UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended:
or
For the transition period from __________ to __________
Commission
file number
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction
of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
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 | ☐ |
| ☐ | 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 18, 2022, there were shares of the Registrant’s common stock outstanding.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
SPYR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Prepaid Expenses | ||||||||
| Inventory | ||||||||
| Current Assets of Discontinued Operations | ||||||||
| Total Current Assets | ||||||||
| Other Assets: | ||||||||
| Property and Equipment, net | ||||||||
| Intangible Asset, net | ||||||||
| Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Liabilities | $ | $ | ||||||
| Related Party Notes Payable, current portion | ||||||||
| Notes Payable, current portion | ||||||||
| Short-Term Convertible Notes Payable, net of discount | ||||||||
| Current Liabilities of Discontinued Operations | ||||||||
| Total Current Liabilities | ||||||||
| Other Liabilities: | ||||||||
| Notes Payable, net of discount | ||||||||
| Long-Term Convertible Notes Payable, net of discount | ||||||||
| Derivative Liability | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred Stock, Class A, $ par value, shares authorized; shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Preferred Stock, Class E, $ par value, shares authorized; shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common Stock, $ par value, shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock to be issued | ||||||||
| Additional Paid-In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholder’s Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
SPYR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||
| Expenses | ||||||||||||||||
| Labor and related expenses | ( | ) | ||||||||||||||
| Rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Research and development | ||||||||||||||||
| Other general and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of Debt Discounts | ( | ) | ( | ) | ||||||||||||
| Other Income | ||||||||||||||||
| Loss on Conversion of Debt | ( | ) | ||||||||||||||
| Loss on Settlement | ( | ) | ||||||||||||||
| Loss on Issuance of Common Stock | ( | ) | ||||||||||||||
| Loss on Issuance of Convertible Debt | ( | ) | ( | ) | ||||||||||||
| Gain on Forgiveness of Debt | ||||||||||||||||
| Gain on Settlement of Debt | ||||||||||||||||
| Gain on disposition of assets | ( | ) | ||||||||||||||
| Settlement Expense | ( | ) | ||||||||||||||
| Change in value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Unrealized gain on trading securities | ||||||||||||||||
| Total Other Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and Diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Common Shares | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
SPYR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| 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, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Employee Compensation | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Fair Value of S-8 Registered Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Settlement | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Conversion of Notes Payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Restricted Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Restricted Common Stock and Options Issued for Employee and Director Compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Reclassification of Derivative Liability to Additional Paid in Capital | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Conversion of Notes Payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Asset Acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Reclassification of Derivative Liability to Additional Paid in Capital | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Cancellation of common stock to be issued | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Fair Value of Restricted Common Stock and Options Issued for Employee and Director Compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of S-8 Registered Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Fair Value of Restricted Common Stock and Options Issued for Employee and Director Compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of S-8 Registered Common Stock Issued for Services | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Conversion of Notes Payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Fair Value of Common Stock Issued for Conversion of Notes Payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SPYR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For The Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Loss on Discontinued Operations | ||||||||
| Depreciation and Amortization | ||||||||
| Common Stock Issued for Employee Compensation | ||||||||
| Common Stock Issued for Services | ||||||||
| Common Stock Issued for Settlement Expense | ||||||||
| Amortization of Debt Discounts on Convertible Notes Payable and Notes Payable | ||||||||
| Unrealized Gain on Trading securities | ( | ) | ||||||
| Gain on Disposition of Assets | ( | ) | ||||||
| Gain on Settlement of Debt | ( | ) | ||||||
| Loss on Conversion of Debt | ||||||||
| Loss on Issuance of Convertible Debt | ||||||||
| Gain on Forgiveness of Debt | ( | ) | ||||||
| Change in Value of Derivative Liability | ( | ) | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Other Receivables | ||||||||
| Prepaid Expenses | ||||||||
| Inventory | ( | ) | ||||||
| Operating Lease Right-of-Use Liability | ( | ) | ||||||
| Accounts Payable and Accrued Liabilities | ||||||||
| Accrued Interest on Notes Payable Related Party | ||||||||
| Accrued Interest on Notes Payable | ||||||||
| Accrued Interest and Liquidated Damages on Convertible Notes | ||||||||
| Net Cash Used in Operating Activities from Continuing Operations | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities from Discontinued Operations | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Sale of Property and Equipment | ||||||||
| Net Cash Provided by Investing Activities | ||||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from Notes Payable, related party | ||||||||
| Proceeds from Long-Term Convertible Notes | ||||||||
| Proceeds from Short-Term Convertible Notes Payable | ||||||||
| Repayment of Short-Term Convertible Notes Payable | ( | ) | ||||||
| Repayment of Notes Payable | ( | ) | ||||||
| Proceeds from SBA PPP Note Payable | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Change in Cash | ( | ) | ( | ) | ||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Disclosure of Interest and Income Taxes Paid: | ||||||||
| Interest Paid during the Period | $ | $ | ||||||
| Income Taxes Paid during the Period | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
| Debt Discounts on Long-Term Convertible Notes Payable | $ | $ | ||||||
| Common Stock Issued for Debt Conversion | $ | $ | ||||||
| Extinguishment of derivative liability from conversion of notes payable | $ | $ | ||||||
| Common Stock and note payable issued for asset acquisition | $ | $ | ||||||
| Fair Value of Partial Conversion Embedded Conversion Option | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SPYR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(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, 2021 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2021 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, E.A.J.: PHL, Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 6). 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 nine months ended September 30, 2022, the Company recorded a net loss
from continuing operations of $
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 software development costs and implementation of our 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.
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 2023. However, management cannot make any assurances that such financing will be secured.
5
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.
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.
The basic and fully diluted shares for the three and nine months ended September 30, 2022 are the same because the inclusion of the potential shares (Class A – , Class E – , Options – and Warrants – ) would have had an anti-dilutive effect due to the Company generating a loss for the three and nine months ended September 30, 2022.
The basic and fully diluted shares for the three and nine months ended September 30, 2021 are the same because the inclusion of the potential shares (Class A – , Class E – , Options – and Warrants – ) would have had an anti-dilutive effect due to the Company generating a loss for the three and nine months ended September 30, 2021.
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 | ||||
| Computer equipment | ||||
| Vehicles |
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.
6
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.
Recent Accounting Standards
The 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.
NOTE 2 – RELATED PARTY NOTES PAYBALE
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 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 $
NOTE 3 – NOTES PAYABLE
The following table summarized the Company’s notes payable as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Berkshire Capital Management Note Payable | $ | $ | ||||||
| JanOne Note Payable | ||||||||
| Accrued interest | ||||||||
| Debt Discount | ( | ) | ||||||
| Notes Payable | $ | $ | ||||||
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 $ with interest at % 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 $. Repayment on the loan is due December 31, 2021. This note is currently in default.
During 2018 and 2019, the Company has received an additional $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 $. No further advances are expected from Berkshire Capital Management Co., Inc. The Company has accrued interest on these short-term advances at % per annum. The short-term advances are due upon demand. As of December 31, 2020, the Company has borrowed $ and accrued interest of approximately $.
On
June 17, 2021, the Company consolidated all prior notes payable with Berkshire Capital Management, resulting in a single consolidated
note payable of $
On
December 16, 2021, the Company issued a promissory note to Grupo Rueda in the amount of $
7
On
May 24, 2022, the Company entered into a material definitive agreement (“MDA”) not made in the ordinary course of business.
The parties to the MDA are the Company and JanOne, Inc., a Nevada corporation (“JanOne”). There was no material relationship
between the Company and JanOne other than in respect of the material definitive agreement. Pursuant to the terms of the MDA, JanOne agreed
to sell, and the Company agreed to buy and assume, all legal right, title, and interest to all of the assets, and none of the liabilities,
of JanOne’s wholly owned subsidiary, GeoTraq, Inc. (“GeoTraq”), including but not limited to records all goodwill and
all intellectual property, including an issued patent associated with GeoTraq. The Company accounted for this transaction as an asset
acquisition under ASC 805, recognizing the value of the acquired assets based on the consideration paid. The Company allocated the value
paid across the acquired assets, including $
The
aggregate consideration for the asset purchase consisted of the Company’s issuance of
shares of unregistered restricted common stock to JanOne, which had a fair value of $
NOTE 4 – SHORT TERM CONVERTIBLE NOTES PAYABLE
On
May 27, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $
On
August 11, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $
On
August 12, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $
On
September 9, 2021, the Company issued a promissory note to Ares Capital, Inc. in the amount of $
8
On
May 10, 2022, the Company entered into a convertible promissory note in the principal amount of $
On
July 1, 2022, the Company entered into a convertible promissory note in the principal amount of $
On
August 4, 2022, the Company entered into a convertible promissory note in the principal amount of $
On
September 23, 2022, the Company entered into a convertible promissory note in the principal amount of $
As
of September 30, 2022, there is approximately $
NOTE 5 – CONVERTIBLE NOTES PAYABLE
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 issue in each closing, an
9
On
November 2, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
November 3, 2021, the Company issued a convertible promissory note to ARES Capital, Inc, in the amount $
On
December 3, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
December 27, 2021, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
January 10, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
January 19, 2022, Mehdi Safavi converted $
On
February 3, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
February 11, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
10
On
March 24, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
April 21, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
On
August 2, 2022, the Company entered into a securities purchase agreement and convertible promissory note with Amir Mehdi Safavi
in the amount of $
The following table summarized the Company’s convertible notes payable as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Beginning Balance | $ | $ | ||||||
| Proceeds from the issuance of convertible notes | ||||||||
| Repayments | ( | ) | ||||||
| Conversion of notes payable into common stock | ( | ) | ( | ) | ||||
| Amortization of debt discount | ||||||||
| Liquidated damages | ||||||||
| New debt discount | ( | ) | ( | ) | ||||
| Accrued Interest | ||||||||
| Convertible notes payable, net | $ | $ | ||||||
| Principal balance | $ | $ | ||||||
| Accrued interest and damages, short term | ||||||||
| Unamortized Debt Discount | ( | ) | ||||||
| Short-term convertible notes payable, net | $ | $ | ||||||
| Convertible notes, long-term principal | $ | |||||||
| Accrued interest and damages, long-term | ||||||||
| Debt discounts, long-term | ( | ) | ( | ) | ||||
| Long-term convertible notes payable, net | $ | $ | ||||||
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Equipment | $ | $ | ||||||
| Furniture & fixtures | ||||||||
| Vehicles | ||||||||
| Property and Equipment, Gross | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, Net | $ | $ | ||||||
Depreciation
and amortization expense for the nine months ended September 30, 2022 and 2021 was $
11
NOTE 7 – INTANGIBLE ASSETS AND OTHER ASSETS
Intangible assets at September 30, 2022 and December 31, 2021 consisted of the following:
| Useful Life (yr) | September 30, 2022 | December 31, 2021 | ||||||||
| Domain Names | $ | $ | ||||||||
| Trademarks and copyrights | ||||||||||
| Intellectual Property, Patents | N/A | |||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
The trade-marks, copyrights and other intellectual property were acquired as part of the asset acquisition transaction with JanOne, as disclosed in Note 3.
At
September 30, 2022 and December 31, 2021 other assets consisted of $
NOTE 8 – 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, 2022:
| Quarter Ended September 30, | ||||
| 2022 | ||||
| Derivative liability balance, December 31, 2021 | $ | |||
| Fair value on the date of issuance of new derivatives | ||||
| Reclassification to Additional Paid-In Capital | ( | ) | ||
| Change in derivative liability during the period | ( | ) | ||
| Derivative liability balance, September 30, 2022 | $ | |||
The table below represents the average assumptions used in valuing the derivative liability at September 30, 2022:
| Quarter Ended September 30, |
||||
| 2022 | ||||
| Expected life in years | ||||
| Stock price volatility | % | |||
| Risk free interest rate | % | |||
| Expected dividends | ||||
| Forfeiture rate | ||||
12
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, 2022 and December 31, 2021 there were
$
The results of operations of our discontinued restaurant for the three and nine months ended September 30, 2022 and 2021, included in the consolidated statements of operations as discontinued operations, consisted of no operations for the three and nine months ended September 30, 2022 and 2021.
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. As of December 31, 2020, all of our games have been removed from the game stores and the Company 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.
The assets and liabilities of our discontinued digital media operations as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Assets: | ||||||||
| Accounts receivable, net | $ | $ | ||||||
| Total Assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Total Liabilities | $ | $ | ||||||
The results of operations of our discontinued digital media operations for the nine months ended September 30, 2022 and 2021, included in the consolidated statements of operations as discontinued operations, consisted of the following:
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Revenues: | $ | $ | ||||||
| Expenses | ||||||||
| Other general and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ||||||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ||||||
| Write down of assets | ( | ) | ||||||
| Loss on discontinued operations | $ | $ | ( | ) | ||||
SPYR APPS, LLC
On February 2, 2022, the Company filed Articles of dissolution with the Nevada Secretary of State dissolving SPYR APPS, LLC.
13
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As
of September 30, 2022 and December 31, 2021, the Company had accounts payable and accrued liabilities of $2,057,000 and $
NOTE 11 – DEBT DISCOUNTS
As
of September 30, 2022 and December 31, 2021, the Company had debt discounts of $
NOTE 12 – 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 Ares Capital, Inc. (“Ares”) dated September 30,
2020. Pursuant to the agreement, Ares agreed to invest up to $
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 $
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:
14
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 Five Hundred Thousand Dollars ($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 and December 31, 2019 and was recorded as litigation settlement costs on the consolidated statements of operations for the year ended December 31, 2019.
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.
On March 15, 2022, the Company and Collier Investments, LLC entered into a Warrant Cancellation Agreement. On May 22, 2018, the Company issued a five year warrant to Collier to purchase 200,000 shares of common stock, adjustable in price and amount for dilutive issuances. The Company and Collier agreed to cancel the warrant in exchange for the Company issuing Collier 2,000,000 shares of common stock.
Judgments
On
or about January 24, 2019,
15
Employment Agreements
On December 31, 2021, the Company terminated its employment agreements with James R. Thompson and Jennifer D. Duettra.
Pursuant
to termination agreements, the Company is liable for unpaid wages and benefits to Ms. Duettra and Mr. Thompson of $
In
settlement of constructive termination under Ms. Duettra and Mr. Thompson’s employment agreements, the Company agreed to issue
On
February 7, 2022, the Company entered into settlement agreements with Harald Zink, Richard Kelly Clark, and Misty Seals to settle
accrued wages. The Company settled $
NOTE 13 – EQUITY TRANSACTIONS
Common Stock:
Nine Months Ended September 30, 2022
During the nine months ended September 30, 2022, the Company issued shares of restricted common stock to Richard Kelly Clark for $ in compensation from the previous year, recorded as common stock to be issued as of December 31, 2021.
During the nine months ended September 30, 2022, the Company also issued common shares for outside consulting with a fair value of $.
During
the nine months ended September 30, 2022, the Company also issued common shares for settlements to Collier Investments,
and separately with Richard Kelly Clark, Harald Zink, and Misty Seals with an aggregate fair market value of $
During
the nine months ended September 30, 2022, the company also issued common shares in conversion of $
In June 2022, the Company issued shares of unregistered restricted common stock to JanOne for the acquisition of Geotraq as discussed in Note 4.
In
February 2022, the Company agreed to issue shares in director compensation, with a fair value of $
16
Nine Months Ended September 30, 2021
During the nine months ended September 30, 2021, the Company committed an aggregate of shares of restricted common stock to an independent contractor with a total fair value of $for services rendered. The shares, once issued, are non-refundable and deemed earned upon issuance. As a result, the Company accrued the entire $ as of September 30, 2021. The shares agreed upon were valued as of September 20, 2021, 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 committed an aggregate of shares of restricted common stock to directors with a total fair value of $ for services rendered. The shares, once issued, are non-refundable and deemed earned upon issuance. As a result, the Company accrued the entire $ 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 shares of restricted common stock to employees and directors with a total fair value of $ for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $ 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 shares of registered common stock to third party service providers with a total fair value of $. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $ 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 shares of restricted common stock to third party service providers with a total fair value of $. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $ 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 shares of common stock with a total fair value of $ 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 $ upon issuance.
Options:
The following table summarizes common stock options activity:
| Options | Weighted Average Exercise Price | |||||||
| December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Outstanding, September 30, 2022 | $ | |||||||
| Exercisable, September 30, 2022 | $ | |||||||
17
The weighted average exercise prices, remaining lives for options granted, and exercisable as of September 30, 2022 were as follows:
| Outstanding Options | Exercisable Options | |||||||||||||||||
| Options Exercise Price Per Share | Shares | Life (Years) | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
| $1.00 | $ | $ | ||||||||||||||||
| $1.50 | $ | $ | ||||||||||||||||
| $ | $ | |||||||||||||||||
At September 30, 2022, the Company’s closing stock price was $ per share. As all outstanding options had an exercise price greater than $0.01 per share, there was intrinsic value of the options outstanding at September 30, 2022.
Warrants:
The following table summarizes common stock warrants activity:
| Warrants | Weighted Average Exercise Price | |||||||
| Outstanding, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| Cancelled | ||||||||
| Outstanding, September 30, 2022 | $ | |||||||
| Exercisable, September 30, 2022 | $ | |||||||
The weighted average exercise prices, remaining lives for warrants granted, and exercisable as of September 30, 2022, were as follows:
| Outstanding and Exercisable Warrants | |||||||||
| Warrants Exercise Price Per Share | Shares | Life (Years) | |||||||
| $ | – | ||||||||
| $ | – | ||||||||
| $ | |||||||||
Shares Reserved:
At September 30, 2022, the Company has reserved shares of common stock in connection with convertible notes or warrants.
NOTE 14 – SUBSEQUENT EVENTS
On
October 17, 2022, the Company issued a convertible promissory note to Brown Stone Capital, LP in the amount of $
Subsequent to September 30, 2022, the Company issued a total of shares for services rendered.
18
| ITEM 2. | 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 Condensed Consolidated Financial Statements and supplementary data referred to in this Form 10-Q.
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-Q that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-Q is as of September 30, 2020, and we undertake no duty to update this information.
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.
19
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2022 TO 2021
The consolidated results of continuing operations for the three months ended September 30, 2022 and 2021 are as follows:
| Three Months Ended September 30, 2022 | Applied Magix | Corporate | Consolidated | |||||||||
| Revenues | $ | 1,000 | $ | - | $ | 1,000 | ||||||
| Cost of goods sold | (1,000 | ) | - | (1,000 | ) | |||||||
| Labor and related expenses | (15,000 | ) | 511,000 | 496,000 | ||||||||
| Rent | (4,000 | ) | (2,000 | ) | (6,000 | ) | ||||||
| Depreciation and amortization | (3,000 | ) | (73,000 | ) | (76,000 | ) | ||||||
| Professional fees | - | (637,000 | ) | (637,000 | ) | |||||||
| Research and development | - | - | - | |||||||||
| Other General and Administrative | (5,000 | ) | (25,000 | ) | (30,000 | ) | ||||||
| Operating loss | (27,000 | ) | (226,000 | ) | (253,000 | ) | ||||||
| Interest Expense | - | (615,000 | ) | (615,000 | ) | |||||||
| Amortization of debt discounts | - | (251,000 | ) | (251,000 | ) | |||||||
| Other Income | - | 1,000 | 1,000 | |||||||||
| Change in value of derivative liability | - | 185,000 | 185,000 | |||||||||
| Other Income (Expense) | - | (680,000 | ) | (680,000 | ) | |||||||
| Loss from continuing operations | $ | (27,000 | ) | $ | (906,000 | ) | $ | (933,000 | ) | |||
| For the Three Months Ended September 30, 2021 | Applied Magix | Corporate | Consolidated | |||||||||
| Revenues | $ | - | $ | - | $ | - | ||||||
| Cost of goods sold | - | - | - | |||||||||
| Labor and related expenses | (127,000 | ) | (450,000 | ) | (577,000 | ) | ||||||
| Rent | (4,000 | ) | (1,000 | ) | (5,000 | ) | ||||||
| Depreciation and amortization | (1,000 | ) | (2,000 | ) | (3,000 | ) | ||||||
| Professional fees | (4,000 | ) | (39,000 | ) | (43,000 | ) | ||||||
| Research and development | - | - | - | |||||||||
| Other general and administrative | (86,000 | ) | (47,000 | ) | (133,000 | ) | ||||||
| Operating loss | (222,000 | ) | (539,000 | ) | (761,000 | ) | ||||||
| Interest Expense | - | (185,000 | ) | (185,000 | ) | |||||||
| Change in Value of derivative liability | - | (164,000 | ) | (164,000 | ) | |||||||
| Loss on Disposition of Assets | - | (1,000 | ) | (1,000 | ) | |||||||
| Gain on Settlement of Debt | - | 498,000 | 498,000 | |||||||||
| Loss on Conversion of Debt | - | (832,000 | ) | (832,000 | ) | |||||||
| Gain on Forgiveness of Debt | - | 73,000 | 73,000 | |||||||||
| Other expense | - | (611,000 | ) | (611,000 | ) | |||||||
| Loss from continuing operations | $ | (222,000 | ) | $ | (1,150,000 | ) | $ | (1,372,000 | ) | |||
20
For the three months ended September 30, 2022 the Company had a loss from continuing operations of $933,000 compared to a loss from continuing operations of $1,372,000 for the three months ended September 30, 2021. This change is due primarily to decreases in labor and related expenses and professional fees.
Total Revenues – For the three months ended September 30, 2022 and 2021, the Company had $1,000 and $0 of revenue, respectively.
The Company had $1,000 and $0 cost of goods sold during the three months ended September 30, 2022 and 2021, respectively.
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 three months ended September 30, 2022 the company had total labor and related gain of $496,000, which was due to the cancellation of common stock to be issued. For the three months ended September 30, 2021 the company had total labor and related expenses of $577,000.
The cost of rent increased to $6,000 for the three months ended September 30, 2022 from $5,000 for the three months ended September 30, 2021 for the Company’s virtual office space.
Professional fees were $637,000 for the three months ended September 30, 2022, compared to $43,000 for the three months ended September 30, 2021. Of the $637,000, $190,000 was paid in cash, $140,000 was accrued as future payables, and $307,000 was paid in restricted stock recorded at fair value.
Other general and administrative expenses decreased to $30,000 for the three months ended September 30, 2022 compared $133,000 to the three months ended September 30, 2021.
Interest expense increased to $615,000 for the three months ended September 30, 2022 compared to $185,000 for the three months ended September 30, 2021, primarily due to increased issuances of convertible notes, and amortized debt discount of $251,000 and $0 during the three months ended September 30, 2022 and 2021, respectively.
The Company had gains on settlement of debt and forgiveness of debt of $498,000 and $73,000, respectively, and losses on disposition of assets and conversion of debt of $1,000 and $832,000, respectively, for the three months ended September 30, 2021.
The Company recognized a gain on the change in value of a derivative liability related to its long-term convertible notes payable in the amount of $185,000 for the three months ended September 30, 2022, compared to a loss of $164,000 for the three months ended September 30, 2021.
21
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2022 TO 2021
The consolidated results of continuing operations for the nine months ended September 30, 2022 and 2021 are as follows:
| Nine Months Ended September 30, 2022 | Applied Magix | Corporate | Consolidated | |||||||||
| Revenues | $ | 2,000 | $ | - | $ | 2,000 | ||||||
| Cost of goods sold | (1,000 | ) | - | (1,000 | ) | |||||||
| Labor and related expenses | (213,000 | ) | (205,000 | ) | (418,000 | ) | ||||||
| Rent | (14,000 | ) | (4,000 | ) | (18,000 | ) | ||||||
| Depreciation and amortization | (5,000 | ) | (126,000 | ) | (131,000 | ) | ||||||
| Professional fees | (12,000 | ) | (2,142,000 | ) | (2,154,000 | ) | ||||||
| Research and development | (33,000 | ) | - | (33,000 | ) | |||||||
| Other general and administrative | (11,000 | ) | (43,000 | ) | (54,000 | ) | ||||||
| Operating loss | (287,000 | ) | (2,520,000 | ) | (2,807,000 | ) | ||||||
| Interest Expense | - | (2,197,000 | ) | (2,197,000 | ) | |||||||
| Amortization of debt discounts | - | (471,000 | ) | (471,000 | ) | |||||||
| Other Income | - | 1,000 | 1,000 | |||||||||
| Loss on conversion of debt | - | (32,000 | ) | (32,000 | ) | |||||||
| Loss on settlement | - | (30,000 | ) | (30,000 | ) | |||||||
| Loss on issuance of common stock | - | (16,000 | ) | (16,000 | ) | |||||||
| Settlement expense | - | (98,000 | ) | (98,000 | ) | |||||||
| Change in value of derivative liability | - | 1,120,000 | 1,120,000 | |||||||||
| Other Income (Expense) | - | (1,723,000 | ) | (1,723,000 | ) | |||||||
| Loss from continuing operations | $ | (287,000 | ) | $ | (4,243,000 | ) | $ | (4,530,000 | ) | |||
| For the Nine Months Ended September 30, 2021 | Applied Magix | Corporate | Consolidated | |||||||||
| Revenues | $ | 1,000 | $ | - | $ | 1,000 | ||||||
| Cost of goods sold | (2,000 | ) | - | (2,000 | ) | |||||||
| Labor and related expenses | (330,000 | ) | (1,022,000 | ) | (1,352,000 | ) | ||||||
| Rent | (10,000 | ) | (43,000 | ) | (53,000 | ) | ||||||
| Depreciation and amortization | (5,000 | ) | (5,000 | ) | (10,000 | ) | ||||||
| Professional fees | (16,000 | ) | (590,000 | ) | (606,000 | ) | ||||||
| Research and development | (9,000 | ) | - | (9,000 | ) | |||||||
| Other general and administrative | (151,000 | ) | (83,000 | ) | (234,000 | ) | ||||||
| Operating loss | (522,000 | ) | (1,743,000 | ) | (2,265,000 | ) | ||||||
| Interest Expense | - | (529,000 | ) | (529,000 | ) | |||||||
| Gain on disposition of assets | - | 4,000 | 4,000 | |||||||||
| Change in Value of derivative liability | - | (336,000 | ) | (336,000 | ) | |||||||
| Gain on Settlement of Debt | - | 498,000 | 498,000 | |||||||||
| Loss on Conversion of Debt | - | (832,000 | ) | (832,000 | ) | |||||||
| Gain on Forgiveness of Debt | - | 73,000 | 73,000 | |||||||||
| Unrealized gain on trading securities | - | 1,000 | 1,000 | |||||||||
| Other expense | - | (1,121,000 | ) | (1,121,000 | ) | |||||||
| Loss from continuing operations | $ | (522,000 | ) | $ | (2,864,000 | ) | $ | (3,386,000 | ) | |||
22
Results of Operations
For the nine months ended September 30, 2022 the Company had a loss from continuing operations of $4,530,000 compared to a loss from continuing operations of $3,386,000 for the nine months ended September 30, 2021. This change is due primarily to increases in professional fees related to consulting agreements which were offset by a decrease in labor and related expenses.
Total Revenues - For the nine months ended September 30, 2022 and 2021, the Company had total revenue of $2,000 and $1,000, respectively. This is due to the Company’s launch of its Applied Magix sales efforts during the current period.
Cost of goods sold was $1,000 and $2,000 during the nine months ended September 30, 2022 and 2021, respectively, which included the costs of inventory, inbound freight, duty and customs charges for the items sold during the period and inventory write downs recognized during the period.
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 nine months ended September 30, 2022 the company had total labor and related expenses of $418,000 with $163,000 being settled in cash and $255,000 in accrued salaries. For the nine months ended September 30, 2021 the company had total labor and related expenses of $1,352,000 with $350,000 being settled in cash, $442,000 in accrued salaries, and $560,000 being paid in restricted stock recorded at fair value.
The cost of rent decreased to $18,000 for the nine months ended September 30, 2022 from $53,000 for the nine months ended September 30, 2021. This change is due primarily to lease termination of lease agreement and payment agreement in 2021.
The Company In addition, 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. Under the lease, the Company pays monthly rent of $1,600.
Professional fees were $2,154,000 for the nine months ended September 30, 2022, compared to $606,000 for the nine months ended September 30, 2021. Of the $2,154,000, $776,000 was paid in cash, $366,000 was accrued as future payables, and $1,012,000 was paid in restricted stock recorded at fair value.
Research and development expenses were $33,000 for the nine months ended September 30, 2022, compared to $9,000 for the nine months ended September 30, 2021.
Other general and administrative expenses decreased to $54,000 for the nine months ended September 30, 2022 compared $234,000 to the nine months ended September 30, 2021.
Interest expense increased to $2,197,000 for the nine months ended September 30, 2022 compared to $529,000 for the nine months ended September 30, 2021, primarily due to increased issuances of convertible notes and initial losses on derivative liability issuances on those convertible notes, and amortized debt discount of $4711,000 and $0 during the nine months ended September 30, 2022 and 2021, respectively.
The Company recognized a loss on conversion of debt of $32,000, a loss on settlement of $30,000, a loss on issuance of common stock of $16,000, $1,000 other income and settlement expense of $98,000 during the nine months ended September 30, 2022. The Company had gains on settlement of debt and forgiveness of debt of $498,000 and $73,000, respectively, and losses on disposition of assets and conversion of debt of $1,000 and $832,000, respectively, for the nine months ended September 30, 2021.
The Company recognized a gain on the change in value of a derivative liability related to its long-term convertible notes payable in the amount of $1,120,000 for the nine months ended September 30, 2022, compared to a loss of $336,000 for the nine months ended September 30, 2021.
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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 nine months ended September 30, 2022 of $4,530,000 and utilized cash in operations of $1,111,000. As of September 30, 2022, the Company had current assets of $126,000, which included cash and cash equivalents of $7,000, prepaid expenses of $4,000 and inventory of $115,000.
During the nine months ended September 30, 2022, the Company has met its capital requirements through proceeds from the Company’s issuance of long term convertible notes.
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.
Operating Activities - For the nine months ended September 30, 2022, the Company used cash in operating activities of $1,111,000. For the nine months ended September 30, 2021, the Company used cash in operating activities of $1,262,000. Operating activities consist of corporate overhead and development of Applied Magix products. Increases are due to increases in cash-paid operating expenses. See the above results of operations discussion for more details.
Investing Activities - During the nine months ended September 30, 2022, the Company received no income from investing activities. During the nine months ended September 30, 2021, the Company purchased property and equipment sold property and equipment for $10,000.
Financing Activities - During the nine months ended September 30, 2022, the Company borrowed $910,000 from long term convertible notes, $269,000 from short-term convertible notes and repaid short-term convertible notes of $30,000 and repaid notes payable of $38,000. During the nine months ended September 30, 2021, the Company borrowed $501,000 from related parties, $198,000 from long term convertible notes payable and $73,000 from the U.S. Small Business Administration pursuant to the Paycheck Protection Program.
Government Regulations - The Company is subject to all pertinent Federal, State, and Local 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.
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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the quarterly and annual 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.
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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. 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.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Management of the Company is responsible for maintaining disclosure controls and procedures that are designed to ensure that financial information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the timeframes specified in the Securities and Exchange Commission’s rules and forms, consistent with Items 307 and 308 of Regulation S-K.
In addition, the disclosure controls and procedures must ensure that such financial information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
As of September 30, 2022, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer, and other persons carrying out similar functions for the Company. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (Revised 2013) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that during the period covered by this report, such disclosure controls and procedures were not effective, due to certain identified material weaknesses. These identified material weaknesses include, (i) insufficient accounting staff, (ii) inadequate segregation of duties, (iii) limited checks and balances in processing cash and other transactions, and (iv) the lack of independent audit committee.
The Company is committed to improving its disclosure controls and procedures and the remediation of identified control weaknesses. As capital becomes available, Management plans to increase the accounting and financial reporting staff, add independent directors to the Board of Directors and establish an independent audit committee. We cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements, nor can we make assurances that additional material weaknesses in its internal control over financial reporting will not be identified in the future.
The Company continues to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together with other complex areas, are subject to multiple reviews by accounting personnel. In addition, the Company evaluates and assesses its internal controls and procedures regarding its financial reporting as necessary and on an on-going basis.
Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of the prevention or detection of misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls Over Financial Reporting
The Company has no reportable changes to its internal controls over financial reporting for the period covered by this report.
The Company will continually enhance and test its internal controls over financial reporting on a continuing basis. Additionally, the Company’s management, under the control of its Chief Executive Officer and Chief Financial Officer, will increase its review of its disclosure controls and procedures on an ongoing basis. Finally, the Company plans to designate, in conjunction with its Chief Financial Officer, individuals responsible for identifying reportable developments and the process for resolving compliance issues related to them. The Company believes these actions will focus necessary attention and resources in its internal accounting functions.
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PART II - OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
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 Five Hundred Thousand Dollars ($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 March 31, 2020 and December 31, 2019 and was recorded as litigation settlement costs on the consolidated statements of operations on the Company’s form 10K for the year ended December 31, 2019.
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.
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 $85,000 plus accrued interest and attorneys’ fees has been reported as part of accounts payable and accrued liabilities. The balance due as of September 30, 2022 and December 31, 2021 was approximately $100,000.
| ITEM 1A. | RISK FACTORS |
Not applicable to smaller reporting companies.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable
| ITEM 5. | OTHER INFORMATION |
None.
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| ITEM 6. | EXHIBITS |
The following exhibits are included as part of this report:
Exhibit Number |
Exhibit Description | |
| 3.1 | Articles of Incorporation (1) | |
| 3.2 | By-laws (1) | |
| 3.3 | Amended Articles of Incorporation (1) | |
| 10.2 | Registration Rights Agreement (1) | |
| 14 | Code of Ethics (1) | |
| 21 | Subsidiaries of the Company (1) | |
| 31** | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32*** | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS** | XBRL Instance Document | |
| 101.SCH** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
| ** | Filed herewith |
| *** | Furnished Herewith |
| (1) | Incorporated by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 18, 2022
| SPYR, INC. | ||
| By: | /s/ Tim Matula | |
| Tim Matula | ||
| President & Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Trang Nguyen | |
| Trang Nguyen | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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