SPYR, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and supplementary data referred to in this Form 10-K.
This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning revenue sources and concentration, selling, general and administrative expenses and capital resources, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-K that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-K is as ofDecember 31, 2021 , and we undertake no duty to update this information. 5 Plan of Operations
SPYR®, Inc. acts as a holding company to develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.
With ourOctober 20, 2020 , acquisition of Applied Magix, aNevada corporation ("Applied Magix"), our business model changed to focus on the development of our wholly owned subsidiaryApplied Magix Inc. , a registered Apple® developer, and reseller of Apple® ecosystem compatible products and accessories with an emphasis on the smart home market. As such, we are in the global "Internet of Things" (IoT) market, and more specifically, the segment of the market related to the development, manufacture and sale of devices and accessories specifically built on Apple's HomeKit® framework. These products work within the Apple® HomeKit® ecosystem and are exclusive to the Apple market and its consumers. Apple® HomeKit® is a system that lets users control smart home devices, so long as they're compatible with the HomeKit® ecosystem, giving users control over smart thermostat, lights, locks and more in multiple rooms, creating comfortable environments and remote control of other connected devices. Our strategy is two-fold. First, we intend to resell, under our Applied Magix brand, a variety of chargers, cables, cords, charging docks, cases, cameras, adaptors and other accessories used in the Apple® ecosystem in various internet marketplaces. Secondly, we are developing an Applied Magix branded hardware device for use with the Apple HomeKit® framework, that will allow users to program and securely control and manage multiple smart home devices labeled as a "Works with Apple HomeKit" accessory through the Apple® HomeKit® app for iOS. To date, our strategy is in the development stage. We have yet to begin sales efforts for our branded Apple® ecosystem compatible products and accessories, and our Apple HomeKit® hardware device is in development. We will also continue to identify and target acquisitions, which will grow our footprint in the technology industry and expand the products we offer consumers, including companies developing artificial intelligence and smart-technology products. The Company intends to utilize cash on hand, shareholder loans and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities to conduct its ongoing business, and to also conduct strategic business development, marketing analysis, due diligence investigations into possible acquisitions, and implementation of our Applied Magix business plans generally. The Company also seeks to diversify, through acquisition or otherwise, in other related and/or unrelated business areas and is exploring opportunities to do so.
Comparison of 2021 to 2020
The consolidated results of continuing operations are as follows:
For the Year EndedDecember 31, 2021 Applied Magix
Corporate Consolidated
Revenues $ 2,000 $ -$ 2,000 Cost of Goods Sold (61,000 ) - (61,000 ) Labor and related expenses (401,000 ) (1,619,000 ) (2,020,000 ) Rent (10,000 ) (63,000 ) (73,000 ) Depreciation and amortization (7,000 ) (6,000 ) (13,000 ) Professional fees (22,000 ) (310,000 ) (332,000 ) Research and development (9,000 ) - (9,000 ) Other general and administrative (216,000 ) (193,000 ) (409,000 ) Operating loss (724,000 )
(2,190,000 ) (2,915,000 )
Interest Expense - (1,139,000 ) (1,139,000 ) Gain on disposition of assets - 5,000 5,000 Change in Value of derivative liability - (1,586,000 ) (1,586,000 ) Loss on Conversion of Debt - (335,000 ) (335,000 ) Gain on Forgiveness of Debt - 145,000 145,000 Impairment on Trading Securities - (1,000) (1,000) Loss from continuing operations$ (724,000 )
$ 5,102,000 $ (5,826,000 ) 6
For the Year EndedDecember 31, 2020 Applied Magix
Corporate Consolidated
Revenues $ - $ - $ - Related party service revenues - 185,000 185,000 Labor and related expenses (945,000 ) (1,085,000 ) (2,030,000 ) Rent - (113,000 ) (113,000 ) Depreciation and amortization (2,000 ) (36,000 ) (38,000 ) Professional fees (6,000 ) (95,000 ) (101,000 ) Research and development (14,000 ) - (14,000 ) Other general and administrative (30,000 )
(180,000 ) (210,000 )
Operating loss (997,000 ) (1,324,000 (2,321,000 )
Interest Expense - (247,000 ) (247,000 )Loss on disposition of assets - (11,000 ) (11,000 ) Bargain purchase gain on acquisition of subsidiary - 11,000 11,000 SBA EIDL grant - 3,000 3,000 Loss on issuance of long-term convertible notes payable - (514,000 ) (514,000 ) Change in Value of derivative liability - 132,000 ) 132,000 Other expense - (626,000 ) (626,000 ) Loss from continuing operations$ (997,000 )
$ (1,950,000 ) $ (2,947,000 ) Results of Operations For the year endedDecember 31, 2021 , the Company had a loss from continuing operations of$5,820,000 compared to a loss from continuing operations of$2,947,000 for the year endedDecember 31, 2020 , an increase of$1,769,000 . This increase is due primarily to an increase in professional fees of$231,000 , and other general and administrative costs of$193,000 . Other factors contributing to the increase include an increase in interest expense of$1,139,000 for 2021 as compared$247,000 in 2020, and a loss on the debt modification$335,000 for 2021 as compared to no loss in 2020. Additionally, there was a decrease in the change in value of derivative liability from a gain of$132,000 in 2020 to a loss of$1,586,000 in 2021, representing a total decrease of$1,718,000 .
More detailed explanation of the year ended
Revenues - For the years endedDecember 31, 2021 and 2020, the Company had non related party revenue of$2,000 and$0 , respectively. The increase was the result of development stage operations of Applied Magix which began selling it's Apple ecosystem products. During the year endedDecember 31, 2021 , the Company had no related party services revenues, as compared to$185,000 in revenue for professional services rendered to related parties in 2020. The Company has not and does not anticipate that it will provide any further professional services to related parties. Our current business is focused on the development of our wholly owned subsidiary, Applied Magix.
Cost of goods sold increased to
Labor and related expenses include the costs of salaries, wages, leased employees, contract labor, and the fair value of common stock and options granted to employees and directors for services. For the year endedDecember 31, 2021 , the company had total labor and related expenses of$2,020,000 with$350,000 being settled in cash,$649,000 in accrued salaries and$1,021,000 being paid in restricted common stock and options recorded at fair value. For the year endedDecember 31, 2020 , the company had total labor and related expenses of$2,030,000 with$302,000 being settled in cash,$393,000 in accrued salaries and$1,335,000 being paid in restricted common stock and options recorded at fair value.
The cost of rent decreased to
The Company leased approximately 5,169 square feet at4643 South Ulster Street ,Denver, Colorado pursuant to an amended lease datedMay 21, 2015 . Under the lease, the Company paid annual base rent on an escalating scale ranging from$143,000 to$152,000 . In addition to the minimum basic rent, rent expense also includes approximately$1,000 per month for other items charged by the landlord in connection with rent. OnMay 1, 2020 andJuly 29, 2020 , the Company entered into amended lease agreements with its landlord. Under the terms of the amendments, the landlord agreed to waive rent, certain rent adjustments and parking for the periodApril 1, 2020 throughAugust 31, 2020 and extend the term of the lease by five months. The lease term date, which wasDecember 31, 2020 , was changed toMay 31, 2021 . OnApril 1, 2021 , the Company entered into a lease termination and payment agreement with the landlord, pursuant to which the Company vacated and surrendered the premises to the landlord and the Company will pay approximately$67,000 over 18 months commencingApril 1, 2021 . As ofNovember 1, 2021 , the Company was delinquent in its monthly payments and has not made payments to date pursuant to the settlement agreement and had approximately$42,000 in unpaid rent which was reported as part of accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as ofDecember 31, 2021 . 7 EffectiveMarch 1, 2021 , the Company's wholly owned subsidiary Applied Magix, entered into a 6-month lease for 2 workspace offices located at1230 Rosecrans Ave ,Manhattan Beach, California . The lease automatically renews on a continuing basis for an additional 6 months unless cancelled in writing 60 days prior the lease termination date. Under the lease, the Company pays monthly rent of$1,400 . Depreciation and amortization expenses was$13,000 for the year endedDecember 31, 2021 compared to$38,000 for the year endedDecember 31, 2020 , a decrease of$25,000 . Depreciation and amortization expenses are attributable to depreciation of the property and equipment and amortization of intangible assets in service during respective periods. We expect depreciation and amortization expenses to decrease in 2022 commensurate with the sale of additional property, equipment, and intangible assets in connection with our planned Applied Magix business operations. Professional fees increased to$332,000 for the year endedDecember 31, 2021 from$101,000 for the year endedDecember 31, 2020 , an increase of$231,000 . Professional fees during 2021 included$83,000 in legal, accounting, and other professional service needs,$22,000 in consulting services related to our Applied Magix operations, and$123,000 for public relations. Professional fees during 2020 included$92,000 in legal, accounting, and other professional service needs,$6,000 in consulting services related to our Applied Magix operations and$3,000 for public relations. Research and development costs during the year endedDecember 31, 2021 included$9,000 in connection with the research and testing of products for our Applied Magix operations, compared to$14,000 during the year endedDecember 31, 2020 , a decrease of$5,000 . Other general and administrative expenses increased to$409,000 for the year endedDecember 31, 2021 compared$210,000 for to the year endedDecember 31, 2020 . The increase can be attributed primarily to increases in advertising and promotion costs attributable to Applied Magix. The Company had interest expense on a line of credit, short-term advances, convertible notes payable and accrued expenses of$1,139,000 for the year endedDecember 31, 2021 . The Company had interest expense on a line of credit, short-term advances, convertible notes payable and accrued expenses of$247,000 for the year endedDecember 31, 2020 . The Company sold certain office equipment for$10,000 which resulted in a gain on disposition of assets of$5,000 for the year endedDecember 31, 2021 . The Company sold office equipment for a total of$9,000 for the year endedDecember 31, 2020 , which resulted in a corresponding loss of$11,000 . The Company recognized no loss on the issuance of long-term convertible notes payable for the year endedDecember 31, 2021 , compared to$514,000 for the
year endedDecember 31, 2020 . The Company recognized a loss on the change in value of a derivative liability related to its long-term convertible notes payable in the amount of$1,586,000 for the year endedDecember 31, 2021 . The Company recognized a gain for the year endedDecember 31, 2020 in the amount of$132,000 . During the year endedDecember 31, 2020 , the Company accrued$500,000 in connection with litigation and legal settlement liabilities. The$500,000 liability was reported as part of accounts payable and accrued liabilities on the accompanying consolidated balance sheets as ofDecember 31, 2020 . There were no such accrued liabilities with litigation and settlement expenses in 2021. The Company had impairment on trading securities of$1,000 for the year endedDecember 31, 2021 compared to no impairment on trading securities for the year endedDecember 31, 2020 . Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities at the
respective reporting dates. 8 AtDecember 31, 2021 , the Company expects to receive deferred tax assets arising from net operating loss carry-forwards, capital loss carry-overs, unrealized losses on trading securities, and deductible temporary differences. As of the date of this filing, this amount is indeterminable. As ofDecember 31, 2020 , the Company had deferred tax assets arising from net operating loss carry-forwards, capital loss carry-overs, unrealized losses on trading securities, and deductible temporary differences of approximately$25,100,000 . During the year endedDecember 31, 2020 , the Company increased its net operating loss carry-forwards by approximately$1,200,000 , had capital losses carry-forwards of approximately$2,200,000 expire and increased its other deductible temporary differences by approximately$600,000 . Management believes it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will not be sufficient to fully recover the deferred tax assets and has established a 100% valuation allowance of$5,280,000 against these potential future tax benefits. The Company will continue to evaluate the realizability of deferred tax assets quarterly. Discontinued Operations Through our wholly owned subsidiary, SPYR APPS®, LLC, during the year endedDecember 31, 2015 throughDecember 31, 2020 , we engaged in the development, publication, and co-publication of mobile electronic games, seeking to generate revenue through those games by way of advertising and in-app purchases. During October, 2020 the Company changed its focus away from this line of business. As ofDecember 31, 2020 , all of our games had been removed from the game stores. Pursuant to current accounting guidelines, the assets, and liabilities ofSPYR APPS LLC as well as the results of its operations are presented in these financial statements as discontinued operations. OnFebruary 22, 2022 , the Company dissolved SPYR APPS®, LLC. OnApril 20, 2021 , the Company dissolvedBranded Food Concepts, Inc. 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 thePhiladelphia International Airport since 1997. Our lease in thePhiladelphia Airport expired inApril 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 are presented in the accompanying financial statements as discontinued operations.
Liquidity and Capital Resources
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has generated a net loss for the year endedDecember 31, 2021 of$5,961,000 and utilized cash in operations of$974,000 . As ofDecember 31, 2021 , the Company had current assets of$82,000 , which included cash and cash equivalents of$32,000 , prepaid expenses of$47,000 , and current assets of discontinued operations of$3,000 . During the year endedDecember 31, 2021 the Company met its capital requirements through a combination of collection of receivables, proceeds from long-term convertible notes payable, proceeds of SBA PPP note payable and SBA Economic Injury Disaster Loan ("EIDL"), and through the use of existing cash reserves. The Company also entered into an Equity Line of Credit pursuant to an Equity Purchase Agreement withBrown Stone Capital, LP , datedSeptember 30, 2020 . Pursuant to the Equity Purchase Agreement, Brown Stone agreed to invest up to$14,000,000 to purchase the Company's Common Stock, par value$0.0001 per share. The purchase price of the common shares is the lesser of the Fixed price or Market price. The Fixed price is$0.50 per share in years 1 and 2, after the effectiveness of a registration statement, and$1.00 per share in years 3, 4 and 5 after the effectiveness of a registration statement covering the underlying shares. The Market price is 70% of the three lowest Variable Weighted Average Price ("VWAP") for the Company's common stock during the 10 trading day period immediately prior to the conversion date. In addition, the Company and Brown Stone entered into a Registration Rights Agreement, whereby the Company agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, and applicable state securities laws, with respect to the shares of Common Stock issuable for Brown Stone's investment pursuant to the Equity Purchase Agreement. The Equity Purchase Agreement terminates five years after the Effective Date or conditioned upon the following events: (i) when Brown Stone has purchased the maximum purchase amount; or (ii) in the event a voluntary or involuntary bankruptcy petition is filed concerning the Company; or, (iii) if a Custodian is appointed for the Company or if the Company makes a general assignment for all or substantially all of its property for the benefit of its creditors. The Company currently does not have sufficient cash and liquidity to meet its anticipated working capital for the next twelve months. The Company will continue to seek additional capital through the sale of its common stock, debt financing and through expansion of its existing and new products. If these goals do not materialize as planned, we believe that the Company can reduce its operating and product development costs and that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. The Company may also decide to expand and/or diversify, through acquisition or otherwise, in other related or unrelated business areas if opportunities present themselves. 9 Operating Activities - For the year endedDecember 31, 2021 and 2020, the Company used cash for operating activities of$974,000 and$521,000 respectively. For the year endedDecember 31, 2021 , net cash used in operating activities from continuing operations of$974,000 consisted of net loss of$5,961,000 , which included non-cash costs of depreciation and amortization of$13,000 , amortization of debt discounts of$553,000 , loss on discontinued operations of$135,000 , common stock issued for services of$896,000 , common stock issued for employee compensation of$239,000 , loss on debt modification of$335,000 and loss on change of fair value derivative liability of$1,586,000 . Changes in operating assets and liabilities included changes in accounts payable and accrued liabilities of$802,000 , accrued interest on notes payable of$209,000 and accrued interest and liquidated damages on convertible notes of$352,000 . For the year endedDecember 31, 2020 , net cash used in operating activities of$501,000 consisted of net loss of$3,057,000 , which included non-cash costs of depreciation and amortization of$38,000 , amortization of debt discounts of$50,000 , loss on discontinued operations of$110,000 , common stock issued for employee compensation of$1,335,000 and gain on change of fair value derivative liability of$132,000 . Changes in operating assets and liabilities included changes in accounts payable and accrued liabilities of$420,000 , and accrued interest and liquidated damages on convertible notes of$59,000 . Investing Activities - During the year endedDecember 31, 2021 , the Company sold property and equipment for$10,000 . The Company sold property and equipment for$9,000 during the year endedDecember 31, 2020 and purchased property and equipment for$15,000 . Financing Activities - During the year endedDecember 31, 2021 , the Company borrowed$215,000 from long-term notes payable,$198,000 from short-term notes payable and$73,000 from theU.S. Small Business Administration pursuant to the Paycheck Protection Program; During the year endedDecember 31, 2020 , the Company borrowed$1,000,000 pursuant to long-term convertible notes payable from a third-party lender,$71,000 from theU.S. Small Business Administration pursuant to the Paycheck Protection Program and received a$3,000 EIDL from theU.S. Small Business Administration . In addition, the Company paid$47,000 in settlement of a short-term convertible note payable to a third-party lender. Government Regulations - The Company is subject to all pertinent federal, state, local and international laws governing its business. Each subsidiary is subject to licensing and regulation by a number of authorities in its State or municipality. These may include health, safety, and fire regulations. The Company's operations are also subject to Federal and State minimum wage laws governing such matters as working conditions, overtime and other credits. Critical Accounting Policies - The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.
Revenue Recognition We determine revenue recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services. The Company's only revenue stream is currently from transactions as a registered reseller of Apple® ecosystem compatible products, accessories and related applications with an emphasis on the smart home market. The Company has had minimal sales to date. The Company's revenue is recognized at a point in time when the sale of the product is completed. There is no significant financing component from the Company's sales. 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 theFinancial 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. 10 The fair value of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded
in future periods. The Company also issues restricted shares of its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value at the date of the grant and is recognized as expense over the period which an employee is required to provide services in exchange for the award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the estimated fair value at measurement date which is either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
Derivative Financial Instruments
The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the Binomial Valuation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. The Company's only derivative financial instruments were embedded conversion features associated with long-term convertible notes payable which contain certain provisions that allow for a variable number of shares on conversion. Loss Contingencies The Company is subject to various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted.
Recent Accounting Pronouncements
See Note 1 of the consolidated financial statements for discussion of recent accounting pronouncements.
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