As filed with the Securities and Exchange Commission on November 6 , 2018

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM S-1 /A1
REGISTRATION STATEMENT

Amendment No. 1
UNDER
THE SECURITIES ACT OF 1933

SPYR®, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of incorporation or organization)

7372
(Primary Standard Industrial Classification Code Number)


75-2636283

(I.R.S. Employer Identification Number)

 

__________________________________________________________

 

4643 South Ulster Street, Ste. 1510

Regency Plaza

Denver CO. 80237
Telephone: (303) 991-8000
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

__________________________________________________________

 

Registered Agents, Inc.

401 Ryland Street, Ste. 200-A

Reno, NV 89502
Telephone: (775) 401-6800
(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Tad Mailander, Esq.

945 4th Avenue, Ste. 311

San Diego, CA 92101

Telephone: (619) 239-9034

 

Approximate date of commencement of proposed sale to the public
From time to time after the effective date of this registration statement.

 

1 
 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

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 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 (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

 

 

2 
 

 

Calculation of Registration Fee

 

Title of each class of
securities to be registered
  Amount to be
Registered (1)
  Proposed Maximum Offering Price per Share   Proposed Maximum Aggregate Offering Price   Amount of
Registration Fee
Shares of Common Stock underlying warrants, par value $0.0001 per share   1,700,000(2)   $2.00   $3,400,000   423.30
Shares of Common Stock underlying convertible notes, par value $0.0001 per share   1,188,000(3)   $0.25   $297,000   36.98
Shares of Common Stock underlying warrants granted in stock purchase agreement, par value $0.0001 per share.   700,000(4)   $0.50   $350,000   43.58
Shares of Common Stock underlying warrants granted in consulting agreement, par value $0.0001 per share.   1,200,000(5)   $0.40   $480,000   59.76
Shares of Common Stock issued in litigation settlement agreement, par value $0.0001 per share.   3,500,000(6)   $0.30   $1,050,000   130.73
Shares of Common Stock underlying warrants granted in litigation settlement agreement, par value $0.0001 per share.   3,500,000(7)   $0.75   $2,625,000   326.81
Total   11,788,000       8,202,000   1,021.15

 

   
(1) An indeterminate number of additional shares of common stock shall be issuable pursuant to Rule 416 under the Securities Act of 1933 to prevent dilution resulting from stock splits, stock dividends or similar transactions and in such an event the number of shares registered shall automatically be increased to cover the additional shares in accordance with Rule 416.
   
(2) Consists of 500,000 shares of common stock issuable to First Fire Global Opportunity Funds under the warrant agreement dated April 20, 2018; 200,000 shares of common stock issuable to Collier Investments, LLC under the warrant agreement dated May 22, 2018; 1,000,000 shares of common stock issuable to William D. Moreland under the warrant agreement dated May 30, 2018.
   
(3) Consists of shares of common stock issuable to Collier Investments, LLC under a convertible note dated May 22, 2018.
   
(4) Consists of 700,000 warrant shares of common stock issuable to Richard Goldfarb, under a warrant agreement granted in an underlying stock purchase agreement dated March 19, 2018.
   
(5) Consists of 1,200,000 warrant shares of common stock issuable to Calan Investments, LLC dba Kreloff Capital Partners under a consulting agreement dated January 12, 2018.
(6) Consists of 3,500,000 shares of common stock issuable to Zakeni Limited under a litigation settlement agreement dated July 12, 2018.
(7) Consists of 3,500,000 warrant shares of common stock issuable to Zakeni Limited under a litigation settlement agreement dated July 12, 2018.
   

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

3 
 

 

The information in this Prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

Subject to Completion, Dated November __ , 2018

 

Preliminary Prospectus

 

 

SPYR®, INC.

 

Shares of Common Stock

 

 

 

This prospectus relates to the offer and sale of shares of our common stock, par value $0.0001, of SPYR®, Inc., a Nevada corporation. The selling stockholders identified in this prospectus may sell up to 11,788,000 shares of our common stock issued pursuant to warrant agreements, convertible notes, warrants underlying stock purchase agreements and consulting agreements. All shares registered in accordance with this registration statement are being registered solely pursuant to the agreements noted above.

 

There is no agreed fixed price at which the selling shareholders are to sell the shares once registered. Solely for purposes of Item 501(b)(3) of Regulation SK, the Company’s bona fide estimate of the range of the maximum offering price to be $0.11 to $0.50 per share based on the 52-week low / high.

 

We will pay the expenses incurred in registering the shares, including legal and accounting fees. See Part II.

 

Our Common Stock is quoted by the OTC Markets under the symbol “SPYR”. On November 5, 2018, the closing price of our Common Stock was $0. 13 per share.

 

Investing in our Common Stock involves risks. See the heading “Risk Factors” commencing on page 8 of this Prospectus for a discussion of these risks, as well as in any Prospectus supplement related to these specific offerings.

 

We may amend or supplement this Prospectus from time to time by filing amendments or supplements as required. You should read the entire Prospectus and any amendments or supplements carefully before you make your investment decision.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this Prospectus is November 6 , 2018

 

4 
 

 

 

Table of Contents

 

    Page Number
About this Prospectus   5
Prospectus Summary   6
Risk Factors   8
Risks Related to Financial Position and Results of Operations   9
Risks Related to Our Business   10
Risks Related to Our Common Stock   12
Forward Looking Statements   14
Use of Proceeds   14
Dilution   14
Plan of Distribution   16
Description of Securities   17
Experts and Counsel   19
Interests of Named Experts and Counsel   19
Information with Respect to Our Company   20
Description of Business   20
Description of Property   22
Legal Proceedings   23
Market Price of and Dividends on Our Common Equity and Related Stockholder Matters   23
Financial Statements   24
Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
Directors and Executive Officers   36
Executive Compensation   39
Security Ownership of Certain Beneficial Owners and Management   40
Certain Relationships and Related Transactions   41
Where You Can Find More Information   42

 

ABOUT THIS PROSPECTUS

 

You should rely only on the information that we have provided in this Prospectus and any applicable Prospectus supplement. We have not authorized anyone to provide you with different information. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this Prospectus and any applicable Prospectus supplement. You must not rely on any unauthorized information or representation. This Prospectus is an offer to sell only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information in this Prospectus and any applicable Prospectus supplement is accurate only as of the date on the front of the document, regardless of the time of delivery of this Prospectus, any applicable Prospectus supplement, or any sale of a security.

 

When we refer to SPYR®, Inc. we use the terms “SPYR®,” “the Company,” “us,” “we” and “our.”

 

5 
 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our financial statements and the related notes and the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

The Offering

 

The selling stockholders identified in this prospectus may offer and sell an aggregate of up to 11,788,000 shares of our common stock under warrant agreements, warrants underlying stock purchase agreements, convertible promissory notes, warrants underlying consulting agreements, shares issued in litigation settlement agreement, and warrants underlying litigation settlement agreement. All shares registered in accordance with this registration statement are being registered solely pursuant to the noted agreements which are filed as exhibits to this registration statement. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

There is no agreed fixed price at which the selling shareholders are to sell the shares once registered. Solely for purposes of Item 501(b)(3) of Regulation SK, the Company’s bona fide estimate of the range of the maximum offering price to be $0.11 to $0.50 per share based on the 52-week low / high.

 

You should rely only on the information contained or incorporated by reference in this prospectus or any prospectus supplement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is not an offer to sell securities, and it is not soliciting an offer to buy securities, in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any prospectus supplement, as well as information we have previously filed with the SEC is accurate as of the date of those documents only. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

Our Company

 

SPYR®, Inc. acts as a holding company to develop a portfolio of profitable subsidiaries, not limited by any particular industry or business. On March 24, 2015, the Company organized its wholly owned subsidiary SPYR APPS®, LLC, a Nevada Limited Liability Company, to engage in the development and publication of electronic games that are downloaded for free by users of mobile devices such as cellular telephones and tablets, including those using Apple’s iOS and Google’s Android mobile operating systems.

 

Our Business and Strategy

 

Our current strategy is to publish and market games developed by third-party developers with the potential to develop our own games, either by contracting with third-party developers or by building or acquiring an in-house development team and to acquire revenue-producing games or companies. As of the date of this prospectus, we have not built or acquired an in-house development team, but are currently in the process of negotiating multiple acquisitions in the mobile games space that would include a development team. We intend to generate revenues from the games based upon users paying for additional features and levels of game play, and from the sale of advertising in our games. Our games use the “free to play” model, which allows users to download the games onto their devices and play them at no cost. “Free to play” is a business model that has existed in videogames (and other industries) for quite some time but one that has, in the last 2-3 years, been adopted by a large number of game developers and publishers both big and small. The “free to play” model allows us to offer games that have zero cost barriers preventing players from trying our games. Players that choose to not continue with the game nonetheless still become marketing channels to their friends, who may become a critical mass of players who do choose to pay for optional aspects of the games, including customization, faster game progress, additional content and more effective competition against other players. There are no limitations on potential purchases, thus catering to the financial capabilities/preferences of all players. We monetize the games by offering features and opportunities within the games that allow players to spend money to unlock new game levels, items and features.

 

Our Games

 

Contracting with a third-party developer, we released three games: “Plucky,” “Plucky Rush” and Rune Guardian in April, May and December 2015, respectively. They are available for free download on mobile devices in the Apple App Store and Google Play Store.

 

6 
 

We entered into our first publication and marketing agreement on October 21, 2015 with Superplus Games Oy for the publication of “Retro Shot.” “Retro Shot” was fully launched in February of 2016 and is available for free download on mobile devices in the Apple App Store and Google Play Store.

 

We entered into our second publishing and marketing agreement on December 17, 2015 with Spectacle Games Publishing (“Spectacle Games”), for its “Massively Multiplayer Online Role Playing Game,” “Pocket Starships,” which is available in the Apple App Store, the Google Play Store and the Amazon App Store for free download, and can also be played in a web browser, via hundreds of web portals around the world or on Facebook’s “Game Room” and VK.com.

 

Pocket Starships is a space warfare themed game that is available to be played regardless of what operating system the player uses, whether that is an Apple iOS device such as an iPhone or iPad, a Google Android device, including phones and tablets from a variety of hardware manufacturers using the Android operating system, or an Amazon Fire OS device such as a Kindle. Pocket Starships is also available to play on the Internet in any web browser at www.pocketstarships.com. Pocket Starships’ software engine allows players worldwide to play against each other in real time and in the same game “universe,” regardless of what platform is used. Thus, players can play Pocket Starships in the same game universe regardless of whether they are playing in a web browser at their desk or using an iPhone on the other side of the planet.. Pocket Starships’ game play is hardware and software agnostic, so regardless of device all users have the same game experience.

 

In June 2016, we obtained an exclusive option to purchase all assets pertaining to Pocket Starships (the “Option”) in consideration for 3,750,000 cash-based options, exercisable as follows: (a) 500,000 shares at $1.00 per share, expiring on December 31, 2017; (b) 750,000 shares at $2.50 per share, expiring on December 31, 2018; and (c) 2,500,000 shares at $5.00 per share, expiring on December 31, 2019. Under the Option, had the Company decided to exercise the Option, it would have purchased the assets for a cash payment of $5,000,000 plus $10,000,000 worth of shares of the Company’s common stock, valued at the time of closing of the purchase. The exclusive Option was exercisable by us at any time, in our sole discretion, through December 31, 2020.

 

On October 23, 2017, we restructured and exercised the Option by entering into a definitive agreement pursuant to which SPYR® acquired all of the game related assets of Pocket Starships in a cashless transaction, including the publishing agreement with Spectacle. The original terms of the Option were terminated. As a result, SPYR® acquired rights to retain 100% of the revenue generated from the game and will be the sole owner of all of the assets related to the game. The acquisition included, among other assets, all Pocket Starships related intellectual property, the userbase, artwork, software, internet domains, game store accounts (such as App Store, Play Store, Amazon, and Facebook Gameroom), web portal accounts (Facebook, VK.com, Kongregate, etc.) and internet domains (www.pocketstarships.com). Under the terms of the agreement, the game's owner received 8,000,000 restricted shares of SPYR® stock (subject to resale gating provisions) and 8,000,000 three-year cash-based options exercisable at $0.50 per share.

 

During 2017, we signed an agreement with CBS Consumer Products that will allow the incorporation of intellectual property (IP) from various Star Trek television series into future Pocket Starships updates and expansions. Our Pocket Starships development team is already working on expansions of Pocket Starships to include the Star Trek IP, which we expect will be released during the 4th quarter 2018. In Pocket Starships, players can build and pilot several ships and forge alliances on their quest for galactic domination. Players can perform or initiate various activities ranging from fighting pirates to participating in Faction Alerts. With the release of the expansion, those playing Pocket Starships will be able to explore new sectors and engage in exciting battles with the Borg and will be able to staff their ships with their favorite Star Trek characters from the Star Trek TV series franchise – including The Next Generation, Deep Space Nine, and Voyager, through a trading card expansion.

 

During July 2017, the Company entered into an agreement with Reset Studios, LLC for the development of at least two new idle tapper games to be published by SPYR®, the first of which, Steven Universe: Tap Together, features characters and storylines from Cartoon Network’s Steven Universe. The Company has secured the necessary license to use the Steven Universe IP in the game through a license agreement with Cartoon Network. The game allows players to play as a team of their favorite Steven Universe characters to battle increasingly difficult enemies in order to unlock new characters and rewards. By performing simple actions such as tapping the screen, players can progress in the game even when they’re not actively playing. Steven Universe: Tap Together was launched globally on the Google Play Store on August 2, 2018 and on the IOS App Store on August 9, 2018.

 

The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and software development costs and implementation of our business plans generally. The Company may also decide to diversify, through acquisition or otherwise, in other unrelated business areas if opportunities present themselves.

7 
 

 

We are a publicly listed company quoted on the OTC Market under the symbol “SPYR.”

 

Where You Can Find Us

 

The principal offices of our company are located at 4643 South Ulster Street, Regency Plaza, Suite 1510, Denver, Colorado 80237. Our telephone number is (303) 991-8000.

 

Summary of Financial Data

 

The following information represents selected audited financial information for our company for the years ended December 31, 2017 and selected unaudited financial information for our company for the six-month period ended June 30, 2018. The summarized financial information presented below is derived from and should be read in conjunction with our audited and unaudited financial statements, as applicable, including the notes to those financial statements which are included elsewhere in this prospectus along with the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page (+) of this prospectus.

 

Statements of Operations Data 

Six Month Period Ended June 30, 2018

(Unaudited)

  Year Ended December 31, 2017
Revenue  $27,000   $128,000 
Net operating expenses  $(5,020,000)  $(10,372,000)
Loss from continuing operations  $(4,993,000)  $(15,643,000)
Basic and diluted loss per share  $(0.03)  $(0.09)

 

Balance Sheets Data  As of
June 30,
2018
  As of
December 31, 2017
Cash and Cash Equivalents  $168,000   $86,000 
Total Current Assets  $231,000   $173,000 
Total Current Liabilities  $3,844,000   $2,533,000 
Total Stockholders’ Deficit  $(2,775,000)  $(2,262,000)
Accumulated Deficit  $(53,857,000)  $(48,842,000)

 

 

RISK FACTORS

 

An investment in our company involves a high degree of risk. In addition to the other information included in this prospectus, you should carefully consider the following risk factors described in this prospectus and the risk factors that may be described in any applicable prospectus supplement and the documents incorporated by reference in this prospectus. You should consider these matters in conjunction with the other information included or incorporated by reference in this prospectus. The risks and uncertainties described in this prospectus, any applicable prospectus supplement and the documents incorporated by reference herein are not the only ones facing us. Additional risks and uncertainties that we do not presently know about, or that we currently believe are not material, may also adversely affect our business. Our business, results of operations or financial condition could be seriously harmed, and the trading price of our common stock may decline due to any of these or other risks.

 

This prospectus contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this prospectus and include statements regarding the intent, belief or current expectations of our management, directors or officers primarily with respect to our future operating performance. Prospective purchasers of our securities are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements due to various factors. The accompanying information contained in this prospectus, including the information set forth below, identifies important factors that could cause these differences. See “Special Note Regarding Forward-Looking Statements” on page 14.

8 
 

 

RISKS RELATED TO OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS

 

We Have Historically Lost Money and Losses May Continue in the Future.

 

No assurances can be given we will be successful in reaching or maintaining profitable operations. Historically, we have relied upon the sales of our common stock, financing, and proceeds from the sales of marketable securities held for sale to generate funds to finance our activities. We currently have limited cash on hand to conduct the ongoing development of our digital advertising and publishing efforts, including mobile application and game development, and for exploring opportunities and new acquisitions. Our digital development and publishing efforts are in their developmental stages and are insufficient as of the date of this prospectus to generate sufficient revenues to finance our future operations. The existence of available financing or opportunities for sales of our common stock on acceptable terms is uncertain. We cannot assure you that sufficient financing, whether from external sources or related parties, will be available if needed, or on favorable terms. Further, the sale of our common stock to raise capital may cause significant dilution to our existing shareholders. The value of our marketable securities held for sale fluctuates from day to day instantaneously. You should not rely upon the prospective value of any of our marketable securities held for sale as a basis for an investment decision in our Company, since any value assigned to them is subject to material changes based on the inter-day trading values of those securities and are an unreliable basis for evaluating our revenue and funding for our future operations.

 

We have a history of operating losses and expect to incur losses for the foreseeable future. We may never generate significant revenues or achieve profitability.

 

We have historically lost money. The operating loss for the fiscal year December 31, 2017 was $(10,244,000), and for the six months ended June 30, 2018 was $(4,993,000), and future losses are likely to occur. We are continuing to implement a new business model focused on our Electronic Games Publishing and Development business. We have generated limited revenues to date from this segment. For the year ended December 31, 2017, our revenues from our Electronic Games operations was $128,000, and for the six months ended June 30, 2018, our revenues from our Electronic Games operations was $27,000. As of the date of this Prospectus, we have published seven mobile games, but we have not yet realized significant revenue from those games. There is no guarantee that revenue from our games segment will continue or develop and grow in amounts sufficient to fund operations.

 

We have a new and evolving business model.

 

Our Company and its prospects should be examined in light of the risks and difficulties frequently encountered by new and development stage companies in new and rapidly evolving markets. These risks include, among other things, the speed at which we can develop, publish and market our games; the growth of our games business, including our recently published games for mobile devices, each having limited market acceptance, and our ability to and to derive significant game play and advertising revenues from these ventures.

 

In early 2015, we changed our business model to focus on becoming a developer and publisher of “free-to-play” games for smartphones, tablets and other next-generation platforms. Free-to-play games are games that a player can download and play for free, but which allow players to access a variety of additional content and features for a fee, and to engage with various advertisements and offers that generate revenues for us. We launched our first free-to-play games – Plucky and Plucky Rush -- in the first and second fiscal quarters of 2015, and in 2016 launched Retro Shot, Rune Guardian, and Pocket Starships. We launched Home Makeover on May 30, 2017 and we launched Steven Universe: Tap Together on August 2, 2018. Although we recently retained persons with industry experience we believe will significantly advance our business, our operating history under this business model is relatively short. Regardless, our efforts to develop successful free-to-play games may prove unsuccessful or, even if successful, may take more time than we anticipate to achieve significant revenues because, among other reasons:

 

•       Many well-funded public and private companies have released, or plan to release, free-to-play games, and this competition may make it more difficult for us to differentiate our games and derive significant revenues from them;

 

•       Free-to-play games, including those delivered as a service, have a relatively limited history, and it is unclear how popular this style of game will become or remain or its revenue potential;

 

•       Our free-to-play strategy assumes that a large number of players will download our games because they are free and that we will then be able to effectively monetize the games; however, players may not widely download our games for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts, lack of sufficient features;

9 
 

 

•       Even if our games are widely downloaded, we may fail to retain users or optimize the monetization of these games for a variety of reasons, including poor game design or quality, lack of community features, gameplay issues such as game unavailability, long load times or an unexpected termination of the game due to technical issues, or our failure to effectively respond and adapt to changing user preferences through game updates; and,

 

•       We may have difficulty hiring the additional monetization, operations, technology, user experience and product management personnel that we require to support our continued the expansion of our digital publishing and advertising company.

 

We have a history of losses, our accountants expressed doubts about our ability to continue as a going concern and we require additional capital to execute our business plan.

 

As of the date of this prospectus, we have not yet achieved profitable operations. We have accumulated losses, a working capital deficiency and we expect to incur further losses in the implementation of our current business plan, all of which, according to our accountants, casts substantial doubt about our ability to continue as a going concern. We will require additional funds through the receipt of conventional sources of capital or through future sales of our Shares, until such time as our revenues are sufficient to meet our cost structure, and ultimately achieve profitable operations. These actions will result in dilution of the ownership interests of existing stockholders and may further dilute our book value, and that dilution may be material.

 

RISKS RELATED TO OUR BUSINESS

 

If we are unable to successfully develop and market our games or features, or our games do not perform as expected, our business and financial condition will be adversely affected.

 

With the release of any new game or any new features to an existing game, we are subject to the risks generally associated with new product or feature introductions and applications, including lack of market acceptance, delays in development and implementation, and failure of new games or features to perform as expected. In order to introduce and market new or enhanced games or features successfully with minimal disruption in customer purchasing patterns and user experiences, we must manage the transition from existing games in the market. There can be no assurance that we will successfully develop and market, on a timely basis, games, game enhancements or features that respond to technological advances by others, that our new games will adequately address the changing needs of the market or that we will successfully manage transitions. Further, failure to generate sufficient cash from operations or financing activities to develop or obtain improved games and technologies could have a material adverse effect on our results of operations and financial condition.

 

We distribute our games primarily on Apple's iOS and Google's Android platforms, and if the Apple App Store or the Google Play Store were unavailable for any prolonged period of time, our business will suffer.

 

We distribute our games primarily on Apple’s iOS and Google’s Android platforms. We are subject to each of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution and operation of applications on their respective storefronts. Each of Apple and Google has broad discretion to change its standard terms and conditions. In addition, these standard terms and conditions can be vague and subject to changing interpretations by Apple or Google. Any change to these standard terms and conditions, or in Apple's or Google's interpretation of these standard terms and conditions, could materially harm our games business, and we may not receive any advance warning of such change. In addition, each of Apple and Google have the right to prohibit a developer from distributing its applications on its storefront if the developer violates its standard terms and conditions. In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions, including by a new interpretation, and prohibits us from distributing our games on its storefront, it would materially harm our business and could cause our stock price to significantly decline. We also rely on the continued function of the Apple App Store and the Google Play Store, as we distribute our games through these two digital storefronts. There have been occasions in the past when these digital storefronts were unavailable for short periods of time. In the event that either the Apple App Store or the Google Play Store is unavailable for a prolonged period of time, it could have a material adverse effect on our revenues and operating results.

 

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.

 

Over time we will need to hire additional qualified personnel with expertise in such areas as digital production, software development, artists, financial matters and sales and marketing. We compete for qualified individuals with numerous other

digital media and software development companies. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.

10 
 

We rely on key members of management, and the loss of their services could adversely affect our success and development.

 

Our success depends on the expertise and continued service of certain other key executives and technical personnel. These individuals are a significant factor in our growth and ability to meet our business objectives in the digital game development and publishing spaces. Additionally, our success is highly dependent upon the efforts of our executive officers and our directors. It may be difficult to find a sufficiently qualified individual to replace key executives in the event of death, disability or resignation, resulting in our being unable to satisfactorily execute our business. The loss of one or more of our executive officers and directors could slow the growth of our business, or it may cease to operate at all, which may result in the total loss of an investor’s investment.

 

Compensation may be paid to our executive officers, directors and employees regardless of our profitability, which may limit our ability to finance our business and adversely affect our business.

 

Our executive officers are receiving compensation, and other current and future employees of our company may be entitled to receive compensation, payments and reimbursements regardless of whether we operate at a profit or a loss. Such obligations may negatively affect our cash flow and our ability to finance our digital publishing and advertising initiatives, which could cause our business to fail.

 

Because of pressures from competitors with more resources, we may fail to implement our business strategy profitably.

 

The digital games, publishing and advertising business is highly fragmented, extremely competitive, and subject to rapid change. By its nature, the business risks associated therewith are numerous and significant. The market for customers is intensely competitive and such competition is expected to continue to increase. We believe that our ability to compete depends upon many factors within and beyond our control, including the timing and market acceptance of new games, and enhancements to our existing games developed and published by us. We are a new and development stage digital game development and publishing company that distributes digital games for mobile media technology. Larger and more established companies, with significantly greater resources, are active in our market with similar technologies, and may be in better competitive positions than we are.

 

We may be unable to compete with larger or more established companies.

 

We face a large and growing number of competitors in the digital publishing and game entertainment industries. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition, and more established relationships in these industries than we do. As a result, certain of these competitors may be in better positions to compete with us for customers and audiences. We cannot be sure that we will be able to compete successfully with existing or new competitors.

 

If we do not continue to develop and offer compelling content and games and attract new consumers or maintain the engagement of our existing users, our advertising revenues could be adversely affected.

 

In order to attract consumers and maintain or increase engagement with our games, we believe we must offer compelling content. Acquiring, developing and offering new content, as well as new functionality, features and enhanced performance of our existing content and games, may require significant investment and time to develop. In addition, consumer tastes are difficult to predict and subject to rapid change. If we are unable to develop sufficient games that are attractive and relevant to our users, we may not be able to maintain or increase our existing users’ engagement on or attract new consumers to our games and as a result our search rankings, traffic and usage metrics, and advertising revenues may be adversely affected.

 

If our Games do not achieve market acceptance, we may not have sufficient financial resources to fund our operations or further development.

 

While we believe that a viable market exists for our games, there is no assurance that our games will prove to be an attractive alternative to conventional or competitive games in the markets that we have identified. If a viable market for our games cannot be created for our business or our games do not achieve market acceptance, we may need to commit greater resources than are currently available to develop commercially viable and competitive games. There can be no assurance that we would have sufficient financial resources to fund such development or that such development would be successful. In addition, if our games do not generate sufficient revenues, or we are unable to raise additional capital, we may be unable to fund our operations. Our ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond our control. There can be no assurance that, when required, sufficient funds will be available to us on satisfactory terms.

11 
 

 

Our business will suffer if the Internet or network systems fail or become unavailable.

 

A reduction in the performance, reliability and availability of Internet infrastructure would harm our ability to distribute our games to our users, as well as our reputation and ability to attract and retain users and content providers. Systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Systems could also be subject to viruses, break-ins, sabotage, acts of terrorism, acts of vandalism, hacking, cyber-terrorism and similar misconduct. We might not carry adequate business interruption insurance to compensate us for losses that may occur from a system outage. Any system error or failure that causes interruption in availability of games, or an increase in response time, could result in a loss of potential customers or content providers, which could have a material adverse effect on our business, financial condition and results of operations. If we suffer sustained or repeated interruptions, our games could be less attractive to our users and our business would be materially harmed.

 

We may be unable to protect our intellectual property rights from third-party claims and litigation, which could be expensive, divert management's attention, and harm our business.

 

Our success is dependent in part on obtaining, maintaining and enforcing our proprietary rights and our ability to avoid infringing on the proprietary rights of others. We seek protection for those inventions and technologies for which we believe such protection is suitable and is likely to provide a competitive advantage to us. Because patent applications in the United States are maintained in secrecy until either the patent application is published or a patent is issued, we may not be aware of third-party patents, patent applications and other intellectual property relevant to our games that may block our use of our intellectual property or may be used in third-party games that compete with our games and processes. In the event a competitor or other party successfully challenges our games, processes, patents or licenses, or claims that we have infringed upon their intellectual property, we could incur substantial litigation costs defending against such claims, be required to pay royalties, license fees or other damages or be barred from using the intellectual property at issue, any of which could have a material adverse effect on our business, operating results and financial condition.

 

We also rely substantially on trade secrets, proprietary technology, nondisclosure and other contractual agreements, and technical measures to protect our technology, application, design, and manufacturing know-how, and work actively to foster continuing technological innovation to maintain and protect our competitive position. We cannot assure you that steps taken by us to protect our intellectual property and other contractual agreements for our business will be adequate, that our competitors will not independently develop or patent substantially equivalent or superior technologies or be able to design around patents that we may receive, or that our intellectual property will not be misappropriated.

 

In addition, we may use open source software in our games and will continue to use open source software in the future. From time to time, we may be subject to claims brought against companies that incorporate open source software into their games or services, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license, or require us to devote additional research and development resources to changing our games or services, any of which would have a negative effect on our business and results of operations.

 

RISKS RELATED TO OUR COMMON STOCK

 

Our Common Stock May Be Affected By Limited Trading Volume and May Fluctuate Significantly

 

There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop or, if developed, be maintained. As a result, this could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. Substantial fluctuations in our stock price could significantly reduce the price of our stock.

 

There is no Assurance of Continued Public Trading Market, and Being a Low-Priced Security May Affect the Market Value of Our Stock

 

12 
 

To date, there has been only a limited public market for our common stock. Our common stock is currently quoted on the OTC Pink Sheets. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the market value of our stock. Our stock is subject to the low-priced security or so called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell such securities. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to recent regulations adopted by the SEC, any equity security that has a market price of less than $5.00 per share, subject to certain exceptions that we no longer meet). For example, brokers/dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Included in this document are the following:

 

-the bid and offer price quotes in and for the "penny stock," and the number of shares to which the quoted prices apply,
 -the brokerage firm's compensation for the trade, and,
 -the compensation received by the brokerage firm's sales person for the trade.

 

In addition, the brokerage firm must send the investor:

 

-a monthly account statement that gives an estimate of the value of each "penny stock" in the investor's account, and,
 -a written statement of the investor's financial situation and investment goals.

 

If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker/dealer, the broker/dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker/dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission's rules may limit the number of potential purchasers of the shares of our common stock.

 

Resale restrictions on transferring "penny stocks" are sometimes imposed by some states, which may make transaction in our stock more difficult and may reduce the value of the investment. Various state securities laws pose restrictions on transferring "penny stocks" and as a result, investors in our common stock may have the ability to sell their shares of our common stock impaired.

 

There can be no assurance we will have market makers in our stock.

 

If the number of market makers in our stock should decline, the liquidity of our common stock could be impaired, not only in the number of shares of common stock which could be bought and sold, but also through possible delays in the timing of transactions, and lower prices for the common stock than might otherwise prevail. Furthermore, the lack of market makers could result in persons being unable to buy or sell shares of the common stock on any secondary market.

 

As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.

 

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

Any payment of cash dividends will depend upon our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Furthermore, we may incur additional indebtedness that may severely restrict or prohibit the payment of dividends.

 

Nevada Law and Our Charter May Inhibit a Takeover of Our Company That Stockholders May Consider Favorable

 

13 
 

Provisions of Nevada law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements in this prospectus and in the documents incorporated by reference in this prospectus contain forward-looking statements that involve risks and uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue” and variations thereof, and other statements contained in this prospectus, regarding matters that are not historical facts and are forward-looking statements. Because these statements involve risks and uncertainties, as well as certain assumptions, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to those risks identified under “Risk Factors” and from time to time in our other filings with the SEC. The information in this prospectus or any prospectus supplement speaks only as of the date of that document and the information incorporated herein by reference speaks only as of the date of the document incorporated by reference. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Forward-looking statements include our plans and objectives for future operations, including plans and objectives relating to our games and our future economic performance. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, we cannot assure you that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of any such statement should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

 

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. Any proceeds from the exercise of warrants will be used for working capital and other general corporate purposes, including but not limited to funding for additional game development, game marketing and user acquisition costs, hiring additional personnel, and the costs of operating as a public company. We will pay for expenses of this offering, except that the selling stockholders will pay any broker discounts or commissions or equivalent expenses and expenses related to the sale of their shares.

 

 

DILUTION

 

The discretionary sale of up to 11,788,000 shares of our common stock by the selling stockholders in accordance with the respective warrant agreements, stock purchase agreements, convertible notes and consulting agreements will have a dilutive impact on our stockholders. As a result, our net loss per share could increase in future periods and the market price of our common stock could decline. If our stock price decreases during the pricing period, then our existing stockholders would experience greater dilution.

 

 

THE OFFERING

 

Consulting Agreement with Calan Investments, LLC dba Kreloff Capital Partners.

 

On January 12, 2018, the Company entered into a consulting agreement with Calan Investments, LLC (“Calan”) dba Kreloff Capital Partners, who agreed to provide consulting services to the Company for a 12 month term expiring on January 12, 2019. The consulting agreement provided that in exchange for services, the Company granted Calan the right to purchase 1,200,000 shares of its common stock at an exercise price of $0.40 per share. The warrant expires January 11, 2021.

 

Stock Purchase Agreement with Underlying Warrant with Richard Goldfarb.

14 
 

 

On March 19, 2018, the Company entered into a stock purchase agreement with an underlying warrant with Richard Goldfarb (“Goldfarb”), granting Goldfarb the right to purchase up to 700,000 warrant shares of its common stock at an exercise price of $0.50 per share. The warrant expires on March 18, 2023.

 

Warrant Agreements with First Fire Global Opportunity Funds.

 

On April 20, 2018, the Company entered into three warrant agreements with First Fire Global Opportunity Funds, LLC (“First Fire”), a Delaware limited liability company. The first warrant agreement granted First Fire the right to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.375 per share, expiring on April 20, 2021. The second warrant agreement granted First Fire the right to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $0.50 per share, expiring on April 20, 2021. The third warrant agreement granted First Fire the right to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $0.625 per share, expiring on April 20, 2021. All three warrant agreements were issued in connection with a convertible promissory note between the Company and First Fire dated April 20, 2018, wherein the Company borrowed from First Fire $157,895, less a $7,895 original issue discount, bearing 8% interest.

 

Convertible Note and Warrant Agreement with Collier Investments, LLC.

 

On May 22, 2018, the Company entered into Convertible Note and Common Stock Purchase Warrant agreements with Collier Investments, LLC (“Collier”). The note grants Collier the right to convert the unpaid balance on the note at $0.25 per share up to 1,188,000 shares of common stock and the warrant agreement grants Collier the right to purchase up to 200,000 shares of common stock at an exercise price of $2.00 per share, expiring on May 22, 2023. The warrant agreement was issued in connection with a convertible promissory note between Collier and the Company dated May 22, 2018, in the principal sum of $275,000, less a $25,000 original issue discount, bearing a one-time interest charge of 8%.

 

Warrant Agreement with William D. Moreland.

 

On May 30, 2018, the Company entered into a warrant agreement with William D. Moreland (“Moreland”), granting Moreland the right to purchase up to 1,000,000 shares of common stock in the following amounts and exercise prices: 500,000 common shares at an exercise price of $0.50; 250,000 common shares at an exercise price of $0.75; and, 250,000 shares at $1.00 per share. The warrants expire on May 29, 2021.

 

Litigation Settlement Agreement with Zakeni Limited.

 

On July 12, 2018, the Company entered into a litigation settlement agreement with Zakeni Limited. The settlement agreement provided that Company issue Zakeni 3,500,000 shares of its common stock, the right to purchase 1,000,000 shares of its common stock at an exercise price of $0.25 per share, the right to purchase 1,500,000 shares of its common stock at an exercise price of $0.50 per share, and the right to purchase 1,000,000 shares of its common stock at an exercise price of $0.75 per share. The warrants expire July 11, 2023.

 

 

Selling Stockholders

 

The selling stockholders may sell, from time to time, any or all of shares of our common stock to be registered under the warrants, convertible notes, stock purchase agreements and/or consulting agreements.

 

The following table sets forth certain information regarding the beneficial ownership of shares of common stock by the selling stockholders as of November 6 , 2018 and the number of shares of our common stock being offered pursuant to this prospectus. We believe that the selling stockholders has sole voting and investment powers over its shares.

 

The selling stockholders have not had any position or office, or other material relationship with us or any of our affiliates over the past three years.

 

To our knowledge, none of the selling stockholders are broker-dealers or affiliates of a broker-dealer. We may require the selling stockholders to suspend the sales of the shares of our common stock being offered pursuant to this prospectus upon the occurrence of any event that makes any statement in this prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in those documents in order to make statements in those documents not misleading.

15 
 

 

Name of Selling Stockholder Shares Owned by the
Selling Stockholder before the Registration(1)
      Total Shares Offered in the  Registration       Number of Shares to Be Owned by Selling Stockholder After the Registration and Percent of Total Issued and Outstanding Shares(1)
                     # of
Shares(3)
  % of
 Class(2),(3)
Collier Investments, LLC   1,588,000       1,388,000     1,588,000   1%
First Fire Global Opportunity Fund, LLC(4)    1,356,874         500,000       1,356,874    1%
William D. Moreland   5,000,000       1,000,000     5,000,000   3%
Richard Goldfarb   1,400,000       700,000     1,400,000   1%
Calan Investments, LLC   1,800,000       1,200,000     1,800,000   1%
Zakeni Limited   7,000,000       7,000,000     7,000,000   4%

 

(1) Beneficial ownership is determined in accordance with Securities and Exchange Commission rules and generally includes voting or investment power with respect to shares of common stock. Shares of common stock subject to warrants currently exercisable, or exercisable within 60 days, are counted as outstanding for computing the percentage of the person holding such options or warrants, but are not counted as outstanding for computing the percentage of any other person.
   
(2) We have assumed that the selling warrant holders will exercise all of the warrants in this offering, and that Collier Investments, LLC will convert its existing debt into common shares.
   
(3) Based on 199,140,231 shares of our common stock issued and outstanding as of November 6 , 2018. Shares of our common stock being offered pursuant to this prospectus by a selling stockholder are counted as outstanding for computing the percentage of the selling stockholder.
   

 

PLAN OF DISTRIBUTION

 

The selling stockholders may, from time to time, after electing to convert warrants or other conversion rights, sell any or all of shares of our common stock covered hereby on the OTC Markets, or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. A selling stockholder may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. A selling stockholder may use any one or more of the following methods when selling securities:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  in transactions through broker-dealers that agree with the selling stockholder to sell a specified number of such securities at a stipulated price per security;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell securities under Rule 144 under the Securities Act of 1933, if available, rather than under this prospectus.

16 
 

 

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

 

DESCRIPTION OF SECURITIES

 

Capital Stock

 

We are authorized to issue 750,000,000 shares of Common Stock, $0.0001 par value, and 10,000,000 preferred shares, $0.0001 par value.

 

Common Stock

 

As of November 6 , 2018, 199,140,231 shares of Common Stock are issued and outstanding.

 

The holders of our Common Stock have equal ratable rights to dividends from funds legally available if and when declared by our board of directors and are entitled to share ratably in all of our assets available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of our affairs. Our Common Stock does not provide the right to a preemptive, subscription or conversion rights and there is no redemption or sinking fund provisions or rights. Our Common Stock holders are entitled to one non-cumulative vote per share on all matters on which stockholders may vote.

 

All shares of Common Stock now outstanding are fully paid for and non-assessable. We refer you to our certificate of incorporation, bylaws and the applicable statutes of the state of Nevada for a more complete description of the rights and liabilities of holders of our securities. All material terms of our Common Stock have been addressed in this section.

 

Holders of shares of our Common Stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of our directors.

 

Preferred Stock

 

As of November 6 , 2018, we have two series of preferred stock issued and outstanding:

 

·107,636 shares of Series “A” Convertible Preferred Stock (convertible to 26,909,028 common shares), par value $0.0001. In our discretion, we will determine when and if dividends will be paid on the Class “A” Convertible Preferred Stock, and whether it will be paid in cash, shares of Common Stock, or a combination of both. All Class “A” Preferred Stockholders shall be treated the same with respect to the payment of dividends. In the event the Company elects to pay a portion or all of the dividends on the Class “A” Preferred Stock by issuing shares of the Company's Common Stock, the shares of common stock issued as dividends will be restricted, unregistered shares, and will be subject to the same transfer restrictions that apply to the shares of Class “A” Preferred Stock. The dividend is payable as may be determined by the Board of Directors, out of funds legally available therefor. The Class “A” Convertible Preferred Stock will have priority as to dividends over the Common Stock. The holders of the Class “A” Preferred Stock shall vote for the election of directors, and shall have full voting rights, except that each Class “A” Preferred share shall entitle the holder to exercise ten thousand (10,000) votes for each one (1) Class “A” Preferred Share held. The Class “A” Convertible Preferred Shares are not redeemable; and,

 

·20,000 shares of Series “E” Convertible preferred stock, par value $0.0001. The Series “E” Convertible preferred stock pays no dividends and is convertible to common stock based upon proceeds received upon issuance of the shares, divided by the average closing bid price for the Company’s common stock for the 5 trading days prior to the conversion date, and is adjustable to prevent dilution. At November 6 , 2018, the 20,000 Class “E” preferred shares were convertible to 757,002 common shares, and convertible at the option of the Company at par value only after repayment of any shareholder loans from Joseph Fiore, our former Chairman of the Board, and subject to the holder’s option to convert. Owners of Series “E” Convertible preferred stock are entitled to vote 1,000 votes per share of Series “E” Convertible Preferred Shares, and are entitled to liquidation preference at par value. Owners of Series “E” Convertible preferred shares are senior to all other shares of preferred or common shares issued past, present and future.
17 
 

 

Dividends

 

We have not paid any cash dividends to our shareholders of our Common or Preferred Stock. The declaration of any future cash dividends is at the discretion of our Board and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations. Dividend rights of both our common and preferred shareholders will entitle them to the same dividend that other shareholders of the same class receive.

 

Warrants

 

At its discretion, the Company may periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.

 

The following table summarizes common stock warrants activity:

      Weighted
      Average
      Exercise
   Warrants  Price
 Outstanding, December 31, 2017    1,700,000   $1.06 
 Granted    7, 2 00,000    0.55 
 Exercised    —      —   
 Forfeited     100,000        0.50   
 Outstanding, November 6 , 2018    8,800,000   $0.65 
 Exercisable, November 6 , 2018    8,800,000   $0.65 

 

The weighted average exercise prices, remaining lives for warrants granted, and exercisable as of November 6 , 2018, were as follows:

 

    Outstanding and Exercisable Warrants  
Warrants          
Exercise Price       Life  
Per Share   Shares   (Years)  
$0.01   600,000   2. 16  
$0.25   1,000,000   4 .68  
$0.375   200,000   2. 46  
$0.40   1,200,000   2 .19  
$0.50   3,000,000   0 .98 – 4 .68  
$0.625   100,000   2. 46  
$0.75   1,250,000   2. 56 -4 .68  
$1.00   250,000   2. 56  
$1.50   500,000   0. 15  
$2.00   700,000   0. 15 – 4 .55  
    8,800,000      

  

18 
 

 

Options

 

The following table summarizes common stock options activity:

      Weighted
      Average
      Exercise
   Options  Price
 December 31, 2017    13,320,000   $1.74 
 Granted    420,000    1.00 
 Exercised    —      —   
 Forfeited    —      —   
 Outstanding, November 6 , 2018    13,740,000   $1.72 
 Exercisable, November 6 , 2018    13, 135 ,000   $1.60 

 

The weighted average exercise prices, remaining lives for options granted, and exercisable as of November 6 , 2018 were as follows:

                     
    Outstanding Options       Exercisable Options
Options           Weighted       Weighted
Exercise Price       Life   Average Exercise       Average Exercise
Per Share   Shares   (Years)   Price   Shares   Price
$0.50   8,000,000   1.82   $0.50   8,000,000   $0.50
$1.00   1,490,000   .97 – 3.26   $1.00   1, 385 ,000   $1.00
$2.50   1,250,000   .15   $2.50   1,250,000   $2.50
$5.00   3,000,000   1.15   $5.00   2,500,000   $5.00
    13,740,000       $1.72   13, 135 ,000   $1.60

 

The following table summarizes options granted with vesting terms activity:

          Weighted
          Average
    Number of     Grant Date
    Shares     Fair Value
Non-vested, December 31, 2017 70,000   $ 1.00
  Granted 420,000     1.00
  Vested ( 385 ,000)     1.00
  Forfeited -     -
Non-vested, November 6 , 2018 105 ,000   $ 1.00

 

 

EXPERTS AND COUNSEL

 

The financial statements of our company included in this Prospectus for the fiscal years ended December 31, 2016 and December 31, 2017 have been audited by Haynie & Company, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.

 

Mailander Law Office, Inc. will render a legal opinion as to the validity of the shares of the Common Stock to be registered hereby.

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

 

No expert named in the registration statement of which this Prospectus forms a part as having prepared or certified any part thereof (or is named as having prepared or certified a report or valuation for use in connection with such registration statement) or counsel named in this Prospectus as having given an opinion upon the validity of the securities being offered pursuant to this Prospectus or upon other legal matters in connection with the registration or offering such securities was employed for such purpose on a contingency basis. Also at the time of such preparation, certification or opinion or at any time thereafter, through the date of effectiveness of such registration statement or that part of such registration statement to which such preparation, certification or opinion relates, no such person had, or is to receive, in connection with the offering, a substantial

19 
 

interest, direct or indirect, in our company or any of its parents or subsidiaries. Nor was any such person connected with our company or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer or employee.

 

 

INFORMATION WITH RESPECT TO OUR COMPANY

DESCRIPTION OF BUSINESS

 

General Development of the Business

 

We were incorporated under the name Conceptualistics, Inc., on January 6, 1988 in Delaware. We have never filed for bankruptcy or been the subject of a receivership.

 

On December 16, 2014, we amended our articles of incorporation and changed our domicile to Nevada. On February 26, 2015, we amended our articles of incorporation to change our name to SPYR®, Inc. Our name change reflected a new direction for our Company. We fundamentally changed our primary business to focus on our electronic games publishing and development business. We are currently operating as a holding company.

 

Internet and Electronic Games Initiatives

 

On March 24, 2015, we formed a wholly owned subsidiary, SPYR APPS®, LLC (“SPYR APPS®”) to implement our electronic games publishing and development initiatives. SPYR APPS® is engaged in the publishing of electronic games that are downloaded for free by users of mobile devices such as cellular telephones and tablets, including those using Apple’s iOS and Google’s Android mobile operating systems. Our current strategy is to publish and market games developed by third-party developers with the potential to develop our own games, either by contracting with third-party developers or by building or acquiring an in-house development team, and to generate revenues from them based upon users paying for additional features and levels of game play, and from the sale of advertising in our games. We currently have no in-house development capability. Contracting with a third-party developer, we released three games: “Plucky” and “Plucky Rush” in April and May 2015, and “Rune Guardian” in December 2015. Our developed games use the “free to play” model, which allows users to download the games onto their devices and play them at no cost. “Free to play” is a business model that has existed in videogames (and other industries) for quite some time but one that has, in the last 2-3 years, been adopted by a large number of games developers and publishers both big and small. “Free to play” gives you a way of leveraging the availability of low cost (in the case of games hosted by social networks including Facebook, or otherwise hosted in ‘the cloud’), or even free digital distribution (as is the case of Apple’s iOS and Google’s Android markets). The “free to play” model allows us to offer games that have zero cost barriers preventing players from trying our games. Players that choose to not continue with the game nonetheless still becomes a marketing channel to their friends, who may become a critical mass of players who do choose to pay for optional aspects of the games, including customization, faster game progress, additional content and more effective competition against other players. There are no limits on potential purchases, thus catering to the financial capabilities/preferences of all players.

 

We monetize the games by offering features and opportunities within the games that allow players to spend money to unlock new game levels and features. Our games are available for download for use on the Apple and Google mobile operating systems that are common to mobile phones, media players and tablet devices manufactured by companies including Apple, Samsung and others. We also intend to market and generate revenues from advertising space in our games.

 

We entered into our first publication and marketing agreement on October 21, 2015 with Superplus Games Oy for the publication of “Retro Shot.” “Retro Shot” was fully launched in February of 2016 and is available for free download on mobile devices in the Apple App Store and Google Play Store. On December 17, 2015, we entered into our second publishing and marketing agreement with Spectacle Games Publishing, for its “Massively Multiplayer Online Role Playing Game” “Pocket Starships.” “Pocket Starships” is a space warfare themed game that is free to play, and available for download on hardware wide array of devices including most mobile phones, tablets and computers, and is available to play regardless of what operating system the player uses, whether that is an Apple iOS device such as an iPhone or iPad, a Google Android device, including phones and tablets from a variety of hardware manufacturers using the Android operating system, or an Amazon Fire OS device such as a Kindle, on a PC in a web browser or on Facebook’s “Game Room” or on VK.com. “Pocket Starships” is also available to play on the Internet at www.pocketstarships.com. “Pocket Starships’” software engine allows players worldwide to play against each other in real time and in the same game “universe,” regardless of what platform is used. Thus, players can play “Pocket Starships” regardless of whether they are playing in a web browser at their desk, or using an iPhone on the other side of the planet. “Pocket Starships” game play is hardware and software agnostic, so regardless of device all users have the same game experience. We believe these attributes set “Pocket Starships” apart from every other game.

20 
 

 

We also believe that the true cross-platform and real-time engine of “Pocket Starships” positions the game to take advantage of the excitement generated by “esports” tournaments. “esports,” also known as “electronic sports,” pits teams of professional digital game players against each other in organized, multiplayer video game competitions. The most common video game genres associated with eSports are real-time strategy, fighting, first-person shooter, and multiplayer online battle arena games. Tournaments such as The International, the League of Legends World Championship, the Battle.net World Championship Series, the Evolution Championship Series, and the Intel Extreme Masters, provide both live broadcasts of the competition, and prize money and salaries to competitors. We recently have been releasing a series of software enhancements that will allow users to engage in “player vs. player” battles and other enhancements that will enable “Pocket Starships” to participate in eSports tournaments.

 

In June 2016, we obtained an exclusive option to purchase all assets pertaining to Pocket Starships (the “Option”) in consideration for 3,750,000 cash-based options, exercisable as follows: (a) 500,000 shares at $1.00 per share, expiring on December 31, 2017; (b) 750,000 shares at $2.50 per share, expiring on December 31, 2018; and (c) 2,500,000 shares at $5.00 per share, expiring on December 31, 2019. Under the Option, had the Company decided to exercise the Option, it would have purchased the assets for a cash payment of $5,000,000 plus $10,000,000 worth of shares of the Company’s common stock, valued at the time of closing of the purchase. The exclusive Option was exercisable by us at any time, in our sole discretion, through December 31, 2020.

 

On October 23, 2017, we restructured and exercised the Option by entering into a definitive agreement pursuant to which SPYR® acquired all of the game related assets of Pocket Starships in a cashless transaction, including the publishing agreement with Spectacle. The original terms of the Option were terminated. As a result, SPYR® acquired rights to retain 100% of the revenue generated from the game and will be the sole owner of all of the assets related to the game. The acquisition included, among other assets, all Pocket Starships related intellectual property, the userbase, artwork, software, internet domains, game store accounts (such as App Store, Play Store, Amazon, and Facebook Gameroom), web portal accounts (Facebook, VK.com, Kongregate, etc.) and internet domains (www.pocketstarships.com). Under the terms of the agreement, the game's owner received 8,000,000 restricted shares of SPYR® stock (subject to resale gating provisions) and 8,000,000 three-year cash-based options exercisable at $0.50 per share.

 

During 2017, we signed an agreement with CBS Consumer Products that will allow the incorporation of intellectual property (IP) from various Star Trek television series into future Pocket Starships updates and expansions. Our Pocket Starships development team is already working on expansions of Pocket Starships to include the Star Trek IP, which we expect will be released toward the end of 2018. In Pocket Starships, players can build and pilot several ships and forge alliances on their quest for galactic domination. Players can perform or initiate various activities ranging from fighting pirates to participating in Faction Alerts. With the release of the expansion those playing Pocket Starships will be able to explore new sectors and engage in exciting battles with the Borg and will be able to staff their ships with their favorite Star Trek characters from the Star Trek TV series franchise – including The Next Generation, Deep Space Nine, and Voyager, through a trading card expansion.

 

During July 2017, the Company entered into an agreement with Reset Studios, LLC for the development of at least two new idle tapper games to be published by SPYR®, the first of which, Steven Universe: Tap Together, features characters and storylines from Cartoon Network’s Steven Universe. The Company has secured the necessary license to use the Steven Universe IP in the game through a license agreement with Cartoon Network. The game allows players to play as a team of their favorite Steven Universe characters to battle increasingly difficult enemies in order to unlock new characters and rewards. By performing simple actions such as tapping the screen, players can progress in the game even when they’re not actively playing. Steven Universe: Tap Together was launched globally on the Google Play Store on August 2, 2018 and on the IOS App Store on August 9, 2018.

 

The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and software development costs and implementation of our business plans generally. The Company may also decide to diversify, through acquisition or otherwise, in other unrelated business areas if opportunities present themselves.

 

Business Overview

 

Our primary operation is the development of our electronic games publishing and development business through our wholly owned subsidiary, SPYR, APPS®, LLC. Our operations include entering into contracts with third party developers to create games we own and market ourselves; and, entering into contracts with third party developers to market and publish electronic

21 
 

games used on mobile devices such as telephones, tablets, PCs and console gaming systems, including those using Apple’s iOS and Google’s Android mobile operating systems.

 

Sales and Marketing

 

Our electronic game assets are distributed for download on Apple’s iOS and Google’s Play Stores. For players of Pocket Starships, the game may be accessed via any web browser connected to the Internet, through hundreds of online portals worldwide, on Facebook.com, VK.com or through Amazon’s App Store.

 

Research and Development

 

We do not currently develop electronic games. However, from time to time we enter into third party agreements with game developers to create games that we own as our own intellectual property including: Plucky, Plucky Rush and Retro Shot. We currently do not have any contracts for the development of games that would add to our intellectual properties. As a component of our electronic games marketing and publishing business we contract with third party developers to market and publish third party games. Currently, we have contracts to market and publish Pocket Starships and Steven Universe Tap Together, both of which are developed by third parties.

 

Intellectual Property

 

We currently own four electronic games, Pocket Starships, Plucky, Plucky Rush and Rune Guardian. We also have a publication and marketing agreement with Superplus Games Oy for the publication of the game “Retro Shot, licenses to use Steven Universe IP in Steven Universe: Tap together, a game published by the Company and owned and developed by Reset Studios and to use Star Trek IP in Pocket Starships.

 

Competition

 

The mobile game market is highly competitive and rapidly changing. Our ability to compete depends upon many factors within and outside our control, including the timely development and introduction of the mobile games we publish and market, and the related enhancements, functionality, performance, reliability, customer service and support and marketing efforts. Due to the relatively low barriers to entry in the mobile game market, we expect additional competition from other emerging companies. Many of our existing and potential competitors are substantially larger than us and have significantly greater financial, technical and marketing resources that will compete for available users, developers, talent and third-party games. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the publishing and promotion of their mobile games. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressure will not have a material adverse effect on our business, operating results and financial condition. See “Risk Factors” in this prospectus.

 

Employees

 

As of November 6 , 2018, the Company had 4 employees and 1 leased employees, none of whom is represented by a labor union.

 

 

DESCRIPTION OF PROPERTY

 

Our Offices

 

All administrative activities of the Company are conducted from the Company’s headquarters located at 4643 South Ulster Street, Suite 1510, Denver, Colorado 80237.

 

The Company leases approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015. The lease expires December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $143,000 to $152,000.

 

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, increasing to $275 per month starting in December 2016 and $325 per month starting in July 2018.

 

22 
 

We believe that our existing office facilities are adequate for our needs. Should we require additional space at that time, or prior thereto, we believe that such space can be secured on commercially reasonable terms.

 

 

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 two convertible debentures in the aggregate principal amount of $1,500,000 in 1998. On July 12, 2018, the court approved a Joint Motion for Order Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000, warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000. The total value of the settlement, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2017.

 

On June 18, 2018 the Company was named as a defendant in a case filed in the United States District Court for the Southern District of New York: Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management Co., Inc., and Eat at Joe’s, Ltd. n/k/a SPYR, Inc. Joseph A. Fiore was the Chairman of our Board of Directors and is a significant shareholder. Mr. Fiore resigned from his positions as Chairman of the Board and as a Director of the Company effective August 1, 2018. The suit alleges that Mr. Fiore, during 2013 and 2014, while he was the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors, engaged in improper conduct on behalf of the defendants named in the case related to the Company’s sales of securities in Plandai Biotechnology, Inc. The Commission alleges that Mr. Fiore and the Company unlawfully benefited through the sales of those securities. The Commission also alleges that from 2013 to 2014, the Company’s primary business was investing and that it failed to register as an investment company, resulting in an alleged violation of Section 7(a) of the Investment Company Act of 1940. The suit seeks to disgorge Joseph A. Fiore, Berkshire Capital Management Co., Inc., and the Company of alleged profits on the sale of the securities and civil fines related to the Company’s failure to register as an investment company with the Commission.

 

The Company vehemently denies any wrongdoing. The allegations demonstrate a fundamental misunderstanding of existing precedent and a mischaracterization of the facts and transactions at issue, which were not violative of any securities laws, rules or regulations. The Company will answer these allegations in court.

 

The Company is being represented by Alex Spiro, Esq., a partner with the firm of Quinn Emmanuel, Urquhart & Sullivan, LLP and Marc S. Gottlieb, Esq., a partner with the firm of Ortoli Rosenstadt LLP.

 

MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

The Company’s Common Stock is traded on OTC Markets under the symbol “SPYR.” The following table presents the high and low bid quotations for the Common Stock as reported by the NASD for each quarter during the last two years. Such prices reflect inter-dealer quotations without adjustments for retail markup, markdown or commission, and do not necessarily represent actual transactions.

 

         
    High   Low
2018        
First Quarter   $0.50   $0.25
Second Quarter   $0.40   $0.17
Third Quarter   $0.33   $0.13
Fourth Quarter   $0.25   $0.11
         
2017        
First Quarter   $1.06   $0.46
Second Quarter   $0.70   $0.40
Third Quarter   $0.57   $0.10
Fourth Quarter   $0.40   $0.18
2016        
First Quarter   $0.22   $0.13
Second Quarter   $0.46   $0.12
Third Quarter   $0.71   $0.22
Fourth Quarter   $0.67   $0.41
         
23 
 

On November 5 , 2018, the closing price of our Common Stock as reported by the OTC Markets Group was $0. 13 per share.

 

DIVIDENDS

 

The Company has never declared or paid any cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of the business and, therefore, the Company does not anticipate paying dividends on its Common Stock in the foreseeable future.

 

Transfer Agent

 

Signature Stock Transfer Company, located at 14673 Midway Road Ste. 220, Addison TX 75001, and telephone number of (972) 612-4120 is the registrar and transfer agent for our Common Stock.

 

Approximate Number of Equity Security Holders

 

As of November 6 , 2018, there were 193 direct holders of record of our Common Stock. Because shares of the Company’s Common Stock are held by depositaries, brokers and other nominees, the number of beneficial holders of the Company’s shares is substantially larger than the number of stockholders of record.

 

The number of shareholders of record of the Company’s Common Stock as of November 6 , 2018 was approximately 2,0 39 .

 

FINANCIAL STATEMENTS

 

 

Index to Consolidated Financial Statements   Page
Report of Independent Registered Public Accounting Firm   F-1
Consolidated Balance Sheets as of December 31, 2017 and 2016   F-2
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016   F-3
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016   F-4
Consolidated Statements of Cash Flows, for the years ended December 31, 2017 and 2016   F-5
Notes to Consolidated Financial Statements   F-7

 

Index to Condensed Consolidated Financial Statements (Unaudited)   Page
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017   F-33
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017   F-34
Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018   F-35
Condensed Consolidated Statements of Cash Flows, for the six months ended June 30, 2018 and 2017   F-36
Notes to Condensed Consolidated Financial Statements   F-38

 

 

24 
 

 

Certified Public Accountants (a pr ofessional corporation)

1221 West Mineral Ave, Ste. 202 Littleton, Colorado 80120-4544 (303) 734-4800 Fax (303) 795-3356

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 To the Board of Directors and Stockholders of SPYR, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of SPYR, Inc. (the Company) as of December 31, 2017 and 2016, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2017 and 2016, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years ended December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.

 

Consideration of the Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses since inception, has negative cash flows from operations, and has negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

  

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.

  

 /s/ Haynie & Company

Haynie & Company

 

Littleton, Colorado

 

August 14, 2018

We have served as the Company’s auditor since 2018.

  

F-1 

 

SPYR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
           
    December 31, 2017    December 31, 2016 
ASSETS   (Restated)    (Restated) 
Current Assets:          
   Cash and cash equivalents  $86,000   $3,204,000 
   Accounts receivable, net   4,000    31,000 
   Other receivable   —      200,000 
   Prepaid expenses   35,000    25,000 
   Trading securities, at market value   48,000    59,000 
   Current assets of discontinued operations   —      50,000 
          Total Current Assets   173,000    3,569,000 
           
   Property and equipment, net   134,000    181,000 
   Capitalized gaming assets and licensing rights, net   743,000    40,000 
   Intangible assets, net   12,000    18,000 
   Other assets   16,000    6,000 
   Non-current assets of discontinued operations   —      46,000 
TOTAL ASSETS  $1,078,000   $3,860,000 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
LIABILITIES          
Current Liabilities:          
   Accounts payable and accrued liabilities  $528,000   $116,000 
   Litigation settlement liability   1,983,000    1,983,000 
   Current liabilities of discontinued operations   22,000    60,000 
          Total Current Liabilities   2,533,000    2,159,000 
           
   Non-current related party line of credit   807,000    —   
          Total Liabilities   3,340,000    2,159,000 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY (DEFICIT)          
   Preferred stock, $0.0001 par value, 10,000,000 shares authorized          
      107,636 Class A shares issued and outstanding          
        as of December 31, 2017 and 2016   11    11 
     20,000 Class E shares issued and outstanding          
        as of December 31, 2017 and 2016   2    2 
   Common Stock, $0.0001 par value, 750,000,000 shares authorized          
        181,128,950 and 157,637,026 shares issued and outstanding          
        as of December 31, 2017 and 2016   18,112    15,763 
   Additional paid-in capital   46,561,875    34,752,224 
   Accumulated deficit   (48,842,000)   (33,067,000)
          Total Stockholders’ Equity (Deficit)   (2,262,000)   1,701,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $1,078,000   $3,860,000 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

 

F-2 

 

SPYR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
       
   For the Years Ended December 31,
   2017  2016
   (Restated)  (Restated)
       
Revenues  $128,000   $139,000 
           
Expenses          
   Labor and related expenses   2,358,000    1,467,000 
   Rent   186,000    146,000 
   Depreciation and amortization   105,000    98,000 
   Professional fees   5,555,000    3,292,000 
   Research and development   1,666,000    1,151,000 
   Other general and administrative   502,000    740,000 
   Cost of acquisition option   —      472,000 
          Total Operating Expenses   10,372,000    7,366,000 
          Operating Loss   (10,244,000)   (7,227,000)
           
Other Income (Expense)          
   Interest and dividend income   4,000    18,000 
   Interest Expense   (11,000)   —   
   Loss on write-down of assets   (5,381,000)   —   
   Litigation settlement costs   —      (1,983,000)
   Unrealized gain (loss) on trading securities   (11,000)   (57,000)
   Loss on sale of marketable securities   —      (95,000)
          Total Other Expense   (5,399,000)   (2,117,000)
           
Loss from continuing operations   (15,643,000)   (9,344,000)
           
Loss on discontinued operations   (132,000)   (29,000)
           
Net Loss  $(15,775,000)  $(9,373,000)
           
           
Per Share Amounts          
   Loss from continuing operations          
      Basic and Diluted earnings per share  $(0.09)  $(0.06)
           
   Loss on discontinued operations          
      Basic and Diluted earnings per share  $—     $—   
           
   Net Loss          
      Basic and Diluted earnings per share  $(0.09)  $(0.06)
           
Weighted Average Common Shares          
      Basic and Diluted   166,443,807    154,092,844 
           
The accompanying notes are an integral part of these consolidated financial statements.


F-3 

 

SPYR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2017 AND 2016
 
                            
   Preferred Stock        Additional      
   Class A  Class E  Common Stock  Paid-in  Accumulated   
   Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Total
Balance at December 31, 2015   107,636   $11    20,000   $2    151,508,127   $15,151   $31,269,836   $(23,694,000)  $7,591,000 
Common stock issued for cash   —      —      —      —      100,000    10    14,990    —      15,000 
Fair value of common stock issued for employee compensation   —      —      —      —      1,843,987    184    412,816    —      413,000 
Fair value of common stock issued for services   —      —      —      —      4,509,912    451    1,950,549    —      1,951,000 
Fair value of options granted for services   —      —      —      —      —      —      199,000    —      199,000 
Vesting of shares of common stock issued for services   —      —      —      —      —      —      273,000    —      273,000 
Fair value of options granted for acquisition option   —      —      —      —      —      —      472,000    —      472,000 
Common stock cancelled upon employee resignation   —      —      —      —      (325,000)   (33)   33    —      —   
Contributed capital from sale of trading securities to related party   —      —      —      —      —      —      160,000    —      160,000 
Net loss (Restated)   —      —      —      —      —      —      —      (9,373,000)   (9,373,000)
Balance at December 31, 2016   107,636   $11    20,000   $2    157,637,026   $15,763   $34,752,224   $(33,067,000)  $1,701,000 
Common stock issued for cash   —      —      —      —      750,000    75    299,925    —      300,000 
Compensation expense recorded upon sale of common stock   —      —      —      —      —      —      210,000    —      210,000 
Fair value of common stock issued for employee compensation   —      —      —      —      2,050,000    205    1,108,795    —      1,109,000 
Fair value of common stock and warrants issued for services   —      —      —      —      12,691,924    1,269    3,756,731    —      3,758,000 
Fair value of common stock issued for game acquisition   —      —      —      —      8,000,000    800    3,199,200    —      3,200,000 
Fair value of options granted for game acquisition   —      —      —      —      —      —      2,452,000    —      2,452,000 
Vesting of options and warrants granted for services   —      —      —      —      —      —      737,000    —      737,000 
Vesting of shares of common stock issued for services   —      —      —      —      —      —      46,000    —      46,000 
Net loss (Restated)   —      —      —      —      —      —      —      (15,775,000)   (15,775,000)
Balance at December 31, 2017 (Restated)   107,636   $11    20,000   $2    181,128,950   $18,112   $46,561,875   $(48,842,000)  $(2,262,000)
                                              
The accompanying notes are an integral part of these consolidated financial statements.

F-4 

 

SPYR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
       
   For the Years Ended December 31,
   2017  2016
Cash Flows From Operating Activities:  (Restated)  (Restated)
Net loss for the period  $(15,775,000)  $(9,373,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
     Loss on discontinued operations   132,000    29,000 
     Loss on write-down of assets   5,381,000    —   
     Depreciation and amortization   105,000    98,000 
     Common stock issued for employee compensation   1,109,000    413,000 
     Common stock issued for professional fees   3,758,000    1,951,000 
     Compensation expense recorded upon sale of common stock   210,000    —   
     Fair value of options granted for services   —      199,000 
     Vesting of options and warrants granted for services   737,000    273,000 
     Vesting of shares of common stock issued for services   46,000    —   
     Fair value of options granted for acquisition option   —      472,000 
     Litigation settlement costs   —      1,983,000 
     Unrealized loss on trading securities   11,000    57,000 
     Loss on sale of trading securities   —      95,000 
Changes in operating assets and liabilities:          
     (Increase) decrease in accounts receivables   27,000    (25,000)
     (Increase) decrease in other receivables   100,000    (200,000)
     (Increase) decrease in prepaid expenses   (10,000)   7,000 
     Increase in other assets   (10,000)   —   
     Increase (decrease) in accounts payable and accrued liabilities   152,000    33,000 
     Increase in accrued interest on note payable - related party   7,000    —   
     Decrease in related party accounts payable   —      (7,000)
Net Cash Used in Operating Activities from Continuing Operations   (4,020,000)   (3,995,000)
Net Cash Used in Operating Activities from Discontinued Operations   (98,000)   66,000 
Net Cash Used in Operating Activities   (4,118,000)   (3,929,000)
           
Cash Flows From Investing Activities:          
     Purchase of licensing rights   (100,000)   (10,000)
     Purchases of trading securities   —      (510,000)
     Proceeds from sale of trading securities   —      783,000 
     Purchase of property and equipment   —      (49,000)
Net Cash (Used in) Provided by Investing Activities   (100,000)   214,000 
           
Cash Flows From Financing Activities:          
     Proceeds from line of credit - related party   800,000    —   
     Proceeds from sale of common stock   300,000    15,000 
Net Cash Provided by Financing Activities   1,100,000    15,000 
           
Net decrease in Cash   (3,118,000)   (3,700,000)
Cash and cash equivalents at beginning of period   3,204,000    6,904,000 
Cash and cash equivalents at end of period  $86,000   $3,204,000 
           
The accompanying notes are an integral part of these consolidated financial statements.

F-5 

 

SPYR, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
       
   For the Years Ended December 31,
   2017  2016
Supplemental Disclosure of Interest and Income Taxes Paid:      
    Interest paid during the year  $—     $—   
   Income taxes paid during the year  $—     $—   
           
Supplemental Disclosure of Non-cash Investing  and Financing Activities:          
   Contributed capital from sale of trading securities  $—     $160,000 
   Common stock issued and options granted for game acquisition  $5,652,000   $—   
   Reclassification of other assets to capitalized licensing rights  $100,000   $—   
           
           
The accompanying notes are an integral part of these consolidated financial statements.

 

 

 


F-6 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of accounting policies for SPYR, Inc. and subsidiaries (the “Company”) is presented to assist in understanding the Company's financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements.

 

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.

 

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. As of October 5, 2016, SPYR APPS, Oy ceased business activities and completed the dissolution process on October 18, 2017.

 

Through our other wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and liabilities of EAJ as well as the results of its operations were presented in these financial statements as discontinued operations.

 

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, E.A.J.: PHL, Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 9), and Branded Foods Concepts, Inc., a Nevada corporation. Intercompany accounts and transactions have been eliminated.

 

Going Concern

 

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business, however, the issues described below raise substantial doubt about the Company’s ability to do so.

 

As shown in the accompanying financial statements, for the year ended December 31, 2017, the Company recorded a net loss from continuing operations of $15,643,000 and utilized cash in continuing operations of $4,020,000. As of December 31, 2017, our cash balance was $86,000 and we had trading securities of $48,000. In addition, the Company’s restaurant, Eat at Joes closed in April 2017, concurrent with the expiration of the lease. These issues raise substantial doubt about the Company’s ability to continue as a going concern.

 

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.

 

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.

 

The ability of the Company to continue as a going concern is dependent upon the success of future capital offerings or alternative financing arrangements and expansion of its operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations through calendar year 2018. However, management cannot make any assurances that such financing will be secured.

 

F-7 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management affected impairment analysis for trading securities, fixed assets, intangible assets, capitalized licensing rights, amounts of potential liabilities, and valuation of issuance of equity securities. Actual results could differ from those estimates.

 

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 year ended December 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E – 415,559, Options – 13,320,000, Warrants – 1,700,000) would have had an anti-dilutive effect due to the Company generating a loss for the year ended December 31, 2017.

 

The basic and fully diluted shares for the year ended December 31, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 20,333, Class A – 26,909,028, Class E – 161,108, Options – 12,900,000 and Warrants – 200,000) would have had an anti-dilutive effect due to the Company generating a loss for the year ended December 31, 2016.

 

Capitalized Gaming Assets and Licensing Rights

 

Capitalized gaming assets and licensing rights represent costs to acquire 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.

 

On October 23, 2017, the Company completed the acquisition of all assets that refer, relate or pertain to the real—time cross-platform MMO game commonly known and referred to as “Pocket Starships,” including but not limited to all intellectual property, know how, “urls,” websites, game engines, game store accounts, prior versions, company names and trade names, business plans, financial reports, financial data, employee data, customer lists, forecasts, strategies, and all other business information; manufacturing or other technical or scientific know-how, specifications, technical drawings, drawings, artwork, music, diagrams, schematics, technology, processes, and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials, formulae, compositions, information, data, results, plans, surveys and/or reports of a technical nature; and software programs (including all forms of code), software documentation, software development kits, game design documents, and formulae related to the current, future and proposed products and services, including any additions, enhancements or modifications to the foregoing or derivatives thereof after the date hereof.

 

F-8 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

As consideration for the acquisition, the Company issued eight million shares of the Company’s restricted common stock valued at $3,200,000, options to purchase up to eight million shares of the Company’s restricted common stock valued at $2,452,000, and assumed liabilities of $210,000 for a total purchase price of $5,862,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting August 31, 2020. The acquisition of “Pocket Starships” was reported as part of capitalized gaming assets and licensing rights valued at $481,000 based upon discounted cash flows. The difference between purchase price and the capitalized value was recorded as loss on write down on assets of $5,381,000. The Company will amortize the capitalized cost on a straight-line basis over an estimated life of seven to ten years.

 

Further, the options previously issued pursuant to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to three million, seven hundred and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect in accordance with the terms of the purchase option agreement.

 

During 2017, the Company capitalized $175,000 pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual property (IP) from various STAR TREK television series in to future updates to and expansions of the Pocket Starships game. The Company estimates that the IP will have an estimated life of 1.6 years, which approximates the term of the license. In addition, we also acquired the game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer. Battlewack: Idle Lords requires additional development before it can be released.

 

In a prior period, the Company capitalized $50,000 as a result of the acquisition of licensing rights of one gaming application. The Company estimates that the gaming application will have an estimated life of five years, which approximates the term of the license.

 

During the year ended December 31, 2017, the Company recorded amortization expense of $52,000. As of December, 2017 and December 31, 2016, the accumulated amortization was $52,000 and $10,000, respectively and the unamortized capitalized gaming assets and licensing rights amounted to $743,000 and $40,000 respectively.

 

The expected annual amortization expense related to capitalized gaming assets and licensing rights as of December 31, 2017, is as follows:

 

 2018   $69,000 
 2019    69,000 
 2020    69,000 
 2021    69,000 
 2022    69,000 
 Thereafter    123,000 
      Total   $468,000 

 

Software Development Costs

 

Costs incurred for software development are expensed as incurred. During the years ended December 31, 2017 and 2016, the Company incurred $1,666,000 and $1,151,000 in software development costs paid to independent gaming software developers.

 

Revenue Recognition

 

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. We recognize revenue when the sale is completed.

 

Though our wholly owned subsidiary E.A.J.: PHL, Airport, Inc. (discontinued operations, see Note 9) we generated revenue from the sale of food and beverage products through our restaurant. Revenue from the restaurant was recognized upon sale to a customer and receipt of payment.

 

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.

 

F-9 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

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.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation or amortization. Depreciation is recorded at the time property and equipment is placed in service using the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements are amortized over the shorter of the expected useful lives of the related assets or the lease term. The estimated economic useful lives of the related assets as follows:

 

Furniture and fixtures 5-10 years
Equipment 5- 7 years
Computer equipment 3 years
Leasehold improvements 6 years

 

Maintenance and repairs are charged to operations; betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation and amortization thereon are eliminated from the property and related accumulated depreciation and amortization accounts, and any resulting gain or loss is credited or charged to operations.

 

Intangible Assets

 

The Company accounts for its intangible assets in accordance with the authoritative guidance issued by the ASC Topic 350 – Goodwill and Other. Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates non-amortizing intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash flows.

 

The cost of internally developing, maintaining and restoring intangible assets 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.

 

F-10 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

An intangible asset 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.

 

During the year ended December 31, 2017, the Company recorded amortization expense of $6,000. As of December 31, 2017, total intangible assets amounted to $20,000 which consist of website development costs. There were no indications of impairment based on management’s assessment of these assets at December 31, 2017. 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 impairment to our intangible assets.

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

 

The Company also issues restricted shares of its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value at the date of the grant and is recognized as expense over the period which an employee is required to provide services in exchange for the award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the estimated fair value at measurement date which is either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.

 

Concentration of Credit Risk

 

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions, in the form of demand deposits. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.

 

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.

F-11 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

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

 

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

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

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

 

The carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, accounts receivable, other receivable, 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.

 

Advertising Costs

 

Advertising, marketing and promotional costs are expensed as incurred and included in general and administrative expenses.

 

Advertising, marketing and promotional expense was $195,000 and $350,000 for the years ended December 31, 2017, and 2016, respectively and was reflected as part of Other General and Administrative Expenses on the accompanying consolidated statements of operations.

 

Reclassifications

 

In presenting the Company’s consolidated statement of operations for the year ended December 31, 2016, certain costs and expenses paid to third party developers in the amount of $735,000, that were previously reflected as other general and administrative expenses, have been reclassified and reported as part of research and development.

 

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 principles-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. Our revenue is recognized at the time of sale and we do not expect that the adoption of ASU 2014-09 will have any significant impact on our operating cash flows.

 

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.

 

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.

 

F-12 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 2 - TRADING SECURITIES

 

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

 

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

 

Investments in securities are summarized as follows:

 

   Fair Value at     Proceeds  Loss on  Contributed  Unrealized  Fair Value at
Year  Beginning of Year  Purchases 

from

Sale

  Sale  Capital  Loss  December 31, 2017
 2017   $59,000   $—     $—     $—     $—     $(11,000)  $48,000 
 2016   $324,000   $510,000   $(783,000)  $(95,000)  $160,000   $(57,000)  $59,000 

 

Realized gains and losses are determined on the basis of specific identification. During the years ended December 31, 2017 and 2016, sales proceeds and gross realized gains and losses on securities classified as available-for-sale securities and trading securities were:

 

   December 31, 2017  December 31, 2016
           
  Sales proceeds  $—     $783,000 
  Gross realized (losses)  $—     $(95,000)
  Gross realized gains   —      —   
  Gain (loss) on sale of trading securities  $—     $(95,000)

 

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
    December 31, 2017   (Level 1)   (Level 2)   (Level 3)
Trading securities    $                  48,000    $                  48,000    $                          -       $                  -   
Money market funds                        36,000                        36,000                                -                           -   
Total    $                  84,000    $                  84,000    $                          -       $                  -   

  

F-13 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

        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    $                          -       $                  -   

 

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

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   December 31, 2017  December 31, 2016
       
Equipment  $28,000   $28,000 
Furniture & fixtures   114,000    114,000 
Leasehold improvements   107,000    107,000 
    249,000    249,000 
Less: accumulated depreciation and amortization   (115,000)   (68,000)
   Property and Equipment, Net  $134,000   $181,000 

 

Depreciation and amortization expense for the years ended December 31, 2017 and 2016 was $105,000 and $98,000, respectively.

 

NOTE 4 - RELATED PARTY TRANSACTIONS

 

On October 3, 2016, the Company sold trading securities valued at $340,000 to Berkshire Capital Management Co., Inc. (“Berkshire”) for $500,000. Berkshire is controlled by Joseph Fiore, majority shareholder and former chairman of the board of directors of the Company. The Company reported the $160,000 difference between the value of the trading securities and cash sale price as contributed capital.

 

On September 5, 2017, the Company obtained a revolving line of credit from Berkshire Capital Management Co., Inc. The line of credit allows the Company to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien on all the assets of the Company and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019. As of December 31, 2017, we have borrowed $800,000.

 

F-14 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 5 - INCOME TAXES

 

The Company did not provide any Federal and State income tax for the years ended December 31, 2017 and 2016 due to the Company’s net losses.

 

A reconciliation of the provision for income taxes computed using the US statutory federal income tax rate is as follows:

 

   December 31,
   2017  2016
Tax provision at US statutory federal income tax rate  $(690,000)  $(2,320,000)
State income tax, net of federal benefit   —      —   
Change in valuation allowances   690,000    2,320,000 
     Provision for Income Taxes  $—     $—   

 

The significant components of the Company’s deferred tax assets were:

 

   December 31,
   2017  2016
Deferred Tax Assets:          
     Net operating loss carry forward  $4,926,000   $3,746,000 
     Unrealized losses on marketable securities   2,000    251,000 
     Stock based compensation   —      197,000 
     Depreciation and other   (13,000)   31,000 
    4,915,000    4,225,000 
Less valuation allowance   (4,915,000)   (4,225,000)
Net Deferred Tax Asset  $—     $—   

 

Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

As of December 31, 2017, the Company recorded a valuation allowance of $4,915,000 for its deferred tax assets. The Company believes that such assets did not meet the more likely than not criteria to be recoverable through projected future profitable operations in the foreseeable future.

 

Effective January 1, 2007, the Company adopted FASB guidance that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The FASB also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2017 and 2016, the Company does not have a liability for unrecognized tax benefits.

 

The Company’s net operating loss carry forward for income tax purposes as of December 31, 2017 was approximately $18,700,000 and may be offset against future taxable income through 2037. Utilization of the Company’s net operating losses may be subject to substantial annual limitation if the Company experiences a 50% change in ownership, as provided by the Internal Revenue Code and similar state provisions. Such an ownership change would substantially increase the possibility of net operating losses expiring before complete utilization.

F-15 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

In December 2017, new tax known as Tax Cut and Jobs Act of 2017 was enacted. The new tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward, a deemed repatriation transition tax, and changes to allow net operating losses to be carried forward indefinitely. In addition, net operating losses arising after December 31, 2017 will be limited to the lesser of the available net operating loss or 80% of the pre-net operating loss taxable income.

 

In accordance with ASC 740, the impact of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a non-cash, change in its net deferred tax balances of approximately $2,429,000 related to the tax rate change. The Company estimates that its deemed repatriation liability will not be material due to its limited international operations.

 

Uncertain Tax Positions

 

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is generally no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2014. However, as of December 31, 2017, the years subsequent to 2013 remain open and could be subject to examination by tax authorities including the U.S. Internal Revenue Service and major state and local tax jurisdictions in the United States.

 

Interest costs related to unrecognized tax benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties, if any, would be recognized as a component of “General and administrative expenses.”

 

As of December 31, 2017, the Company had no liability for unrecognized tax benefits and no accrual for the payment of related interest and penalties, nor did the Company recognized any interest or penalties expense related to unrecognized tax benefits during the years ended December 31, 2016 or 2015.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Rent

 

The Company leases approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015 and expiring on December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $142,000 to $152,000.

 

The Company’s wholly owned subsidiary leases office shared office space in Berlin Germany pursuant to a lease dated June 29, 2018 and expiring on March 31, 2018. Under the lease, the Company pays monthly base rent of $4,248 (3,570 Euros).

 

The minimum future lease payments under these leases for the next five years are:

  

Year Ended December 31,  Amount
 2018   $161,000 
 2019    150,000 
 2020    152,000 
 2021    —   
 2022    —   
 Thereafter    —   
 Total Five Year Minimum Lease Payments   $463,000 

  

Rent expense for the years ended December 31, 2017 and 2016 was $186,000 and $146,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately $200 per month for other items charged by the landlord in connection with rent.

 

F-16 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

Legal Proceedings

 

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

 

On October 14, 2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate principal amount of $1,500,000 in 1998. On July 12, 2018, the court approved a Joint Motion for Order Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000, warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000. The total value of the settlement, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated balance sheets as of December 31, 2017 and 2016, with a corresponding charge to litigation settlement costs on the consolidated statement of operations for the year ended December 31, 2016,

 

On June 18, 2018 the Company was named as a defendant in a case filed in the United States District Court for the Southern District of New York: Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management Co., Inc., and Eat at Joe’s, Ltd. n/k/a SPYR, Inc. Joseph A. Fiore was the Chairman of our Board of Directors and a significant shareholder. Mr. Fiore resigned from his positions as Chairman of the Board and as a Director of the Company effective August 1, 2018. The suit alleges that Mr. Fiore, during 2013 and 2014, while he was the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors, engaged in improper conduct on behalf of the defendants named in the case related to the Company’s sales of securities in Plandai Biotechnology, Inc. The Commission alleges that Mr. Fiore and the Company unlawfully benefited through the sales of those securities. The Commission also alleges that from 2013 to 2014, the Company’s primary business was investing and that it failed to register as an investment company, resulting in an alleged violation of Section 7(a) of the Investment Company Act of 1940. The suit seeks to disgorge Joseph A. Fiore, Berkshire Capital Management Co., Inc., and the Company of alleged profits on the sale of the securities and civil fines related to the Company’s failure to register as an investment company with the Commission.

 

The Company vehemently denies any wrongdoing. The allegations demonstrate a fundamental misunderstanding of existing precedent and a mischaracterization of the facts and transactions at issue, which were not violative of any securities laws, rules or regulations. The Company will answer these allegations in court.

 

The Company is being represented by Alex Spiro, Esq., a partner with the firm of Quinn Emmanuel, Urquhart & Sullivan, LLP and Marc S. Gottlieb, Esq., a partner with the firm of Ortoli Rosenstadt LLP.

 

Employment Agreements

 

Pursuant to employment agreements entered in December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the aggregate of $450,000 per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant these officers an aggregate of 1.55 million shares of common stock at the beginning of each employment year.

 

Game Development Agreements

 

The Company is party to various game development agreements. Payments are contingent upon the developer(s) meeting specified milestones and game performance. Pursuant to these agreements, the Company has agreed to pay up to $843,000 during the period from January 2018 through January 2019.

 

Common Stock To Be Issued

 

The Company is party to various third-party service agreements to be paid through the issuance of the company’s restricted common stock. Contingent upon the third parties providing the agreed upon services, the Company will issue up to 4,570,000 restricted common shares at various intervals during the period from January 2018 through February 2019. The shares will be recorded at fair value on the date earned under the respective agreements.

F-17 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 7 – EQUITY TRANSACTIONS

 

Common Stock:

 

Year Ended December 31, 2016:

 

During the year ended December 31, 2016, the Company issued an aggregate of 100,000 shares of restricted common stock to consultants for cash of $15,000.

 

During the year ended December 31, 2016, the Company issued an aggregate of 1,843,987 shares of common stock to employees with a total fair value of $413,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $413,000 upon issuance. The shares issued were valued at the date of the respective agreements.

 

During the year ended December 31, 2016, the Company issued an aggregate of 4,509,912 shares of restricted common stock to consultants with a total fair value of $1,951,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,951,000 upon issuance. The shares issued were valued at the date of the respective agreements.

 

In April 2016, the Company cancelled a total of 325,000 shares of common stock issued to an employee pursuant to a settlement and termination agreement. Pursuant to current accounting guidelines, no further accounting was necessary for the cancellation of the 325,000 shares of common stock other than to remove the par value amounting to $33.00.

 

Year Ended December 31, 2017:

 

During the year ended December 31, 2017, the Company issued an aggregate of 750,000 shares of restricted common stock to an existing shareholder and former officer/employee for cash of $300,000. The common shares had a fair value of $510,000 at the date of sale, and as a result, the Company reflected an additional expense of $210,000 to account the difference between the sale price and the fair market value of common shares sold.

 

During the year ended December 31, 2017, the Company issued an aggregate of 2,050,000 shares of restricted common stock to employees with a total fair value of $1,109,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,109,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.

 

During year ended December 31, 2017, the Company issued an aggregate of 12,691,924 shares of restricted common stock to consultants with a total fair value of $3,758,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,758,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.

 

During year ended December 31, 2017, the Company issued an aggregate of 8,000,000 shares of restricted common stock to third parties with a total fair value of $3,320,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,320,000 upon issuance. The shares issued were valued at the date earned under the respective agreements. (See Note 1 “Capitalized Gaming Assets and Licensing Rights”)

 

F-18 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

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, 2015 329,167   $ 0.47
  Granted    
  Vested (308,334)     0.47
  Forfeited    
Non-vested, December 31, 2016 20,833   $ 0.47
  Granted    
  Vested (20,833)     0.47
  Forfeited    
Non-vested, December 31, 2017   $

 

During 2015, the Company granted and issued 600,000 shares of its restricted common stock to employees and third-party service providers. The 600,000 shares were forfeitable and deemed earned upon completion of service over a period of twelve to twenty-four months. The Company recognized the fair value of these shares as they vested. As of December 31, 2016, 579,167 of these shares had vested and 20,833 common shares were unvested. During the year ended December 31, 2017, the remaining 20,833 of these shares vested and as a result, the Company recognized compensation cost of $46,000. As of December 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, if dilutive, are included in weighted average common shares outstanding as of their grant date.

 

Options:

 

The following table summarizes common stock options activity:

      Weighted
      Average
      Exercise
   Options  Price
 December 31, 2015    —     $—   
 Granted    12,900,000    2.94 
 Exercised    —      —   
 Forfeited    —      —   
 Outstanding, December 31, 2016    12,900,000   $2.94 
             
 Granted    8,920,000    0.55 
 Exercised    —      —   
 Forfeited    (8,500,000)   3.88 
 Outstanding, December 31, 2017    13,320,000   $1.74 
             
 Exercisable, December 31, 2016    4,400,000   $2.83 
 Exercisable, December 31, 2017    12,250,000   $1.58 

 

The weighted average grant date fair value of options granted during the years ended December 31, 2017 and 2016, was $0.55 and $2.83 respectively.

 

F-19 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

In June 2016, the Company granted options to purchase 3.75 million shares of restricted common stock valued at $472,000 pursuant to the planned acquisition of Pocket Starships (See Note 1 “Capitalized Gaming Assets and Licensing Rights”). The stock options are fully vested, exercisable at a price per share of $1.00, $2.50, and $5.00 and stated to expire December 31, 2017 through December 31, 2019. During the year ended December 31, 2016, the Company recognized compensation expense of $472,000. On December 31, 2017, options to purchase 500,000 shares of restricted common stock expired, with the remaining 3.25 million expiring December 31, 2018 through December 31, 2019.

 

In August 2016, the Company granted an employee options to purchase a total of 7.5 million shares of common stock with an exercise price per share of $1.00, $2.50 and $5.00. The options are fully vested upon grant but are only exercisable in three tranches starting in January 2017, 2018 and 2019. Total fair value of the options at grant date amounted to $201,000 computed using the Black-Scholes Option Pricing Model. The Company determined the appropriate treatment is to recognize the fair value of the options over the service period, which would be when the options are fully exercisable. The first tranche of 1 million shares became exercisable on January 1, 2017 with a fair value of the options at grant date of $28,000 computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2016, the Company recognized compensation expense of $28,000. Subsequent to December 31, 2016, the employment agreement was terminated, all options cancelled, and no further compensation expense for these options will be recognized.

 

In October 2016, the Company granted an employee options to purchase a total of 1.5 million shares of restricted common stock with an exercise price per share of $1.00, $2.50 and $5.00 and will expire starting December 31, 2017 through December 31, 2019. The options are fully vested upon grant but are only exercisable in three tranches starting in October 2016 and January 2018 and 2019. Total fair value of the options at grant date amounted to $145,000 computed using the Black-Scholes Option Pricing Model. The Company determined the appropriate treatment is to recognize the fair value of the options over the service period, which would be when the options are fully exercisable. During the year ended December 31, 2016, the Company recognized compensation expense of $62,000. During the year ended December 31, 2017, the Company recognized compensation expense of $60,000. On December 31, 2017, options to purchase 500,000 shares of restricted common stock at $0.50 per share expired. As of December 31, 2017, future unamortized costs amounted to approximately $22,000.

 

In October 2016, the Company signed an investor relations consulting agreement with a third party granting options to purchase 50,000 shares of restricted common stock per month beginning October 24, 2016 through October 24, 2017 with an exercise price of $1.00 per share that will expire 36 months from date of grant. The options are granted monthly and fully vested and exercisable upon grant. As of December 31, 2016, 150,000 options were granted. Total fair value of the options at their respective grant dates amounted to $59,000 computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2016, the Company fully recognized the $59,000 compensation expense. As of December 31, 2017, 500,000 options were granted. Total fair value of the options at their respective grant dates amounted to $177,000 computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2017, the Company fully recognized the $177,000 compensation expense.

 

During the year ended December 31, 2017, the Company granted stock options to consultants to purchase a total of 420,000 shares of common stock. A total of 350,000 options vested during 2017 while the remaining 70,000 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 year ended December 31, 2017, the Company recognized $210,000 in compensation expense based upon the vesting of outstanding options. As of December 31, 2017, the unamortized compensation expense for unvested options was $42,000 which will be recognized during 2018.

 

F-20 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

During year ended December 31, 2017, the Company granted stock options purchase up to eight million shares of the Company’s restricted common stock to third parties valued at $2,452,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting August 31, 2020. The fair values of the options were computed using the Black-Scholes Option Pricing Model, and recorded at the date of grant. (See Note 1 “Capitalized Gaming Assets and Licensing Rights”)

 

The weighted average exercise prices, remaining lives for options granted, and exercisable as of December 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
$0.50   8,000,000   2.67   $0.50   8,000,000   $0.50
$1.00   1,070,000   1.81 – 3.10   $1.00   1,000,000   $1.00
$2.50   1,250,000   1   $2.50   750,000   $2.50
$5.00   3,000,000   2   $5.00   2,500,000   $5.00
    13,320,000       $3.97   12,250,000   $1.58

 

At December 31, 2017, the Company’s closing stock price was $0.265 per share. As all outstanding options had an exercise price greater than $0.265 per share, there was no intrinsic value of the options outstanding at December 31, 2017.

 

The following table summarizes options granted with vesting terms activity:

 

          Weighted
          Average
    Number of     Grant Date
    Shares     Fair Value
Non-vested, December 31, 2015   $
  Granted    
  Vested    
  Forfeited    
Non-vested, December 31, 2016   $
  Granted 420,000     1.00
  Vested (350,000)     1.00
  Forfeited    
Non-vested, December 31, 2017 70,000   $ 1.00

 

Warrants:

 

The following table summarizes common stock warrants activity:

 

      Weighted
      Average
      Exercise
   Warrants  Price
 December 31, 2015    —     $—   
 Granted    200,000    0.50 
 Exercised    —      —   
 Forfeited    —      —   
 Outstanding, December 31, 2016    200,000   $0.50 
             
 Granted    1,700,000    1.06 
 Exercised        —   
 Forfeited    (200,000)   050 
 Outstanding, December 31, 2017    1,700,000   $1.06 
             
 Exercisable, December 31, 2016    200,000   $0.50 
 Exercisable, December 31, 2017    1,700,000   $1.06 

 

F-21 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

In October and November 2016, pursuant to advisory services agreement, the Company granted warrants to purchase a total of 200,000 shares of restricted common stock with an exercise price of $0.50 and will expire 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair value of the options at grant date amounted to $50,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.

 

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 $290,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.

 

In October 2017, pursuant to advisory services agreement, the Company granted warrants to purchase a total of 100,000 shares of restricted common stock with an exercise price of $0.50 and will expire 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair value of the options at grant date amounted to $20,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.

 

In October 2017, pursuant to a services agreement, the Company granted warrants to purchase a total of 600,000 shares of restricted common stock with an exercise price of $0.01 and will expire December 31, 2020. The options are fully vested and exercisable upon grant. Total fair value of the options at grant date amounted to $188,000 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 December 31, 2017, were as follows:

 

    Outstanding and Exercisable Warrants  
Warrants          
Exercise Price       Life  
Per Share   Shares   (Years)  
$0.01   600,000   3.00  
$0.50   100,000   0.83  
$1.50   500,000   1.00  
$2.00   500,000   1.00  
    1,700,000      

 

At December 31, 2017, the Company’s closing stock price was $0.265 per share. As all outstanding warrants had an exercise price greater than $0.265 per share, there was no intrinsic value of the warrants outstanding at December 31, 2017.

 

F-22 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

The table below represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2016:

 

    Year Ended
December 31,
 
    2016 
Expected life in years   0.61 – 3.0 
Stock price volatility   132% - 159% 
Risk free interest rate   0.56 % - 1.54% 
Expected dividends   —   
Forfeiture rate   —   

 

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

 

    Year Ended
December 31,
 
    2017 
Expected life in years   1.00 – 3.19 
Stock price volatility   127% - 157% 
Risk free interest rate   1.26 % - 1.70% 
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 8 - PREFERRED STOCK

 

The Class A Preferred Stock carries the following rights and preferences;

 

Dividends

 

The Company shall, in its discretion, determine when and if dividends will be paid on the Class A Preferred Shares, and whether it will be paid in cash, shares of Common Stock, or a combination of both. All Class A Preferred Stockholders shall be treated the same with respect to the payment of dividends. In the event the Company elects to pay a portion or all of the dividends on the Class A Preferred Stock by issuing shares of the Company's Common Stock, the shares of common stock issued as dividends will be restricted, unregistered shares, and will be subject to the same transfer restrictions that apply to the shares of Class A Preferred Stock. The dividend is payable as may be determined by the Board of Directors, out of funds legally available therefor. The Class A Preferred Stock will have priority as to dividends over the Common Stock.

 

Voting Rights

 

The holders of the Class A Preferred Stock shall vote for the election of directors, and shall have full voting rights, except that each Class A Preferred share shall entitle the holder to exercise ten thousand (10,000) votes for each one (1) Class A Preferred Share held.

 

Redemptive Rights

 

The Class A Preferred Stock shall not be redeemable.

 

Conversion Rights

 

The holders of the Class A Preferred Stock will be entitled at any time to convert their shares of Class A Preferred Stock into shares of the Company's Common Stock at the rate of one (1) share of Class A Preferred Stock be converted into common shares of the Company at an agreed price of forty cents ($0.40) per share (the "Conversion Price"), which, based upon the recorded fair value of the Class A Preferred Stock, results in a conversion ratio of 1 share of Class A Preferred Stock to approximately 250 shares of common stock. No fractional shares will be issued.

 

The Conversion Ratio of the Class A Preferred Stock shall be adjusted in certain circumstances, including the payment of a stock dividend on shares of the Common Stock and combinations and subdivisions of the Common Stock.

 

In the case of any share exchange, capital reorganization, consolidation, merger or reclassification, whereby the Common Stock is converted into other securities or property, the Company will make appropriate provisions so that the holder of each share of Class A Preferred Stock then outstanding, will have the right thereafter to convert such share of Class A Preferred Stock into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, share exchange, capital reorganization or reclassification by a holder of the number of shares of Common Stock into which such shares of Class A Preferred Stock might have been converted immediately prior to such consolidation, merger, share exchange, capital reorganization or reclassification. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Conversion Ratio shall be proportionately increased in the case of subdivision of shares. If the shares of Common Stock are combined, consolidated or reverse split into a smaller number of shares of Common Stock, the Conversion Ratio shall be proportionally decreased. The kind and type of Common Shares issuable upon conversion of the Class A Preferred Stock both before and after combination, consolidation or reverse split of the Common Shares shall be the same.

 

F-23 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

The same transfer restrictions imposed on the Class A Preferred Stock shall be applicable to the Common Stock into which the Class A Preferred Stock is converted, although for purposes of Rule 144 as presently in effect, the holding period requirement may be met by adding together the period in which the Class A Preferred Stock is held and the period in which the Common Stock into which the Class A Preferred Stock is converted, is held.

 

Other Provisions

 

The shares of Class A Preferred Stock to be issued and any Common Shares into which it is converted, shall be duly and validly issued, fully paid and non-assessable. The holders of the Class A Preferred Stock shall not have pre-emptive rights with respect to any shares of capital stock of the Company or any other securities of the Company convertible into Common Stock or rights or options to purchase any such shares.

 

The Class E Convertible Preferred Stock carries the following rights and preferences;

 

* No dividends.
* Convertible to common stock based upon proceeds received upon issuance of the shares, divided by the average closing bid price for the Company’s common stock for the 5 trading days prior to the conversion date, and is adjustable to prevent dilution.  At December 31, 2017, the 20,000 Class E preferred shares were convertible to 415,559 common shares.
* Convertible at the Option of the Company at par value only after repayment of the shareholder loans from Joseph Fiore and subject to the holder’s option to convert.
* Entitled to vote 1,000 votes per share of Series E Convertible Preferred Shares.
* Entitled to liquidation preference at par value.
* Is senior to all other share of preferred or common shares issued past, present and future.

 

NOTE 9 – DISCONTINUED OPERATIONS

 

Restaurant

 

Through our other wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported as discontinued operations.

 

The following table summarizes the assets and liabilities of our discontinued restaurant segment's discontinued operations as of December 31, 2017 and December 31, 2016:

 

 

   December 31, 2017  December 31, 2016
Assets:          
   Accounts receivable, net  $—     $13,000 
   Inventory   —      12,000 
   Prepaid expenses   —      25,000 
   Property and equipment, net   —      30,000 
   Other assets   —      16,000 
Total Assets  $—     $96,000 
           
Liabilities:          
   Accounts payable and accrued liabilities  $22,000   $60,000 
Total Liabilities  $22,000   $60,000 

 

 

F-24 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

The following table summarizes the results of operations of our discontinued restaurant for the years ended December 31, 2017 and 2016 and is included in the consolidated statements of operations as discontinued operations:

 

   For the Year Ended December 31,
   2017  2016
       
Revenues  $420,000   $1,413,000 
Cost of sales   133,000    421,000 
          Gross Margin   287,000    992,000 
Expenses          
   Labor and related expenses   177,000    471,000 
   Rent   77,000    278,000 
   Depreciation and amortization   20,000    68,000 
   Professional fees   33,000    2,000 
   Other general and administrative   102,000    198,000 
          Total Operating Expenses   409,000    1,017,000 
          Operating Income (Loss)   (122,000)   (25,000)
Other Income (Expense)          
   Loss on disposal of assets   (10,000)   —   
Income (Loss) on discontinued operations  $(132,000)  $(25,000)

  

Other

 

During the year ended December 31, 2016, the Company incurred additional expenses of $4,000 related to the winding-up of its former subsidiary Franklin Networks, Inc. The following table provides additional detail of these losses which are reflected as a loss on discontinued operations.

 

   December 31, 2016
Revenues  $—   
General and administrative   4,000 
   Loss from discontinued operations  $(4,000)

 

F-25 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 10 – RESTATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016

 

On July 12, 2018, the court approved a Joint Motion for Order Approving Settlement Agreement in the Zakeni Limited v. SPYR, Inc. case. Pursuant to the settlement, the Company will issue to Zakeni Limited 3,500,000 common shares, warrants to purchase 1,000,000 common shares at $0.25 per share, warrants to purchase 1,500,000 common shares at $0.50 per share, and warrants to purchase 1,000,000 common shares at $0.75 per share. The shares and warrants were valued at the date the court signed the settlement agreement. The total value of the settlements, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated balance sheets as of December 31, 2017 and 2016, with a corresponding charge to litigation settlement costs on the consolidated statement of operations for the year ended December 31, 2016.

 

Analysis of the restated December 31, 2016 and 2017 balance sheets and results of operations for the year then ended is as follows.

 

1 – The Company recorded a litigation settlement liability on the 2016 and 2017 consolidated balance sheet in the amount of $1,983,000 (fair value of the 3,500,000 shares and 3,500,000 warrants).

 

2 – The Company recorded litigation settlement costs on the 2016 consolidated statement of operations in the amount of $1,983,000 (fair value of the 3,500,000 shares and 3,500,000 warrants).

 

3 – The Company recorded a reduction in accounts payable and accrued liabilities on the 2017 consolidated balance sheet in the amount of $350,000 (Pre-settlement estimated legal and trial costs).

 

4 – The Company recorded a reduction in professional fees on the 2017 consolidated statement of operations in the amount of $350,000 to remove the pre-settlement estimated legal and trial costs.

 

F-26 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

   December 31, 2016
ASSETS   As Reported    Adjustment    As Restated 
Current Assets:               
   Cash and cash equivalents  $3,204,000   $—     $3,204,000 
   Accounts receivable, net   31,000    —      31,000 
   Other receivable   200,000    —      200,000 
   Prepaid expenses   25,000    —      25,000 
   Trading securities, at market value   59,000    —      59,000 
   Current assets of discontinued operations   50,000    —      50,000 
          Total Current Assets   3,569,000    —      3,569,000 
                
   Property and equipment, net   181,000    —      181,000 
   Capitalized gaming assets and licensing rights, net   40,000    —      40,000 
   Intangible assets, net   18,000    —      18,000 
   Other assets   6,000    —      6,000 
   Non-current assets of discontinued operations   46,000    —      46,000 
TOTAL ASSETS  $3,860,000   $—     $3,860,000 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
LIABILITIES               
Current Liabilities:               
   Accounts payable and accrued liabilities  $116,000   $—     $116,000 
   Litigation Settlement Liability   —      1,983,000 1  1,983,000 
   Current liabilities of discontinued operations   60,000    —      60,000 
          Total Current Liabilities   176,000    1,983,000    2,159,000 
                
          Total Liabilities   176,000    1,983,000    2,159,000 
                
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 December 31, 2017 and 2016   11    —      11 
     20,000 Class E shares issued and outstanding               
        as of December 31, 2017 and 2016   2    —      2 
   Common Stock, $0.0001 par value, 750,000,000 shares    authorized               
   181,128,950 and 157,637,026 shares issued and    outstanding               
   as of December 31, 2017 and 2016   15,763    —      15,763 
   Additional paid-in capital   34,752,224    —      34,752,224 
   Accumulated deficit   (31,084,000)   (1,983,000)   (33,067,000)
          Total Stockholders’ Equity   3,684,000    (1,983,000)   1,701,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $3,860,000   $—     $3,860,000 

 

F-27 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

   December 31, 2016
    As Reported    Adjustment    As Restated 
Revenues  $139,000   $—     $139,000 
                
Expenses               
   Labor and related expenses   1,467,000    —      1,467,000 
   Rent   146,000    —      146,000 
   Depreciation and amortization   98,000    —      98,000 
   Professional fees   3,292,000    —      3,292,000 
   Research and development   1,151,000    —      1,151,000 
   Other general and administrative   740,000    —      740,000 
   Cost of acquisition option   472,000    —      472,000 
          Total Operating Expenses   7,366,000    —      7,366,000 
          Operating Loss   (7,227,000)   —      (7,227,000)
                
Other Income (Expense)               
   Interest and dividend income   18,000    —      18,000 
   Litigation settlement costs   —      (1,983,000)2  (1,983,000)
   Unrealized gain (loss) on trading securities   (57,000)   —      (57,000)
   Loss on sale of marketable securities   (95,000)   —      (95,000)
          Total Other Expense   (134,000)   (1,983,000)   (2,117,000)
                
Loss from continuing operations   (7,361,000)   (1,983,000)   (9,344,000)
                
Loss on discontinued operations   (29,000)   —      (29,000)
                
Net Loss  $(7,390,000)  $(1,983,000)  $(9,373,000)
                
                
Per Share Amounts               
   Loss from continuing operations               
      Basic and Diluted earnings per share  $(0.05)  $(0.01)  $(0.06)
                
   Loss on discontinued operations               
      Basic and Diluted earnings per share  $—     $—     $—   
                
   Net Loss               
      Basic and Diluted earnings per share  $(0.05)  $(0.01)  $(0.06)
                
Weighted Average Common Shares               
      Basic and Diluted   154,092,844    —      154,092,844 

 

F-28 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

   December 31, 2017
ASSETS   As Reported    Adjustment    As Restated 
Current Assets:               
   Cash and cash equivalents  $86,000   $—     $86,000 
   Accounts receivable, net   4,000    —      4,000 
   Prepaid expenses   35,000    —      35,000 
   Trading securities, at market value   48,000    —      48,000 
          Total Current Assets   173,000    —      173,000 
                
   Property and equipment, net   134,000    —      134,000 
   Capitalized gaming assets and licensing rights, net   743,000    —      743,000 
   Intangible assets, net   12,000    —      12,000 
   Other assets   16,000    —      16,000 
TOTAL ASSETS  $1,078,000   $—     $1,078,000 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
LIABILITIES               
Current Liabilities:               
   Accounts payable and accrued liabilities  $878,000   $(350,000)3 $528,000 
   Litigation Settlement Liability   —      1,983,000 1  1,983,000 
   Current liabilities of discontinued operations   22,000    —      22,000 
          Total Current Liabilities   900,000    1,633,000    2,533,000 
                
   Non-current related party line of credit   807,000    —      807,000 
          Total Liabilities   1,707,000    1,633,000    3,340,000 
                
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 December 31, 2017 and 2016   11    —      11 
     20,000 Class E shares issued and outstanding               
        as of December 31, 2017 and 2016   2    —      2 
   Common Stock, $0.0001 par value, 750,000,000 shares    authorized               
   181,128,950 and 157,637,026 shares issued and    outstanding               
    as of December 31, 2017 and 2016   18,112    —      18,112 
   Additional paid-in capital   46,561,875    —      46,561,875 
   Accumulated deficit   (47,209,000)   (1,633,000)   (48,842,000)
          Total Stockholders’ Equity   (629,000)   (1,633,000)   (2,262,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,078,000   $—     $1,078,000 

 

F-29 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

   December 31, 2017
    As Reported    Adjustment    As Restated 
Revenues  $128,000   $—     $128,000 
                
Expenses               
   Labor and related expenses   2,358,000    —      2,358,000 
   Rent   186,000    —      186,000 
   Depreciation and amortization   105,000    —      105,000 
   Professional fees   5,905,000    (350,000)4  5,555,000 
   Research and development   1,666,000    —      1,666,000 
   Other general and administrative   502,000    —      502,000 
          Total Operating Expenses   10,722,000    (350,000)   10,372,000 
          Operating Loss   (10,594,000)   350,000    (10,244,000)
                
Other Income (Expense)               
   Interest and dividend income   4,000    —      4,000 
   Interest Expense   (11,000)   —      (11,000)
   Loss on write-down of assets   (5,381,000)   —      (5,381,000)
   Unrealized gain (loss) on trading securities   (11,000)   —      (11,000)
          Total Other Expense   (5,399,000)   —      (5,399,000)
                
Loss from continuing operations   (15,993,000)   350,000    (15,643,000)
                
Loss on discontinued operations   (132,000)   —      (132,000)
                
Net Loss  $(16,125,000)  $350,000   $(15,775,000)
                
                
Per Share Amounts               
   Loss from continuing operations               
      Basic and Diluted earnings per share  $(0.10)  $0.01   $(0.09)
                
   Loss on discontinued operations               
      Basic and Diluted earnings per share  $—     $—     $—   
                
   Net Loss               
      Basic and Diluted earnings per share  $(0.10)  $0.01   $(0.09)
                
Weighted Average Common Shares               
      Basic and Diluted   166,443,807    —      166,443,807 

F-30 

 

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDING DECEMBER 31, 2017 AND 2016

 

NOTE 11 - SUBSEQUENT EVENTS

 

During period from January through August 14, 2018, the Company issued 6.7 million shares of common stock for cash of $905,000 pursuant to various private placement agreements.

 

During period from January through August 14, 2018, the Company issued 5.9 million shares of common stock pursuant to various third-party service agreements.

 

On February 1, 2018, the Company issued 1.25 million shares of common stock with a fair value of $625,000 pursuant to existing employment and consulting agreements.

 

On April 20, 2018, the Company signed a convertible promissory note with a third-party lender for up to $475,000 (net of original issue discount of $25,000). The note is for 12 months with interest at 8% per annum on the unpaid principal amount. The note holder has the right, at any time on or after 181 calendar days after the date of the note, to convert all or any portion of the outstanding principal and interest into the Company’s restricted common stock at $0.20 per share. On April 26, 2018 the Company borrowed $150,000 on this note.

 

On May 22, 2018, the Company signed a convertible promissory note with a third-party lender for up to $250,000 (net of original issue discount of $25,000). The note is for 8 months with a one-time interest charge of 8% on the issuance date outstanding balance. The note holder has the right, at any time on or after the issuance date, to convert all or any portion of the outstanding principal and interest into the Company’s restricted common stock at $0.25 per share. On May 22, 2018 the Company borrowed $250,000 on this note.

 

On May 23, 2018, the Company cancelled an aggregate of 625,000 shares of restricted common stock on termination of a third-party service agreement with a total fair value on the date of termination of $207,000. The Company recorded a gain on cancellation of $113,000 for the portion of shares (375,000) issued during 2017 and reversed expenses of $94,000 for the portion of shares (250,000) issued during 2018. The shares issued were valued at the termination date of the agreement based upon closing market price of the Company’s common stock.

 

On July 12, 2018, the court approved a Joint Motion for Order Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000, warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000. The total value of the settlement, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated balance sheets as of December 31, 2017 and 2016, with a corresponding charge to litigation settlement costs on the consolidated statement of operations for the year ended December 31, 2016.

 

 

 

 

 F-31 

 

  

Index to Condensed Consolidated Financial Statements (Unaudited)   Page
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017   F-33
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017   F-34
Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018   F-35
Condensed Consolidated Statements of Cash Flows, for the six months ended June 30, 2018 and 2017   F-36
Notes to Condensed Consolidated Financial Statements   F-38
 F-32 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
       
    June 30,
2018
    December 31,
2017
 
ASSETS        (Restated) 
Current Assets:          
   Cash and cash equivalents  $168,000   $86,000 
   Accounts receivable, net   18,000    4,000 
   Prepaid expenses   26,000    35,000 
   Trading securities, at market value   19,000    48,000 
          Total Current Assets   231,000    173,000 
           
   Property and equipment, net   113,000    134,000 
   Capitalized gaming assets and licensing rights, net   709,000    743,000 
   Intangible assets, net   10,000    12,000 
   Other assets   6,000    16,000 
TOTAL ASSETS  $1,069,000   $1,078,000 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
LIABILITIES          
Current Liabilities:          
   Accounts payable and accrued liabilities  $552,000   $528,000 
   Related party short-term advances   55,000    —   
  Related party line of credit   1,036,000    —   
   Convertible note payable, net   196,000      
   Litigation settlement liability   1,983,000    1,983,000 
   Current liabilities of discontinued operations   22,000    22,000 
          Total Current Liabilities   3,844,000    2,533,000 
           
   Non-current related party line of credit   —      807,000 
         Total Liabilities   3,844,000    3,340,000 
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY (DEFICIT)          
   Preferred stock, $0.0001 par value, 10,000,000 shares authorized          
      107,636 Class A shares issued and outstanding          
        as of June 30, 2018 and December 31, 2017   11    11 
     20,000 Class E shares issued and outstanding          
        as of June 30, 2018 and December 31, 2017   2    2 
   Common Stock, $0.0001 par value, 750,000,000 shares authorized          
        194,041,732 and 181,128,950 shares issued and outstanding          
        as of June 30, 2018 and December 31, 2017   19,404    18,112 
   Additional paid-in capital   51,062,583    46,561,875 
   Accumulated deficit   (53,857,000)   (48,842,000)
          Total Stockholders’ Equity ( Deficit)   (2,775,000)   (2,262,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $1,069,000   $1,078,000 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 F-33 

SPYR, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                     
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
    2018    2017    2018    2017 
                     
Revenues  $21,000   $32,000   $27,000   $84,000 
                     
Expenses                    
   Labor and related expenses   235,000    308,000    1,121,000    1,678,000 
   Rent   39,000    49,000    88,000    87,000 
   Depreciation and amortization   28,000    30,000    57,000    45,000 
   Professional fees   518,000    1,300,000    3,074,000    2,892,000 
   Research and development   154,000