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: September 30, 2015

 

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. (formerly Eat At Joe’s Ltd)
(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 November 2, 2015, there were 153,326,876 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 398,661 common shares), par value $0.0001.

 

 

1 
 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

  

SPYR, INC., AND SUBSIDIARIES
(Formerly EAT AT JOE'S LTD)
CONDENSED CONSOLIDATED BALANCE SHEETS
           
    September 30,
2015
    December 31,
2014
 
ASSETS   (Unaudited)      
Current Assets:          
   Cash and cash equivalents  $7,256,437   $6,994,180 
   Accounts receivable   53,662    4,271 
   Inventory   11,085    14,499 
   Prepaid expenses and other current assets   61,472    60,819 
   Trading securities, at market value   1,163,925    6,026,780 
          Total Current Assets   8,546,581    13,100,549 
           
   Property and equipment, net   251,986    155,250 
   Goodwill and other intangible assets, net   1,801,967    5,000 
   Other assets   22,299    15,000 
TOTAL ASSETS  $10,622,833   $13,275,799 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
LIABILITIES          
Current Liabilities:          
   Accounts payable and accrued liabilities  $157,252   $72,550 
   Related party accounts payable   7,606    270,000 
          Total Current Liabilities   164,858    342,550 
           
   Deferred tax liability – non-current   117,741    —   
         Total Liabilities   282,599    342,550 
           
STOCKHOLDERS’ EQUITY          
   Preferred stock, $0.0001 par value, 10,000,000 shares authorized          
      107,636 Class A shares issued and outstanding          
        as of September 30, 2015 and December 31, 2014   11    11 
     20,000 Class E shares issued and outstanding          
        as of September 30, 2015 and December 31, 2014   2    2 
   Common Stock, $0.0001 par value, 250,000,000 shares authorized          
        153,326,876 and 140,627,710 shares issued and outstanding          
        as of September 30, 2015 and December 31, 2014   15,333    14,063 
   Common stock issuable, 0 and 5,500,000 shares          
        as of September 30, 2015 and December 31, 2014   —      987,500 
   Additional paid-in capital   31,591,978    26,681,601 
   Accumulated deficit   (21,267,090)   (14,749,928)
          Total Stockholders’ Equity   10,340,234    12,933,249 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $10,622,833   $13,275,799 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2 
 

 

SPYR, INC., AND SUBSIDIARIES
(Formerly EAT AT JOE'S LTD)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
             
   For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
   2015  2014  2015  2014
             
Revenues  $465,676   $373,664   $1,610,188   $1,113,305 
Cost of sales   155,083    140,725    358,248    372,274 
          Gross Margin   310,593    232,939    1,251,940    741,031 
                     
Expenses                    
   Labor and related expenses   421,864    86,660    1,561,948    273,472 
   Depreciation and amortization   45,673    17,997    108,235    54,129 
   Professional fees   185,552    322,387    2,328,275    506,478 
   Other general and administrative   541,255    125,465    1,501,155    388,611 
          Total Operating Expenses   1,194,344    552,509    5,499,613    1,222,690 
          Operating Loss   (883,751)   (319,570)   (4,247,673)   (481,659)
                     
Other Income (Expense)                    
   Interest and dividend income   5,712    2,256    16,699    5,752 
   Interest expense - related party   —      (147,072)   —      (439,918)
   Change in unrealized gain (loss) on trading securities   (227,554)   234,444    (1,314,931)   483,926 
   Gain (loss) on sale of marketable securities   (485,928)   —      (971,257)   5,819,432 
          Total Other Income (Expense)   (707,770)   89,628    (2,269,489)   5,869,192 
                     
Income (Loss) Before Income Taxes   (1,591,521)   (229,942)   (6,517,162)   5,387,533 
Provision for income taxes   —      159,000    —      (1,666,000)
Net Income (Loss)   (1,591,521)   (70,942)   (6,517,162)   3,721,533 
                     
Other Comprehensive Income                    
  Unrealized gain on available-for-sale securities   —      (2,343,916)   —      2,813,210 
Total Comprehensive Income (Loss)  $(1,591,521)  $(2,414,858)  $(6,517,162)  $6,534,743 
                     
Earnings (Loss) Per Share:                    
   Basic  $(0.01)  $—     $(0.04)  $0.03 
   Diluted  $(0.01)  $—     $(0.04)  $0.03 
                     
Weighted Average Common Shares                    
  Basic   153,241,052    136,627,710    151,840,448    136,627,710 
   Diluted   153,241,052    136,627,710    151,840,448    137,222,240 
                     
The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

3 
 

 

SPYR, INC., AND SUBSIDIARIES
(Formerly EAT AT JOE'S LTD)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)
                                         
                                         
    Preferred Stock           Common   Additional        
    Class A   Class E   Common Stock   Stock   Paid-in   Accumulated    
    Shares   Amount   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Total
Balance at December 31, 2014   107,636    $     11   20,000    $       2   140,627,710    $ 14,063    $ 987,500    $ 26,681,601    $(14,749,928)    $ 12,933,249
                                         
Common stock issued for employee signing bonuses               -               -                     -               -              5,500,000            550     (987,500)            986,950                       -                         -   
Common stock issued for employee compensation               -               -                     -               -              1,679,166            168                 -               879,015                       -               879,183
Common stock issued for professional fees               -               -                     -               -              2,420,000            242                 -            1,280,308                       -            1,280,550
Common stock issued for acquisition of Franklin Networks, Inc.               -               -                     -               -              2,500,000            250                 -            1,699,750                       -            1,700,000
Fair value of warrants granted to employee               -               -                     -               -                           -                  -                    -                 16,564                       -                 16,564
Vesting of shares of common stock issued for services               -               -                     -               -                 600,000              60                 -                 47,790                       -                 47,850
Net loss               -               -                     -               -                           -                  -                    -                         -      (6,517,162)        (6,517,162)
Balance at September 30, 2015   107,636    $     11   20,000    $       2    $ 153,326,876    $ 15,333    $           -       $ 31,591,978    $(21,267,090)    $ 10,340,234
                                         
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4 
 

 

SPYR, INC., AND SUBSIDIARIES
(Formerly EAT AT JOE'S LTD)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
   For the Nine Months Ended
September 30,
   2015  2014
Cash Flows From Operating Activities:          
Net income (loss) for the period  $(6,517,162)  $3,721,533 
Adjustments to reconcile net income (loss) to net cash          
          provided by (used in) operating activities:          
     Depreciation and amortization   108,235    54,129 
    Fair value of vesting warrants   16,564    —   
     Non-cash interest on notes payable, related parties   —      439,918 
     Common stock issued for employee compensation   879,183    —   
     Common stock issued for professional fees   1,280,550    —   
     Vesting of shares of common stock issued for services   47,850    —   
     Unrealized (gain) loss on trading securities   1,314,931    (483,926)
     (Gain) loss on sale of marketable securities   971,257    (5,819,432)
     Deferred income tax expense   —      594,000 
     Increase in accounts receivables   (49,391)   1,053 
     Decrease (increase) in inventory   3,414    (3,000)
     (Increase) decrease in prepaid expense and other current assets   (653)   (33,342)
     Increase in other assets   (7,299)   —   
     Increase in federal income taxes payable   —      1,072,000 
     Increase in accounts payable and accrued liabilities   84,702    22,867 
     Decrease in related party accounts payable   (262,394)   —   
Net Cash Used in Operating Activities   (2,130,213)   (434,200)
           
Cash Flows From Investing Activities:          
     Purchases of trading securities   —      (1,402,032)
     Purchases of available-for-sale securities   —      (500,000)
     Prepayment on purchase of available-for-sale securities   —      (46,250)
     Proceeds from sale of trading securities   2,576,667    8,176,418 
     Purchase of property and equipment   (163,995)   —   
     Purchase of domain name   (20,202)   (5,000)
Net Cash Provided by Investing Activities   2,392,470    6,223,136 
           
Cash Flows From Financing Activities:          
Net Cash Provided by Financing Activities   —      —   
           
Increase in cash and cash equivalents   262,257    5,788,936 
Cash and cash equivalents at beginning of period   6,994,180    1,628,529 
Cash and cash equivalents at end of period  $7,256,437   $7,417,465 
           
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:          
   Unrealized gain on available-for-sale securities  $—     $2,813,210 
   Issuance of common stock valued at 1,700,000 for acquisition of Franklin allocated to:          
      Fair value of identified intangible assets  $671,131   $—   
      Goodwill acquired  $1,146,610   $—   
      Deferred Tax liability  $117,741   $—   
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5 
 

 

SPYR, INC. AND SUBSIDIARIES (formerly Eat At Joe’s Ltd)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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, 2014 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2014 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.

 

From 2002 to present, the Company has owned and operated one “American Diner” theme restaurant called “Eat at Joe’s (R)”. Located in the Philadelphia International Airport, Eat at Joe's, the classic American grill, is a restaurant concept that takes you back to eating in the era when favorite old rockers were playing on chrome-spangled jukeboxes and neon signs reflected on shiny tabletops of the 1950's.

 

On December 16, 2014, the Company amended it articles of incorporation and changed its domicile to Nevada.

 

On February 23, 2015 the Company issued an aggregate of 2.5 million shares of its restricted common stock valued at $1,700,000, in exchange for the issued and outstanding shares of Franklin Networks, Inc., a Tennessee corporation. (“Franklin”). (See Note 3).

 

In February 2015, the Company changed its name from Eat at Joe’s, Ltd. to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March 12, 2015.

 

On March 24, 2015, the Company organized its wholly owned subsidiary SPYR APPS, LLC, (“Apps”) a Nevada Limited Liability Company for the purpose of expanding the Company’s digital media presence into the mobile app industry.

 

Nature of Business

 

The primary focus of the business of SPYR, Inc. (the “Company”) is digital media publishing and advertising and the development of mobile applications and games. The Company also owns and operates an “American Diner” theme restaurant called “Eat at Joe’s (R).”

 

Principles of Consolidation

 

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

6 
 

 

The results of operations attributable to subsidiaries are included in the consolidated results of operations beginning on the date on which the Company’s interest in a subsidiary was acquired.

 

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 Franklin Networks, Inc. we produce content for websites and attract visitors to our sites, and then sell advertising on our sites, which generates revenue. Ad revenue is recognized when the service has been provided and collection is reasonably assured.

 

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. Revenue is recognized when the service has been provided and collection is reasonably assured.

 

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.

 

Goodwill and Other Intangible Assets

 

Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.

 

The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, are recognized as an expense when incurred.

 

An intangible asset (excluding goodwill) with a definite useful life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine whether events and circumstances continue to support an indefinite useful life.

 

There were no indications of impairment based on management’s assessment of these assets at September 30, 2015. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased revenues and increased costs, we may have to record an impairment to our goodwill and intangible assets.

7 
 

 

Accounts Receivable

 

The Company evaluates the collectability of its accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected.

 

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 June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

 

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.

 

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.

 

The basic and fully diluted shares for the three and nine months ended September 30, 2015 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 436,681, Warrants – 250,000) would have had an anti-dilutive effect due to the Company generating a loss for the three and nine months ended September 30, 2015.

 

The basic and fully diluted shares for the three months ended September 30, 2014 are the same because the inclusion of the potential shares (Class E – 594,593) would have had an anti-dilutive effect due to the Company generating a loss for the three months ended September 30, 2014.

 

Diluted net income per common share for the nine months ended September 30, 2014 was calculated based on an increased number of shares that would be outstanding assuming that the Class E preferred shares were converted to 594,593 common shares as of September 30, 2014.

 

8 
 

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

 

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 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 Financial Accounting Standards Board (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.

 

Concentration of Credit Risk

 

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions, in the form of demand deposits. At September 30, 2015, the Company had cash deposits in four financial institutions that were above FDIC limits of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of these four financial institutions.

 

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.

 

9 
 

 

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, 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.

 

Reclassifications

 

In presenting the Company’s consolidated statement of operations for the nine months ended September 30, 2014, the Company reclassified merchant fees of $21,954, that were previously reflected as net revenues, to other general and administrative expenses, rent of $201,360 that was previously separately stated has been combined with other general and administrative expenses and professional fees of $506,478, that were previously combined with other general and administrative expenses, have been separately stated.

 

In presenting the Company’s consolidated statement of operations for the three months ended September 30, 2014, the Company reclassified merchant fees of $12,089, that were previously reflected as net revenues, to other general and administrative expenses, rent of $95,100 that was previously separately stated has been combined with other general and administrative expenses and professional fees of $322,387, that were previously combined with other general and administrative expenses, have been separately stated.

 

NOTE 2 - INVESTMENT IN TRADING SECURITIES

 

The Company’s securities investments that are bought and held for an indefinite period of time are classified as available-for-sale securities. Available-for-sale securities are purchased with the intent of selling them before they reach maturity and are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. The Company’s available-for-sale securities are marketable securities and have no maturity date. When sold the cost of the securities is determined using the average purchase cost of the securities and the difference is recorded as a realized gain or loss. The Company will transfer some of its available for sale securities to trading securities. When this occurs the unrealized gain or loss is immediately recognized in earnings. 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.

 

10 
 

 Change in investments in securities is summarized as follows:

Fair Value at   Proceeds from   Loss on   Change In Unrealized   Fair Value at
January 1, 2015   Sale   Sale   Gain (Loss)   September 30, 2015
 $                   6,026,780    $                 (2,576,667)    $                    (971,257)    $            (1,314,931)    $                   1,163,925

  

Realized gains and losses are determined on the basis of specific identification. During the nine months ended September 30, 2015 and 2014, sales proceeds and gross realized gains and losses on securities classified as available-for-sale securities and trading securities were:

 

   September 30,
2015
  September 30,
2014
       
  Sales proceeds  $2,576,667   $8,176,418 
  Gross realized (losses)  $(971,257)  $(122,122)
  Gross realized gains   —      5,941,554 
  Gain on sale of marketable securities  $(971,257)  $5,819,432 

  

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
    September 30, 2015   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                   1,163,925    $                   1,163,925    $                               -       $                          -   
Money market funds                            248,749                            248,749                                     -                                   -   
Total    $                   1,412,674    $                   1,412,674    $                               -       $                          -   

 

 

 

        Fair Value Measurements at Reporting Date Using
        Quoted Prices   Significant   Significant
        in Active   Other   Unobservable
    Fair Value at   Markets   Observable Inputs   Inputs
    December 31, 2014   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                   6,026,780    $                   6,026,780    $                               -       $                          -   
Money market funds                            673,281                            673,281                                     -                                   -   
Total    $                   6,700,061    $                   6,700,061    $                               -       $                          -   

 

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NOTE 3 – ACQUISITION

 

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 has been accounted for as a purchase and the operations of Franklin have been consolidated since February 23, 2015, the effective date of the acquisition. The $1.7 million purchase price was allocated based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm. The allocation of the purchase price was as follows:

 

Intangible assets:     
·        Domains and websites  $591,229 
·        Covenants not to compete   79,902 
Deferred tax liability   (117,741)
Goodwill   1,146,610 
Purchase price  $1,700,000 

 

The Company estimates that the intangible assets will have a life of 3.5 to 10 years.

 

During the period ended September 30, 2015, the Company recorded amortization expense of $40,976. As of September 30, 2015, the unamortized balance of these intangible assets amounted to $630,155. The recorded goodwill of $1,146,610 is not amortized and will be subject to impairment analysis at least annually.

 

The Company plans to update its purchase price allocation upon completion of an independent valuation firm’s measurement and allocation of the purchase price based upon the fair value of the acquired assets by December 2015. The Company will amend its Form 8-K filed on February 27, 2015 to include audited financial statements and pro forma information for Franklin. As Franklin did not operate in the corresponding period in the previous year, no pro-forma financial information was available.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   September 30,
2015
  December 31,
2014
Equipment  $130,755   $106,861 
Furniture & fixtures   71,184    3,964 
Leasehold improvements   347,518    274,637 
    549,457    385,462 
Less: accumulated depreciation and amortization   (297,471)   (230,212)
   Property and Equipment, Net  $251,986   $155,250 

  

Depreciation and amortization expense for the three months ended September 30, 2015 and 2014 was $25,185 and $17,997 and for the nine months ended September 30, 2015 and 2014 was $67,259 and, $54,129, respectively.

 

NOTE 5 - RELATED PARTY TRANSACTIONS

 

On February 23, 2015, the Company acquired Franklin Networks, Inc. from Mark McGarrity and another minority shareholder. Subsequently, on March 2, 2015, Mr. McGarrity was hired as Chief Information Officer of the Company.

 

During the months of April, May and June, 2015 all activities of the Company’s wholly owned subsidiary Franklin Networks Inc. were conducted from shared business offices of an officer of the Company. The Company paid $2,500 per month for the use of these facilities for a total of $7,500 to this officer.

 

During the months of April, May, June and July 2015, the Company used consulting services of a company owned by an officer of the Company in the amount of $38,215.

12 
 

 

During the period ended September 30, 2015, the Company used consulting services of a company owned by the Chairman of the Company in the amount of $45,000.

 

NOTE 6 – STOCKHOLDERS EQUITY

 

Common Stock

 

In December 2014 the Company entered into an employment agreement with two officers effective February 2015. As part of the agreement, the Company agreed to issue a total of 5,500,000 shares of the Company’s restricted common stock as a form of signing bonus. The Company determined that it was contractually obligated to issue the 5,500,000 signing bonus shares at December 31, 2014 and as a result, recorded its fair value of $987,500 in the December 31, 2014 statement of stockholders’ equity as common stock issuable. The shares issuable were valued at the date of the respective agreements. These shares were issued on January 9, 2015.

 

During the period ended September 30, 2015, the Company issued an aggregate of 1,679,166 shares of common stock to employees with a total fair value of $879,183 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $879,183 upon issuance. The shares issued were valued at the date of the respective agreements.

 

During the period ended September 30, 2015, the Company issued an aggregate of 2,420,000 shares of common stock to consultants with a total fair value of $1,280,550 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,280,550 upon issuance. The shares issued were valued at the date of the respective agreements.

 

On February 23, 2015 the Company issued 2,500,000 shares of the its restricted common stock valued at $1,700,000, pursuant to the acquisition of Franklin Networks, Inc. See Note 3.

 

Common Stock with Vesting Terms

 

In August 2015, the Company granted 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.

 

In February 2015, the Company granted 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.

 

During the period ended September 30, 2015, 183,334 shares vested and as a result, the Company recognized compensation cost of $47,850. As of September 30, 2015, total unvested shares totaled 416,666 shares with compensation costs of approximately $114,200 which will be recognized in fiscal years 2016 and 2017.

 

Warrants

 

The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting December 31, 2014 up to September 30, 2015.

   Warrants  Weighted Avg.  
Exercise Price
 December 31, 2014    —     $—   
 Granted    250,000    0.55 
 Exercised    —      —   
 Cancelled    —      —   
 September 30, 2015    250,000   $0.55 

 

On June 22, 2015, pursuant to an employment agreement, the Company granted an employee warrants to purchase 250,000 shares of common stock at $0.55 per share. The warrants vest one year after grant and expire in one year thereafter. Total fair value of the warrants at grant date amounted to $60,914 using the Black-Scholes Option Pricing model with the following assumptions: life of 0.5 year; risk free interest rate of 0.08%; volatility of 145% and dividend yield of 0%. During the period ended September 30, 2015, the Company recorded compensation expense of $16,564 pursuant to the vesting of the warrants. In addition, the Company is obligated to issue warrants to purchase between 100,000 to 300,000 shares of common stock upon achievement of certain milestones or benchmarks by the employee. As of September 30, 2015, the Company determined that the probability of achievement of these milestones or benchmark is remote. The Company will make a determination on the probability of its achievement in future reporting period.

13 
 

 

At September 30, 2015, the aggregate intrinsic value of the warrants outstanding was $0. Future unamortized compensation expense on the unvested outstanding warrants at September 30, 2015 is $44,350.

 

NOTE 7 – SEGMENT REPORTING

 

The Company operated in one segment during 2014, but concurrent with the acquisition of Franklin Networks, Inc. on February 23, 2015 (see Note 3), we operate in two segments: Digital Media and Restaurant, which provide different products or services.

 

Digital Media Segment - Through our wholly owned subsidiary Franklin Networks, Inc., the Company produces content for websites and attracts visitors to our sites, and then we programmatically sell advertising on our sites, which generates revenue. Through our wholly owned subsidiary SPYR APPS, LLC, the Company is expanding its digital media presence into the mobile app industry.

 

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
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
                     
Revenues  $392,553   $1,217,635   $—     $1,610,188 
Cost of sales   —      358,248    —      358,248 
General and administrative   1,186,349    676,125    3,528,904    5,391,378 
Depreciation and amortization   41,423    55,720    11,092    108,235 
Operating income (loss)  $(835,219)  $127,542   $(3,539,996)  $(4,247,673)
                     
                     
Current assets   90,227   $271,126   $8,185,228   $8,546,581 
Fixed assets   6,715    115,445    129,826    251,986 
Intangible assets and goodwill   1,776,765    —      25,202    1,801,967 
Other non-current assets   —      16,610    5,689    22,299 
Total assets  $1,873,707   $403,181   $8,345,945   $10,622,833 

 

14 
 

 

 

 

REPORTABLE SEGMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2014
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
                     
Revenues  $—     $1,113,305   $—     $1,113,305 
Cost of sales   —      372,274    —      372,274 
General and administrative   —      609,937    558,624    1,168,561 
Depreciation and amortization   —      54,129    —      54,129 
Operating Loss  $—     $76,965   $(558,624)  $(481,659)
                     
                     
Current assets  $—     $220,855   $12,879,694   $13,100,549 
Fixed assets   —      155,250    —      155,250 
Intangible assets and goodwill   —      —      5,000    5,000 
Other non-current assets   —      15,000    —      15,000 
Total assets  $—     $391,105   $12,884,694   $13,275,799 

 

 

 

REPORTABLE SEGMENTS
THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
             
    Digital Media    Restaurants    Corporate    Consolidated 
                     
2015                    
Revenues  $21,169   $444,507   $—     $465,676 
Cost of sales   —      155,083    —      155,083 
General and administrative   514,885    254,207    379,579    1,148,671 
Depreciation and amortization   20,845    19,146    5,682    45,673 
Operating income (loss)  $(514,561)  $16,071   $(385,261)  $(883,751)

 

   Digital Media  Restaurants  Corporate  Consolidated
                     
2014                    
Revenues  $—     $373,664   $—     $373,664 
Cost of sales   —      140,725    —      140,725 
General and administrative   —      187,145    347,367    534,512 
Depreciation and amortization   —      17,997    —      17,997 
Operating Loss  $—     $27,797   $(347,367)  $(319,570)
                     

 

 

15 
 

NOTE 8 – SUBSEQUENT EVENTS

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 and will vigorously defend this lawsuit. 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

 

Plan of Operations - SPYR, Inc. (formerly Eat At Joe’s Ltd) intends to maintain its restaurant operations as they currently exist and does not anticipate the hiring of new full-time employees or the need for additional funds to satisfy cash requirements for the restaurant operation.

 

Through its wholly-owned subsidiary, Franklin, the Company plans to develop its internet and digital holdings and operations by exploring opportunities for additional acquisitions in the digital media, software and related services realms.

 

Through its wholly-owned subsidiary SPYR APPS, LLC, the Company is expanding its digital media presence into the mobile app and game industry,

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2015 TO 2014

 

Results of Operations - For the nine months ended September 30, 2015 the Company had a net loss before income taxes of approximately $6,517,000 compared to income of approximately $5,388,000 for the nine months ended September 30, 2014. This change is due primarily to decreases in the amount of realized and unrealized gains on the sale of marketable securities of approximately $8,590,000, increased operating expenses of approximately $4,277,000, partially offset by increased gross margin of $511,000, increased interest and dividend income of $11,000 and reduced related party interest expense of $440,000.

 

More detailed explanation of the nine months ended September 30, 2015 and 2014 changes are included in the applicable segment discussions following.

 

Total Revenues - For the nine months ended September 30, 2015 and 2014, the Company had total sales of approximately $1,610,000 and $1,113,000, respectively, for an increase of approximately $497,000 or 45%. For the nine months ended September 30, 2015, revenues included approximately $392,000 in advertising revenues from our newly acquired Digital Media Publishing and Advertising subsidiary and approximately $1,218,000 in restaurants revenues. Management plans to expand its internet and digital holdings and operations by exploring opportunities for additional acquisitions in the digital media realm, including additional websites to expand its digital publishing presence, and expanding its mobile application and game development, all of which will be used to support our digital advertising and monetization efforts. 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 $1,289,000 to $1,562,000 from $273,000 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Approximately $966,000 of this is due to hiring the executive officers during February and March of 2015. Of this amount, approximately $258,000 was paid in cash and $708,000 was paid in restricted stock recorded at fair value. Approximately $226,000 of the increase is due to hiring additional employees for our digital media operations. Of this amount, approximately $202,000 was paid in cash and $24,000 was paid in restricted stock and warrants recorded at fair value. The cost of labor is expected to increase in 2015 as a result of these new administrative compensation agreements.

 

The cost of rent decreased approximately 2% as a percentage of sales from 2014 to 2015. 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. The Company’s wholly owned subsidiary, Franklin Networks, Inc. paid $2,500 per month rent during 2nd quarter, and $1,000 during the month of July for the use of shared business offices of an officer of the Company. Effective August 1, 2015, Franklin Networks, Inc. pays $1,030 per month for office space located in Franklin Tennessee. Beginning May 1, 2015, the Company moved into its new corporate offices in Denver, Colorado and began recording lease expense of $5,487 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 will further increase our rent expense for the remainder of 2015.

 

17 
 

 

General and administrative expenses increased approximately $2,988,000 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase can be attributed primarily to professional fees, which increased by approximately $1,822,000, Digital media and marketing expenses of $683,000, depreciation and amortization of $54,000, and other general and administrative cost of $429,000. With regard to professional fees, approximately $1,322,000 is due to the issuance of 2,920,000 shares of restricted common stock of which, 500,000 shares of restricted common stock issued to third parties for legal services recorded at fair value of $295,000, and 2,420,000 shares of restricted common stock issued to third parties for consulting services recorded at fair value of $1,027,000. The Company paid approximately $421,000 in consulting fees for investor and public relations. The remaining $79,000 increase is due to increased accounting and other professional service needs.

 

Interest expense decreased approximately $440,000 for the nine months ended September 30, 2014 due to the settlement of the related party notes payable as of December 31, 2014 and management does not anticipate further borrowing during 2015.

 

The Company had unrealized losses on trading securities of approximately $1,315,000 for the nine months ended September 30, 2015 compared to unrealized gains of $484,000 for the nine months ended September 30, 2014. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities.

 

The Company realized losses from the sale of trading securities of approximately $971,000 for the nine months ended September 30, 2015, compared to realized gains of approximately $5,819,000 for the nine months ended September 30, 2014. Realized gains and losses are the difference between the selling prices and purchase costs of the underlying securities.

 

As of December 31, 2014, the Company had deferred tax assets arising from net operating loss carry-forwards, unrealized losses on marketable securities and deductible temporary differences of approximately $2,700,000. During the nine months ended September 30, 2015, the Company increased its net operating loss carry-forwards by approximately $4,295,000 and used approximately $56,000 in deductible temporary differences.

 

Management believes it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will not be sufficient to fully recover the deferred tax assets and has established a 100% valuation allowance of $2,491,000 against these potential future tax benefits. The Company will continue to evaluate the realizability of deferred tax assets quarterly.

 

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2015 TO 2014

 

Results of Operations - For the three months ended September 30, 2015 the Company had a net loss before income taxes of approximately $1,592,000 compared to a loss of approximately $230,000 for the three months ended September 30, 2014. This change is due primarily to decreases in the amount of realized and unrealized gains on the sale of marketable securities of approximately $949,000, increased operating expenses of approximately $641,000, partially offset by increased gross margin of $77,000, increased interest and dividend income of $4,000 and reduced related party interest expense of $147,000.

 

Total Revenues - For the three months ended September 30, 2015 and 2014, the Company had total sales of approximately $466,000 and $374,000, respectively, for an increase of approximately $92,000 or 25%. For the three months ended September 30, 2015, revenues included approximately $21,000 in advertising revenues from our newly acquired Digital Media Publishing and Advertising subsidiary and approximately $445,000 in restaurants revenues. Management plans to develop its internet and digital holdings and operations by exploring opportunities for additional acquisitions in the digital media, software and related services realms, and expand its mobile application and game development activities. 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 $335,000 to $422,000 from $87,000 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Approximately $127,000 of this is due to hiring the executive officers during February and March of 2015. Of this amount, approximately $105,000 was paid in cash and $22,000 was paid in restricted stock recorded at fair value. Approximately $142,000 of the increase is due to hiring additional employees for our digital media operations. Of this amount, approximately $135,000 was paid in cash and $7,000 was paid in restricted stock and warrants recorded at fair value. The cost of labor is expected to increase in 2015 as a result of these new administrative compensation agreements and the expansion of operations support staff.

 

18 
 

 

The cost of rent decreased approximately 3% as a percentage of sales from 2014 to 2015. 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. The Company’s wholly owned subsidiary, Franklin Networks, Inc. paid $2,500 per month rent during 2nd quarter, and $1,000 during the month of July for the use of shared business offices of an officer of the company. Effective August 1, 2015, Franklin Networks, Inc. pays $1,030 per month for office space located in Franklin Tennessee. Beginning May 1, 2015, the Company moved into its new administrative offices in Denver, Colorado and began recording lease expense of $5,487 per month pursuant to this lease agreement. On October 1, 2015, we are added additional square footage that more than doubled our administrative office space in Denver and will further increase our rent expense for the remainder of 2015.

 

General and administrative expenses increased approximately $308,000 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase can be attributed primarily to professional fees, which decreased by approximately $136,000, Digital media and marketing expenses of $210,000, depreciation and amortization of $28,000, and increased other general and administrative cost of $206,000 relating to rent, consulting, accounting and legal service needs.

 

Interest expense decreased approximately $147,000 for the three months ended September 30, 2014 due to the settlement of the related party notes payable as of December 31, 2014 and management does not anticipate further borrowing during 2015.

 

The Company had unrealized losses on trading securities of approximately $228,000 for the three months ended September 30, 2015 compared to unrealized gains of $234,000 for the three months ended September 30, 2014. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities.

 

The Company realized losses from the sale of marketable securities of approximately $486,000 for the three months ended September 30, 2015, compared to no realized gains or losses for the three months ended September 30, 2014. Realized gains and losses are the difference between the selling prices and purchase costs of the underlying securities.

 

Digital Media Segment:

 

Results of Operations – For the period since acquisition on February 23, 2015 to September 30, 2015 the Digital Media segment had a net loss before income taxes of approximately $835,000.

 

Revenues – For the period since acquisition of February 23, 2015 to September 30, 2015, the Digital Media segment had total sales of approximately $392,000. Management plans to develop its internet and digital holdings and operations by exploring opportunities for additional acquisitions in the digital media, software and related services realms, and expands its mobile application and game development activities.

 

General and Administrative Expenses – For the period since acquisition of February 23, 2015 to September 30, 2015, the Digital Media segment had total selling, general and administrative expenses of approximately $1,228,000, which included professional fees of approximately $40,000, digital marketing expenses of approximately $626,000, Labor and related expenses of approximately $292,000, rent expense of approximately $11,000, depreciation and amortization expense of approximately $41,000, and other general and administrative costs of approximately $218,000.

 

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 Restaurant Segment:

Results of Operations – For the nine months ended September 30, 2015 the Restaurant segment had net income before income taxes of approximately $128,000 compared to a net income of approximately $77,000 for the nine months ended September 30, 2014 This change is due primarily to an increase in revenues of approximately $105,000, and a decreased in cost of sales of approximately $14,000.

 

Revenues – For the nine months ended September 30, 2015 and 2014, the Restaurant segment had sales of approximately $1,218,000 and $1,113,000, respectively, for an increase of approximately $105,000 or 9%. We believe restaurant revenues will continue to fluctuate in the future as airport traffic fluctuates.

 

Costs of Sales – For the nine months ended September 30, 2015 and 2014, the Restaurant segment had costs of sales of approximately $358,000 and $372,000, respectively, for a decrease of approximately $14,000 or 4%. Costs of sales include the costs of food, beverage, and kitchen.

 

General and Administrative Expenses – For the nine months ended September 30, 2015 and 2014, the Restaurant segment had general and administrative expenses of approximately $732,000 compared to approximately $664,000 for the nine months ended September 30, 2014.

 

The increased revenue and decreased costs and expenses is attributed to personnel changes in restaurant management and employees leading to greater productivity, increased customer satisfaction, expanded repeat customer base, better price negotiation with suppliers and reduced product waste.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has generated a net loss for the nine months ended September 30, 2015 of approximately $6,517,000. As of September 30, 2015, the Company had current assets of approximately $8,547,000, which included cash and cash equivalents of approximately $7,256,000, and trading securities of approximately $1,164,000. 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 nine months ended September 30, 2015 and 2014, the Company has met its capital requirements through the sale of its trading securities for proceeds of $2,577,000 and $8,176,000, respectively.

 

Operating Activities - For the nine months ended September 30, 2015, the Company used cash for operating activities of $2,130,213. For the nine months ended September 30, 2014, the Company used cash for operating activities of $434,200. This change 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 during the nine months ended September 30, 2015 over the nine months ended September 30, 2014, including labor and related expenses, rent, professional fees, digital media marketing expenses and other general and administrative expenses.

 

Investing Activities - During the nine months ended September 30, 2015, the Company received $2,576,667 in cash proceeds from sales of trading securities and used cash of $184,197 for the purchase of property plant and equipment and domain names. During the nine months ended September 30, 2014, the Company received $8,176,418 in cash proceeds from sales of trading securities, used cash of $1,948,282 for the purchase of trading and available for sale securities and used cash of $5,000 for the purchase of domain names. As of September 30, 2015, the Company owns trading securities valued at $1,163,925.

 

Financing Activities - During the nine months ended September 30, 2015 and 2015, the Company did not engage in any financing activities.

 

After the completion of its expansion plans, 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.

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Each Eat at Joe's 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 Condensed 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 Condensed Consolidated Financial Statements.

 

Income Taxes

 

The Company recognizes deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities represent the expected future tax return consequences of those differences, which are expected to be either deductible or taxable when the assets and liabilities are recovered or settled.

 

Investments

 

The Company’s securities investments that are bought and held for an indefinite period of time are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. 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 on the balance sheet in current assets, with the change in fair value during the period included in earnings. Gains from the sales of such marketable securities are utilized to fund our 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Management of the Company is responsible for maintaining disclosure controls and procedures that are designed to ensure that financial information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the timeframes specified in the Securities and Exchange Commission’s rules and forms, consistent with Items 307 and 308 of Regulation S-K.

 

In addition, the disclosure controls and procedures must ensure that such financial information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

 

As of September 30, 2015, 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.

 

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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 and will vigorously defend this lawsuit. 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.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

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

 

On July 31, 2015, the Company issued 25,000 restricted common shares as part of the base salary pursuant to employment contracts with an officer of the Company. These shares were recorded at fair value of $9,250 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

On August 1, 2015, the Company issued 100,000 restricted common shares as part of the base salary pursuant to employment contracts with an employee of the Company. These shares were recorded at fair value of $6,167 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

On August 31, 2015, the Company issued 25,000 restricted common shares as part of the base salary pursuant to employment contracts with an officer of the Company. These shares were recorded at fair value of $6,250 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

On August 31, 2015, the Company issued 2,083 restricted common shares as part of the base salary pursuant to employment contracts with an employee of the Company. These shares were recorded at fair value of $521 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

On September 30, 2015, the Company issued 25,000 restricted common shares as part of the base salary pursuant to employment contracts with an officer of the Company. These shares were recorded at fair value of $6,253 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

 

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On September 30, 2015, the Company issued 2,083 restricted common shares as part of the base salary pursuant to employment contracts with an employee of the Company. These shares were recorded at fair value of $521 in the statement of operations and comprehensive income as part of Labor and related expenses for the nine months ended September 30, 2015. 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.

 

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
31** Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*** Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document

 

** Filed herewith

*** Furnished Herewith

(1) Incorporated by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 16, 2015

  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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