017
|
|
Expected life in years
|
|
|
1.00 – 3.19
|
|
Stock price volatility
|
|
|
127% - 157%
|
|
Risk free interest rate
|
|
|
1.26 % - 1.70%
|
|
Expected dividends
|
|
|
—
|
|
Forfeiture rate
|
|
|
—
|
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2018:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2018
|
|
Expected life in years
|
|
|
1.00 – 5.00
|
|
Stock price volatility
|
|
|
138% - 153%
|
|
Risk free interest rate
|
|
|
2.12 % - 2.90%
|
|
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 December 31, 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 underlying warrants issued in connection with the court approved settlement agreement for a total of 33,500,000 reserved
shares of common stock.
NOTE 9 - PREFERRED STOCK
The Class A Preferred Stock carries the
following rights and preferences;
Dividends
The Company shall, in its discretion, determine
when and if dividends will be paid on the Class A Preferred Shares, and whether it will be paid in cash, shares of Common Stock,
or a combination of both. All Class A Preferred Stockholders shall be treated the same with respect to the payment of dividends.
In the event the Company elects to pay a portion or all of the dividends on the Class A Preferred Stock by issuing shares of the
Company's Common Stock, the shares of common stock issued as dividends will be restricted, unregistered shares, and will be subject
to the same transfer restrictions that apply to the shares of Class A Preferred Stock. The dividend is payable as may be determined
by the Board of Directors, out of funds legally available therefor. The Class A Preferred Stock will have priority as to dividends
over the Common Stock.
Voting Rights
The holders of the Class A Preferred Stock
shall vote for the election of directors, and shall have full voting rights, except that each Class A Preferred share shall entitle
the holder to exercise ten thousand (10,000) votes for each one (1) Class A Preferred Share held.
Redemptive Rights
The Class A Preferred Stock shall not be redeemable.
Conversion Rights
The holders of the Class A Preferred
Stock will be entitled at any time to convert their shares of Class A Preferred Stock into shares of the Company's Common
Stock at the rate of one (1) share of Class A Preferred Stock be converted into common shares of the Company at an agreed
price of forty cents ($0.40) per share (the "Conversion Price"), which, based upon the recorded fair value of the
Class A Preferred Stock, results in a conversion ratio of 1 share of Class A Preferred Stock to approximately 250 shares of
common stock. No fractional shares will be issued.
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2018 AND 2017
The Conversion Ratio of the Class A Preferred
Stock shall be adjusted in certain circumstances, including the payment of a stock dividend on shares of the Common Stock and combinations
and subdivisions of the Common Stock.
In the case of any share exchange, capital
reorganization, consolidation, merger or reclassification, whereby the Common Stock is converted into other securities or property,
the Company will make appropriate provisions so that the holder of each share of Class A Preferred Stock then outstanding, will
have the right thereafter to convert such share of Class A Preferred Stock into the kind and amount of shares of stock and other
securities and property receivable upon such consolidation, merger, share exchange, capital reorganization or reclassification
by a holder of the number of shares of Common Stock into which such shares of Class A Preferred Stock might have been converted
immediately prior to such consolidation, merger, share exchange, capital reorganization or reclassification. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Conversion Ratio shall be proportionately
increased in the case of subdivision of shares. If the shares of Common Stock are combined, consolidated or reverse split into
a smaller number of shares of Common Stock, the Conversion Ratio shall be proportionally decreased. The kind and type of Common
Shares issuable upon conversion of the Class A Preferred Stock both before and after combination, consolidation or reverse split
of the Common Shares shall be the same.
The same transfer restrictions imposed on the
Class A Preferred Stock shall be applicable to the Common Stock into which the Class A Preferred Stock is converted, although for
purposes of Rule 144 as presently in effect, the holding period requirement may be met by adding together the period in which the
Class A Preferred Stock is held and the period in which the Common Stock into which the Class A Preferred Stock is converted, is
held.
Other Provisions
The shares of Class A Preferred Stock to be
issued and any Common Shares into which it is converted, shall be duly and validly issued, fully paid and non-assessable. The holders
of the Class A Preferred Stock shall not have pre-emptive rights with respect to any shares of capital stock of the Company or
any other securities of the Company convertible into Common Stock or rights or options to purchase any such shares.
The Class E Convertible Preferred Stock
carries the following rights and preferences;
*
|
No dividends.
|
*
|
Convertible to common stock based upon proceeds received upon issuance of the shares, divided by the average closing bid price for the Company’s common stock for the 5 trading days prior to the conversion date, and is adjustable to prevent dilution. At December 31, 2018, the 20,000 Class E preferred shares were convertible to 1,445,504 common shares.
|
*
|
Convertible at the Option of the Company at par value only after repayment of the shareholder loans from Joseph Fiore and subject to the holder’s option to convert.
|
*
|
Entitled to vote 1,000 votes per share of Series E Convertible Preferred Shares.
|
*
|
Entitled to liquidation preference at par value.
|
*
|
Is senior to all other share of preferred or common shares issued past, present and future.
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDING DECEMBER
31, 2018 AND 2017
NOTE 10 – DISCONTINUED OPERATIONS
Restaurant
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported as discontinued
operations.
The following table summarizes the assets and
liabilities of our discontinued restaurant segment's discontinued operations as of December 31, 2018 and December 31, 2017:
|
|
|
December 31, 2018
|
|
|
|
December 31, 2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Inventory
|
|
|
—
|
|
|
|
—
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
—
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
Total Liabilities
|
|
$
|
22,000
|
|
|
$
|
22,000
|
|
The following table summarizes the results
of operations of our discontinued restaurant for the years ended December 31, 2018 and 2017 and is included in the consolidated
statements of operations as discontinued operations:
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|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
420,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
133,000
|
|
Gross Margin
|
|
|
—
|
|
|
|
287,000
|
|
Expenses
|
|
|
|
|
|
|
|
|
Labor and related expenses
|
|
|
—
|
|
|
|
177,000
|
|
Rent
|
|
|
1,000
|
|
|
|
77,000
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
20,000
|
|
Professional fees
|
|
|
—
|
|
|
|
33,000
|
|
Other general and administrative
|
|
|
(1,000
|
)
|
|
|
102,000
|
|
Total Operating Expenses
|
|
|
—
|
|
|
|
409,000
|
|
Operating Income (Loss)
|
|
|
—
|
|
|
|
(122,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Gain (Loss) on disposal of assets
|
|
|
1,000
|
|
|
|
(10,000
|
)
|
Income (Loss) on discontinued operations
|
|
$
|
1,000
|
|
|
$
|
(132,000
|
)
|
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEARS ENDING DECEMBER 31, 2018
AND 2017
NOTE 11 – RESTATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2017
On July 12, 2018, the court approved a Joint
Motion for Order Approving Settlement Agreement in the Zakeni Limited v. SPYR, Inc. case. Pursuant to the settlement, the Company
will issue to Zakeni Limited 3,500,000 common shares, warrants to purchase 1,000,000 common shares at $0.25 per share, warrants
to purchase 1,500,000 common shares at $0.50 per share, and warrants to purchase 1,000,000 common shares at $0.75 per share. The
shares and warrants were valued at the date the court signed the settlement agreement. The total value of the settlements, $1,983,000
has been recorded as litigation settlement liability with a corresponding charge to accumulated deficit on the accompanying consolidated
balance sheet as of December 31, 2017. In addition, the Company recorded a
reduction
in professional fees on the 2017 consolidated statement of operations in the amount of $350,000 to remove the pre-settlement estimated
legal and trial costs
with a corresponding reduction in accounts payable and accrued liabilities on the accompanying consolidated
balance sheet as of December 31, 2017
. The shares and warrants were issued on
July 12, 2018.
NOTE 12 - SUBSEQUENT EVENTS
On February 1, 2019, the Company issued 1.25
million shares of common stock with a fair value of $131,000 pursuant to existing employment and consulting agreements.
On February 21, 2019, the Company amended its
revolving line of credit with Berkshire Capital Management Co., Inc. to extend the repayment date from February 28, 2019 to July
1, 2019.
Subsequent to December 31, 2018, the Company
received $169,000 in the form of short-term advances from Berkshire Capital Management Co., Inc. The short-term advances are due
upon demand.