UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2017

 

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 ☐ 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 ☐ 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

 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of April 28, 2017, there were 160,507,026 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 170,648 common shares), par value $0.0001.

 

 

1 
 

PART I - FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS 
           
    March 31,
2017
    December 31,
2016
 
ASSETS   (Unaudited)      
Current Assets:          
   Cash and cash equivalents  $2,296,000   $3,204,000 
   Accounts receivable, net   48,000    44,000 
   Other receivable   100,000    200,000 
   Inventory   8,000    12,000 
   Prepaid expenses   52,000    50,000 
   Trading securities, at market value   44,000    59,000 
          Total Current Assets   2,548,000    3,569,000 
           
   Property and equipment, net   184,000    211,000 
   Intangible assets, net   17,000    18,000 
   Capitalized licensing rights, net   38,000    40,000 
   Other assets   22,000    22,000 
TOTAL ASSETS  $2,809,000   $3,860,000 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
LIABILITIES          
Current Liabilities:          
   Accounts payable and accrued liabilities  $222,000   $176,000 
          Total Current Liabilities   222,000    176,000 
           
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 March 31, 2017 and December 31, 2016   11    11 
     20,000 Class E shares issued and outstanding          
        as of March 31, 2017 and December 31, 2016   2    2 
   Common Stock, $0.0001 par value, 250,000,000 shares authorized          
       160,447,026 and 157,637,026 shares issued and outstanding          
        as of March 31, 2017 and December 31, 2016   16,044    15,763 
   Additional paid-in capital   37,111,943    34,752,224 
   Accumulated deficit   (34,541,000)   (31,084,000)
          Total Stockholders’ Equity   2,587,000    3,684,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $2,809,000   $3,860,000 
           
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 March 31,
   2017  2016
       
Revenues  $364,000   $332,000 
Cost of sales   99,000    97,000 
          Gross Margin   265,000    235,000 
           
Expenses          
   Labor and related expenses   1,493,000    553,000 
   Rent   99,000    104,000 
   Depreciation and amortization   30,000    38,000 
   Professional fees   1,592,000    219,000 
   Research and development   113,000    75,000 
   Other general and administrative   383,000    210,000 
          Total Operating Expenses   3,710,000    1,199,000 
          Operating Loss   (3,445,000)   (964,000)
           
Other Income (Expense)          
   Interest and dividend income   3,000    5,000 
   Unrealized (loss) gain on trading securities   (15,000)   101,000 
   Gain on sale of marketable securities   —      49,000 
          Total Other (Expense) Income   (12,000)   155,000 
           
Loss from continuing operations   (3,457,000)   (809,000)
           
Loss on discontinued operations   —      (4,000)
           
Net Loss  $(3,457,000)  $(813,000)
           
Per Share Amounts          
   Loss from continuing operations          
      Basic and Diluted earnings per share  $(0.02)  $(0.01)
           
   Loss on discontinued operations          
      Basic and Diluted earnings per share  $—     $—   
           
   Net Loss          
      Basic and Diluted earnings per share  $(0.02)  $(0.01)
           
Weighted Average Common Shares          
      Basic and Diluted   159,333,637    152,289,857 
           
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
THREE MONTHS ENDED MARCH 31, 2017
(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, 2016   107,636   $11    20,000   $2    157,637,026   $15,763   $34,752,224   $(31,084,000)  $3,684,000 
                                              
Fair value of common stock issued for employee compensation   —      —      —      —      1,250,000    125    846,875    —      847,000 
Fair value of common stock issued for professional fees   —      —      —      —      1,560,000    156    1,064,844    —      1,065,000 
Vesting of options and warrants granted for services   —      —      —      —      —      —      402,000    —      402,000 
Vesting of shares of common stock issued for services   —      —      —      —      —      —      46,000    —      46,000 
Net loss   —      —      —      —      —      —      —      (3,457,000)   (3,457,000)
Balance at March 31, 2017   107,636   $11    20,000   $2    160,447,026   $16,044   $37,111,943   $(34,541,000)  $2,587,000 
                                              
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 Three Months Ended March 31,
   2017  2016
Cash Flows From Operating Activities:          
Net loss for the period  $(3,457,000)  $(813,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
     Loss on discontinued operations   —      4,000 
     Depreciation and amortization   30,000    38,000 
     Fair value of vesting warrants and options   402,000    —   
     Common stock issued for employee compensation   847,000    200,000 
     Common stock issued for professional fees   1,065,000    52,000 
     Vesting of shares of common stock issued for services   46,000    6,000 
     Unrealized loss on trading securities   15,000    (101,000)
     (Gain) loss on sale of trading securities   —      (49,000)
     (Increase) decrease in accounts receivables   (4,000)   (20,000)
     Decrease (Increase) in other receivables   100,000    —   
     Decrease in inventory   4,000    3,000 
     (Increase) decrease in prepaid expenses   (2,000)   15,000 
     Increase (decrease) in accounts payable and accrued liabilities   46,000    34,000 
     Decrease in related party accounts payable   —      (8,000)
Net Cash Used in Operating Activities from Continuing Operations   (908,000)   (639,000)
Net Cash Used in Operating Activities from Discontinued Operations   —      (4,000)
Net Cash Used in Operating Activities   (908,000)   (643,000)
           
Cash Flows From Investing Activities:          
     Purchase of licensing rights   —      (10,000)
     Purchases of trading securities   —      (510,000)
     Proceeds from sale of trading securities   —      189,000 
     Purchase of property and equipment   —      (40,000)
Net Cash (Used in) Provided by Investing Activities   —      (371,000)
           
Net decrease in Cash   (908,000)   (1,014,000)
Cash and cash equivalents at beginning of period   3,204,000    6,904,000 
Cash and cash equivalents at end of period  $2,296,000   $5,890,000 
           
Supplemental Disclosure of Interest and Income Taxes Paid:          
    Interest paid during the period  $—     $—   
   Income taxes paid during the period  $—     $—   
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

  

5 
 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2017 and 2016

(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, 2016 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2016 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 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 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 and will not be renewed. Concurrent with expiration of the lease the restaurant closed. The Company’s plan is to divest itself from its restaurant division and is considering spinning off the business, and issue a stock dividend to its shareholders; however, there is no assurance this can be completed. The Company is also exploring opportunities to license or franchise the name “Eat at Joe’s” as well as merger and acquisition targets of other food related businesses.

 

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.

 

6 
 

Liquidity

 

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. For the three months ended March 31, 2017, the Company recorded a net loss from continuing operations of $3,457,000 and utilized cash in continuing operations of $908,000. As of March 31, 2017, our cash balance was $2,296,000 and we had trading securities of $44,000.

 

The Company’s restaurant, Eat At Joes closed in April 2017, concurrent with the expiration of the lease. However, the Company plans to expand its mobile games and application development and publishing activities, such as Pocket Starships, through acquisition and/or development of its own intellectual property and publishing agreements with developers.

 

We estimate the Company currently has sufficient cash and liquidity to meet its anticipated working capital for the next twelve months. Historically, we have financed our operations primarily through private sales of our trading securities or through sales of our common stock. If our sales goals for our products do not materialize as planned, we believe that the Company can reduce its operating and product development costs that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.

 

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 months ended March 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 150,775, Options – 5,970,000, Warrants – 1,200,000) would have had an anti-dilutive effect due to the Company generating a loss for the three months ended March 31, 2017.

 

The basic and fully diluted shares for the three months ended March 31, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 241,667, Class A – 26,909,028, Class E – 696,767) would have had an anti-dilutive effect due to the Company generating a loss for the three months ended March 31, 2016.

 

Software Licensing and Publication Costs

 

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

 

Software licensing and publication costs were $147,000 and $15,000 for the three months ended March 31, 2017 and 2016, respectively, and was reflected as part of Other general and administrative expenses on the accompanying condensed consolidated statements of operations.

7 
 

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.

 

In a prior period, the Company capitalized $50,000 as a result of the acquisition of licensing rights of one gaming applications. The Company estimates that the gaming application will have an estimated life of five years, which approximates the term of the license. As of March 31, 2017 and December 31, 2016, the unamortized capitalized licensing rights amounted to $38,000 and $40,000 respectively.

 

Research and Development Costs

 

Costs incurred for research and development are expensed as incurred. During the three months ended March 31, 2017 and 2016, the Company incurred $113,000 and $75,000 in research and development costs paid to an independent gaming software developer for the Pocket Starships game.

 

Reclassifications

 

During the period ended March 31, 2016, the Company incurred $75,000 in connection with fees paid to a game developer for the development of the Pocket Starships game that were accounted as part of Operating expenses. To conform with presentation adopted for the current period, the Company reclassified this amount as Research and Development expenses. The reclassification had no effect on total assets, total shareholder's equity, net loss or cash flows as previously presented.

 

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.

 

8 
 

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

 

The Company’s securities investments are bought and held principally for the purpose of selling them in the short term and are classified as trading securities. Trading securities are recorded at fair value based on quoted market prices (level 1) on the balance sheet in current assets, with the change in fair value during the period included in earnings as unrealized gains or losses in the statement of operations. Gains from the sales of such 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.

 

Investments in securities are summarized as follows:

 

   Fair Value at          
Year  Beginning of Year  Purchases 

Proceeds from

Sale

 

Gain on

Sale

 

Unrealized

Loss

 

Fair Value at

March 31, 2017

 2017   $59,000   $—     $—     $—     $(15,000)  $44,000 

 

 

Realized gains and losses are determined on the basis of specific identification. During the three months ended March 31, 2017 and 2016, sales proceeds and gross realized gains and losses on trading securities were:

 

   March 31,
2017
  March 31,
2016
       
  Sales proceeds  $—     $189,000 
  Gross realized (losses)  $—     $—   
  Gross realized gains   —      49,000 
  Gain (loss) on sale of trading securities  $—     $49,000 

  

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

 

        Fair Value Measurements at Reporting Date Using
        Quoted Prices   Significant   Significant
        in Active   Other   Unobservable
    Fair Value at   Markets   Observable Inputs   Inputs
    March 31, 2017   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                   44,000    $                   44,000    $                           -       $                          -   
Money market funds                         36,000                         36,000                                 -                                   -   
Total    $                   80,000    $                   80,000    $                           -       $                          -   

 

 

9 
 

 

        Fair Value Measurements at Reporting Date Using
        Quoted Prices   Significant   Significant
        in Active   Other   Unobservable
    Fair Value at   Markets   Observable Inputs   Inputs
    December 31, 2016   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                   59,000    $                   59,000    $                           -       $                          -   
Money market funds                         36,000                         36,000                                 -                                   -   
Total    $                   95,000    $                   95,000    $                           -       $                          -   

 

The fair value of the Company’s trading securities is determined by reference to quoted market prices (level 1). During the three months ended March 31, 2017, the Company recorded $15,000 in unrealized losses to account for the changes in fair value of its trading securities. During the three months ended March 31, 2016, the Company recorded $101,000 in unrealized gains to account for the changes in fair value of its trading securities.

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

       
   March 31,
2017
  December 31,
2016
    (Unaudited)      
Equipment  $150,000   $151,000 
Furniture & fixtures   116,000    116,000 
Leasehold improvements   381,000    381,000 
    647,000    648,000 
Less: accumulated depreciation and amortization   (463,000)   (437,000)
   Property and Equipment, Net  $184,000   $211,000 

 

Depreciation and amortization expense for the three months ended March 31, 2017 and 2016 was $27,000 and $29,000, respectively.

 

NOTE 4 – EQUITY TRANSACTIONS

 

Common Stock:

 

During the three months ended March 31, 2017, the Company issued an aggregate of 1,250,000 shares of common stock to employees with a total fair value of $847,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $847,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.

 

During the three months ended March 31, 2017, the Company issued an aggregate of 1,560,000 shares of restricted common stock to consultants with a total fair value of $1,065,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,065,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.

 

10 
 

Common Stock with Vesting Terms:

 

The following table summarizes common stock with vesting terms activity:

 

          Weighted
          Average
    Number of     Grant Date
    Shares     Fair Value
Non-vested, December 31, 2016 20,833    $ 0.50
  Granted    
  Vested (20,833)     0.50
  Forfeited    
Non-vested, March 31, 2017   $
           

 

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. As of December 31, 2016, 479,167 of these shares had vested. During the three months ended March 31, 2017, the remaining 20,833 of these shares vested and as a result, the Company recognized compensation cost of $46,000. As of March 31, 2017, there were no unvested shares and no unearned compensation costs to be recorded.

 

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

 

Options

 

The following table summarizes common stock options activity:

 

          Weighted
          Average
    Options     Exercise Price
December 31, 2016 12,900,000    $ 2.83 
  Granted 570,000      1.00 
  Exercised    
  Cancelled    
  Forfeited (7,500,000)     3.97 
Outstanding, March 31, 2017 5,970,000      3.32 
Exercisable, March 31, 2017 4,585,000    $ 3.43 
           

During the period ended March 31, 2017, the Company granted stock options to consultants to purchase a total of 570,000 shares of common stock. A total of 185,000 options vested upon grant while the remaining 385,000 options will vest through February 2018 at a rate of 35,000 shares per month. The options are exercisable at $1.00 per share and will expire over 4 years. The fair values of the options are recorded at their respective grant dates computed using the Black-Scholes Option Pricing Model. During the three months ended March 31, 2017, the Company recognized $111,000 in compensation expense based upon the vesting of outstanding options. As of March 31, 2017 the unamortized compensation expense for unvested options was $231,000 which will be recognized over the vesting period.

 

11 
 

The weighted average exercise prices, remaining lives for options granted, and exercisable as of March 31, 2017, 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   1,720,000   0.75 – 3.86   $1.00   1,335,000   $1.00
$2.50   1,250,000   1.75   $2.50   750,000   $2.50
$5.00   3,000,000   2.75   $5.00   2,500,000   $5.00
    5,970,000       $3.32   4,585,000   $3.43

 

At March 31, 2017, the Company’s closing stock price was $0.65 per share. As all outstanding options had an exercise price greater than $0.65 per share, there was no intrinsic value of the options outstanding at March 31, 2017.

 

Warrants:

 

The following table summarizes common stock warrants activity:

      Weighted
      Average
      Exercise
   Warrants  Price
 December 31, 2016    200,000   $0.50 
 Granted    1,000,000    1.75 
 Exercised    —      —   
 Cancelled    —      —   
 Forfeited    —      —   
 Outstanding, March 31, 2017    1,200,000   $1.54 
 Exercisable, March 31, 2017    1,200,000   $1.54 

 

In March 2017, pursuant to an employee separation agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock with an exercise price of $1.50 and $2.00 which will expire December 31, 2018. The warrants are fully vested and exercisable upon grant. Total fair value of the warrants at grant date amounted to $291,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.

 

The weighted average exercise prices, remaining lives for warrants granted, and exercisable as of March 31, 2017, were as follows:

 

    Outstanding and Exercisable Warrants  
Warrants          
Exercise Price       Life  
Per Share   Shares   (Years)  
$0.50   200,000   0.6  
$1.50   500,000   1.75  
$2.00   500,000   1.75  
    1,200,000      

 

At March 31, 2017, the Company’s closing stock price was $0.65 per share and the aggregate intrinsic value of the warrants outstanding at March 31, 2017 was $30,000.

 

12 
 

The table below represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2017:

 

    Three-Months Ended March 31,  
    2017  
  Expected life in years 1.75 – 3.92  
  Stock price volatility 127% - 158%  
  Risk free interest rate 1.26 % - 1.60%  
  Expected dividends -
  Forfeiture rate   -  


The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options is the expected life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock price volatility was based upon the Company’s historical stock price over the expected term of the option. (3) The risk-free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4) The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.

 

NOTE 5 – SEGMENT REPORTING

 

The Company operated 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.

 

Restaurant Segment - Through our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we owned and operated one “American Diner” theme restaurant called “Eat at Joe’s ® located in the Philadelphia International Airport. Eat at Joe’s ® menu included 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.

 

Our lease in the Philadelphia Airport expired in April 2017 and will not be renewed. Concurrent with expiration of the lease the restaurant closed. The Company’s plan is to divest itself from its restaurant division and is considering spinning off the business, and issue a stock dividend to its shareholders; however, there is no assurance this can be completed. The Company is also exploring opportunities to license or franchise the name “Eat at Joe’s®” as well as merger and acquisition targets of other businesses in the food service industries. Pursuant to current accounting guidelines, the Company will report the restaurant segment as a discontinued operations starting in April 2017.

 

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.

 

13 
 

Information related to these segments is as follows:

REPORTABLE SEGMENTS
THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $52,000   $312,000   $—     $364,000 
Cost of sales   —      99,000    —      99,000 
Research and development   113,000    —      —      113,000 
General and administrative   751,000    233,000    2,583,000    3,567,000 
Depreciation and amortization   3,000    15,000    12,000    30,000 
Operating loss  $(815,000)  $(35,000)  $(2,595,000)  $(3,445,000)
                     
                     
Current assets  $316,000   $378,000   $1,854,000   $2,548,000 
Property and equipment, net   6,000    15,000    163,000    184,000 
Intangible assets   —      —      17,000    17,000 
Other non-current assets   38,000    17,000    5,000    60,000 
Total assets  $360,000   $410,000   $2,039,000   $2,809,000 
                     

 

REPORTABLE SEGMENTS
THREE MONTHS ENDED MARCH 31, 2016
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
Revenues  $35,000   $297,000   $—     $332,000 
Cost of sales   —      97,000    —      97,000 
Research and development   75,000    —      —      75,000 
General and administrative   258,000    239,000    589,000    1,086,000 
Depreciation and amortization   8,000    19,000    11,000    38,000 
Operating income (loss)  $(306,000)  $(58,000)  $(600,000)  $(964,000)
                     
                     
Current assets  $137,000   $245,000   $6,463,000   $6,845,000 
Property and equipment, net   —      78,000    208,000    286,000 
Intangible assets   —      —      20,000    20,000 
Other non-current assets   —      17,000    6,000    23,000 
Total assets  $137,000   $340,000   $6,697,000   $7,174,000 
                     


NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

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:

14 
 

 

On October 14, 2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate principal amount of $1,500,000 in 1998. 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 and is vigorously defending this lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment, which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on January 8, 2018. Based upon available information at this very early stage of litigation, it is still the belief of management and opinion 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.

 

NOTE 7 – SUBSEQUENT EVENTS

 

Subsequent to March 31, 2017, the Company issued an aggregate of 60,000 shares of common stock to third party service providers with a total fair value of $38,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance.

 

15 
 

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 March 31, 2017, and we undertake no duty to update this information.

 

Plan of Operations – SPYR, Inc. operated in two separate and distinct segments: Digital Media and Restaurant. The Digital Media segment includes publishing, co-publishing, developing and marketing mobile games and applications. The Restaurant segment included owning and operating an “American Diner” theme restaurant called “Eat at Joe’s®.” Concurrent with the expiration of our lease in the Philadelphia Airport in April 2017 and the closing of the restaurant, Management plans to focus our efforts on the Digital Media Segment.

 

Through our wholly owned subsidiaries SPYR APPS, LLC, d/b/a SPYR GAMES 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 2017 to help with the development and marketing of existing and future games and applications.

 

In June 2016, we obtained an exclusive option to purchase all the assets of the developer of the electronic game commonly known and referred to as “Pocket Starships” (the “Option”). This exclusive Option is exercisable by the Company at any time, in the Company’s sole discretion, through December 31, 2020, on fixed terms favorable to the Company.

Since December 17, 2015, the Company has been publishing Pocket Starships through an exclusive publishing agreement (the “Publishing Agreement”) with the game’s former publisher, Spectacle Games Publishing (“Spectacle”). The exclusive Publishing Agreement runs for a term of five years, expiring on December 17, 2020, and provides for the Company to fund advanced development and marketing of Pocket Starships in exchange for 50% of the revenue generated by Pocket Starships, us a recoupment, out of Spectacle’s share of the revenue, of the development money advanced by the Company. Should the Company decide to exercise the Option, the Company will receive 100% of the revenue generated by Pocket Starships.

16 
 

Spectacle is a California corporation that is under common ownership and control of MMOJoe, as defined below. Spectacle maintains a proper registered agent in California, but otherwise has no formal presence in the U.S. The developer and owner of Pocket Starships, MMOJoe UG, maintains its physical offices out of which its employees perform their work at Rosenstrasse 17, 10178 Berlin, Germany and has incorporated a related entity in the U.S. under common ownership and control by the name of MMOJoe USA, a California corporation, which maintains a proper registered agent, but otherwise has no formal presence in the U.S. (collectively “MMOJoe”). All services and work by Spectacle and MMOJoe are performed by employees working out of offices in Berlin, Germany and/or third party contractors overseas. Should the Company decide to exercise the Option, it will pay to MMOJoe $5,000,000 in cash plus $10,000,000 worth of shares of the Company’s common stock, valued at the time of closing of the purchase. In exchange for the Option, the Company granted MMOJoe stock options to purchase an aggregate of 3.75 million shares of common stock with a fair value of $472,000 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 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 THREE MONTHS ENDED MARCH 31, 2017 TO 2016

 

The consolidated results of continuing operations for the three months ended March 31, 2017 and 2016 are as follows:

 

   Digital Media  Restaurants  Corporate  Consolidated
             
Three Months Ended March 31, 2017                    
Revenues  $52,000   $312,000   $—     $364,000 
Cost of sales   —      99,000    —      99,000 
Labor and related expenses   383,000    123,000    987,000    1,493,000 
Rent   3,000    61,000    35,000    99,000 
Depreciation and amortization   3,000    15,000    12,000    30,000 
Professional fees   93,000    —      1,499,000    1,592,000 
Research and development   113,000    —      —      113,000 
Other general and administrative   272,000    49,000    62,000    383,000 
Operating loss   (815,000)   (35,000)   (2,595,000)   (3,445,000)
                     
Other income (expense)   —      —      (12,000)   (12,000)
Loss from continuing operations  $(815,000)  $(35,000)  $(2,607,000)  $(3,457,000)

  

 

17 
 

 

Three Months Ended March 31, 2016            
Revenues  $35,000   $297,000   $—     $332,000 
Cost of sales   —      97,000    —      97,000 
Labor and related expenses   71,000    117,000    365,000    553,000 
Rent   —      72,000    32,000    104,000 
Depreciation and amortization   8,000    19,000    11,000    38,000 
Professional fees   75,000    —      144,000    219,000 
Research and development   75,000    —      —      75,000 
Other general and administrative   112,000    50,000    48,000    210,000 
Operating income (loss)   (306,000)   (58,000)   (600,000)   (964,000)
                     
Other income (expense)   —      —      155,000    155,000 
Income (loss) from continuing operations  $(306,000)  $(58,000)  $(445,000)   (809,000)

 

Results of Operations - For the three months ended March 31, 2017 the Company had a loss from continuing operations of $3,457,000 compared to a loss from continuing operations of $809,000 for the three months ended March 31, 2016. This change is due primarily to restricted stock awards granted to employees and third party service providers recorded at fair value of $2,360,000 during the period ended March 31, 2017, compared to $258,000 during the corresponding period in 2016. Other items contributing to the change included increases in professional fees settled in cash of $216,000, in research and development costs of $38,000, in other general and administrative expenses of $173,000, and decreases in gains on trading securities of $165,000.

 

More detailed explanation of the three months ended March 31, 2017 and 2016 changes are included in the applicable segment discussions following.

 

Total Revenues - Total revenues increased $32,000, to $364,000 from $332,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This change is due to increased digital media revenues of $17,000 and increased restaurant revenues of $15,000. For the three months ended March 31, 2017, revenues included $52,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and $312,000 in restaurant revenues. For the three months ended March 31, 2016, revenues included $35,000 in revenues from our Digital Media Mobile Games Publishing and Advertising segment and $297,000 in restaurant revenues. Management plans to expand its mobile application and game development and monetization efforts and expects revenues to continued increasing in this segment in the coming months. As stated above, the lease in the Philadelphia Airport expired in April 2017 and the restaurant closed. The Company’s plan is to divest itself from its restaurant division and is considering spinning off the business, and issuing a stock dividend to its shareholders; however, there is no assurance this can be completed. The Company is also exploring opportunities to license or franchise the name “Eat at Joe’s” as well as merger and acquisition targets of other businesses in the food service industries.

 

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 $940,000 to $1,493,000 from $553,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The cost of labor increased in our Digital Media Mobile Games Publishing and Advertising segment by $312,000. Of this amount, $15,000 was settled in cash and $297,000 was paid in restricted stock recorded at fair value. At the corporate level, cash compensation decreased by $26,000, while the amounts paid in restricted stock recorded at fair value increased by $648,000 for a net increase of $622,000. The remaining difference is attributed to ring 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 decreased 4% as a percentage of sales from 2016 to 2017. The Company’s wholly owned subsidiary, E.A.J.: PHL, Airport, paid $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. As has been previously described, our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration of the lease the restaurant closed. Beginning in May 2017, there will not be any further rent expense pursuant to this lease. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado and began recording lease expense of $5,500 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 rent expense for the year. Beginning September 1, 2016, we began leasing office space in Berlin, Germany on a month to month basis at a cost of EUR 250 plus 19% tax per person up to a maximum of 10 people. The Berlin office is being used by leased employees hired by the Company for the marketing and user acquisition for the Pocket Starships game. Beginning October 17, 2016, we began leasing shared office for one employee in Redmond, Washington on a month to month basis at a cost of $225 per month per desk.

 

Depreciation and amortization expenses decreased by $8,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This is attributable to certain of the Company’s office equipment, furniture and fixtures, and other fixed assets being fully depreciated, no new fixed asset purchases during the three months ended March 31, 2017, and reductions in the amount of capitalized licensing rights subject to amortization.

 

Professional fees increased $1,373,000 from $219,000 for the three months ended March 31, 2016 to $1,592,000 for the three months ended March 31, 2017. Professional fees during 2017 included $1,407,000 for investor and public relations, of which $200,000 was settled in cash and $1,207,000 was paid in restricted stock recorded at fair value, $51,000 for accounting and auditing services, $37,000 for legal fees, $90,000 for consulting and professional fees related to our digital media segment, $7,000 for other professional service needs. Professional fees during 2016 $71,000 for investor and public relations, of which $21,000 was settled in cash and $50,000 was paid in restricted stock recorded at fair value, $49,000 for accounting and auditing services, $13,000 for legal fees, $75,000 for consulting and professional fees related to our digital media segment, $11,000 for other professional service needs.

 

During the three months ended March 31, 2017, the Company incurred research and development costs of $113,000 in connection with fees paid to a game developer for the development of the Pocket Starships game, compared to $75,000 during the three months ended March 31, 2016.

 

Other general and administrative expenses increased $173,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The increase can be attributed primarily to software licensing and publishing costs which increased by $132,000, travel costs which increased by $11,000, and various other general and administrative cost increases.

 

The Company had unrealized losses on trading securities of $15,000 for the year ended March 31, 2017 compared to unrealized gains of $101,000 for the three months ended March 31, 2016. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities.

 

The Company did not sell any trading securities during the three months ended March 31, 2017. The Company realized losses from the sale of trading securities of $49,000 for the three months ended March 31, 2016. Realized gains and losses are the difference between the selling prices and fair value of the underlying trading securities at the date of sale.

19 
 

Digital Media Segment:

   2017  2016  Difference  %
Revenues  $52,000   $35,000   $17,000    100%
General and administrative   864,000    333,000    531,000    159%
Depreciation and amortization   3,000    8,000    (5,000)   100%
Operating Loss  $(815,000)  $(306,000)  $(509,000)   166%

  

Results of Operations – For the three months ended March 31, 2017 the Digital Media segment had an operating loss of $815,000 compared to an operating loss of $306,000 for three months ended March 31, 2016. This increase is due to increased time and resources being devoted to the development of Pocket Starships. Management’s plan for the next 12 months is to continue building upon this foundation and focus our efforts on marketing, user acquisition optimization and retention. We will also continue to provide the monthly advances to further the development, enhancement and maintenance of the game as needed to meet the needs of the users and maximize revenue into the future. In addition to our plans for Pocket Starships, we will continue to seek additional games and apps to publish as we strive to broaden our range of products and increase revenues and operating cash flows. We expect these marketing, development and expansion plans will be financed through existing cash, operating cash flows from game revenues and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities.

 

Revenues – For the three months ended to March 31, 2017, the Digital Media segment had revenues of $52,000 compared to revenues of $35,000 the three months ended March 31, 2016. Management expects digital media revenues to increase during the next 12-18 months as the Company expands its mobile games and application development and publishing activities through the acquisition and/or development of its own intellectual property and publishing agreements with developers.

 

General and Administrative Expenses – For the three months ended to March 31, 2017, the Digital Media segment had total selling, general and administrative expenses of $864,000, which included Labor and related expenses of $383,000, of which $77,000 was paid in cash and $306,000 was paid in restricted stock recorded at fair value, rent expense of $3,000, professional fees of $93,000, of which $48,000 was paid in cash and $45,000 was paid in restricted stock recorded at fair value, research and development costs of $113,000, software licensing and publishing costs of$147,000, marketing costs of $44,000, travel costs of $20,000, and various other general and administrative costs of $61,000. For the three months ended March 31, 2016, the Digital Media segment had total selling, general and administrative expenses of $334,000, which included Labor and related expenses of $71,000, of which $62,000 was paid in cash and $9,000 was paid in restricted stock recorded at fair value, marketing expenses of $75,000, research and development costs of $75,000, software licensing and publishing costs of $15,000, professional fees of $75,000, and other general and administrative costs of $23,000.

 

Depreciation and Amortization Expenses – For the three months ended March 31, 2017 the Digital Media segment had total depreciation and amortization expense of $3,000 compared $8,000 for the three months ended March 31, 2016.

 

Restaurant Segment:

 

   2017  2016  Difference  %
Revenues  $312,000   $297,000   $15,000    5%
Cost of sales   99,000    97,000    2,000    2%
General and administrative   233,000    239,000    (6,000)   -3%
Depreciation and amortization   15,000    19,000    (4,000)   -21%
Operating income (loss)  $(35,000)  $(58,000)  $23,000    -40%

20 
 

  

Results of Operations – For the three months ended March 31, 2017 the Restaurant segment had an operating loss of $35,000 compared to an operating loss of $57,000 for the three months ended March 31, 2016. This change is due primarily to the increase in revenues of $15,000, an increase in cost of sales of $2,000, and a decreased in operating costs (general and administrative costs including depreciation and amortization) of $9,000.

 

Revenues – For the three months ended March 31, 2017 and 2016, the Restaurant segment had sales of $312,000 and $297,000, respectively, for an increase of $15,000 or 5%. Restaurant revenues fluctuate based upon airport traffic fluctuations.

 

Costs of Sales – For the three months ended March 31, 2017 and 2016, the Restaurant segment had costs of sales of $99,000 and $97,000, respectively, for an increase of $2,000 or 2%. As a percentage of sales, cost of sales for the three months ended March 31, 2017 and 2016 were 32% and 33%, respectively for a decrease of 1%. This decrease represents fluctuations in the costs of food, beverage, and kitchen supplies.

 

General and Administrative Expenses – For the three months ended March 31, 2017 and 2016, the Restaurant segment had general and administrative expenses of $233,000 compared to $238,000 for the three months ended March 31, 2016. The increase in general and administrative expenses is due primarily decreases in percentage rent of $11,000 and increases in salary and wages of employees of $6,000.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has generated a net loss from continuing operations for the three months ended March 31, 2017 of $3,457,000. As of March 31, 2017, the Company had current assets of $2,548,000, which included cash and cash equivalents of $2,296,000, and trading securities of $44,000. The Company’s restaurant, Eat at Joe’s®, subsequently closed in April 2017 concurrent with the expiration of the lease. However, the Company plans to expand its mobile games and application development and publishing activities, such as Pocket Starships, through acquisition and/or development of its own intellectual property and publishing agreements with developers.

 

During the three months ended March 31, 2017 and 2016, the Company has met its capital requirements through a combination of collection of revenues and utilization of cash reserves.

 

Operating Activities - For the three months ended March 31, 2017, the Company used cash in operating activities of $908,000. For the three months ended March 31, 2016, the Company used cash in operating activities of $639,000. 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 three months ended March 31, 2017, the Company did not engage in any investing activities. During the three months ended March 31, 2016. During the three months ended March 31, 2016, the Company used cash of $10,000 for the purchase of software licensing rights, used $510,000 in cash to purchase trading securities, received $189,000 in cash proceeds from sales of trading securities and used cash of $40,000 for the purchase of property plant and equipment.

 

Financing Activities - During the three months ended March 31, 2017 and 2016, the Company did not engage in any financing activities.

 

During 2016 and 2017 we invested in the Company’s future by working closely with the development team at Spectacle Games to optimize game play and expand the availability of the Pocket Starships to more users through new and existing game portals, social networking sites and app stores throughout the world. Management’s plan for the next 12 months is to build upon this foundation and focus our efforts on marketing and optimizing user acquisition and retention. We will also continue to provide the monthly advances to Spectacle for further development, enhancement and maintenance of the game as needed to meet the needs of the users and maximize revenue into the future. In addition to our plans for Pocket Starships, we will continue to seek additional games and apps to publish as we strive to broaden our range of products and increase revenues and operating cash flows. We expect these marketing, development and expansion plans will be financed through existing cash, operating cash flows from game revenues and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities.

 

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We estimate the Company currently has sufficient cash and liquidity to meet its anticipated working capital for the next twelve months. Historically, we have financed our operations primarily through private sales of our trading securities or through sales of our common stock. If our sales goals for our products do not materialize as planned, we believe that the Company can reduce its operating and product development costs that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.

 

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.

 

Though our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. we generated 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.

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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.

 

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.

 

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 March 31, 2017, 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.

 

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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 captioned: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate principal amount of $1,500,000 in 1998. 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 and is vigorously defending this lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment, which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on January 8, 2018. Based upon available information at this very early stage of litigation, it is still the belief of management and opinion 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.

 

ITEM 1A.RISK FACTORS

 

Not applicable to smaller reporting companies.

 

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

 

During January, February, and March 2017, the Company issued 1,250,000 restricted common shares as part of the base salary pursuant to employment contracts with two officers of the Company. These shares were recorded at fair value of $847,000 in the statement of operations and comprehensive income as part of Labor and related expenses for the three months ended March 31, 2017. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

During January, February, and March 2017, the Company issued 1,560,000 restricted common shares pursuant to third party service agreements. These shares were recorded at fair value of $1,065,000 in the statement of operations and comprehensive income as part of professional fees for the three months ended March 31, 2017. 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.

 

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)
10.1 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: May 15, 2017

  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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