UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2016

 

or

 

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

EXCHANGE ACT

 

For the transition period from __________ to __________

 

Commission file number 33-20111

 

SPYR, INC.
(Exact name of registrant as specified in its charter)

 

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

 

4643 S. Ulster St., Suite 1510, Denver, CO 80237

(Address of principal executive offices)

 

(303) 991-8000

(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 Yes þ No ¨

 

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). Yes þ No ¨

 

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

 

Large accelerated filer         ¨     Accelerated filer                  ¨      
Non-accelerated filer           ¨      Smaller reporting company    þ

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 2, 2016, there were 153,025,627 shares of the Registrant's common stock, par value $0.0001, issued, 107,636 shares of Series A Convertible preferred stock (convertible to 26,909,028 common shares), par value $0.0001, and 20,000 shares of Series E Convertible preferred stock (convertible to 376,790 common shares), par value $0.0001.

 

 

 1 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
       
    June 30,
2016
    December 31,
2015
 
ASSETS   (Unaudited)      
Current Assets:          
   Cash and cash equivalents  $5,014,010   $6,903,887 
   Accounts receivable, net   22,493    7,701 
   Inventory   10,205    12,957 
   Prepaid expenses   99,270    55,533 
   Capitalized licensing rights, net   75,000    80,000 
   Trading securities, at market value   544,266    324,444 
          Total Current Assets   5,765,244    7,384,522 
           
   Property and equipment, net   263,899    274,886 
   Intangible assets, net   19,506    21,307 
   Deferred acquisition costs   471,574    —   
   Other assets   22,299    22,299 
TOTAL ASSETS  $6,542,522   $7,703,014 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
LIABILITIES          
Current Liabilities:          
   Accounts payable and accrued liabilities  $79,420   $104,871 
   Related party accounts payable   —      7,506 
          Total Current Liabilities   79,420    112,377 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY          
   Preferred stock, $0.0001 par value, 10,000,000 shares authorized          
      107,636 Class A shares issued and outstanding          
        as of June 30, 2016 and 2015   11    11 
     20,000 Class E shares issued and outstanding          
        as of June 30, 2016 and 2015   2    2 
   Common Stock, $0.0001 par value, 250,000,000 shares authorized          
        153,000,627 and 151,508,127 shares issued and outstanding          
        as of June 30, 2016 and 2015   15,300    15,151 
   Additional paid-in capital   32,093,951    31,269,822 
   Accumulated deficit   (25,646,162)   (23,694,349)
          Total Stockholders’ Equity   6,463,102    7,590,637 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $6,542,522   $7,703,014 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 2 

 

 

 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
             
   For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
   2016  2015  2016  2015
             
Revenues  $374,343   $441,207   $706,732   $773,128 
Cost of sales   95,136    102,577    192,620    203,165 
          Gross Margin   279,207    338,630    514,112    569,963 
                     
Expenses                    
   Labor and related expenses   337,702    246,990    890,258    1,032,834 
   Rent   91,875    66,652    196,231    141,177 
   Depreciation and amortization   38,088    23,282    75,745    41,984 
   Professional fees   321,819    905,612    540,784    2,121,923 
   Other general and administrative   473,088    277,656    758,245    369,880 
          Total Operating Expenses   1,262,572    1,520,192    2,461,263    3,707,798 
          Operating Loss   (983,365)   (1,181,562)   (1,947,151)   (3,137,835)
                     
Other Income (Expense)                    
   Interest and dividend income   4,382    5,634    9,815    10,987 
   Unrealized gain (loss) on trading securities   (184,595)   35,169    (84,393)   (1,087,377)
   Gain (loss) on sale of marketable securities   25,148    (187,207)   74,410    (485,329)
          Total Other Expense   (155,065)   (146,404)   (168)   (1,561,719)
Loss from continuing operations   (1,138,430)   (1,327,966)   (1,947,319)   (4,699,554)
                     
   Loss from discontinued operations   —      (263,626)   (4,494)   (226,087)
                     
Net Loss  $(1,138,430)  $(1,591,592)  $(1,951,813)  $(4,925,641)
                     
Per Share Amounts                    
   Loss from continuing operations                    
      Basic and Diluted earnings per share  $(0.01)  $(0.01)  $(0.01)  $(0.03)
                     
   Loss on discontinued operations                    
      Basic and Diluted earnings per share  $—     $—     $—     $—   
                     
   Net Loss                    
      Basic and Diluted earnings per share  $(0.01)  $(0.01)  $(0.01)  $(0.03)
                     
Weighted Average Common Shares                    
      Basic and Diluted   152,564,198    152,958,754    152,838,539    151,115,970 
                     
The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 3 

 

 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2016
(Unaudited)
                            
   Preferred Stock        Additional      
    Class A    Class E    Common Stock    Paid-in    Accumulated      
    Shares    Amount    Shares    Amount    Shares    Amount    Capital    Deficit    Total 
Balance at December 31, 2015   107,636   $11    20,000   $2    151,508,127   $15,151   $31,269,822   $(23,694,349)  $7,590,637 
                                              
Common stock issued for employee compensation   —      —      —      —      1,325,000    133    199,379    —      199,512 
Common stock issued for professional fees   —      —      —      —      392,500    39    65,861    —      65,900 
Common stock issued for cash   —      —      —      —      100,000    10    18,990    —      19,000 
Fair value of options granted for acquisition option   —      —      —      —      —      —      471,574    —      471,574 
Common stock cancelled upon employee resignation   —      —      —      —      (325,000)   (33)   33    —      —   
Vesting of shares of common stock issued for services   —      —      —      —      —      —      68,292    —      68,292 
Net loss   —      —      —      —      —      —      —      (1,951,813)   (1,951,813)
Balance at June 30, 2016   107,636   $11    20,000   $2    153,000,627   $15,300   $32,093,951   $(25,646,162)  $6,463,102 
                                              
The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 

 4 

 

 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
   For the Six Months Ended
June 30,
   2016  2015
Cash Flows From Operating Activities:          
Net loss for the period  $(1,951,813)  $(4,925,641)
Adjustments to reconcile net loss to net cash used in operating activities:          
     Loss on discontinued operations   4,494    226,087 
     Depreciation and amortization   75,745    41,984 
     Common stock issued for employee compensation   199,512    856,388 
     Common stock issued for professional fees   69,900    1,340,477 
     Vesting of shares of common stock issued for services   68,292    —   
     Unrealized loss on trading securities   84,393    1,087,377 
     (Gain) loss on sale of trading securities   (74,410)   485,329 
     (Increase) decrease in accounts receivables   (14,792)   3,884 
     Decrease in inventory   2,752    —   
     (Increase) decrease in prepaid expenses   (43,737)   736 
     Increase (decrease) in accounts payable and accrued liabilities   (25,450)   50,401 
     Decrease in related party accounts payable   (7,506)   (270,000)
Net Cash Used in Operating Activities from Continuing Operations   (1,612,620)   (1,102,978)
Net Cash Used in Operating Activities from Discontinued Operations   (4,494)   (379,984)
Net Cash Used in Operating Activities   (1,617,114)   (1,482,962)
           
Cash Flows From Investing Activities:          
     Purchase of licensing rights   (10,000)   —   
     Purchases of trading securities   (510,000)   —   
     Proceeds from sale of trading securities   280,195    1,959,738 
     Purchase of property and equipment   (47,958)   (142,090)
     Purchase of intangible assets   —      (20,202)
Net Cash (Used in) Provided by Investing Activities   (287,763)   1,797,446 
           
Cash Flows From Financing Activities:          
     Proceeds from sale of common stock   15,000    —   
Net Cash Provided by Financing Activities   15,000    —   
           
Net increase (decrease) in Cash   (1,889,877)   314,484 
Cash and cash equivalents at beginning of period   6,903,887    6,994,180 
Cash and cash equivalents at end of period  $5,014,010   $7,308,664 
           
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:          
   Common stock options granted  $471,574   $—   
   Common stock issued for acquisition of Franklin Networks, Inc.  $—     $1,700,000 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 5 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2016 and 2015

(Unaudited)

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Statements

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

 

Organization

 

The Company was incorporated as Conceptualistics, Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its name to Eat at Joe’s, Ltd. In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March 12, 2015.

 

Nature of Business

 

The primary focus of SPYR, Inc. (the “Company”) is to act as a holding company and develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.

 

We currently own three operating subsidiaries, two in the digital technology industry and, one in the restaurant industry, each having their own particular focus.

 

Through our wholly owned subsidiaries, SPYR APPS, LLC and SPYR APPS Oy, we operate our mobile games and applications business. The focus of the SPYR APPS subsidiaries is the development and publication of our own mobile games as well as the publication of games developed by third-party developers.

 

Through our other wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we own and operate the restaurant “Eat at Joe’s” ®, which is located in the Philadelphia International Airport and has been in operations since 1997.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of SPYR, Inc. and its wholly-owned subsidiaries, SPYR APPS, LLC, a Nevada Limited Liability Company, and SPYR APPS, Oy, a Finnish Limited Liability Company, and E.A.J.: PHL, Airport Inc., a Pennsylvania corporation. Intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

 

The Company generates revenues from its wholly owned subsidiaries, which operate separate and distinct businesses. The following is a summary of our revenue recognition policies.

 

 6 

 

Through our wholly owned subsidiary SPYR APPS, LLC, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be downloaded through the app stores maintained by Apple and Google. The Company’s cross platform gaming application which can be played on personal computers, Facebook and mobile devices, can be downloaded from the internet and Facebook as well as through the app stores maintained by Apple, Google and Amazon. The Company receives revenue from sale of advertising provided with games and through in-app purchases. The Company also receives revenue from publishing agreements entered into during 2015 for one mobile game and one cross platform game. The Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured, which is typically after receipt of payment and delivery.

 

Though our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we generate revenue from the sale of food and beverage products through our restaurant. Revenue from the restaurant is recognized upon sale to a customer and receipt of payment.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of ASC 740 “Accounting for Income Taxes,” which requires a company to first determine whether it is more likely than not (which is defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

 

Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and cause a change in management's judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

 

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 fixed assets, intangible assets, amounts of potential liabilities and valuation of issuance of equity securities. Actual results could differ from those estimates.

 

Earnings (Loss) Per Share

 

The Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss) available to common stockholders by the weighted average number of common shares during the period. Diluted EPS reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest.

 

The basic and fully diluted shares for the three and six months ended June 30, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 154,166, Class A – 26,909,028, Class E – 365,738, Options - 3,750,000) would have had an anti-dilutive effect due to the Company generating a loss for the three and six months ended June 30, 2016.

 

 7 

 

The basic and fully diluted shares for the three and six months ended June 30, 2015 are the same because the inclusion of the potential shares (Non-vested Common – 395,833, Class A – 26,909,028, Class E – 175,039) would have had an anti-dilutive effect due to the Company generating a loss for the three and six months ended June 30, 2015.

 

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.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

 

The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3: Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, accounts receivable, inventory, prepaid expenses, and accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.

 

The Company’s trading securities are measured at fair value using level 1 fair values.

 

 8 

 

Software Licensing Costs

 

Software licensing costs pertains to non-refundable payments made to independent gaming software developers pursuant to licensing agreements executed in 2015. The payments are intended to assist gaming software developers in the marketing and further development of two gaming software applications.

 

Software licensing costs were $370,000 and $0 for the six months ended June 30, 2016 and 2015, respectively and was reflected as part of Other General and Administrative Expenses on the accompanying consolidated statements of operations.

 

Capitalized Licensing Rights

 

Capitalized licensing rights represent fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single product.

 

Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative factors.

 

As of December 31, 2015, the Company capitalized $80,000 as a result of the acquisition of licensing rights for two gaming applications. The Company estimates that the two gaming applications will have an estimated life ranging from two to five years, which approximates the term of the respective licenses.

 

During the period ended June 30, 2016, the Company capitalized an additional $10,000 and amortized $15,000. As of June 30, 2016, the unamortized capitalized licensing rights amounted to $75,000.

 

Deferred Acquisition Costs

 

The Company capitalizes all costs of intended acquisitions until such acquisitions occurs. If management determines that such acquisitions will not occur, the capitalized costs will be expensed.

 

Recent Accounting Standards

 

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 will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 9 

 

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.

 

NOTE 2 - TRADING SECURITIES

 

Trading securities are purchased with the intent of selling them in the short term. Trading securities are recorded at market value and the difference between market value and cost of the securities is recorded as an unrealized gain or loss in the statement of operations. Gains from the sales of such marketable securities will be utilized to fund payment of obligations and to provide working capital for operations and to finance future growth, including, but not limited to: conducting our ongoing business, conducting strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and research and development and implementation of the Company’s business plans generally.

 

The Company’s securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value based on quoted market price (level 1) on the balance sheet in current assets, with the change in fair value during the period included in earnings.

 

Investments in securities are summarized as follows:

   Fair Value at     Proceeds from  Gain on  Unrealized  Fair Value at
Year  Beginning of Year  Purchases  Sale  Sale  Loss  June 30, 2016
 2016   $324,444   $510,000   $(280,195)  $74,410   $(84,393)  $544,266 

 

Realized gains and losses are determined on the basis of specific identification. During the six months ended June 30, 2016 and 2015, sales proceeds and gross realized gains and losses on trading securities were:

 

    June 30,
2016
    June 30,
2015
 
           
  Sales proceeds  $280,195   $1,959,738 
  Gross realized (losses)  $—     $(485,329)
  Gross realized gains   74,410    —   
  Gain (loss) on sale of trading securities  $74,410   $(485,329)

 

 

The following table discloses the assets measured at fair value on a recurring basis and the methods used to determine fair value:

 

        Fair Value Measurements at Reporting Date Using
        Quoted Prices   Significant   Significant
        in Active   Other   Unobservable
    Fair Value at   Markets   Observable Inputs   Inputs
    June 30, 2016   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                544,266    $                544,266    $                          -       $                          -   
Money market funds                        42,734                        42,734                                -                                   -   
Total    $                587,000    $                587,000    $                          -       $                          -   

 

 10 

 

 

        Fair Value Measurements at Reporting Date Using
        Quoted Prices   Significant   Significant
        in Active   Other   Unobservable
    Fair Value at   Markets   Observable Inputs   Inputs
    December 31, 2015   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                324,444    $                324,444    $                          -       $                          -   
Money market funds                      332,706                      332,706                                -                                   -   
Total    $                657,150    $                657,150    $                          -       $                          -   

 

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

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   June 30,
2016
(unaudited)
  December 31,
2015
Equipment  $151,219   $131,821 
Furniture & fixtures   115,503    86,943 
Leasehold improvements   381,450    381,450 
    648,172    600,214 
Less: accumulated depreciation and amortization   (384,273)   (325,328)
   Property and Equipment, Net  $263,899   $274,886 

 

 

Depreciation and amortization expense for the six months ended June 30, 2016 and 2015 was $58,945 and $41,984, respectively.

 

NOTE 4 – EQUITY TRANSACTIONS

 

Common Stock:

 

During the six months ended June 30, 2016, the Company issued an aggregate of 1,325,000 shares of common stock to employees with a total fair value of $199,512 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $199,512 upon issuance. The shares issued were valued at the date of the respective agreements.

 

During the six months ended June 30, 2016, the Company issued an aggregate of 392,500 shares of restricted common stock to consultants with a total fair value of $65,900. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $65,900 upon issuance. The shares issued were valued at the date of the respective agreements.

 

During the six months ended June 30, 2016, the Company issued an aggregate of 100,000 shares of restricted common stock to consultants for cash of $15,000. The common shares had a fair value of $19,000 at the date of grant, and as a result, the Company reflected an expense of $4,000 upon issuance. The shares issued were valued at the date of the respective agreements.

 

Common Stock with Vesting Terms:

 

In August 2015, the Company granted and issued 100,000 shares of its restricted common stock to an employee pursuant to

an employment agreement. The 100,000 shares vest over a period of one year with a fair value of $37,000 at the date of grant.

 11 

 

In February 2015, the Company granted and issued 500,000 shares of its restricted common stock to a consultant pursuant to a consulting agreement. The 500,000 shares are forfeitable and are deemed earned upon completion of service over a period of twenty four months. The Company recognizes the fair value of these shares as they vest.

 

During the six months ended June 30, 2016, 175,001 of these shares vested and as a result, the Company recognized compensation cost of $68,292. As of June 30, 2016, total unvested shares totaled 154,166 shares with unearned compensation costs of $42,458 which will be recognized in the remainder of fiscal year 2016 and in fiscal 2017.

 

When calculating basic net income (loss) per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date.

 

The following table summarizes common stock with vesting terms activity:

 

          Weighted
          Average
    Number of     Grant Date
    Shares     Fair Value
Non-vested, December 31, 2015 329,167    $ 0.47
  Granted -     -
  Vested (175,001)     0.46
  Forfeited -     -
Non-vested, June 30, 2016 154,166    $ 0.49
           

 

Options

 

In June 2016, the Company was granted an exclusive option to purchase all the assets of a game developer and licensor, MMOJoe USA, Inc. (“MMOJoe”) for $5,000,000 payable in cash and issuance shares of common stock valued at $10,000,000. The purchase option will expire on December 31, 2020. In exchange for this purchase option, the Company granted MMOJoe stock options to purchase an aggregate of 3.75 million shares of common stock with a fair value of $471,574 using the Black-Scholes Option Pricing Model. The stock options are fully vested, exercisable at a price per share of $1.00, $2.50 and $5.00 and will expire starting in December 31, 2017 through December 31, 2019.

 

The Company deferred the entire fair value of $471,574 at grant date based upon the Company’s determination that the acquisition of MMOJoe will occur on or before December 31, 2016, otherwise, the amount will be reflected as an expense if the acquisition is deemed not to occur. Once the acquisition of MMOJoe occurs, the $471,574 will be included as part of its acquisition cost. The deferred fair value of $471,574 was reported as Deferred acquisition costs in the accompanying Consolidated Balance Sheets at June 30, 2016.

 

The following table summarizes common stock options activity:

 

          Weighted
          Average
    Options     Exercise Price
December 31, 2015   $
  Granted 3,750,000      3.97 
  Exercised    
  Forfeited    
Outstanding June 30, 2016 3,750,000      3.97 
Exercisable, June 30, 2016 3,750,000    $ 3.97 
           

 

 12 

 

The weighted average exercise prices, remaining lives for options granted, and exercisable as of June 30, 2016, were as follows:

 

                     
    Outstanding Options       Exercisable Options
Options           Weighted       Weighted
Exercise Price       Life   Average  Exercise       Average  Exercise
Per Share   Shares   (Years)   Price   Shares   Price
$1.00   500,000   1.5   $1.00   500,000   $1.00
$2.50   750,000   2.5   $2.50   750,000   $2.50
$5.00   2,500,000   3.5   $5.00   2,500,000   $5.00
    3,750,000   3.03   $3.97   3,750,000   $3.97
                     

 

At June 30, 2016, the Company’s closing stock price was $0.27 per share. As all outstanding options had an exercise price greater than $0.27 per share, the aggregate intrinsic value of the options outstanding at June 30, 2016 was $0.

 

NOTE 5 – SEGMENT REPORTING

 

The Company operated in one segment as of the beginning of 2015, but concurrent with the organization of SPYR APPS, LLC on March 24, 2015, it operates in two segments: Digital Media and Restaurant, which provide different products or services.

 

Digital Media Segment - Through our wholly owned subsidiaries SPYR APPS, LLC and SPYR APPS Oy, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app purchases. The Company also recognizes revenues from fees received pursuant to licensing rights acquired during 2015 for two gaming applications.

 

Restaurant Segment - Through our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we own and operate one “American Diner” theme restaurant called “Eat at Joe’s ® located in the Philadelphia International Airport. Eat at Joe’s menu includes a variety of dishes including omelets, waffles and hotcakes, sandwiches, hot dogs, burgers, traditional Philly Steak sandwiches, custom wraps, fresh salads and a full complement of beverages and deserts, all made with top quality, fresh ingredients and all prepared to order.

 

Revenue and expenses earned and charged between segments are eliminated in consolidation. Corporate expenses, interest income, interest expense, gains and losses on trading or marketable securities and income taxes are managed on a total company basis.

 

Information related to these segments is as follows:

 

REPORTABLE SEGMENTS
SIX MONTHS ENDED JUNE 30, 2016
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $64,919   $641,813   $—     $706,732 
Cost of sales   —      192,620    —      192,620 
General and administrative   823,586    468,167    1,093,765    2,385,518 
Depreciation and amortization   15,293    37,001    23,451    75,745 
Operating loss  $(773,960)  $(55,975)  $(1,117,216)  $(1,947,151)
                     
                     
Current assets  $153,376   $270,966   $5,340,902   $5,765,244 
Property and equipment, net   6,426    59,723    197,750    263,899 
Intangible assets   —      —      19,506    19,506 
Deferred acquisition costs   471,574    —      —      471,574 
Other non-current assets   —      16,610    5,689    22,299 
Total assets  $631,376   $347,299   $5,563,847   $6,542,522 

 

 13 

 

 

 

REPORTABLE SEGMENTS
SIX MONTHS ENDED JUNE 30, 2015
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $—     $773,128   $—     $773,128 
Cost of sales   —      203,165    —      203,165 
General and administrative   94,571    421,918    3,149,325    3,665,814 
Depreciation and amortization   —      36,574    5,410    41,984 
Operating Loss  $(94,571)  $111,471   $(3,154,735)  $(3,137,835)
                     
                     
Current assets  $50,911   $234,402   $9,457,434   $9,742,747 
Property and equipment, net   —      134,591    118,590    253,181 
Intangible assets   —      —      25,202    25,202 
Other non-current assets   —      16,610    5,689    22,299 
Total assets  $50,911   $385,603   $9,606,915   $10,043,429 

 

 14 

 

 

REPORTABLE SEGMENTS
THREE MONTHS ENDED JUNE 30, 2016
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $29,592   $344,751   $—     $374,343 
Cost of sales   —      95,136    —      95,136 
General and administrative   489,777    229,677    505,030    1,224,484 
Depreciation and amortization   7,793    18,280    12,015    38,088 
Operating income (loss)  $(467,978)  $1,658   $(517,045)  $(983,365)

  

REPORTABLE SEGMENTS
THREE MONTHS ENDED JUNE 30, 2015
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $—     $441,207   $—     $441,207 
Cost of sales   —      102,577    —      102,577 
General and administrative   94,571    147,819    1,254,520    1,496,910 
Depreciation and amortization   —      18,777    4,505    23,282 
Operating Loss  $(94,571)  $172,034   $(1,259,025)  $(1,181,562)

  

NOTE 6 – DISCONTINUED OPERATIONS

 

On February 23, 2015 the Company entered into an agreement whereby, the Company issued an aggregate of 2.5 million shares of its restricted common stock valued at $1,700,000, in exchange for all of the issued and outstanding shares of Franklin Networks, Inc., a Tennessee corporation (“Franklin”), an internet company that began operations in September 2014. The acquisition of Franklin had been accounted for as a purchase and the operations of Franklin have been consolidated since the date of the acquisition. The $1.7 million purchase price was allocated based upon the fair value of the acquired assets which consisted of intangible assets of $671,131, deferred tax liability of $117,741 and goodwill of $1,146,610, as determined by management with the assistance of an independent valuation firm.

 

On December 31, 2015, the Company and the former owners of Franklin agreed to unwind the agreement and return the original consideration exchanged in the contract. Pursuant to ASC 2014-08, Reporting of Discontinued Operations, the Company reported the gain (loss) from operations as a gain (loss) from discontinued operations in the accompanying statements of operations since the Company considered its decision to rescind the Franklin acquisition as a strategic shift that has a major effect in the Company’s operations and financial results.

 

During the six months ended June 30, 2016, the Company incurred additional expenses of $4,494 related to the winding-up of Franklin. During the six months ended June 30, 2015, Franklin generated a loss from operations of $226,087. The following table provides additional detail of these losses which are reflected as a loss on discontinued operations.

 

   June 30,
2016
  June 30,
2015
Revenues  $—     $371,384 
General and administrative   4,494    597,471 
   Loss from discontinued operations  $(4,494)  $(226,087)

 

 15 

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. A material legal proceeding that is currently pending is as follows:

 

On October 14, 2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of its convertible debentures in the aggregate principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together with accrued interest and unspecified damages. The Company believes the claim is not a valid debt, is vigorously defending this lawsuit, and filed a motion to dismiss, which is pending before the Court. Based upon available information at this very early stage of litigation it is the opinion of management and belief of in-house counsel that the Company will obtain a favorable ruling and no amount will be awarded to the plaintiff in this action. Accordingly, Management believes the likelihood of material loss resulting from this lawsuit to be remote.

 

 

 16 

 

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 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 June 30, 2016, and we undertake no duty to update this information.

 

Plan of Operations – SPYR, Inc. operates in two separate and distinct segments: Digital Media and Restaurant. The Digital Media segment includes developing, publishing, co-publishing and marketing mobile games and applications. The Restaurant segment includes owning and operating an “American Diner” theme restaurant called “Eat at Joe’s”®.

 

Through our wholly owned subsidiaries SPYR APPS, LLC and SPYR APPS Oy, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app purchases. Our primary focus is on the development and expansion of our mobile games and applications. We anticipate we will need to hire additional employees during 2016 to help with the development and marketing of existing and future games and application.

 

Though our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we generate revenue from the sale of food and beverage products through our theme restaurant located in Philadelphia, Pennsylvania. We plan to maintain the restaurant operations as they currently exist and do not anticipate the hiring of new full-time employees or the need for additional funds to satisfy cash requirements for the restaurant operations.

 

The Company intends to utilize cash on hand to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and research and development and implementation of our business plans generally.

 

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

 

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2016 TO 2015

 

The consolidated results of continuing operations for the six months ended June 30, 2016 and 2015 are as follows:

 

   Digital Media  Restaurants  Corporate  Consolidated
                     
Six Months Ended June 30, 2016                    
Revenues  $64,919   $641,813   $—     $706,732 
Cost of sales   —      192,620    —      192,620 
Labor and related expenses   157,207    234,467    498,584    890,258 
Rent   —      128,686    67,545    196,231 
Depreciation and amortization   15,293    37,001    23,451    75,745 
Professional fees   138,417    2,769    399,598    540,784 
Other general and administrative   527,962    102,245    128,038    758,245 
Operating loss   (773,960)   (55,975)   (1,117,216)   (1,947,151)
                     
Other Income   —      50    (218)   (168)
Loss from continuing operations  $(773,960)  $(55,925)  $(1,117,434)  $(1,947,319)
 17 

 

 

Six Months Ended June 30, 2015                    
Revenues  $—     $773,128   $—     $773,128 
Cost of sales   —      203,165    —      203,165 
Labor and related expenses   —      201,393    831,441    1,032,834 
Rent   —      130,203    10,974    141,177 
Depreciation and amortization   —      36,574    5,410    41,984 
Professional fees   —      5,583    2,116,340    2,121,923 
Other general and administrative   94,571    84,739    190,570    369,880 
Operating income (loss)   (94,571)   111,471    (3,154,735)   (3,137,835)
                     
Other Income (Expense)   —     20    (1,561,739)   (1,561,719)
Loss from continuing operations  $(94,571)  $111,491   $(4,716,474)   (4,699,554)

 

Results of Operations - For the six months ended June 30, 2016 the Company had a loss from continuing operations of approximately $1,947,000 compared to a loss from continuing operations of approximately $4,700,000 for the six months ended June 30, 2015. This change is due primarily to decreases in the amount of realized and unrealized losses on the sale of marketable securities of approximately $1,562,000, in labor and related costs of approximately $143,000 and in professional fees of approximately $1,581,000, partially offset by increases in rent of approximately $55,000, in depreciation and amortization of approximately $34,000, and in other general and administrative expenses of approximately $388,000.

 

More detailed explanation of the six months ended June 30, 2016 and 2015 changes are included in the applicable segment discussions following.

 

Total Revenues - Total revenues decreased $66,000, to $707,000 from $773,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This change is primarily the due to fluctuations in airport traffic resulting in lower restaurant revenues. For the six months ended June 30, 2016, revenues included approximately $65,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and approximately $642,000 in restaurant revenues. For the six months ended June 30, 2015, all revenues were generated from our restaurant segment. Management plans to expand its mobile application and game development and monetization efforts and expects increased revenues in this segment in the coming months. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.

 

Costs and Expenses - Costs of sales, include the costs of food, beverage, and kitchen supplies and relates solely to our restaurant business.

 

The cost of labor decreased approximately $143,000 to $890,000 from $1,033,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This decrease is primarily due to restricted stock awards granted to executive officers recorded at fair value of approximately $200,000 for the six months ended June 30, 2016 compared to approximately $856,000 in restricted stock awards granted to executive officers recorded at fair value for the six months ended June 30, 2015. The cost of labor increased in our Digital Media Mobile Games Publishing and Advertising segment by approximately $157,000 is due to hiring additional employees for our digital media operations. Of this amount, approximately $138,000 was settled in cash and $19,000 was paid in restricted stock recorded at fair value. The remaining difference is attributed to hiring dates and changes in pay rates and the overall number of employees. The cost of labor is expected to increase in conjunction with expansion of the digital media operations.

 

 18 

 

The cost of rent increased approximately $55,000 from 2015 to 2016. The Company’s wholly owned subsidiary, E.A.J.: PHL, Airport, pays $14,000 per month basic rent plus percentage rent equal to 20% of gross revenues above $1,200,000 under the lease based on sales for the 12 month period from July to June of each year. Basic rent is a fixed cost and percentage rent is variable, so the total rent paid is expected to vary from year to year in conjunction with restaurant sales. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado and began recording lease expense of $5,000 per month pursuant to this lease agreement. On October 1, 2015, we added additional square footage that more than doubled our administrative office space in Denver and further increased our corporate rent expense to $12,000 per month.

 

Depreciation and amortization expenses increased by approximately $34,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This is attributable to depreciation and amortization expenses on the purchase of office equipment, furniture and fixtures and leasehold improvements for the new corporate headquarters in Denver Colorado of approximately $243,000, new restaurant equipment of approximately $4,000, new digital media equipment of approximately $7,000 and amortization of our capitalized licensing rights of $15,000.

 

Professional fees decreased approximately $1,581,000 from approximately $2,122,000 in 2015 to approximately $541,000 in 2016. Professional fees during 2016 included $169,000 for investor and public relations, $64,000 for accounting and auditing services, $33,000 for legal fees, $134,000 for consulting and professional fees related to our digital media segment, $21,000 for other professional service needs and 492,500 shares of restricted common stock issued to third parties for consulting services recorded at fair value of $120,000. Professional fees during 2015 included $448,000 for investor and public relations, $94,000 for accounting and auditing services, $51,000 for legal fees, $19,000 for other professional service needs, and the issuance of 3,170,000 shares of restricted common stock issued for consulting services and employee signing bonuses recorded at fair value of $1,510,000.

 

Other general and administrative expenses increased approximately $388,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The increase can be attributed primarily to software licensing costs of approximately $370,000, and increases in various other general and administrative costs of $18,000.

 

Other income (loss) - The Company had unrealized losses on trading securities of approximately $84,000 for the six months ended June 30, 2016 compared to unrealized losses of $1,087,000 for the six months ended June 30, 2015. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities at the respective reporting dates. The Company realized gains from the sale of trading securities of approximately $74,000 for the six months ended June 30, 2016, compared to realized losses of approximately $485,000 for the six months ended June 30, 2015. Realized gains and losses are the difference between the selling prices and the underlying fair value of these securities at the corresponding reporting date prior to sale.

 

Digital Media Segment:

 

   2016  2015  Difference  %
Revenues  $64,919   $—     $64,919    100%
General and administrative   823,586    94,571    729,015    771%
Depreciation and amortization   15,293    —      15,293    100%
Operating Loss  $(773,960)  $(94,571)  $(679,389)   718%

 

Results of Operations – For the six months ended June 30, 2016 the Digital Media segment had a net loss from continuing operations of approximately $774,000. During the period since the incorporation of SPYR APPS, LLC on March 24, 2015 to June 30, 2015, the Digital Media segment had a net loss from continuing operations of approximately $95,000.

 

Revenues – For the six months ended to June 30, 2016, the Digital Media segment had total sales of approximately $65,000. Management plans to expand its mobile games and application development activities by developing and/or publishing mobile games and/or applications through acquisition and/or development of its own intellectual property and publishing agreements with developers.

 

General and Administrative Expenses – For the six months ended June 30, 2016, the Digital Media segment had total selling, general and administrative expenses of approximately $824,000, which included Labor and related expenses of approximately $157,000, of which approximately $139,000 was paid in cash and $18,000 was paid in restricted stock recorded at fair value, professional expenses of approximately $138,000, marketing and promotional expenses of approximately $106,000, software licensing costs of approximately $370,000, and other general and administrative costs of approximately $53,000.

 

 19 

 

 

Depreciation and Amortization Expenses – For the six months ended June 30, 2016 the Digital Media segment had total depreciation and amortization expense of approximately $15,000 relating to its capitalized licensing rights. The capitalized licensing rights are being amortized of the estimated useful life of the related games of 2-5 years.

 

Restaurant Segment:

 

   2016  2015  Difference  %
Revenues  $641,813   $773,128   $(131,315)   -17%
Cost of sales   192,620    203,165    (10,545)   -5%
General and administrative   468,167    421,918    46,249    11%
Depreciation and amortization   37,001    36,574    427    1%
Operating income (loss)  $(55,975)  $111,471   $(167,446)   -150%

 

Results of Operations – For the six months ended June 30, 2016 the Restaurant segment had a net loss from continuing operations of approximately $56,000 compared to net operating income of approximately $111,000 for the six months ended June 30, 2015 This change is due primarily to a decrease in revenues of approximately $131,000 and a decreased in cost of sales of approximately $10,000 and increased operating costs (general and administrative costs including depreciation and amortization) of approximately $46,000.

 

Revenues – For the six months ended June 30, 2016 and 2015, the Restaurant segment had sales of approximately $642,000 and $773,000, respectively, for a decrease of approximately $131,000 or 17%. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.

 

Costs of Sales – For the six months ended June 30, 2016 and 2015, the Restaurant segment had costs of sales of approximately $193,000 and $203,000, respectively, for a decrease of approximately $10,000 or 5%. Costs of sales include the costs of food, beverage, and kitchen supplies.

 

General and Administrative Expenses – For the six months ended June 30, 2016 and 2015, the Restaurant segment had general and administrative expenses of approximately $468,000 compared to approximately $422,000 for the six months ended June 30, 2015.

 

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2016 TO 2015

 

The consolidated results of continuing operations for the three months ended June 30, 2016 and 2015 are as follows: 

 

   Digital Media  Restaurants  Corporate  Consolidated
                     
Three Months Ended June 30, 2016                    
Revenues  $29,592   $344,751   $—     $374,343 
Cost of sales   —      95,136    —      95,136 
Labor and related expenses   86,282    117,297    134,123    337,702 
Rent   —      56,699    35,176    91,875 
Depreciation and amortization   7,793    18,280    12,015    38,088 
Professional fees   63,170    2,769    255,880    321,819 
Other general and administrative   340,325    52,912    79,851    473,088 
Operating income (loss)   (467,978)   1,658    (517,045)   (983,365)
                     
Other Income   (131)   25    (154,959)   (155,065)
Loss from continuing operations  $(468,109)  $1,683   $(672,004)  $(1,138,430)

  

Three Months Ended June 30, 2015                    
Revenues  $—     $441,207   $—     $441,207 
Cost of sales   —      102,577    —      102,577 
Labor and related expenses   —      112,091    134,899    246,990 
Rent   —      55,678    10,974    66,652 
Depreciation and amortization   —      18,777    4,505    23,282 
Professional fees   —      2,259    903,353    905,612 
Other general and administrative   94,571    51,304    131,781    277,656 
Operating income (loss)   (94,571)   98,521    (1,185,512)   (1,181,562)
                     
Other Income (Expense)   —      10    (146,414)   (146,404)
Loss from continuing operations  $(94,571)  $98,531   $(1,331,926)  $(1,327,966)

 

Results of Operations - For the three months ended June 30, 2016 the Company had a loss from continuing operations of approximately $1,138,000 compared to a loss from continuing operations of approximately $1,328,000 for the three months ended June 30, 2015. This change is due primarily to decreases in professional fees of approximately $584,000, increases in the amount of realized and unrealized gains on the sale of marketable securities of approximately $8,000, partially offset by increases in labor and related costs of approximately $91,000, in rent of approximately $25,000, in depreciation and amortization of approximately $15,000, and in other general and administrative expenses of approximately $195,000.

 

More detailed explanation of the three months ended June 30, 2016 and 2015 changes are included in the applicable segment discussions following.

 

Total Revenues - Total revenues decreased $67,000, to $374,000 from $441,000 for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This change is primarily the due to fluctuations in airport traffic resulting in lower restaurant revenues. For the three months ended June 30, 2016, revenues included approximately $29,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and approximately $345,000 in restaurant revenues. For the three months ended June 30, 2015, all revenues were generated from our restaurant segment. Management plans to expand its mobile application and game development and monetization efforts and expects increased revenues in this segment in the coming months. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.

 

Costs and Expenses - Costs of sales, include the costs of food, beverage, and kitchen supplies and relates solely to our restaurant business.

 

The cost of labor increased approximately $91,000 to $338,000 from $247,000 for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This increase is primarily due to hiring additional employees for our digital media operations. During the three months ended June 30, 2016, our Digital Media Mobile Games Publishing and Advertising segment incurred labor and related expenses of approximately $86,000, compared to $0 for the three months ended June 30, 2015. Of this amount, approximately $77,000 was paid in cash and $9,000 was paid in restricted stock recorded at fair value. The remaining difference is attributed to hiring dates and changes in pay rates and the overall number of employees. The cost of labor is expected to increase in conjunction with expansion of the digital media operations.

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The cost of rent increased approximately $25,000 from 2015 to 2016. The Company’s wholly owned subsidiary, E.A.J.: PHL, Airport, pays $14,000 per month basic rent plus percentage rent equal to 20% of gross revenues above $1,200,000 under the lease based on sales for the 12 month period from July to June of each year. Basic rent is a fixed cost and percentage rent is variable, so the total rent paid is expected to vary from year to year in conjunction with restaurant sales. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado and began recording lease expense of $5,000 per month pursuant to this lease agreement. On October 1, 2015, we added additional square footage that more than doubled our administrative office space in Denver and further increased our corporate rent expense to $12,000 per month.

 

Depreciation and amortization expenses increased by approximately $15,000 for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This is attributable to depreciation and amortization expenses on the purchase of office equipment, furniture and fixtures and leasehold improvements for the new corporate headquarters in Denver Colorado of approximately $243,000, new restaurant equipment of approximately $4,000, new digital media equipment of approximately $7,000 and amortization of our capitalized licensing rights of $15,000.

 

Professional fees decreased approximately $584,000 from approximately $906,000 in 2015 to approximately $322,000 in 2016. Professional fees during 2016 included $147,000 for investor and public relations, $15,000 for accounting and auditing services, $20,000 for legal fees, $59,000 for consulting and professional fees related to our digital media segment, $10,000 for other professional service needs and 142,500 shares of restricted common stock issued to third parties for consulting services recorded at fair value of $71,000. Professional fees during 2015 included $303,000 for investor and public relations, $94,000 for accounting and auditing services, $20,000 for legal fees, $40,000 for other professional service needs, and 670,000 shares of restricted common stock issued for consulting services and employee signing bonuses recorded at fair value of $449,000.

 

Other general and administrative expenses increased approximately $195,000 for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The increase can be attributed primarily to software licensing costs of approximately $280,000, and decreases in various other general and administrative costs of $85,000.

 

The Company had unrealized losses on trading securities of approximately $185,000 for the three months ended June 30, 2016 compared to unrealized gains of $35,000 for the three months ended June 30, 2015. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities at the respective reporting dates.

 

The Company realized gains from the sale of trading securities of approximately $25,000 for the three months ended June 30, 2016, compared to realized losses of approximately $187,000 for the three months ended June 30, 2015. Realized gains and losses are the difference between the selling prices and the underlying fair value of these securities at the corresponding reporting date prior to sale.

 

Digital Media Segment:

 

   2016  2015  Difference  %
Revenues  $29,592   $—     $29,592    100%
General and administrative   489,777    94,571    395,206    418%
Depreciation and amortization   7,793    —      7,793    100%
Operating Loss  $(467,978)  $(94,571)  $(373,407)   395%

 

Results of Operations – For the three months ended June 30, 2016 the Digital Media segment had a net loss from continuing operations of approximately $468,000 compared to a net loss from continuing operations of approximately $95,000 for the three months ended June 30, 2015.

 

Revenues – For the three months ended to June 30, 2016, the Digital Media segment had total sales of approximately $29,000. Management plans to expand its mobile games and application development activities by developing and/or publishing mobile games and/or applications through acquisition and/or development of its own intellectual property and publishing agreements with developers.

 

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General and Administrative Expenses – For the three months ended June 30, 2016, the Digital Media segment had total selling, general and administrative expenses of approximately $490,000, which included Labor and related expenses of approximately $86,000, of which approximately $77,000 was paid in cash and $9,000 was paid in restricted stock recorded at fair value, professional expenses of approximately $63,000, marketing and promotional expenses of approximately $31,000, software licensing costs of approximately $280,000, and other general and administrative costs of approximately $30,000.

 

Depreciation and Amortization Expenses – For the three months ended June 30, 2016 the Digital Media segment had total depreciation and amortization expense of approximately $8,000 relating to its capitalized licensing rights. The capitalized licensing rights are being amortized of the estimated useful life of the related games of 2-5 years.

 

Restaurant Segment:

 

   2016  2015  Difference  %
Revenues  $344,751   $441,207   $(96,456)   -22%
Cost of sales   95,136    102,577    (7,441)   -7%
General and administrative   229,677    221,332    8,345    4%
Depreciation and amortization   18,280    18,777    (497)   -3%
Operating income (loss)  $1,658   $98,521   $(96,863)   -98%

 

Results of Operations – For the three months ended June 30, 2016 the Restaurant segment had income from continuing operations of approximately $1,000 compared to income from continuing operations of approximately $99,000 for the three months ended June 30, 2015 This change is due primarily to a decrease in revenues of approximately $97,000 and a decreased in cost of sales of approximately $7,000 and increased operating costs (general and administrative costs including depreciation and amortization) of approximately $8,000.

 

Revenues – For the three months ended June 30, 2016 and 2015, the Restaurant segment had sales of approximately $345,000 and $441,000, respectively, for a decrease of approximately $96,000 or 22%. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.

 

Costs of Sales – For the three months ended June 30, 2016 and 2015, the Restaurant segment had costs of sales of approximately $95,000 and $103,000, respectively, for a decrease of approximately $7,000 or 7%. Costs of sales include the costs of food, beverage, and kitchen supplies.

 

General and Administrative Expenses – For the three months ended June 30, 2016 and 2015, the Restaurant segment had general and administrative expenses of approximately $230,000 compared to approximately $221,000 for the three months ended June 30, 2015.

 

The decrease in revenue is attributed to changes in the timing and flow of airport traffic.

 

DISCONTINUED OPERATIONS

 

On February 23, 2015 the Company entered into an agreement whereby, the Company issued an aggregate of 2.5 million shares of its restricted common stock valued at $1,700,000, in exchange for all of the issued and outstanding shares of Franklin Networks, Inc., a Tennessee corporation (“Franklin”), an internet company that began operations in September 2014. The acquisition of Franklin had been accounted for as a purchase and the operations of Franklin have been consolidated since the date of the acquisition. The $1.7 million purchase price was allocated based upon the fair value of the acquired assets which consists of intangible assets of $671,131, deferred tax liability of $117,741 and goodwill of $1,146,610, as determined by management with the assistance of an independent valuation firm.

 

On December 31, 2015, the Company and the former owners of Franklin agreed to unwind the agreement and return the original consideration exchanged in the contract. The Company reported the gain (loss) from operations from Franklin as a gain (loss) from discontinued operations in the accompanying statements of operations since the Company considered its decision to rescind the Franklin acquisition as a strategic shift that has a major effect in the Company’s operations and financial results.

 

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During the six months ended June 30, 2016, the Company incurred expenses of $4,494 related to Franklin. During the six months ended June 30, 2015, Franklin generated a loss from operations of $226,087.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has generated a net loss from continuing operations for the six months ended June 30, 2016 of approximately $1,947,000. As of June 30, 2016, the Company had current assets of approximately $5,765,000, which included cash and cash equivalents of approximately $5,014,000, and trading securities of approximately $544,000. While the Company believes it has sufficient cash and cash equivalents to carry out its operating plans for the next twelve to twenty-four months, there can be no assurance the Company will be able to successfully execute its plans at the anticipated level or that additional debt or equity financing will not be needed, or will be available on terms acceptable to the Company.

 

During the six months ended June 30, 2016 and 2015, the Company has met its capital requirements through a combination of collection of revenues, the sale of its trading securities, and utilization of cash reserves.

 

Operating Activities - For the six months ended June 30, 2016, the Company used cash in operating activities of $1,617,114. For the six months ended June 30, 2015, the Company used cash in operating activities of $1,482,962. This increase is due primarily to our expansion efforts into the digital media publishing, advertising and gaming industry, the addition of new management and operations personnel and the resulting increases in operating expenses.

 

Investing Activities - During the six months ended June 30, 2016, the Company used $510,000 in cash to purchase trading securities, received $280,195 in cash proceeds from sales of trading securities and used cash of $47,958 for the purchase of property plant and equipment. During the six months ended June 30, 2015, the Company received $1,959,738 in cash proceeds from sales of trading securities, and used cash of $162,292 for the purchase of property plant and equipment and domain names. As of June 30, 2016, the Company owns trading securities valued at $544,266.

 

Financing Activities - During the six months ended June 30, 2016 and 2016, the Company sold 100,000 shares of restricted common stock to a service provider for $15,000. The shares were recorded at fair value of $19,000 with the remaining $4,000 recorded as professional fees.

 

The Company expects future development and expansion will be financed through cash flows from operations and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available on terms acceptable or favorable to the Company.

 

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 of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.

 

Revenue Recognition

 

The Company generates revenues from its wholly owned subsidiaries, which operate separate and distinct businesses. The following is a summary of our revenue recognition policies.

 

Through our wholly owned subsidiary SPYR APPS, LLC, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be downloaded through the app stores maintained by Apple and Google. The Company’s cross platform gaming application which can be played on personal computers, Facebook and mobile devices, can be downloaded from the internet and Facebook as well as through the app stores maintained by Apple, Google and Amazon. The Company receives revenue from sale of advertising provided with games and through in-app purchases. The Company also receives revenue from publishing agreements entered into during 2015 for one mobile game and one cross platform game. The Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured, which is typically after receipt of payment and delivery.

 

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Though our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we generate revenue from the sale of food and beverage products through our restaurant. Revenue from the restaurant is recognized upon sale to a customer and receipt of payment.

 

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.

 

Deferred Acquisition

 

The Company capitalizes all costs of intended acquisitions until such acquisitions occurs. If management determines that such acquisitions will not occur, the capitalized costs will be expensed.

 

Recent Accounting Pronouncements

 

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

 

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.

 24 

 

 

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 June 30, 2016, 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. Based on the evaluation of the Company’s disclosure controls and procedures, the Company concluded that during the period covered by this report, such disclosure controls and procedures were effective.

 

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, utilizing standards incorporating applicable portions of the Public Company Accounting Oversight Board’s 2009 Guidance for Smaller Public Companies in Auditing Internal Controls Over Financial Reporting as necessary and on an on-going basis.

 

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. 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.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On October 14, 2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of its convertible debentures in the aggregate principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together with accrued interest and unspecified damages. The Company believes the claim is not a valid debt, is vigorously defending this lawsuit, and filed a motion to dismiss, which is pending before the Court.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During April, May, and June 2016, the Company issued 42,500 restricted common shares pursuant to consulting agreements with a third party. These shares were recorded at fair value of $13,400 in the statement of operations and comprehensive income as part of professional fees for the six months ended June 30, 2016. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

On April 14, 2016, the Company sold 100,000 restricted common shares to a third party service provider for $15,000. These shares were recorded at fair value of $19,000, with $4,000 being recorded in the statement of operations and comprehensive income as part of professional fees for the six months ended June 30, 2016. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None.

 

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)
10.1 Lease Information Form between E.A.J.: PHL, Airport Inc. and Marketplace Redwood Limited Partnership(1)
10.2 Registration of trade name for Eat at Joe's(1)
10.2 Registration Rights Agreement(1)
10.3 Franklin Networks Acquisition 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: August 12, 2016

  SPYR, INC.
     
By: /S/ James R. Thompson
    James R. Thompson
    President & Chief Executive Officer
    (Principal Executive Officer)
     
  By: /S/ Barry D. Loveless
    Barry D. Loveless
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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