NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements
The
accompanying condensed consolidated financial statements of SPYR, Inc. and subsidiaries (the “Company”) are unaudited. These
unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”)
regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared
in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC. The condensed consolidated balance sheet as
of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date, but does not include
all disclosures, including notes, required by GAAP.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to
fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all
adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not
necessarily indicative of fiscal year-end results.
Principles
of Consolidation
The
consolidated financial statements include the accounts of SPYR, Inc. and its wholly owned subsidiaries, Applied Magix, Inc., a
Nevada corporation, SPYR APPS, LLC, a Nevada Limited Liability Company (discontinued operations, see Note 9), E.A.J.: PHL, Airport
Inc., a Pennsylvania corporation (discontinued operations, see Note 9), and Branded Foods Concepts, Inc., a Nevada corporation
(dissolution pending). Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain
reclassifications have been made in the 2020 financial statements to conform with the 2021 presentation related to the discontinued operations
of SPYR APPS, LLC. See Note 9 Discontinued Operations for additional information.
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 Nine months ended September 30, 2021, the Company recorded a net loss of $3,176,000
and utilized cash in operations of $1,260,000. As of September 30, 2021, our cash balance was $30,000, and we had trading securities
valued at $2,000. 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.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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.
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, derivative liabilities, and valuation of issuance of equity securities. Actual results could differ
from those estimates.
Earnings
(Loss) Per Share
The
basic and fully diluted shares for the three months ended September 30, 2021 are the same because the inclusion of the potential shares
(Class A – 26,909,028, Class E – 1,385,042, Options – 5,379,900, Warrants – 7,200,000) would have had an anti-dilutive
effect due to the Company generating a loss for the three months ended September 30, 2021.
The basic
and fully diluted shares for the three months ended September 30, 2020 are
the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 803,213,
Options – 849,900, Warrants – 9,800,000)
would have had an anti-dilutive effect due to the Company generating a loss for the three months ended September 30,
2020.
The basic and fully diluted shares for the nine months
ended September 30, 2021 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 1,385,042, Options – 5,379,900, Warrants – 7,200,000) would have had an anti-dilutive
effect due to the Company generating a loss for the nine months ended September 30,
2021.
The
basic and fully diluted shares for the nine months ended September 30, 2020 are the same because the inclusion of the potential shares (Class
A – 26,909,028, Class E – 803,213, Options – 849,900, Warrants – 9,800,000) would have had an anti-dilutive
effect due to the Company generating a loss for the nine months ended September 30, 2020.
Product
Research and Development Costs
Costs
incurred for product research and development are expensed as incurred. During the nine months ended September 30, 2021 and 2020, the
Company incurred $9,000 and $0 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.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
We
adopted this new revenue recognition standard along with its 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.
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. The Company’s products are available for sale through its
website at https://appliedmagix.com/shop/, as well as the eBay Marketplace and Amazon Marketplace. Payment is required at time of purchase and the purchase price is a fixed amount.
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.
Inventory
The
Company’s inventory consisting of Magix Drive units and Apple HomeKit compatible products for resale by the Company, is
recorded at the lower of cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for
estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis
when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the
Company’s investment in inventories for such declines in value. The write-downs are recognized as a component of cost of
sales. During the nine months ended September 30, 2021 and 2020, the Company recognized inventory write downs of approximately
$1,000.
As of September 30, 2021, the inventory was valued at $60,000. As of December 31, 2020, the company held no inventory.
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.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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 September 30, 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.
Advertising
Costs
Advertising,
marketing, and promotional costs are expensed as incurred and included in general and administrative expenses. Advertising, marketing,
and promotional expense was $118,000 and $0 for the nine months ended September 30, 2021, and 2020, respectively and was reflected as
part of Other General and Administrative Expenses on the accompanying condensed consolidated statements of operations.
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.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE
2 – RELATED PARTY TRANSACTIONS
On
September 5, 2017, the Company obtained a revolving line of credit (LOC) 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. During 2018 and 2019, the Company has
received an additional $1,062,000 in the form of short-term advances (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. On June 17, 2021, the Company
and Berkshire entered into a debt consolidation agreement to consolidate the LOC and Advances into a single balloon note with interest
at 6% per annum and an extended due date of December 31, 2025, thereby replacing and otherwise cancelling the LOC and Advances. The June
17, 2021 consolidated balance due was approximately $2,454,000. As of September 30, 2021, the consolidated balance due with accrued interest
was approximately $2,496,000.
During
the three months ended March 31, 2020, the Company, received $185,000 in revenue for professional services rendered to Berkshire Capital
Management Co., Inc. Subsequent to March 31, 2020, the Company has not and does not anticipate that it will provide any further professional
services to related parties.
On
May 17, 2021, the Company entered into an agreement to borrow funds from the 481149 Irrevocable Trust, a related party, that controls
all of the currently outstanding preferred stock of the Company and the trustee of which is a member of the Company’s board of
directors. Pursuant to the agreement, the Company borrowed approximately $501,000 with interest at 6% per annum, due and payable in full
on May 17, 2022. As of September 30, 2021, the balance due with accrued interest was approximately $512,000.
NOTE
3 – SHORT TERM NOTES
On May 27, 2021, the Company entered into an agreement
to borrow funds from a third party pursuant to which, the Company borrowed $85,000 with interest at 8% per annum, due and payable in full
on or before November 27, 2021. On August 11, 2021, the Company entered into an agreement to borrow funds from a third party pursuant
to which, the Company borrowed $33,333 with interest at 8% per annum, due and payable in full on or before February 11, 2022.
On
August 12, 2021, the Company entered into an agreement to borrow funds from a third party pursuant to which, the Company borrowed $40,000
with interest at 8% per annum, due and payable in full on or before February 12, 2022. On September 9, 2021, the Company entered into
an agreement to borrow funds from a third party pursuant to which, the Company borrowed $40,000 with interest at 8% per annum, due and
payable in full on or before March 9, 2022. As of September 30, 2021, the balance due with accrued interest was approximately $202,000.
NOTE
4 – 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 $71,000. 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. As of September 30, 2021, the balance due on this note with accrued interest was $72,000.
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.
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 equal monthly payments of principal and interest beginning in May 2022. On February 2, 2021, the
Company submitted its application to the SBA for forgiveness, which was correspondingly confirmed forgiven as of August 20, 2021. As
of September 30, 2021, the balance due on this note was approximately $0.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE
5 – CONVERTIBLE NOTES
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 September 30, 2021, the principal balance together with accrued interest is recorded on the
Company’s condensed consolidated balance sheet net of discounts at $27,000.
The
following table summarized the Company’s convertible notes payable as of September 30, 2021 and December 31, 2020:
|
Summary of Convertible Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Beginning
Balance
|
|
$
|
64,000
|
|
|
$
|
550,000
|
|
|
Proceeds
from the issuance of convertible notes, net of issuance discounts
|
|
|
-
|
|
|
|
-
|
|
|
Repayments
|
|
|
-
|
|
|
|
(47,000
|
)
|
|
Conversion
of notes payable and accrued interest into common stock
|
|
|
(320,000
|
)
|
|
|
(548,000
|
)
|
|
Amortization
of discounts
|
|
|
330,000
|
|
|
|
50,000
|
|
|
Extinguishment of Debt
|
|
|
(108,000
|
)
|
|
|
-
|
|
|
Liquidated
damages
|
|
|
-
|
|
|
|
(53,000
|
)
|
|
Debt
settlement costs
|
|
|
-
|
|
|
|
96,000
|
|
|
Accrued
Interest
|
|
|
61,000
|
|
|
|
16,000
|
|
|
Convertible
notes payable, net
|
|
$
|
27,000
|
|
|
$
|
64,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes, long-term
|
|
$
|
740,000
|
|
|
$
|
1,000,000
|
|
|
Accrued
interest and damages, long-term
|
|
|
-
|
|
|
|
14,000
|
|
|
Debt
discounts, long-term
|
|
|
(713,000
|
)
|
|
|
(950,000
|
)
|
|
Long-term
convertible notes payable, net
|
|
$
|
27,000
|
|
|
$
|
64,000
|
|
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE
6 – 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.
The
following table represents the Company’s derivative liability activity for the nine months ended September 30, 2021:
|
Schedule of Derivative Liability Activity
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
Derivative
liability balance, December 31, 2020
|
|
$
|
1,382,000
|
|
|
Decrease due to conversion of the underlying note
|
|
|
(412,000
|
)
|
|
Increase due to modifications of underlying notes
|
|
|
455,000
|
|
|
Change
in derivative liability during the period
|
|
|
336,000
|
|
|
Derivative
liability balance, September 30, 2021
|
|
$
|
1,761,000
|
|
The
table below represents the average assumptions used in valuing the derivative liability on September 30, 2021:
|
Summary of Average Assumptions Used in Valuing the Derivative Liability
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
Expected
life in years
|
|
|
4.14
|
|
|
Stock
price volatility
|
|
|
195.21
|
%
|
|
Risk
free interest rate
|
|
|
0.42
|
%
|
|
Expected
dividends
|
|
|
-
|
|
|
Forfeiture
rate
|
|
|
-
|
|
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE
7 – 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. On or about September 20, 2021, this agreement was cancelled and replaced with a similar Equity Line of Credit
to Ares Capital. As of September
30, 2021, no shares have been registered or 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 September
30, 2021, the company had approximately $45,000 in unpaid rent which was reported as part of accounts payable and accrued expenses in
the accompanying condensed consolidated balance sheet as of September 30, 2021.
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.
Rent
expense for the nine months ended September 30, 2021 and 2020 was $53,000 and $88,000, respectively.
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:
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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 had until April
14, 2021 to satisfy its remaining financial obligation to the Commission, an agreed upon civil penalty of Five Hundred Thousand Dollars
($500,000). On May 17, 2021, the Company borrowed approximately $501,000 from a related party to pay its principal settlement liability
with the Securities and Exchange Commission and has done so (See Note 2 – Related Party Transactions). As of September 30, 2021,
the $500,000 together with accrued interest of approximately $1,000 has been paid to the Securities and Exchange Commission in settlement
of this obligation.
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 September 30, 2021 and December 31, 2020 was approximately $98,000 and $95,000,
respectively and is reported as part of current liabilities of discontinued operations.
|
|
[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.
|
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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 accounts receivable 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 intangible assets and other long-lived assets; and contingent obligations.
NOTE
8 – EQUITY TRANSACTIONS
Common
Stock:
Nine
Months Ended September 30, 2021
During the nine months
ended September 30, 2021, the Company committed an aggregate of 150,000 shares of restricted common stock to directors with a total fair
value of $7,000 for services rendered. The shares, once issued, are non-refundable and deemed earned upon issuance. As a result, the
Company accrued the entire $7,000 as of September 30, 2021. The shares agreed upon were valued as of September 30, 2021, based upon closing
market price of the Company’s common stock.
During
the nine months ended September 30, 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 nine months ended September 30, 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 $371,000. 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 nine months ended September 30, 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, 2020, the Company issued an aggregate of 3,736,237 shares of common stock with a total fair value of $425,000
in conversion of notes. As a result, the Company reduced the balance due on the notes and accrued interest by $204,000 and reduced the
value of the derivative liability by $221,000 upon issuance.
Nine
Months Ended September 30, 2020
During
the nine months ended September 30, 2020, the Company issued an aggregate of 1,250,000 shares of restricted common stock to employees
with a total fair value of $25,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a
result, the Company expensed the entire $25,000 upon issuance. The shares issued were valued at the date earned under the respective
agreement based upon closing market price of the Company’s common stock.
During
the nine months ended September 30, 2020, the Company issued an aggregate of 1,007,500 shares of common stock in conversion of notes
payable with a total fair value of $152,000. As a result, the Company reduced the balance due on the notes by $152,000 upon issuance.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
Options:
The
following table summarizes common stock options activity:
|
Summary of Common Stock Options Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
December
31, 2020
|
|
|
5,799,900
|
|
|
$
|
0.88
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(420,000
|
)
|
|
|
1.00
|
|
|
Outstanding,
September 30, 2021
|
|
|
5,379,900
|
|
|
$
|
0.87
|
|
|
Exercisable,
September 30, 2021
|
|
|
5,379,900
|
|
|
$
|
0.87
|
|
The
weighted average exercise prices, remaining lives for options granted, and exercisable as of September 30, 2021 were as follows:
|
Schedule of Weighted Average Exercise Price Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Options
|
|
|
Exercisable
Options
|
|
|
Options
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Exercise Price
|
|
|
|
|
|
Life
|
|
|
Average Exercise
|
|
|
|
|
|
Average Exercise
|
|
|
Per Share
|
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$0.25
|
|
|
|
1,000,000
|
|
|
0.06
|
|
|
$0.25
|
|
|
|
1,000,000
|
|
|
$0.25
|
|
|
$0.50
|
|
|
|
1,300,000
|
|
|
0.56
|
|
|
$0.50
|
|
|
|
1,300,000
|
|
|
$0.50
|
|
|
$1.00
|
|
|
|
1,679,900
|
|
|
0.36 – 1.06
|
|
|
$1.00
|
|
|
|
1,679,900
|
|
|
$1.00
|
|
|
$1.50
|
|
|
|
1,400,000
|
|
|
1.56
|
|
|
$1.50
|
|
|
|
1,400,000
|
|
|
$1.50
|
|
|
|
|
|
|
5,379,900
|
|
|
|
|
|
$0.87
|
|
|
|
5,379,900
|
|
|
$0.87
|
|
On
September 30, 2021, the Company’s closing stock price was $0.0452 per share. As all outstanding options had an exercise price greater
than $0.0452 per share, there was no intrinsic value of the options outstanding as of September 30, 2021.
Warrants:
The
following table summarizes common stock warrants activity:
|
Summary of Common Stock Warrants Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Outstanding,
December 31, 2020
|
|
|
11,100,000
|
|
|
$
|
0.39
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(3,900,000
|
)
|
|
|
0.17
|
|
|
Outstanding,
September 30, 2021
|
|
|
7,200,000
|
|
|
$
|
0.40
|
|
|
Exercisable,
September 30, 2021
|
|
|
7,200,000
|
|
|
$
|
0.40
|
|
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
The
weighted average exercise prices, remaining lives for warrants granted, and exercisable as of September 30, 2021, were as follows:
|
Schedule of Warrants Weighted Average Exercise Price Range
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Outstanding and Exercisable Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
Life
|
|
|
Per Share
|
|
|
Shares
|
|
|
(Years)
|
|
|
$0.25
|
|
|
|
4,000,000
|
|
|
1.64 – 4.16
|
|
|
$0.50
|
|
|
|
2,200,000
|
|
|
1.47 – 1.78
|
|
|
$0.75
|
|
|
|
1,000,000
|
|
|
1.78
|
|
|
|
|
|
|
7,200,000
|
|
|
|
|
On
September 30, 2021, the Company’s closing stock price was $0.0452 per share. As all outstanding warrants had an exercise price
greater than $0.0452 per share, there was no intrinsic value of the warrants outstanding as of September 30, 2021.
Shares
Reserved:
On
September 30, 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
9 – DISCONTINUED OPERATIONS
Restaurant
Through
our other wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017.
Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported
as discontinued operations.
The
assets and liabilities of our discontinued restaurant operations as of September 30, 2021 and December 31, 2020 consisted of $0 assets
and $22,000 in accounts payable and accrued liabilities.
There
were no operations for our discontinued restaurant during the nine months ended September 30, 2021 and 2020.
Digital
Media
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. All of our games
had been removed from the game stores and the Company has decided not to continue this line of business. Pursuant to current accounting
guidelines, the assets and liabilities of SPYR APPS LLC as well as the results of its operations were presented in these financial statements
as discontinued operations.
SPYR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
The
assets and liabilities of our discontinued digital media operations as of September 30, 2021 and December 31, 2020 were as follows:
|
Summary of Assets and Liabilities of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
14,000
|
|
|
$
|
13,000
|
|
|
Capitalized
gaming assets and licensing rights, net
|
|
|
-
|
|
|
|
75,000
|
|
|
Total
Assets
|
|
$
|
14,000
|
|
|
$
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
781,000
|
|
|
$
|
745,000
|
|
|
Total
Liabilities
|
|
$
|
781,000
|
|
|
$
|
745,000
|
|
The
results of operations of our discontinued digital media operations for the nine months ended September 30, 2021 and 2020, included in
the consolidated statements of operations as discontinued operations, consisted of the following:
|
Summary of Results of Operations of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Revenues:
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Labor
and related expenses
|
|
|
-
|
|
|
|
-
|
|
|
Other
general and administrative
|
|
|
-
|
|
|
|
4,000
|
|
|
Total
operating expenses
|
|
|
-
|
|
|
|
4,000
|
|
|
Operating
loss
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(36,000
|
)
|
|
|
(11,000
|
)
|
|
Write
down of assets
|
|
|
(75,000
|
)
|
|
|
(25,000
|
)
|
|
Loss
on discontinued operations
|
|
$
|
(111,000
|
)
|
|
$
|
(39,000
|
)
|
NOTE
10 – SUBSEQUENT EVENTS
On October 20, 2021, a convertible note holder
converted $100,000 of principal debt at a conversion rate of $0.0195 a share, into 5,128,205 Common Stock shares.
On October 26, 2021, the Company entered into
two short term promissory notes, for $33,000 and $12,000 with maturity dates of March 22, 2022 and April 12, 2022, respectively. Both
notes carry a rate of 8% per annum.
On November 2, 2021, the Company entered into
two convertible promissory notes, for $45,000 and $50,000, both with a maturity date of November 2, 2026, and a rate of 8% annum. Additionally,
both notes allow for conversion at any time between the issue date and maturity date, of all or any part of the indebtedness. Furthermore,
both notes have a conversion price calculated as the lesser of: 1.) $0.25 (the “Base Conversion Price”), and 2.) 50% of the
average of the three lowest VWAP for the Common Stock for a Trading Day on the Trading Market during the 20 Trading Day period immediately
prior to the Conversion Date.
The $45,000 convertible note issued on November
2, 2021 was then used to pay off the two promissory notes issued on October 26, 2021.
On November 5, 2021, the Company appointed Trang
Nguyen, age 40, as its Principal Financial and Accounting Officer.
On November 17, 2021, the SBA PPP loan that was
entered into on May 12, 2020 was confirmed forgiven.
