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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K/A

(Amendment No. 1)

 

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to_______

 

Commission file number 33-20111

 

 

SPYR, INC.

 

(Exact Name of registrant as specified in its charter)

 

Nevada   75-2636283
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

6700 Woodlands ParkwaySte. 230#331    
The Woodlands, TX   77382
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (303) 991-8000

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

Common Stock, $.0001 par value

 

Title of Class

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer   Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates, as of December 31, 2021, was $7,658,511.

 

As of December 31, 2021, there were 245,050,988 shares of the Registrant’s common stock, par value $0.0001, issued, 107,636 shares of Series A Convertible preferred stock (convertible to 26,909,028 common shares), par value $0.0001, and 20,000 shares of Series E Convertible preferred stock (convertible to 145,599 common shares), par value $0.0001.

 

 

     

 

EXPLANATORY NOTE

 

SPYR, Inc., referred to in this report as “SPYR,” the “Company,” “we,” “us,” and “our,” is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to its Annual Report on Form 10-K for the Year ended December 31, 2021, originally filed on April 15, 2022 (the “Original Report”). This Amendment amends and restates Items 7 and 8 Part I and Item 15 of Part II of the Original Report. In Item 8, this Amendment includes our restated consolidated balance sheet, consolidated statement of operations and consolidated statement of cash flows for the year ended December 31, 2021 to correct the errors discussed below.

 

Management identified multiple errors in its financial statements which related to the following. The corrections have the effect of:

 

1. Stock-based compensation accounting for shares to be issued for services rendered to the Company during the year ended December 31, 2021;
     
2. Stock-based compensation accounting for shares to certain consultants that were cancelled.
     
3. A write down of accounts receivable related to the Company’s discontinued operations, and classifying cash accounts as discontinued operations
     
4. Certain vendor invoices not recognized in the correct accounting period.
     
5. The fair value estimate as of December 31, 2021 of the derivative liability related to its convertible note agreements.
     
  6. The Company's Form 10-K failed to include the audit report and consent from the Company's previous audit firm Haynie & Co. for the year ended December 31, 2020.

 

This Amendment amends and restates Item 7 of Part I, which includes our revised discussion of operating results to reflect the impact of the corrections discussed above.

 

In addition, the Exhibits index in Item 15 of Part II of the Original Report is hereby amended and restated in its entirety, and new certifications of the Company’s principal executive officer and principal financial officer required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, dated as of the filing of this Amendment, are filed and furnished, as applicable, as exhibits to this Amendment.

 

Except as described above, no other changes have been made to the Original Report. This Amendment continues to speak as of the date of the Original Report and does not reflect events occurring after the filing of the Original Report.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 

None

 

     

 

SPYR, Inc.

Form 10-K

 

For the Fiscal Year Ended December 31, 2021

 

TABLE OF CONTENTS

 

  Page
PART I
 
Item 1. Business 1
Item 1A. Risk Factors 3
Item 1B. Unresolved Staff Comments 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Mine Safety Disclosures 4
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 5
Item 6. Selected Financial Data 5
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 5
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47
Item 9A Controls and Procedures 47
Item 9B. Other Information 47
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions, and Director Independence 52
Item 14. Principal Accountant Fees and Services 53
PART IV
 
Item 15. Exhibits, Financial Statement Schedules 54
Item 16 Form 10-K Summary 54

 

     

 

PART I

 

ITEM 1. BUSINESS

 

Organization and Nature of Business

 

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.

 

The Company’s common stock is traded on OTC Markets under the symbol “SPYR.”

 

The primary focus of SPYR, Inc. (the “Company”) is to be a technology company that through its subsidiary, Applied Magix Inc. (discussed in more detail below), develops and resells Apple® ecosystem compatible products with an emphasis on the smart home market, while at the same time continuing to identify and target acquisitions, which will grow its footprint in the technology industry and expand the products it offers consumers, including companies developing artificial intelligence and smart-technology products.

 

The Company has the following wholly owned subsidiaries:

 

Applied Magix a Nevada corporation (“Applied Magix”);

 

SPYR APPS, LLC a Nevada Limited Liability Company;

 

E.A.J.: PHL, Airport Inc. a Pennsylvania corporation; and

 

Applied Magix

 

On October 20, 2020, we entered into a stock purchase agreement with Dr. Harald Zink and Richard Kelly Clark, sole shareholders of Applied Magix, a Nevada corporation, pursuant to which we acquired all of the issued and outstanding shares of Applied Magix.

 

Through our wholly owned subsidiary Applied Magix we are a registered Apple® developer, and reseller of Apple ecosystem compatible products and accessories with an emphasis on the smart home market. As such, we are in the global “Internet of Things” (IoT) market, and more specifically, the segment of the market related to the development, manufacture and sale of devices and accessories specifically built on Apple’s HomeKit® framework. These products work within the Apple® HomeKit® ecosystem and are exclusive to the Apple market and its consumers. Apple® HomeKit® is a system that lets users control smart home devices, so long as they are compatible with the HomeKit® ecosystem, giving users control over smart thermostat, lights, locks and more in multiple rooms, creating comfortable environments and remote control of other connected devices.

 

Apple® HomeKit® app for iOS lets users securely control, organize and manage any smart home devices labeled as a "Works with Apple HomeKit” accessory. In the app, users can organize accessories by room, manage multiple accessories at the same time, control a home with Siri, and more.

 

SPYR APPS, LLC

 

On March 24, 2015, the Company organized its wholly owned subsidiary SPYR APPS®, LLC, a Nevada Limited Liability Company, to engage in 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.

 

Historically, through our wholly owned subsidiary, SPYR APPS®, LLC, we engaged in the development, publication and co-publication of mobile electronic games, seeking to generate revenue through those games by way of advertising and in-app purchases. Contracting with a third-party developer, we released three games: “Plucky,” “Plucky Rush” and Rune Guardian in April, May and December 2015, respectively. Also, in 2015, we entered into a publishing and marketing agreement with Spectacle Games Publishing, for its “Massively Multiplayer Online Role Playing Game,” “Pocket Starships.” In 2016 we obtained an exclusive option to purchase all assets pertaining to Pocket Starships and on October 23, 2017, we restructured and exercised the option by entering into a definitive agreement pursuant to which we acquired all of the game related assets of Pocket Starships. As a result, we acquired rights to retain 100% of the revenue generated from the game and owned outright all of the assets related to the game. The acquisition included, among other assets, all Pocket Starships related intellectual property, the userbase, artwork, software, internet domains, game store accounts (such as App Store, Play Store, Amazon, and Facebook Gameroom), web portal accounts (Facebook, VK.com, Kongregate, etc.) and internet domains (www.pocketstarships.com). In 2017 we signed an agreement with CBS Consumer Products to incorporate Start Trek intellectual property into Pocket Starships. Also, in 2017, we entered into an agreement with Reset Studios, LLC for the development of two new idle tapper games, the first of which was Steven Universe: Tap Together. As of December 31, 2019, the Cartoon Network license for the Steven Universe IP was terminated and the game was removed from the stores. As of December 31, 2020, all of our games have been removed from the game stores. Pursuant to current accounting guidelines, the assets, and liabilities of SPYR APPS LLC as well as the results of its operations are presented in these financial statements as discontinued operations. On February 2, 2022, we filed a Certificate of Dissolution for SPYR APPS, LLC.

 

  1  

 

E.A.J.: PHL, Airport Inc.

 

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 E.A.J.: PHL, Airport Inc. as well as the results of its operations are presented in these financial statements as discontinued operations.

 

Operating Losses

 

The Company has incurred net loss from operations of $5,961,000 and $3,057,000 for the years ended December 31, 2021 and 2020, respectively. Such operating losses reflect developmental and other administrative costs for 2021 and 2020. The Company expects to incur losses in the near future until profitability is achieved. The Company’s operations are subject to numerous risks associated with establishing any new business, including unforeseen expenses, delays, and complications. There can be no assurance that the Company will achieve or sustain profitable operations.

 

Future Capital Needs and Uncertainty of Additional Funding

 

Revenues are not yet sufficient to support the Company’s operating expenses and are not expected to reach such levels until the Company completes its expansion plans in manufacturing, marketing and sales of Apple® HomeKit® products.

 

Our Business and Strategy

 

Our primary business operation is focused on the development of our wholly owned subsidiary Applied Magix Inc., a registered Apple® developer, and reseller of Apple® ecosystem compatible products and accessories with an emphasis on the smart home market. As such, we are in the global “Internet of Things” (IoT) market, and more specifically, the segment of the market related to the development, manufacture and sale of devices and accessories specifically built on Apple’s HomeKit® framework. These products work within the Apple® HomeKit® ecosystem and are exclusive to the Apple market and its consumers. Apple® HomeKit® is a system that lets users control smart home devices, so long as they’re compatible with the HomeKit® ecosystem, giving users control over smart thermostat, lights, locks and more in multiple rooms, creating comfortable environments and remote control of other connected devices. Our strategy is two-fold. First, we intend to resell, under our Applied Magix brand, a variety of chargers, cables, cords, charging docks, cases, cameras, adaptors and other accessories used in the Apple® ecosystem in various internet marketplaces. Secondly, we are developing an Applied Magix branded hardware device for use with the Apple HomeKit® framework, that will allow users to program and securely control and manage multiple smart home devices labeled as a "Works with Apple HomeKit” accessory through the Apple® HomeKit® app for iOS. To date, our strategy is in the development stage. We have yet to begin sales efforts for our branded Apple® ecosystem compatible products and accessories, and our Apple HomeKit® hardware device is in development.

 

We will also continue to identify and target acquisitions, which will grow our footprint in the technology industry and expand the products we offer consumers, including companies developing artificial intelligence and smart-technology products.

 

The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and product development costs and implementation of our business plans generally. The Company also seeks to diversify, through acquisition or otherwise, in other related and/or unrelated business areas and is exploring opportunities to do so.

 

Government Regulation

 

The Company is subject to all pertinent federal, state, local, and international laws governing its business. Each subsidiary is subject to licensing and regulation by a number of authorities in its State or municipality. These may include health, safety, and fire regulations. The Company’s operations are also subject to Federal and State minimum wage laws governing such matters as working conditions, overtime and tip credits.

 

  2  

 

Competition

 

The Apple® HomeKit® market is highly competitive and rapidly changing. Our ability to compete depends upon many factors within and outside our control, including the timely development and introduction of the Apple® HomeKit® products we market and sell, along with the related enhancements, functionality, performance, reliability, customer service and support and marketing efforts. We expect additional competition from other emerging companies. Many of our existing and potential competitors are substantially larger than us and have significantly greater financial, technical and marketing resources that will compete for available Apple® HomeKit® products and development. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the Apple® HomeKit® market. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressure will not have a material adverse effect on our business, operating results and financial condition.

 

Employees

 

As of the date of this filing, the Company had 3 employees, none of whom is represented by a labor union.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable to smaller reporting companies.

 

ITEM 2. PROPERTIES

 

Our Offices

 

All administrative activities of the Company are conducted remotely given the COVID-19 pandemic. Our mailing address is 6700 Woodlands Parkway, Ste. 230, #331, The Woodlands, TX 77382.

 

ITEM 3. 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. Information about material legal proceedings follows:

 

Settlements

 

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.(“Defendants”). 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 alleged 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 alleged that Mr. Fiore and the Company unlawfully benefited through the sales of those securities. The Commission also alleged 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 sought 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.

 

Pursuant to a settlement agreement among the parties, on April 14, 2020, final judgment was entered in the case: Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management, Inc. and Eat at Joes, Inc., n/k/a SPYR, Inc., case number 7:18-cv-05474-KMK filed in the U.S. District Court for the Southern District of New York.

 

  3  

 

On April 23, 2020, Joseph Fiore/Berkshire Capital Management, Inc. satisfied the Company’s joint and several liability obligations by paying to the Commission the agreed upon sum of Two Million Dollars pursuant to a settlement agreement between Joseph Fiore/Berkshire Capital Management, Inc. and the Company, which settlement agreement was entered into on April 15, 2020. The Company had until April 14, 2021 to satisfy its remaining financial obligation to the Commission, and has since satisfied its payment of the civil penalty of Five Hundred Thousand Dollars ($500,000).

 

In electing to settle with the Commission, the Company neither admitted nor denied liability to any of the Commission’s allegations in its complaint, and in consideration for the Commission discontinuing its action, the Company, along with the two other defendants Joseph Fiore and Berkshire Capital Management agreed to be jointly and severally liable for disgorgement of profits and prejudgment interest in the amount of two million dollars, and to each be solely liable to pay a civil penalty in the amount of five hundred thousand dollars.1

 

Judgments

 

On or about January 24, 2019, SPYR APPS, LLC entered into an agreement with one of its vendors, Shatter Storm Studios, to whom it owed $84,250 for artwork related to the Steven Universe game. Pursuant to the terms of that agreement, SPYR APPS, LLC needed to make payment in the amount of $85,000 to cover the principal owed and attorneys’ fees together plus 6% interest in that amount by December 1, 2019. Should SPYR APPS, LLC not make the required payment on or before December 1, 2019, it consented to entry of judgment in favor of Shatter Storm Studios for the amount owed. SPYR APPS, LLC did not make the payment and on January 27, 2020 Shatter Storm Studios initiated Case No. 1:200cv-00217 in the U.S. District Court for the District of Colorado seeking entry of the consent judgment against SPYR APPS, LLC. The judgment was not contested by SPYR APPS, LLC and judgment in the amount of $85,000 plus post judgment interest at the rate of 6% was entered on March 17, 2020. The balance due as of December 31, 2021 and December 31, 2020 was approximately $100,000 and $95,000, respectively, which includes accrued interest and attorneys’ fees, has been reported as part of current liabilities of discontinued operations.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 

1 In addition, an injunction was entered against the Company enjoined it from violating the antifraud, market manipulation, beneficial ownership reporting, and other provisions of the federal securities laws charged in the SEC’s complaint.

 

  4  

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The Company’s Common Stock is traded on OTC Markets under the symbol “SPYR.” The following table presents the high and low bid quotations for the Common Stock as reported by the OTC for each quarter during the last two years. Such prices reflect inter-dealer quotations without adjustments for retail markup, markdown or commission, and do not necessarily represent actual transactions.

 

2021   High     Low  
First Quarter   $ 0.20     $ 0.12  
Second Quarter   $ 0.16     $ 0.05  
Third Quarter   $ 0.07     $ 0.03  
Fourth Quarter   $ 0.09     $ 0.02  
2020                
First Quarter   $ 0.03     $ 0.01  
Second Quarter   $ 0.07     $ 0.01  
Third Quarter   $ 0.19     $ 0.04  
Fourth Quarter   $ 0.22     $ 0.07  

 

Dividends

 

The Company has never declared or paid any cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of the business and, therefore, the Company does not anticipate paying dividends on its Common Stock in the foreseeable future.

 

Approximate Number of Equity Security Holders

 

As of December 31, 2021, there were 134 direct holders of record of our Common Stock. Because shares of the Company’s Common Stock are held by depositaries, brokers and other nominees, the number of beneficial holders of the Company’s shares is substantially larger than the number of stockholders of record.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable to smaller reporting companies.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and supplementary data referred to in this Form 10-K.

 

This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning revenue sources and concentration, selling, general and administrative expenses and capital resources, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-K that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-K is as of December 31, 2021, and we undertake no duty to update this information.

 

  5  

 

Plan of Operations

 

SPYR®, Inc. acts as a holding company to develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.

 

With our October 20, 2020, acquisition of Applied Magix, a Nevada corporation (“Applied Magix”), our business model changed to focus on the development of our wholly owned subsidiary Applied Magix Inc., a registered Apple® developer, and reseller of Apple® ecosystem compatible products and accessories with an emphasis on the smart home market. As such, we are in the global “Internet of Things” (IoT) market, and more specifically, the segment of the market related to the development, manufacture and sale of devices and accessories specifically built on Apple’s HomeKit® framework. These products work within the Apple® HomeKit® ecosystem and are exclusive to the Apple market and its consumers. Apple® HomeKit® is a system that lets users control smart home devices, so long as they’re compatible with the HomeKit® ecosystem, giving users control over smart thermostat, lights, locks and more in multiple rooms, creating comfortable environments and remote control of other connected devices. Our strategy is two-fold. First, we intend to resell, under our Applied Magix brand, a variety of chargers, cables, cords, charging docks, cases, cameras, adaptors and other accessories used in the Apple® ecosystem in various internet marketplaces. Secondly, we are developing an Applied Magix branded hardware device for use with the Apple HomeKit® framework, that will allow users to program and securely control and manage multiple smart home devices labeled as a "Works with Apple HomeKit” accessory through the Apple® HomeKit® app for iOS. To date, our strategy is in the development stage. We have yet to begin sales efforts for our branded Apple® ecosystem compatible products and accessories, and our Apple HomeKit® hardware device is in development.

 

We will also continue to identify and target acquisitions, which will grow our footprint in the technology industry and expand the products we offer consumers, including companies developing artificial intelligence and smart-technology products.

 

The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and implementation of our Applied Magix business plans generally. The Company also seeks to diversify, through acquisition or otherwise, in other related and/or unrelated business areas and is exploring opportunities to do so.

 

Comparison of 2021 to 2020

 

The consolidated results of continuing operations are as follows:

 

For the Year Ended December 31, 2021   Applied Magix     Corporate     Consolidated  
                   
Revenues   $ 2,000     $ -     $ 2,000  
Cost of Goods Sold     (61,000 )     -       (61,000 )
Labor and related expenses     (401,000 )     (1,619,000 )     (2,020,000 )
Rent     (10,000 )     (63,000 )     (73,000 )
Depreciation and amortization     (7,000 )     (6,000 )     (13,000 )
Professional fees     (22,000 )     (310,000 )     (332,000 )
Research and development     (9,000 )     -       (9,000 )
Other general and administrative     (216,000 )     (193,000 )     (409,000 )
Operating loss     (724,000 )     (2,190,000 )     (2,915,000 )
                         
Interest Expense     -       (1,139,000 )     (1,139,000 )
Gain on disposition of assets     -       5,000       5,000  
Change in Value of derivative liability     -       (1,586,000 )     (1,586,000 )
Loss on Conversion of Debt     -       (335,000 )     (335,000 )
Gain on Forgiveness of Debt     -       145,000       145,000  
Impairment on Trading Securities     -       (1,000)       (1,000)  
Loss from continuing operations   $ (724,000 )   $ 5,102,000     $ (5,826,000 )

  

  6  

 

For the Year Ended December 31, 2020   Applied Magix     Corporate     Consolidated  
                         
Revenues   $ -     $ -     $ -  
Related party service revenues     -       185,000       185,000  
Labor and related expenses     (945,000 )     (1,085,000 )     (2,030,000 )
Rent     -       (113,000 )     (113,000 )
Depreciation and amortization     (2,000 )     (36,000 )     (38,000 )
Professional fees     (6,000 )     (95,000 )     (101,000 )
Research and development     (14,000 )     -       (14,000 )
Other general and administrative     (30,000 )     (180,000 )     (210,000 )
Operating loss     (997,000 )     (1,324,000       (2,321,000 )
                         
Interest Expense     -       (247,000 )     (247,000 )
Loss on disposition of assets     -       (11,000 )     (11,000 )
Bargain purchase gain on acquisition of subsidiary     -       11,000       11,000  
SBA EIDL grant     -       3,000       3,000  
Loss on issuance of long-term convertible notes payable     -       (514,000 )     (514,000 )
Change in Value of derivative liability     -       132,000 )     132,000  
Other expense     -       (626,000 )     (626,000 )
Loss from continuing operations   $ (997,000 )   $ (1,950,000 )   $ (2,947,000 )

 

Results of Operations

 

For the year ended December 31, 2021, the Company had a loss from continuing operations of $5,820,000 compared to a loss from continuing operations of $2,947,000 for the year ended December 31, 2020, an increase of $1,769,000. This increase is due primarily to an increase in professional fees of $231,000, and other general and administrative costs of $193,000. Other factors contributing to the increase include an increase in interest expense of $1,139,000 for 2021 as compared $247,000 in 2020, and a loss on the debt modification $335,000 for 2021 as compared to no loss in 2020. Additionally, there was a decrease in the change in value of derivative liability from a gain of $132,000 in 2020 to a loss of $1,586,000 in 2021, representing a total decrease of $1,718,000.

 

More detailed explanation of the year ended December 31, 2021 and 2020 changes are included in the following discussions.

 

Revenues - For the years ended December 31, 2021 and 2020, the Company had non related party revenue of $2,000 and $0, respectively. The increase was the result of development stage operations of Applied Magix which began selling it’s Apple ecosystem products. During the year ended December 31, 2021, the Company had no related party services revenues, as compared to $185,000 in revenue for professional services rendered to related parties in 2020. The Company has not and does not anticipate that it will provide any further professional services to related parties. Our current business is focused on the development of our wholly owned subsidiary, Applied Magix.

 

Cost of goods sold increased to $61,000 for the year ended December 31, 2021 compared $0 for to the year ended December 31, 2020. This increase can be attributed to management’s decision to write-off the inventory asset as of year-end due to obsolescence.

 

Labor and related expenses include the costs of salaries, wages, leased employees, contract labor, and the fair value of common stock and options granted to employees and directors for services. For the year ended December 31, 2021, the company had total labor and related expenses of $2,020,000 with $350,000 being settled in cash, $649,000 in accrued salaries and $1,021,000 being paid in restricted common stock and options recorded at fair value. For the year ended December 31, 2020, the company had total labor and related expenses of $2,030,000 with $302,000 being settled in cash, $393,000 in accrued salaries and $1,335,000 being paid in restricted common stock and options recorded at fair value.

 

The cost of rent decreased to $73,000 for the year ended December 31, 2021 from $113,000 for the year ended December 31, 2020 a decrease of $40,000.

 

The Company leased approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015. Under the lease, the Company paid annual base rent on an escalating scale ranging from $143,000 to $152,000. In addition to the minimum basic rent, rent expense also includes approximately $1,000 per month for other items charged by the landlord in connection with rent. On May 1, 2020 and July 29, 2020, the Company entered into amended lease agreements with its landlord. Under the terms of the amendments, the landlord agreed to waive rent, certain rent adjustments and parking for the period April 1, 2020 through August 31, 2020 and extend the term of the lease by five months. The lease term date, which was December 31, 2020, was changed to May 31, 2021. On April 1, 2021, the Company entered into a lease termination and payment agreement with the landlord, pursuant to which the Company vacated and surrendered the premises to the landlord and the Company will pay approximately $67,000 over 18 months commencing April 1, 2021. As of November 1, 2021, the Company was delinquent in its monthly payments and has not made payments to date pursuant to the settlement agreement and had approximately $42,000 in unpaid rent which was reported as part of accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as of December 31, 2021.

 

  7  

 

Effective March 1, 2021, the Company’s wholly owned subsidiary Applied Magix, entered into a 6-month lease for 2 workspace offices located at 1230 Rosecrans Ave, Manhattan Beach, California. The lease automatically renews on a continuing basis for an additional 6 months unless cancelled in writing 60 days prior the lease termination date. Under the lease, the Company pays monthly rent of $1,400.

 

Depreciation and amortization expenses was $13,000 for the year ended December 31, 2021 compared to $38,000 for the year ended December 31, 2020, a decrease of $25,000. Depreciation and amortization expenses are attributable to depreciation of the property and equipment and amortization of intangible assets in service during respective periods. We expect depreciation and amortization expenses to decrease in 2022 commensurate with the sale of additional property, equipment, and intangible assets in connection with our planned Applied Magix business operations.

 

Professional fees increased to $332,000 for the year ended December 31, 2021 from $101,000 for the year ended December 31, 2020, an increase of $231,000. Professional fees during 2021 included $83,000 in legal, accounting, and other professional service needs, $22,000 in consulting services related to our Applied Magix operations, and $123,000 for public relations. Professional fees during 2020 included $92,000 in legal, accounting, and other professional service needs, $6,000 in consulting services related to our Applied Magix operations and $3,000 for public relations.

 

Research and development costs during the year ended December 31, 2021 included $9,000 in connection with the research and testing of products for our Applied Magix operations, compared to $14,000 during the year ended December 31, 2020, a decrease of $5,000.

 

Other general and administrative expenses increased to $409,000 for the year ended December 31, 2021 compared $210,000 for to the year ended December 31, 2020. The increase can be attributed primarily to increases in advertising and promotion costs attributable to Applied Magix.

 

The Company had interest expense on a line of credit, short-term advances, convertible notes payable and accrued expenses of $1,139,000 for the year ended December 31, 2021. The Company had interest expense on a line of credit, short-term advances, convertible notes payable and accrued expenses of $247,000 for the year ended December 31, 2020.

 

The Company sold certain office equipment for $10,000 which resulted in a gain on disposition of assets of $5,000 for the year ended December 31, 2021. The Company sold office equipment for a total of $9,000 for the year ended December 31, 2020, which resulted in a corresponding loss of $11,000.

 

The Company recognized no loss on the issuance of long-term convertible notes payable for the year ended December 31, 2021, compared to $514,000 for the year ended December 31, 2020.

 

The Company recognized a loss on the change in value of a derivative liability related to its long-term convertible notes payable in the amount of $1,586,000 for the year ended December 31, 2021. The Company recognized a gain for the year ended December 31, 2020 in the amount of $132,000.

 

During the year ended December 31, 2020, the Company accrued $500,000 in connection with litigation and legal settlement liabilities. The $500,000 liability was reported as part of accounts payable and accrued liabilities on the accompanying consolidated balance sheets as of December 31, 2020. There were no such accrued liabilities with litigation and settlement expenses in 2021.

 

The Company had impairment on trading securities of $1,000 for the year ended December 31, 2021 compared to no impairment on trading securities for the year ended December 31, 2020. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities at the respective reporting dates.

 

  8  

 

At December 31, 2021, the Company expects to receive deferred tax assets arising from net operating loss carry-forwards, capital loss carry-overs, unrealized losses on trading securities, and deductible temporary differences. As of the date of this filing, this amount is indeterminable. As of December 31, 2020, the Company had deferred tax assets arising from net operating loss carry-forwards, capital loss carry-overs, unrealized losses on trading securities, and deductible temporary differences of approximately $25,100,000. During the year ended December 31, 2020, the Company increased its net operating loss carry-forwards by approximately $1,200,000, had capital losses carry-forwards of approximately $2,200,000 expire and increased its other deductible temporary differences by approximately $600,000. Management believes it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will not be sufficient to fully recover the deferred tax assets and has established a 100% valuation allowance of $5,280,000 against these potential future tax benefits. The Company will continue to evaluate the realizability of deferred tax assets quarterly.

 

Discontinued Operations

 

Through our wholly owned subsidiary, SPYR APPS®, LLC, during the year ended December 31, 2015 through December 31, 2020, we engaged in the development, publication, and co-publication of mobile electronic games, seeking to generate revenue through those games by way of advertising and in-app purchases. During October, 2020 the Company changed its focus away from this line of business. As of December 31, 2020, all of our games had been removed from the game stores. Pursuant to current accounting guidelines, the assets, and liabilities of SPYR APPS LLC as well as the results of its operations are presented in these financial statements as discontinued operations. On February 22, 2022, the Company dissolved SPYR APPS®, LLC. On April 20, 2021, the Company dissolved Branded Food Concepts, Inc.

 

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 are presented in the accompanying financial statements as discontinued operations.

 

Liquidity and Capital Resources

 

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.

 

The Company has generated a net loss for the year ended December 31, 2021 of $5,961,000 and utilized cash in operations of $974,000. As of December 31, 2021, the Company had current assets of $82,000, which included cash and cash equivalents of $32,000, prepaid expenses of $47,000, and current assets of discontinued operations of $3,000.

 

During the year ended December 31, 2021 the Company met its capital requirements through a combination of collection of receivables, proceeds from long-term convertible notes payable, proceeds of SBA PPP note payable and SBA Economic Injury Disaster Loan (“EIDL”), and through the use of existing cash reserves.

 

The Company also entered into an Equity Line of Credit pursuant to an Equity Purchase Agreement with Brown Stone Capital, LP, dated September 30, 2020. Pursuant to the Equity Purchase Agreement, Brown Stone agreed to invest up to $14,000,000 to purchase the Company’s Common Stock, par value $0.0001 per share. The purchase price of the common shares is the lesser of the Fixed price or Market price. The Fixed price is $0.50 per share in years 1 and 2, after the effectiveness of a registration statement, and $1.00 per share in years 3, 4 and 5 after the effectiveness of a registration statement covering the underlying shares. The Market price is 70% of the three lowest Variable Weighted Average Price (“VWAP”) for the Company’s common stock during the 10 trading day period immediately prior to the conversion date. In addition, the Company and Brown Stone entered into a Registration Rights Agreement, whereby the Company agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, and applicable state securities laws, with respect to the shares of Common Stock issuable for Brown Stone’s investment pursuant to the Equity Purchase Agreement. The Equity Purchase Agreement terminates five years after the Effective Date or conditioned upon the following events: (i) when Brown Stone has purchased the maximum purchase amount; or (ii) in the event a voluntary or involuntary bankruptcy petition is filed concerning the Company; or, (iii) if a Custodian is appointed for the Company or if the Company makes a general assignment for all or substantially all of its property for the benefit of its creditors.

 

The Company currently does not have sufficient cash and liquidity to meet its anticipated working capital for the next twelve months. 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 these goals do not materialize as planned, we believe that the Company can reduce its operating and product development costs and 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. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.

 

The Company may also decide to expand and/or diversify, through acquisition or otherwise, in other related or unrelated business areas if opportunities present themselves.

 

  9  

 

Operating Activities - For the year ended December 31, 2021 and 2020, the Company used cash for operating activities of $974,000 and $521,000 respectively. For the year ended December 31, 2021, net cash used in operating activities from continuing operations of $974,000 consisted of net loss of $5,961,000, which included non-cash costs of depreciation and amortization of $13,000, amortization of debt discounts of $553,000, loss on discontinued operations of $135,000, common stock issued for services of $896,000, common stock issued for employee compensation of $239,000, loss on debt modification of $335,000 and loss on change of fair value derivative liability of $1,586,000. Changes in operating assets and liabilities included changes in accounts payable and accrued liabilities of $802,000, accrued interest on notes payable of $209,000 and accrued interest and liquidated damages on convertible notes of $352,000. For the year ended December 31, 2020, net cash used in operating activities of $501,000 consisted of net loss of $3,057,000, which included non-cash costs of depreciation and amortization of $38,000, amortization of debt discounts of $50,000, loss on discontinued operations of $110,000, common stock issued for employee compensation of $1,335,000 and gain on change of fair value derivative liability of $132,000. Changes in operating assets and liabilities included changes in accounts payable and accrued liabilities of $420,000, and accrued interest and liquidated damages on convertible notes of $59,000.

 

Investing Activities – During the year ended December 31, 2021, the Company sold property and equipment for $10,000. The Company sold property and equipment for $9,000 during the year ended December 31, 2020 and purchased property and equipment for $15,000.

 

Financing Activities – During the year ended December 31, 2021, the Company borrowed $215,000 from long-term notes payable, $198,000 from short-term notes payable and $73,000 from the U.S. Small Business Administration pursuant to the Paycheck Protection Program; During the year ended December 31, 2020, the Company borrowed $1,000,000 pursuant to long-term convertible notes payable from a third-party lender, $71,000 from the U.S. Small Business Administration pursuant to the Paycheck Protection Program and received a $3,000 EIDL from the U.S. Small Business Administration. In addition, the Company paid $47,000 in settlement of a short-term convertible note payable to a third-party lender.

 

Government Regulations - The Company is subject to all pertinent federal, state, local and international laws governing its business. Each subsidiary is subject to licensing and regulation by a number of authorities in its State or municipality. These may include health, safety, and fire regulations. The Company’s operations are also subject to Federal and State minimum wage laws governing such matters as working conditions, overtime and other credits.

 

Critical Accounting Policies - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.

 

Revenue Recognition

 

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. The Company’s only revenue stream is currently from transactions as a registered reseller of Apple® ecosystem compatible products, accessories and related applications with an emphasis on the smart home market. The Company has had minimal sales to date. The Company’s revenue is recognized at a point in time when the sale of the product is completed. There is no significant financing component from the Company’s sales.

 

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.

  

  10  

 

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.

 

Derivative Financial Instruments

 

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the Binomial Valuation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. The Company’s only derivative financial instruments were embedded conversion features associated with long-term convertible notes payable which contain certain provisions that allow for a variable number of shares on conversion.

 

Loss Contingencies

 

The Company is subject to various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted.

 

Recent Accounting Pronouncements

 

See Note 1 of the consolidated financial statements for discussion of recent accounting pronouncements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

  11  

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

 

Index to Audited Consolidated Financial Statements   Page
Report of Independent Registered Public Accounting Firm   13
Consolidated Balance Sheets as of December 31, 2021 and 2020   17
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020   18
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2021 and 2020   19
Consolidated Statements of Cash Flows, for the years ended December 31, 2021 and 2020   20
Notes to Consolidated Financial Statements   21

 

  12  

 

FL Office

7951 SW 6th Street, Suite 216

Plantation, FL 33324

Tel: 954-424-2345

Fax: 954-424-2230

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

SPYR, Inc. and Its Subsidiaries:

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SPYR, Inc. and its subsidiaries (“the Company”) as of December 31, 2021 and the related statements of operations, stockholders’ deficit, cash flows and the related notes to consolidated financial statements (collectively referred to as the consolidated financial statements) for the year ended December 31, 2021. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Restatement of 2021 Financial Statements

 

As discussed in Note 1 to the consolidated financial statements, the December 31, 2021 consolidated financial statements have been restated to correct misstatements.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

  13  

 

Discontinued operations – Restaurant and Digital Media:

 

As described in Note 16 to the consolidated financial statements, the Company has determined that its restaurant and digital medial subsidiaries meet the criteria for discontinued operations in the consolidated financial statements as of December 31, 2021.

 

Significant and complex judgements are required in evaluating discontinued operations recognition particularly when the possible transaction is approaching or in excess of one year from the initial accounting recognition as a discontinued operation.

 

The principal audit procedures related to the evaluation of discontinued operations classification as of December 31, 2021 included the following:

 

· We evaluated and tested the design and implementation of the Company’s controls related to the evaluation and approval of complex, significant and usual transactions, and the related accounting;

 

· Obtained management's discontinued operations analysis including assessment of the specific facts and circumstances around legal, regulatory, and economic factors that were relevant in the Company’s analysis as of December 31, 2021;

 

· Evaluated the basis for management's conclusions against the framework for evaluating discontinued operations with a focus on disruptions in the sale of their insurance subsidiary due to legal, regulatory, and economic factors;

 

· Obtained supporting documentation for management's current status and sales efforts related to the restaurant and digital media.

 

· Evaluated management’s ability and intent to execute management’s plans based on prior experience.

 

Convertible Notes

 

As discussed in Note 10 and11 to the consolidated financial statements, the Company had various debt instruments which included conversion features requiring bifurcation and separate accounting. Management evaluated the required accounting, significant estimates, and judgments around the valuation for these embedded derivatives. These embedded derivatives were initially measured at fair value and have subsequently been remeasured to fair value at each reporting period and at settlement.

 

There is no current observable market for these types of features and, as such, the Company determined the fair value of the embedded derivatives using a binomial option pricing model to measure the fair value of the bifurcated derivative. As a result, a high degree of auditor judgment and effort was required in performing audit procedures to evaluate the conclusions reached by management as well as the inputs to the Company’s binomial option pricing model.

 

Our principal audit procedures performed to address this critical audit matter included the following:

 

· We obtained an understanding of the controls and processes surrounding the evaluation, initial measurement and revaluation of the bifurcated derivatives.

 

· We evaluated management’s assessment and the conclusions reached to ensure these instruments were recorded in accordance with the relevant accounting guidance.

 

We evaluated the fair value of the bifurcated derivatives that included testing the valuation models and assumptions utilized by management. We reviewed and tested the fair value model used, significant assumptions, and underlying data used in the model.

 

The firm has served this client since January 2022.

 

/s/ L&L CPAS, PA

L&L CPAS, PA

Certified Public Accountants

Plantation, FL

The United States of America

April 15, 2022, except for the effects of the restatement described in Note 1, as to which the date is August 30, 2022

 

14

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of SPYR, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of SPYR, Inc. (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Consideration of the Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recognized recurring losses, negative cash flows from operations, and currently has minimal revenue producing activities. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

15

 

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Complex Financing Transactions

 

Description of the Matter:

 

As discussed in Note 8 to the consolidated financial statements, the Company’s financing transactions include convertible notes which are convertible into a variable number of shares. As a result, the conversion feature is bifurcated from the debt host and accounted for as a derivative liability. Derivative accounting is complex and involves judgement and estimations.

 

How We Addressed the Matter in Our Audit:

 

We reviewed the underlying convertible note agreements, evaluated management’s selection of a valuation method, tested the inputs used in the Black-Scholes calculation by agreeing terms of the debt agreements and market information to third-party sites, and recalculated the derivative liability. We also reviewed the Company’s debt agreements to determine if there were unidentified derivatives.

 

Haynie & Company

Salt Lake City, Utah

March 31, 2021

   
We have served as the Company’s auditor since 2018.

 

16

 

 

SPYR, Inc. and Subsidiaries

Consolidated Balance Sheets

(Audited)

 

    December 31,     December 31,  
    2021     2020  
     (As Restated)        
ASSETS                
Current Assets:                
Cash and Cash Equivalents   $ 32,000     $ 510,000  
Other Receivables     -       4,000  
Prepaid Expenses     47,000       49,000  
Trading Securities, at Market Value     -       1,000  
Current Assets of Discontinued Operations     3,000       13,000  
Total Current Assets     82,000       577,000  
                 
Non-Current Assets:                
Property and Equipment, net     16,000       31,000  
Intangible Assets, net     -       3,000  
Operating Lease Right-of-Use Asset     -       28,000  
Other Assets     1,000       13,000  
Non-Current Assets of Discontinued Operations     -       75,000  
TOTAL ASSETS   $ 99,000     $ 727,000  
                 
LIABILITIES & STOCKHOLDERS’ DEFICIT                
Current Liabilities:                
Accounts Payable and Accrued Liabilities   $ 1,825,000     $ 1,061,000  
Settlement Liability     -       500,000  
Short-Term Advances     -       1,184,000  
Line of Credit     -       1,204,000  
Related Party Notes Payable, current portion     524,000       -  
Notes Payable, current portion     38,000       -  
Short-Term Convertible Notes Payable, net of discount     206,000       -  
SBA PPP Note Payable, current portion     -       51,000  
Operating Lease Liability, current portion     -       54,000  
Current Liabilities of Discontinued Operations     815,000       767,000  
Total Current Liabilities     3,408,000       4,821,000  
                 
Other Liabilities:                
Notes Payable     2,534,000       -  
SBA PPP Note Payable     -       20,000  
Long-Term Convertible Notes Payable, net of discount     286,000       64,000  
Derivative Liability     1,907,000       1,382,000  
Total Liabilities     8,135,000       6,287,000  
                 
Stockholders’ Deficit:                
Preferred Stock, Class A, $0.0001 par value, 10,000,000 shares authorized; 107,636 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively     11       11  
Preferred Stock, Class E, $0.0001 par value, 10,000,000 shares authorized; 20,000 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively     2       2  
Common Stock, $0.0001 par value, 750,000,000 shares authorized; 245,050,988 and 210,137,631 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively     24,505       21,014  
 Common stock to be issued     425,097       -  
Additional Paid-In Capital     58,448,385       55,391,973  
Accumulated Deficit     (66,934,000 )     (60,973,000 )
                 
Total Stockholder’s Deficit     (8,036,000 )     (5,560,000 )
TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIT   $ 99,000     $ 727,000  

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

17

 

 

SPYR, Inc. and Subsidiaries

Consolidated Statements of Operations

(Audited)

 

                 
    For The Years Ended  
    December 31,  
    2021     2020  
   

(As Restated)

       
Revenues   $ 2,000     $ -  
Related Party Service Revenues     -       185,000  
Cost of Goods Sold     (61,000 )     -  
Gross Profit (Loss)     (59,000     185,000  
                 
Expenses:                
Labor and Related Expenses     2,020,000       2,030,000  
Rent     73,000       113,000  
Depreciation and Amortization     13,000       38,000  
Professional Fees     332,000       101,000  
Research and Development     9,000       14,000  
Other General and Administrative     409,000       210,000  
Total Operating Expenses     2,856,000       2,506,000  
                 
Operating Loss     (2,915,000 )     (2,321,000 )
                 
Other Income (Expenses)                
Interest Expense     (1,139,000 )     (247,000 )
Gain (Loss) on Disposition of Assets     5,000       (11,000 )
Gain on Forgiveness of Debt     145,000       -  
Loss on Debt Modification     (335,000 )     -  
Bargain Purchase Gain on Acquisition of Subsidiary     -       11,000  
SBA EIDL Grant     -       3,000  
Loss on Issuance of Long-Term Convertible Notes Payable     -       (514,000 )
Change in Value of Derivative Liability     (1,586,000 )     132,000  
Impairment on Trading Securities     (1,000     -  
Total Other Income (Expenses)     (2,911,000 )     (626,000 )
                 
Loss from Continuing Operations     (5,826,000 )     (2,947,000 )
Loss from Discontinued Operations     (135,000 )     (110,000 )
Net Loss   $ (5,961,000 )   $ (3,057,000 )
                 
Basic and diluted loss per common share   $ (0.03 )   $ (0.01 )
                 
Weighted average common shares outstanding     221,315,426       203,839,473  

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

18

 

 

SPYR, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

For The Years Ended December 31, 2021, 2020, and 2019

(Audited)

 

                                                                                 
    Preferred Stock, Class A     Preferred Stock, Class E     Common Stock      Common Stock
To be
    Additional
Paid In
Capital
    Accumulated
Deficit
    Total  
    Shares     Amount     Shares     Amount     Shares     Amount     Issued     Amount     Amount     Amount  
                                                               
Balance, December 31, 2018     107,636     $ 11       20,000     $ 2       198,305,131     $ 19,830     $  -     $ 53,265,157     $ (55,951,000 )   $ (2,666,000 )
Fair Value of Common Stock Issued for Employee Compensation     -       -       -       -       1,550,000       155       -       142,845       -       143,000  
Fair Value of Common Stock and Warrants Issued for Services     -       -       -       -       25,000       3       -       1,997       -       2,000  
Fair Value of Common Stock Issued for Conversion of Notes Payable     -       -       -       -       1,000,000       100       -       99,900       -       100,000  
Net Loss     -       -       -       -       -       -       -       -       (1,965,000 )     (1,965,000 )
Balance, December 31, 2019     107,636     $ 11       20,000     $ 2       200,880,131     $ 20,088     $ -     $ 53,509,899     $ (57,916,000 )   $ (4,386,000 )
                                                                                 
Balance, December 31, 2019     107,636     $ 11       20,000     $ 2       200,880,131     $ 20,088       -     $ 53,509,899     $ (57,916,000 )   $ (4,386,000 )
Fair Value of Common Stock and Options Issued for Employee and Director Compensation     -       -       -       -       5,850,000       585       -       1,334,415       -       1,335,000  
Fair Value of Common Stock and Warrants Issued for Conversion of Notes Payable     -       -       -       -       3,407,500       341       -       547,659       -       548,000  
Net Loss     -       -       -       -       -       -       -       -       (3,057,000 )     (3,057,000 )
Balance, December 31, 2020     107,636     $ 11       20,000     $ 2       210,137,631     $ 21,014     $ -     $ 55,391,973     $ (60,973,000 )   $ (5,560,000 )
                                                                                 
Balance, December 31, 2020     107,636     $ 11       20,000     $ 2       210,137,631     $ 21,014     $ -     $ 55,391,973     $ (60,973,000 )   $ (5,560,000 )
Fair Value of Restricted Common Stock and Options Issued for Employee and Director Compensation     -       -       -       -       1,550,000       155       -       238,845       -       239,000  
Fair Value of S-8 Registered Common Stock Issued for Services     -       -       -       -       3,000,000       300       -       371,000       -       371,300  
Fair Value of Restricted Common Stock Issued for Services     -       -       -       -       1,242,854       124      

425,097

      99,876       -       525,097  
Fair Value of Common Stock Issued for Conversion of Notes Payable     -       -       -       -       29,120,503       2,912       -       1,242,680       -       1,245,592  

Extinguishment of derivative liability from conversion of notes payable

    -       -       -        -        -       -       -        1,104,011       -        1,104,011  
Net Loss     -       -       -       -       -       -       -       -       (5,961,000 )     (5,961,000 )
Balance, December 31, 2021 – As Restated     107,636     $ 11       20,000     $ 2       245,050,988     $ 24,505     $ 425,097     $ 58,448,385     $ (66,934,000 )   $ (8,036,000 )

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

19

 

 

SPYR, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Audited)

 

                 
    For The Year Ended  
    December 31,  
    2021     2020  
     

(As Restated) 

         
Cash Flows From Operating Activities:                
Net Loss   $ (5,961,000 )   $ (3,057,000 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:                
Loss on Discontinued Operations     135,000       110,000  
Depreciation and Amortization     13,000       38,000  
Common Stock Issued for Employee Compensation     239,000       1,335,000  
Common Stock Issued for Services     896,000       -  
Amortization of Debt Discounts on Convertible Notes Payable     553,000       50,000  
Impairment on trading securities     1,000       -  
Loss (Gain) on Disposition of Assets     (5,000 )     11,000  
Bargain Purchase Gain on Acquisition of Subsidiary     -       (11,000 )
Loss on Debt Modification     335,000       -  
Gain on Forgiveness of Debt     (145,000 )     -  
SBA EIDL Grant     -       (3,000 )
Loss on Issuance of Long-Term Convertible Notes Payable     -       514,000  
Change in Value of Derivative Liability     1,586,000       (132,000 )
Changes in Operating Assets and Liabilities:                
Decrease in Receivable from Related Parties     -       50,000  
Increase in Other Receivables and Other Assets     16,000     (4,000 )
(Increase) Decrease in Prepaid Expenses     2,000       (34,000 )
Decrease in Operating Lease Right-of-Use Asset     28,000       14,000  
Decrease in Operating Lease Right-of-Use Liability     (54,000 )     -  
Increase in Accounts Payable and Accrued Liabilities     802,000       420,000  
Increase in Accrued Interest on Related Party Notes Payable     24,000       -  
Increase in Accrued Interest on Short-Term Advances     -       69,000  
Increase in Accrued Interest on Notes Payable     209,000       -  
Increase in Accrued Interest on Line of Credit     -       70,000  
Increase in Accrued Interest and Liquidated Damages on Convertible Notes     352,000       59,000  
Net Cash Used in Operating Activities from Continuing Operations     (974,000 )     (501,000 )
Net Cash Provided by (Used in) Operating Activities from Discontinued Operations     -       (20,000 )
Net Cash Used in Operating Activities     (974,000 )     (521,000 )
                 
Cash Flows From Investing Activities:                
Purchase of Property and Equipment     -       (15,000 )
Sale of Property and Equipment     10,000       9,000  
Net Cash Provided by (Used in) Investing Activities     10,000       (6,000 )
                 
Cash Flows From Financing Activities:                
Proceeds from Long-Term Convertible Notes     215,000       1,000,000  
Proceeds from Short-Term Convertible Notes Payable     198,000       -  
Proceeds from SBA EIDL Grant     -       3,000  
Proceeds from SBA PPP Note Payable     73,000       71,000  
Payments on Short-Term Convertible Notes Payable     -       (47,000 )
Net Cash Provided by Financing Activities     486,000       1,027,000  
                 
Net Change in Cash     (478,000 )     500,000  
                 
Cash and Cash Equivalents at Beginning of Period     510,000       10,000  
                 
Cash and Cash Equivalents at End of Period   $ 32,000     $ 510,000  
                 
Supplemental Disclosure of Interest and Income Taxes Paid:                
Interest Paid during the Period   $ -     $ 1,000  
Income Taxes Paid during the Period   $ -     $ -  
                 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:                
Debt Discounts on Long-Term Convertible Notes Payable   $ -     $ 1,000,000  
Warrants Issued for Debt Settlement   $ 220,592     $ 96,000  

Extinguishment of derivative liability from conversion of notes payable

  $ 1,104,011     -  
Common stock to be issued for services   $ 425,097     $ -  
Common Stock Issued for Debt Conversion   $ 1,245,592     $ 452,000  
Notes Payable issued to Settle Accounts Payable   $ 38,000     $ -  

 

The accompanying notes are an integral part of these audited consolidated financial statements 

 

20

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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 subsidiary Applied Magix we are a registered Apple® developer, and reseller of Apple ecosystem compatible products and accessories with an emphasis on the smart home market. As such, we are in the global “Internet of Things” (IoT) market, and more specifically, the segment of the market related to the development, manufacture and sale of devices and accessories specifically built on Apple’s HomeKit® framework. These products work within the Apple® HomeKit® ecosystem and are exclusive to the Apple market and its consumers. Apple® HomeKit® is a system that lets users control smart home devices, so long as they are compatible with the HomeKit® ecosystem, giving users control over smart thermostat, lights, locks and more in multiple rooms, creating comfortable environments and remote control of other connected devices.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of SPYR, Inc. and its wholly owned subsidiaries, Applied Magix, a Nevada corporation, SPYR APPS, LLC, a Nevada Limited Liability Company (discontinued operations, see Note 12), E.A.J.: PHL, Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 12). 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, 2021, the Company recorded a net loss of $5,961,000 and utilized cash in operations of $974,000. As of December 31, 2021, our cash balance was $32,000 and we had prepaid expenses of $47,000. At December 31, 2021, the Company had a working capital deficit of $3,326,000. These issues raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and implementation of our Applied Magix business plans generally. The Company also plans to diversify, through acquisition or otherwise, in other unrelated business areas and is exploring opportunities to do so.

 

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 financing goals for our products do not materialize as planned and 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.

 

21

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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 2021. 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, 2021 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 1,385,042, Options – 4,779,900 and Warrants – 7,200,000) would have had an anti-dilutive effect due to the Company generating a loss for the year ended December 31, 2021.

 

The basic and fully diluted shares for the year ended December 31, 2020 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 1,200,480, Options – 5,799,900 and Warrants – 11,100,000) would have had an anti-dilutive effect due to the Company generating a loss for the year ended December 31, 2020.

 

Product Research and Development Costs

 

Costs incurred for product research and development are expensed as incurred. During the years ended December 31, 2021 and 2020, the Company incurred $9,000 and $14,000 respectively, in product development costs paid to independent third parties.

 

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 replaced 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 or 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. The Company’s only revenue stream is currently from transactions as a registered reseller of Apple® ecosystem compatible products, accessories and related applications with an emphasis on the smart home market. The Company has had minimal sales to date. The Company’s revenue is recognized at a point in time when the sale of the product is completed. There is no significant financing component from the Company’s sales.

 

22

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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.

 

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 3-7 years
Computer equipment 1-3 years
Vehicles 5 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.

 

23

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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, 2021, the Company recorded amortization expense of $3,000. As of December 31, 2021, the intangible asset balance was fully amortized. As of December 31, 2020, net intangible assets amounted to $3,000 which consist of website development costs There were no indications of impairment based on management’s assessment of these assets as of December 31, 2021. 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.

 

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.

 

Derivative Financial Instruments

 

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes Option Pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2021, the Company’s only derivative financial instruments were embedded conversion features associated with long-term convertible notes payable which contain certain provisions that allow for a variable number of shares on conversion.

 

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.

 

24

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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, short-term advances, 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 3 fair values and derivative liability is a level 3 fair value.

 

Advertising Costs

 

Advertising, marketing and promotional costs are expensed as incurred and included in general and administrative expenses.

 

Advertising, marketing and promotional expense was $123,000 and $8,000 for the years ended December 31, 2021, and 2020, respectively and was reflected as part of Other General and Administrative Expenses on the accompanying consolidated statements of operations.

 

Leases

 

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 adopted ASU 2016-02 on January 1, 2019. See Note 9 “Operating Leases” for additional required disclosures.

 

Recent Accounting Standards 

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses.” This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is in the process of determining the potential impact of adopting this guidance on its consolidated financial statements.

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of ASU 2020-06 on its financial statements.

 

25

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

Restatement

 

In 2022, the Company identified errors in account balances in the Form 10K filed for the year ended December 31, 2021. The following accounts were deemed to contain errors: cash, trading securities, at market value, current assets of discontinued operations, other assets, accounts payable, note payable, derivative liability, common stock, common stock to be issued, additional paid in capital, operating expenses, gain on forgiveness of debt and loss on change in derivative liabilities. The errors primarily resulted from incorrect recognition of stock-based compensation previously awarded, certain share awards not yet issued and not recognized during the year ended December 31, 2021, incorrect estimates used in the fair value of derivative liability and certain adjustments to discontinued operations.

 

The tables below summarize previously reported amounts and the restated presentation of the balance sheet, statement of operations and statement of cash flows for the affected period:

 

Schedule of restated presentation                        
    December 31, 2021  
    As Reported     Adjustments     As Restated  
                   
ASSETS                        
Current Assets:                        
Cash and Cash Equivalents   $ 35,000     $ (3,000 )     32,000  
Prepaid Expenses     47,000       -       47,000  
Trading Securities, at Market Value     1,000       (1,000 )     -  
Current Assets of Discontinued Operations     14,000       (11,000 )     3,000  
Total Current Assets     97,000       (15,000 )     82,000  
                         
Other Assets:                        
Property and Equipment, net     16,000       -       16,000  
Other Assets     46,000       (45,000 )     1,000  
TOTAL ASSETS   $ 159,000     $ (60,000 )   $ 99,000  
                         
LIABILITIES & STOCKHOLDERS’ DEFICIT                        
Current Liabilities:                        
Accounts Payable and Accrued Liabilities   $ 1,818,000     $ 7,000       1,825,000  
Related Party Notes Payable, current portion     524,000       -       524,000  
Notes Payable, current portion     -       38,000       38,000  
Short-Term Convertible Notes Payable     206,000       -       206,000  
SBA PPP Note Payable, current portion     70,000       (70,000 )     -  
Current Liabilities of Discontinued Operations     803,000       12,000       815,000  
Total Current Liabilities     3,421,000       (13,000 )     3,408,000  
                         
Other Liabilities:                        
Notes Payable     2,534,000       -       2,534,000  
Long-Term Convertible Notes Payable, net     286,000       -       286,000  
Derivative Liability     2,621,000       (714,000 )     1,907,000  
Total Liabilities     8,862,000       (727,000 )     8,135,000  
                         
Stockholders’ Deficit:                        
Preferred Stock, Class A, $0.0001 par value, 10,000,000 shares authorized; 107,636 shares issued and outstanding as of December 31, 2021     11       -       11  
Preferred Stock, Class E, $0.0001 par value, 10,000,000 shares authorized; 20,000 shares issued and outstanding as of December 31, 2021     2       -       2  
Common Stock, $0.0001 par value, 750,000,000 shares authorized; 245,050,988 and outstanding as of December 31, 2021 and outstanding as of December 31, 2021     25,205       (700 )     24,505  
Common stock to be issued     -       425,097       425,097  
Additional Paid-In Capital     57,779,303       (669,082 )     58,448,385  
Accumulated Deficit     (66,508,521 )     (425,479     (66,934,000 )
                         
Total Stockholder’s Deficit     (8,704,000 )     667,000       (8,036,000 )
TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIT   $ 159,000     $ (60,000 )   $ 99,000  

 

26

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

                   
    For the Year Ended December 31, 2021  
    As Reported     Adjustment     As Restated  
                   
Revenues   $ 2,000     $ -     $ 2,000  
Cost of Goods Sold     (1,000 )     (60,000     (61,000 )
Gross Profit     1,000        (60,000     (59,000
                         
Expenses:                        
Labor and Related Expenses     1,672,000       348,000       2,020,000  
Rent     61,000       12,000       73,000  
Depreciation and Amortization     13,000       -       13,000  
Professional Fees     733,000       (401,000 )     332,000  
Research and Development     9,000       -       9,000  
Impairment of inventory     60,000       (60,000 )     -  
Other General and Administrative     286,000       123,000       409,000  
Total Operating Expenses     2,834,000       12,000       2,856,000  
                         
Operating Loss     (2,833,000 )     (82,000 )     (2,915,000 )
                         
Other Income (Expenses)                        
Interest Expense     (1,139,000 )     -       (1,139,000 )
Gain (Loss) on Disposition of Assets     5,000       -       5,000  
Loss on Debt Modification     (335,000 )     -       (335,000 )

Gain on Forgiveness of Debt

    73,000       72,000       145,000  

Change in Value of Derivative Liability

    (1,196,000 )    

(390,000

)     (1,586,000 )
Impairment of Trading Securities     -       (1,000     (1,000
Unrealized Loss on Trading Securities     1,000      

(1,000

    -  
Total Other Income (Expenses)     (2,591,000 )     (320,000     (2,911,000 )
                         
Loss from Continuing Operations     (5,424,000 )     (402,000     (5,826,000 )
Loss from Discontinued Operations     (110,000 )     (25,000 )     (135,000 )
Net Loss   $ (5,534,000 )   $ (427,000   $ (5,961,000 )
                         
Basic and diluted loss per common share   $ (0.02 )   $ 0.01     $ (0.03 )
                         
Weighted average common shares outstanding     222,792,139       (1,476,713     221,315,426  

 

27

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

                   
    For the Year Ended December 31, 2021  
    As Reported     Adjustment     As Restated  
                   
Cash Flows From Operating Activities:                        
Net Loss   $ (5,534,000 )   $ (427,000   $ (5,961,000 )
                         
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:                        
Loss on Discontinued Operations     110,000       25,000       135,000  
Adjustment to Deficit for Intercompany Elimination     (1,000 )     1,000      
Depreciation and Amortization     13,000       -       13,000  
Common Stock Issued for Employee Compensation     239,000       -       239,000  
Common Stock Issued for Services     905,000       (9,000 )     896,000  
Amortization of Debt Discounts on Convertible Notes Payable     377,000      

176,000

      553,000  
Loss (Gain) on Disposition of Assets     (5,000 )     -       (5,000 )
Write Off of Trading Securities     -       1,000       1,000  
Loss on Debt Modification     334,000      

1,000

      335,000  
Gain on Forgiveness of Debt     (73,000 )     (72,000 )     (145,000 )
Change in Value of Derivative Liability     1,196,000       390,000     1,586,000  
                         
Changes in Operating Assets and Liabilities:                    
Increase in Other Receivables and Other Assets     (29,000 )     45,000       16,000  
(Increase) Decrease in Prepaid Expenses     2,000       -       2,000  
Decrease in Operating Lease Right-of-Use Asset     28,000       -       28,000  
Decrease in Operating Lease Right-of-Use Liability     (54,000 )     -       (54,000 )
Increase in Accounts Payable and Accrued Liabilities     257,000       545,000       802,000  
Increase in Accrued Interest on Related Party Notes Payable   99,000       (75,000     24,000  
Increase in Accrued Interest on Notes Payable     6,000       -       209,000  
Increase in Accrued Interest and Liquidated Damages on Convertible Notes     642,000       (290,000 )     352,000  
Net Cash Used in Operating Activities from Continuing Operations     (1,488,000 )     514,000       (974,000 )
Net Cash Provided by Operating Activities from Discontinued Operations     -       -       -  
Net Cash Used in Operating Activities     (1,488,000 )     514,000       (974,000 )
                         
Cash Flows From Financing Activities:                        
  Proceeds from Long-Term Convertible Notes     -       215,000       215,000  
  Proceeds from Related Party Notes Payable     505,000       (505,000 )     -  
  Proceeds from Long-Term Notes Payable     425,000       (425,000 )     -  
  Proceeds from Short-Term Convertible Notes     -       198,000       198,000  
  Proceeds from SBA PPP Note Payable     73,000       -       73,000  
Net Cash Provided by Financing Activities     1,003,000       (517,000 )     486,000  
                         
Net Decrease in Cash     (475,000 )     (3,000 )     (478,000 )
                         
Cash and Cash Equivalents at Beginning of Period     510,000       -       510,000  
                         
Cash and Cash Equivalents at End of Period   $ 35,000     $ (3,000 )   $ 32,000  

 

28

 

  

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

The Company accounts for stock-based compensation for employees and directors in accordance with Accounting Standards Codification 718, Compensation (“ASC 718”) as issued by the FASB. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair value of the award, and are recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess tax benefits realized from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in the condensed consolidated statements of operations. The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Accounting Standards Update (“ASU”) 2018-07.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease guidance effective January 1, 2019. The Company is not a party to any leases and therefore is not showing any asset or liability related to leases in the current period or prior periods. 

 

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832). The amendments within the update require certain disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The amendments will require disclosure of information about the nature of the transactions and the related accounting policy used to account for the transactions, information regarding the line items within the consolidated financial statements that are affected by the transactions, and significant terms and conditions of the transactions. The amendments in the update will be effective for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted. The Company does not believe the adoption of this ASU will have a material impact on the Company’s consolidated financial statements or results of options.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

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.

 

29

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

NOTE 2 – TRADING SECURITIES

 

Investments in securities are summarized as follows:

 

                                                       
    Fair Value at Beginning of           Proceeds from    

Write off

    Contributed     Unrealized     Fair Value at  
Year   Year     Purchases     Sale     of Securities     Capital     Loss     December 31,  
2021   $ 1,000     $                 -     $        -     $  (1,000   $        -     $ -     $ -  
2020   $ 1,000     $ -     $ -     $ -     $ -     $        -   $ 1,000  

 

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
Other
    Significant  
    Fair Value at     in Active     Observable     Unobservable  
    December 31,     Markets     Inputs     Inputs  
    2021     (Level 1)     (Level 2)     (Level 3)  
Trading securities   $ -     $ -     $       -     $        -  
Money market funds     1,000       1,000       -       -  
Total   $ 1,000     $ 1,000     $ -     $ -  

 

          Fair Value Measurements at Reporting Date Using  
          Quoted Prices     Significant Other     Significant  
    Fair Value at     in Active     Observable     Unobservable  
    December 31,     Markets     Inputs     Inputs  
    2020     (Level 1)     (Level 2)     (Level 3)  
Trading securities   $ 1,000     $ 1,000     $       -     $        -  
Money market funds     1,000       1,000       -       -  
Total   $ 2,000     $ 2,000     $ -     $ -  

 

Generally, for all trading securities and available-for-sale securities, fair value is determined by reference to quoted market prices (level 1).

 

NOTE 3 – PREPAID EXPENSES

 

At December 31, 2021, prepaid expenses were $47,000 as compared to $49,000 at December 31, 2020. Prepaid expenses consist of a down payment on the Magix Button device development of $33,000 and a retainer for future video production of $10,000, account set up costs from Teledirect of $2,000, $1,000 of prepaid insurance costs, and $1,000 of prepaid product costs for Applied Magix.

 

30

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 Schedule of Property and Equipment   December 31,
2021
    December 31,
2020
 
             
Computer Equipment   $ 16,000     $ 22,000  
Furniture & fixtures     17,000       33,000  
Vehicles     10,000       10,000  
 Property and Equipment, Gross     43,000       65,000  
Less: accumulated depreciation     (27,000 )     (34,000 )
Property and Equipment, Net   $ 16,000     $ 31,000  

 

Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $10,000 and $38,000, respectively.

 

The Company sold certain office equipment for $10,000 which resulted in a gain on disposition of assets of $5,000 for the year ended December 31, 2021. The Company sold office equipment for a total of $9,000 for the year ended December 31, 2020, which resulted in a corresponding loss of $11,000.

 

NOTE 5 – INTANGIBLE ASSETS AND OTHER ASSETS

 

Intangible assets at December 31, 2021 and December 31, 2020 consisted of the following:

 

                   
    Useful
Life (yr)
  December 31,
2021
    December 31,
2020
 
Domain Names   7   $ 21,000     $ 21,000  
Less: accumulated amortization         (21,000 )     (18,000 )
        $ -     $ 3,000  

  

At December 31, 2021 and 2020, other assets consisted of $1,000 and $13,000, respectively, which consist of security deposits for the Denver corporate office and Premier Workspaces.

 

NOTE 6 – RELATED PARTY ADVANCES AND LINE OF CREDIT

 

Related Party Advances and Line of Credit consisted of the following:

 

             
    December 31,
2021
    December 31,
2020
 
             
Related Party Notes Payable, current portion   $ 501,000     $        -  
Short Term Advances     -       1,062,000  
Line of credit     -       1,000,000  
Accrued interest     19,000      

326,000

 
Other     4,000          
Current portion   $ 524,000     $ 2,388,000  

 

On September 5, 2017, the Company obtained a revolving line of credit from Berkshire Capital Management Co., Inc. which is controlled by the Company’s former chairman of the board. 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. The loan was fully drawn as of February 2018, at which time the Company had borrowed $1,000,000 and accrued interest of approximately $16,000. Repayment on the loan is due December 31, 2021. As of December 31, 2020, the Company has borrowed $1,000,000 and accrued interest of approximately $204,000.

 

During 2018 and 2019, the Company has received an additional $1,062,000 in the form of short-term advances from Berkshire Capital Management Co., Inc. The last advance occurred on September 30, 2019, at which time the Company had borrowed $1,062,000. No further advances are expected from Berkshire Capital Management Co., Inc. The Company has accrued interest on these short-term advances at 6% per annum. The short-term advances are due upon demand. As of December 31, 2020, the Company has borrowed $1,062,000 and accrued interest of approximately $122,000.

 

During the year ended December 31, 2020, no professional services were rendered to this Limited Liability Company and no revenue was received therefrom.

 

31

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

During the period from January 1 through March 31, 2020, the Company, received $185,000 in revenue for professional services rendered to Berkshire Capital Management Co., Inc. During the period April 1, 2020 through December 31, 2021, no professional services were rendered to Berkshire Capital Management Co., Inc. and no revenue was received therefrom.

 

On May 17, 2021, the Company entered into an agreement to borrow funds from the 481149 Irrevocable Trust that controls all of the currently outstanding preferred stock of the Company, and whose trustee is the Chief Executive Officer of the Company and a member of the board of directors. Pursuant to the agreement, the Company borrowed approximately $501,000 with interest at 6% per annum due and payable on May 17, 2022. As of December 31, 2021, the balance due with accrued interest is approximately $524,000.

 

The amounts shown as related party in December 31, 2020 are no longer considered a related party as of December 31, 2021, in accordance with FASB ASC 850.

 

NOTE 7 – NOTES PAYABLE

 

Notes Payable consisted of the following:

 

               
December 31, 2021 December 31, 2020
Notes Payable, long-term $ 2,454,000     -  
Accrued interest   80,000     -  
Long-term portion $ 2,534,000   $         -  

 

On June 17, 2021, the Company consolidated all prior notes payable with Berkshire Capital Management, resulting in a single consolidated note payable of $2,454,000. As of consolidation, $80,000 of interest has accrued, resulting in a net payable at December 31, 2021 of $2,534,000.

 

On December 16, 2021, the Company issued a promissory note to Grupo Rueda in the amount of $38,000 with 8% interest per annum and matures on December 16, 2022, in exchange for settlement of accounts payable on behalf of the Company. As of December 31, 2021, the notes payable was recorded as notes payable, current portion on the balance sheet.

 

NOTE 8 – INCOME TAXES

 

The Company did not provide for any Federal and State income tax for the years ended December 31, 2021 and 2020 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,  
    2021     2020  
Tax provision at US statutory federal income tax rate   $ 1,016,000     $ 96,000  
State income tax, net of federal benefit     220,000       -  
Change in valuation allowances     (1,236,000 )     (96,000 )
Provision for Income Taxes   $ -     $ -  

 

The significant components of the Company’s deferred tax assets were:

 

               
    December 31,  
    2021     2020  
Deferred Tax Assets:                
Net operating loss carry forward   $ 5,765,000     $ 4,969,000  
Capital loss carry over     163,000       163,000  
Accrued expenses     205,000       151,000  
Depreciation and other     (3,000 )     (3,000 )
 Gross Deferred Tax Asset     6,130,000       5,280,000  
Less valuation allowance     (6,130,000 )     (5,280,000 )
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, 2021, the Company recorded a valuation allowance of $6,130,000 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.

 

32

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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, 2021 and 2020, the Company does not have a liability for unrecognized tax benefits.

 

The Company’s net operating loss carry forward for income tax purposes as of December 31, 2021 was approximately $24,312,000, of which $18,300,000 and may be offset against future taxable income through 2038 and $6,012,000 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.

 

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 2017. However, as of December 31, 2021, the years subsequent to 2017 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, 2021, the Company had no liability for unrecognized tax benefits and no accrual for the payment of related interest and penalties, nor did the Company recognize any interest or penalties expense related to unrecognized tax benefits during the years ended December 31, 2021 or 2020.

 

NOTE 9 – SMALL BUSINESS ADMINISTRATION DEBT

 

On May 12, 2020 the Company received a Paycheck Protection Program loan from the U.S. Small Business Administration (“SBA”) in the approximate amount of $70,000. The loan agreement provides for six months principal and interest deferral. The interest rate is 1%. Under the terms of the loan, up to 100% of the loan may be forgiven conditioned upon meeting certain requirements for the use of funds. Any amount not forgiven must be repaid in eighteen monthly consecutive principal and interest payments. During the year ended December 31, 2021, the Company was notified that the outstanding principal and accrued interest for the PPP Loan was forgiven in full by the SBA. As of December 31, 2021, the balance due on this note was approximately $0.

 

On January 21, 2021, the Company received a second Paycheck Protection Program loan from the U.S. Small Business Administration in the approximate amount of $73,000. At December 31, 2021, the balance due on the note was $0, as the loan was confirmed as forgiven on August 20, 2021.

 

NOTE 10 – SHORT TERM CONVERTIBLE NOTES PAYABLE

 

On May 27, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $85,000 with 8% interest due and payable upon demand. On December 2, 2021, the note was amended to provide the holder with conversion rights consisting of a conversion price calculated by a 50% discount to the average of the lowest three (3) VWAP’s for the Company’s Common Stock during the twenty (20) Trading Day period ending on the latest complete trading day prior to the Conversion Date.

 

33

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

On August 11, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $33,333 with 8% interest due and payable upon demand. On December 2, 2021, the note was amended to provide the holder with conversion rights consisting of a conversion price calculated by a 50% discount to the average of the lowest three (3) VWAP’s for the Company’s Common Stock during the twenty (20) Trading Day period ending on the latest complete trading day prior to the Conversion Date.

 

On August 12, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $40,000 with 8% interest due and payable upon demand. On December 2, 2021, the note was amended to provide the holder with conversion rights consisting of a conversion price calculated by a 50% discount to the average of the lowest three (3) VWAP’s for the Company’s Common Stock during the twenty (20) Trading Day period ending on the latest complete trading day prior to the Conversion Date.

 

On September 9, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $40,000 with 8% interest due and payable upon demand. On December 2, 2021, the note was amended to provide the holder with conversion rights consisting of a conversion price calculated by a 50% discount to the average of the lowest three (3) VWAP’s for the Company’s Common Stock during the twenty (20) Trading Day period ending on the latest complete trading day prior to the Conversion Date.

 

NOTE 11 – 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 amended maturity date of the note was June 1, 2019 and was 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 determined the note to contain a beneficial conversion feature valued at $104,000 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature was 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. On May 10, 2019, the Company amended the note to extend the due date to June 1, 2019, provide for a partial conversion of $25,000 of the outstanding principal balance into common shares of the Company at a conversion price of $0.10 per share for a total of 250,000 shares, and waive any prior alleged or actual defaults under the note. On August 25, 2020 the holder converted $101,500 of the outstanding principal balance into common shares of the Company at a conversion price of $0.20 per share for a total of 507,500 shares. On September 30, 2020, the Company amended the note to provide for a conversion of $150,000 of the outstanding principal and interest due into common shares of the Company at a conversion price of $0.125 per share for a total of 1,200,000 shares, and amend the warrants by adjusting the exercise price to $0.25 per share. The Company accrued approximately $120,000 in interest, liquidated damages and debt settlement costs for this note through October 22, 2020. On October 22, 2020, the Company completed the issuance of the 1,200,000 shares and the note was considered paid in full.

 

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 amended maturity date of the note was December 31, 2019 and was 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 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 was recorded as a discount to the debt agreement. The noteholder was also granted detachable 5-year warrants to purchase 200,000 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. On May 10, 2019, the Company amended the note to extend the due date to September 1, 2019, provide for a partial conversion of $25,000 of the outstanding principal balance into common shares of the Company at a conversion price of $0.10 per share for a total of 250,000 shares, and waive any prior alleged or actual defaults under the note. On October 11, 2019, the Company amended the note to extend the due date to December 31, 2019, provide for a partial conversion of $50,000 of the outstanding principal balance into common shares of the Company at a conversion price of $0.10 per share for a total of 500,000 shares, and waive any prior alleged or actual defaults under the note. On August 25, 2020, the Company amended the note to extend the due date to March 31, 2021, provide for a partial conversion of $50,000 of the outstanding principal balance into common shares of the Company at a conversion price of $0.10 per share for a total of 500,000 shares, and waive any prior alleged or actual defaults under the note. On September 30, 2020, the Company amended the note to provide for a conversion of $150,000 of the outstanding principal balance into common shares of the Company at a conversion price of $0.125 per share for a total of 1,200,000 shares, and amend the warrants by increasing the number of warrant shares to 1,000,000 at an adjusted exercise price to $0.25 per share. The Company accrued approximately $134,000 in interest, liquidated damages and debt settlement costs for this note through October 21, 2020. On October 21, 2020, the Company completed the issuance of the 1,200,000 shares and payment of the $47,000 cash and the note was considered paid in full.

 

34

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

On September 30, 2020, the Company entered into a Stock Purchase Agreement with a third-party investor. By virtue of the Stock Purchase Agreement, in two separate closings, the Company agreed to sell, in each closing, an 8% $500,000 Convertible Promissory Note and Warrant to purchase one million common shares. Each Convertible Promissory Note bears 8% interest and matures five year after issuance. Amounts due under the Convertible Promissory Note are convertible into the Registrant’s common stock at the lower of $0.25 per share or 70% of the average of the three lowest Variable Weighted Average Price (“VWAP”) for the Registrant’s common stock for the twenty trading days prior to an election to convert. The Warrants are exercisable for five-years at an exercise price of 0.25 per share or, subject to the Registrant filing a registration statement including the shares of common stock that may be issued upon exercise of the Warrant, in a cashless exercise. The first closing occurred October 5, 2020 upon the receipt by the Company of a check for $500,000. The Company received two payments in the amount of $250,000 each on November 20, 2020 and November 24, 2020 in connection with the second closing. Total proceeds from the issuance of these convertible notes payable was $1,000,000. The Company determined that the conversion features of these notes represented embedded derivatives since the notes are convertible into a variable number of shares upon conversion. The conversion features were valued at $1,514,000 at the time of closing and the Company recognized a derivative liability of $1,514,000 with corresponding debt discounts of $1,000,000 and a loss on issuance of long-term convertible notes payable of $514,000. During May and June of 2021, the Company received conversion notices received from the lender requesting the conversion of approximately $204,000 ($160,000 principal and $44,000 interest) of the notes to 3,736,237 shares of the company’s common stock. On July 29, 2021, a convertible note holder converted $100,000 of principal debt and $15,000 of interest at a conversion rate of $0.0324 a share, into 3,561,830 Common Stock shares. On August 6, 2021, the company entered into an Amendment of the existing convertible debt, of which resulted in the conversion rates changing to 50% of the average of the lowest VWAP, and the interest on the loan was eliminated, as well as, a $455,000 increase in the Derivative Liability portion of the convertible debt, from $1,382,000 to $1,761,000. The company recorded amortization of debt discounts, recognized as interest expense, in the amount of $330,000 and accrued interest of $47,000 during the nine months ended September 30, 2021. On December 31, 2021, the principal balance together with accrued interest is recorded on the Company’s condensed consolidated balance sheet net of discounts at $27,000.

 

On November 2, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $50,000 with 8% interest due on November 2, 2026. The note is convertible into Company common stock at a fixed price of $0.25 (the “Base Conversion Price) and (2) 50% of the average of the three lowest VWAP (as defined below) for the Common Stock (or any replacement security pursuant to Section 1(x)) for a Trading Day (as defined below) on the Trading Market during the 20 Trading Day period immediately prior to the Conversion Date (as defined below), provided that if the VWAP is determined pursuant to Section 1(n) then 50% of such VWAP as so determined.

 

On November 3, 2021, the Company issued a convertible promissory note to Ares Capital, Inc, in the amount $45,000 with 8% interest due on November 2, 2026. The note is convertible into Company common stock at a fixed price of $0.25 (the “Base Conversion Price) and (2) 50% of the average of the three lowest VWAP (as defined below) for the Common Stock (or any replacement security pursuant to Section 1(x)) for a Trading Day (as defined below) on the Trading Market during the 20 Trading Day period immediately prior to the Conversion Date (as defined below), provided that if the VWAP is determined pursuant to Section 1(n) then 50% of such VWAP as so determined.

 

On December 3, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $70,000 with 8% interest due December 3, 2026. The note converts into Company common stock at the lesser price of (1) $0.25 (the “Base Conversion Price) and (2) 50% of the average of the three lowest VWAP (as defined below) for the Common Stock (or any replacement security pursuant to Section 1(w)) for a Trading Day (as defined below) on the Trading Market (as defined below) during the 20 Trading Day period immediately prior to the Conversion Date (as defined below), provided that if the VWAP is determined pursuant to Section 1(m) then 50% of such VWAP as so determined.

 

On December 27, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $50,000 with 8% interests due December 27, 2026. The note converts into Company common stock at the lesser price of (1) $0.25 (the “Base Conversion Price) and (2) 50% of the average of the three lowest VWAP (as defined below) for the Common Stock (or any replacement security pursuant to Section 1(w)) for a Trading Day (as defined below) on the Trading Market (as defined below) during the 20 Trading Day period immediately prior to the Conversion Date (as defined below), provided that if the VWAP is determined pursuant to Section 1(m) then 50% of such VWAP as so determined.

 

35

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

The following table summarized the Company’s convertible notes payable as of December 31, 2021 and December 31, 2020:

 

Summary of Convertible Notes                
    December 31,
2021
    December 31,
2020
 
Beginning Balance   $ 64,000     $ 550,000  
Proceeds from the issuance of convertible notes     413,000       -  
Repayments     -       (47,000 )
Conversion of notes payable into common stock     (559,000 )     (548,000 )
Amortization of Debt Discounts     553,000       50,000  
Liquidated damages     351,000       (53,000 )
New debt discount     (43,000 )      
Debt settlement costs           96,000  
Accrued Interest     63,000       16,000  
Convertible notes payable, net   $ 492,000     $ 64,000  
Principal balance   $ 198,000     $ -  
Accrued interest and damages, short term     8,000       -  
Debt discounts, short term     -       -  
Short-term convertible notes payable, net   $ 206,000     $ -  
Convertible notes, long-term principal   $ 670,000     $ 1,000,000  
Accrued interest and damages, long-term     56,000       14,000  
Debt discounts, long-term     (440,000 )     (950,000
Long-term convertible notes payable, net   $ 286,000     $ 64,000  

 

NOTE 12 – DERIVATIVE LIABILITY

 

The Company determined that the conversion features of the long-term convertible notes payable represented embedded derivatives since the notes are convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt and the embedded conversion feature is bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments is recorded as liabilities on the balance sheet with the corresponding amount recorded as a discount to each note and any excess of the fair value of the derivative component over the face amount of the note recorded as an expense on the date of issuance. Discounts are amortized from the date of issuance to the maturity dates of the notes. Fair value of derivative liabilities is evaluated at the end of each reporting period with any change in value reported in other income or expenses on the statements of operations for the period.

 

36

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

The following table represents the Company’s derivative liability activity for the year ended December 31, 2021:

 

  Year Ended 
December 31,
    Year Ended 
December 31,
 
    2021     2020  
Derivative liability balance, December 31, 2020     1,382,000     $ -  
Issuance of derivative liability during the period     43,000       1,514,000  
Increase due to Modification of Note     455,000       -  
Reclassification to Additional Paid-In Capital     (1,104,000 )     -  
                 
Change in derivative liability during the period     1,131,000       (132,000 )
Derivative liability balance, December 31, 2021   $ 1,907,000     $ 1,382,000  

 

The table below represents the average assumptions used in valuing the derivative liability at December 31, 2021:

 

  Year Ended
December 31,
    Year Ended
December 31,
 
    2021     2020  
Expected life in years     3.89       4.76-4.90  
Stock price volatility     182.99% - 198.39 %     180.45% - 182.99 %
Risk free interest rate     0.42 %     0.17 %
Expected dividends     -       -   
Forfeiture rate     -       -   

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Equity Line of Credit

 

The Company entered into a five-year Equity Line of Credit pursuant to an Equity Purchase Agreement with Brown Stone Capital, LP, dated September 30, 2020. Pursuant to the agreement, Brown Stone agreed to invest up to $14,000,000 to purchase the Company’s Common Stock, par value $0.0001 per share. The purchase price of the common shares is the lesser of the Fixed price or Market price. The Fixed price is $0.50 per share in years 1 and 2, after the effectiveness of a registration statement, and $1.00 per share in years 3, 4 and 5 after the effectiveness of this registration statement. The Market price is 70% of the three lowest Variable Weighted Average Price (“VWAP”) for the Company’s common stock during the 10-trading day period immediately prior to the conversion date. In addition, the Company and Brown Stone entered into a Registration Rights Agreement, whereby the Company agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, and applicable state securities laws, with respect to the shares of Common Stock issuable for Brown Stone’s investment pursuant to the Equity Purchase Agreement. As of December 31, 2021, no shares have been sold pursuant to this agreement.

 

Operating Leases

 

The Company leased approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015. Under the lease, the Company paid annual base rent on an escalating scale ranging from $143,000 to $152,000. In addition to the minimum basic rent, rent expense also includes approximately $1,000 per month for other items charged by the landlord in connection with rent. On May 1, 2020 and July 29, 2020, the Company entered into amended lease agreements with its landlord. Under the terms of the amendments, the landlord agreed to waive rent, certain rent adjustments and parking for the period April 1, 2020 through August 31, 2020 and extend the term of the lease by five months. The lease term date, which was December 31, 2020, was changed to May 31, 2021. On April 1, 2021, the Company entered into a lease termination and payment agreement with the landlord, pursuant to which the Company vacated and surrendered the premises to the landlord and the Company will pay approximately $67,000 over 18 months commencing April 1, 2021. As of November 1, 2021, the company was delinquent in its monthly payments and has not made payments to date pursuant to the settlement agreement had approximately $42,000 in unpaid rent which was reported as part of accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as of December 31, 2021.

 

Rent expense for the years ended December 31, 2021 and 2020 was $61,000 and $113,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately $1,000 per month for other items charged by the landlord in connection with rent.

 

37

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

  

Settlement Payable

 

During the year ended December 31, 2020, the Company accrued a contingent liability for anticipated litigation and legal settlement liabilities, which has been reported as part of settlement liability on the accompanying consolidated balance sheet and litigation settlement costs on the accompanying consolidated statements of operations in the amount of $500,000, which was expensed in the year ended December 31, 2019 and settled during the year ended December 31, 2021.

 

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. Information about material legal proceedings follows:

 

Settlements

 

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.(“Defendants”). 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 alleged 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 alleged that Mr. Fiore and the Company unlawfully benefited through the sales of those securities. The Commission also alleged 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 sought 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.

 

Pursuant to a settlement agreement among the parties, on April 14, 2020, final judgment was entered in the case: Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management, Inc. and Eat at Joes, Inc., n/k/a SPYR, Inc., case number 7:18-cv-05474-KMK filed in the U.S. District Court for the Southern District of New York.

 

On April 23, 2020, Joseph Fiore/Berkshire Capital Management, Inc. satisfied the Company’s joint and several liability obligation by paying to the Commission the agreed upon sum of Two Million Dollars pursuant to a settlement agreement between Joseph Fiore/Berkshire Capital Management, Inc. and the Company, which settlement agreement was entered into on April 15, 2020. The Company has until April 14, 2021 to satisfy its remaining financial obligation to the Commission, an agreed upon civil penalty of $500,000. The $500,000 liability is reported as part of accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets as of December 31, 2020.

 

In electing to settle with the Commission, the Company neither admitted nor denied liability to any of the Commission’s allegations in its complaint, and in consideration for the Commission discontinuing its action, the Company, along with the two other defendants Joseph Fiore and Berkshire Capital Management agreed to be jointly and severally liable for disgorgement of profits and prejudgment interest in the amount of two million dollars, and to each be solely liable to pay a civil penalty in the amount of five hundred thousand dollars.2

 

Judgments

 

On or about January 24, 2019, SPYR APPS, LLC entered into an agreement with one of its vendors, Shatter Storm Studios, to whom it owed $84,250 for artwork related to the Steven Universe game. Pursuant to the terms of that agreement, SPYR APPS, LLC needed to make payment in the amount of $85,000 to cover the principal owed and attorneys’ fees together plus 6% interest in that amount by December 1, 2019. Should SPYR APPS, LLC not make the required payment on or before December 1, 2019, it consented to entry of judgment in favor of Shatter Storm Studios for the amount owed. SPYR APPS, LLC did not make the payment and on January 27, 2020 Shatter Storm Studios initiated Case No. 1:200cv-00217 in the U.S. District Court for the District of Colorado seeking entry of the consent judgment against SPYR APPS, LLC. The judgment was not contested by SPYR APPS, LLC and judgment in the amount of $85,000 plus post judgment interest at the rate of 6% was entered on March 17, 2020. The balance due as of December 31, 2020 was approximately $95,000, which includes accrued interest and attorneys’ fees, has been reported as part of current liabilities of discontinued operations.

 

 

 
2 In addition, an injunction was entered against the Company enjoined it from violating the antifraud, market manipulation, beneficial ownership reporting, and other provisions of the federal securities laws charged in the SEC’s complaint.

 

38

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

  

Employment Agreements

 

Pursuant to employment agreements entered in December 2014 and October 2015, the Company agreed to compensate three officers with an initial base salary in the aggregate of $450,000 per year with rolling five-year terms until terminated. In addition, as part of the employment agreements, the Company also agreed to grant these officers an aggregate of 1.55 million shares of restricted common stock at the beginning of each employment year. On September 17, 2021, Barry D. Loveless resigned as Chief Financial Officer. On December 31, 2021, the Company and James R. Thompson and Jennifer D. Duettra agreed to terminate their positions as Chief Executive Officer, President, General Counsel and Vice-President and Assistant General Counsel, respectively.

 

Pursuant to employment agreements entered in October 2020, the Company agreed to compensate the two former owners of Applied Magix with an initial base salary in the aggregate of $300,000 for one year. In addition, as part of the employment agreements, the Company also agreed to grant these officers an aggregate of 2 million shares of restricted common stock as a signing bonus and 5 million options to purchase shares of restricted common stock.

 

On December 31, 2021, the Company terminated its employment agreements with James R. Thompson and Jennifer D. Duettra.

 

Covid-19

 

On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, the Company is anticipating potential reductions in revenue, labor and supply shortages, difficulty meeting debt covenants, delays in collecting receivables and paying liabilities and changes in the fair value of assets and liabilities. Our necessity for fund raising activities make it reasonably possible that we are vulnerable to the risk of a near-term severe impact.

 

Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including potential credit losses on receivables and investments; impairment losses related to long-lived assets; and contingent obligations.

 

NOTE 14 – EQUITY TRANSACTIONS

 

Common Stock:

 

Year Ended December 31, 2020

 

During the year ended December 31, the Company issued an aggregate of 5,850,000 shares of restricted common stock to employees and directors with a total fair value of $1,335,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,335,000 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, 2020, the Company issued an aggregate of 3,407,500 shares of common stock in conversion of notes payable with a total fair value of $548,000. As a result, the Company reduced the balance due on the notes by $548,000 upon issuance.

 

39

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

Year Ended December 31, 2021

 

During the year ended December 31, 2021 the Company awarded an aggregate of 9,115,019 shares of restricted common stock to employees and directors with a total fair value of $425,097 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As of December 31, 2021, the shares have not been issued. As a result, the Company expensed the entire $425,097 and recorded common stock to be issued. 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, 2021, the Company issued an aggregate of 1,550,000 shares of restricted common stock to employees and directors with a total fair value of $239,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $239,000 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, 2021, the Company issued an aggregate of 3,000,000 shares of registered common stock to third party service providers with a total fair value of $371,300. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $371,000 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, 2021, the Company issued an aggregate of 1,242,854 shares of restricted common stock to third party service providers with a total fair value of $100,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $100,000 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, 2021, the Company issued an aggregate of 29,120,503 shares of common stock with a total fair value of $1,245,592 in conversion of notes.

 

Options:

 

The following table summarizes common stock options activity:

 

 Summary of Common Stock Options Activity         Weighted  
          Average  
          Exercise  
    Options     Price  
Outstanding, January 1, 2020     9,299,900     $ 0.57  
Granted     5,000,000     $ 0.99  
Exercised     -       -  
Expired     (8,500,000 )     4.76  
Outstanding, December 31, 2020     5,799,900     $ 0.88  
Granted     -       -  
Exercised     -       -  
Expired     (1,420,000 )     0.24  
Outstanding, December 31, 2021     4,379,900     $ 0.88  
Exercisable, December 31, 2020     5,799,900     $ 0.88  
Exercisable, December 31, 2021     4,379,900     $ 0.82  

 

40

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

  

The weighted average grant date fair value of options granted during the years ended December 31, 2020, was $0.99. There were no options granted during the year ended December 31, 2021.

 

During the year ended December 31, 2021, the Company granted no stock options to employees. During the year ended December 31, 2020, the Company granted stock options to purchase a total of 5,000,000 shares of the Company’s restricted common stock. The options are fully vested, exercisable at prices ranging from $0.25 to $1.50 per share and will expire over 2.5 years. The fair values of the options are recorded at their grant dates computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2020, the Company recognized $561,000 in compensation expense on the issuance of these options.

 

The weighted average exercise prices, remaining lives for options granted, and exercisable as of December 31, 2021, 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       880,000       0.30     $ 0.50       880,000     $ 0.50  
$ 1.00       2,099,900       0.80     $ 1.00       2,099,900     $ 1.00  
$ 1.50       1,400,000       1.30     $ 1.50       1,400,000     $ 1.50  
          4,379,900             $ 0.88       4,379,900     $ 0.82  

 

On December 31, 2020, 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 as of December 31, 2020.

 

Warrants:

 

The following table summarizes common stock warrants activity:

 

          Weighted  
          Average  
          Exercise  
    Warrants     Price  
Outstanding, January 1, 2020     9,000,000     $ 0.46  
Granted     2,800,000       0.25  
Exercised     -       -  
Expired     (700,000 )     0.08  
Outstanding, December 31, 2020     11,100,000     $ 0.46  
                 
Granted     -       0.25  
Exercised     -       -  
Expired     (3,900,000 )     0.08  
Outstanding, December 31, 2021     7,200,000     $ 0.39  
                 
Exercisable, December 31, 2020     11,100,000     $ 0.39  
Exercisable, December 31, 2021     7,200,000     $ 0.39  

 

41

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

In April 2018, in combination with a 12-month convertible promissory note, as amended, the Company granted warrants to purchase a total of 500,000 shares of restricted common stock with an exercise price of $0.25 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 was amortized over the life of the note as interest expense. During the year ended December 31, 2020, pursuant to a debt settlement agreement, the Company amended the exercise price of the warrants and recorded $9,000 in debt settlement costs, recognized as interest expense.

 

In May 2018, in combination with an 8-month convertible promissory note, as amended, the Company granted warrants to purchase a total of 1,200,000 shares of restricted common stock with an exercise price of $0.25 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, 2020, pursuant to a debt settlement agreement, the Company increased the number of warrants amended the exercise price of the warrants and recorded $87,000 in debt settlement costs, recognized as interest expense.

 

In October 2019, 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 expiration date of October 30, 2020. The warrants are fully vested and exercisable upon grant. Total fair value of the options at grant date amounted to $1,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.

 

In October and November 2020, in combination with a 5-year convertible promissory note, the Company granted warrants to purchase a total of 2,000,000 shares of restricted common stock with an exercise price of $0.25 and will expire on various dates between October 5, 2025 and November 24, 2025. The warrants are fully vested and exercisable upon grant. The proceeds of the note were allocated between the note, the warrants, and the derivative liability which resulted in proceeds of $0 allocated to the warrants.

 

The weighted average exercise prices, remaining lives for warrants granted, and exercisable as of December 31, 2021, were as follows:

 

             
      Outstanding and Exercisable Warrants  
Warrants              
Exercise Price           Life  
Per Share     Shares     (Years)  
$ 0.25       3,500,000       3.9  
$ 0.40       1,200,000       0.03  
$ 0.50       2,700,000       1.53  
$ 0.75       1,250,000       1.53  
$ 1.00       1,250,000       0.41  
          7,200,000          

 

At December 31, 2021, the Company’s closing stock price was $0.05 per share. As all outstanding warrants had an exercise price greater than $0.05 per share, there was no intrinsic value of the options outstanding at December 31, 2021.

 

The table below represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2020:

 

  Year Ended
December 31,
 
    2020  
Expected life in years     1.005.00  
Stock price volatility     177% - 246 %
Risk free interest rate     0.12% - 0.22 %
Expected dividends     -  
Forfeiture rate     -  

 

42

 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

  

The table below represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2021:

 

    Year Ended
December 31,
 
    2021  
Expected life in years     1.005.00  
Stock price volatility     177% - 246 %
Risk free interest rate     0.12% - 0.22 %
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, 2021, the Company has reserved 80,000,000 shares of common stock in connection with convertible notes with detachable warrants, 100,000,000 shares of common stock in connection with shares underlying an equity line of credit and 3,500,000 shares of common stock underlying warrants issued in connection with the court approved settlement agreement for a total of 183,500,000 reserved shares of common stock.

 

NOTE 15 – 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.

 

43

 

  

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2021 AND 2020

 

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, 2021, the 20,000 Class E preferred shares were convertible to 1,200,480 common shares.