Item
1. Financial Statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
($
in thousands except per share amounts)
|
|
September
30
|
|
|
December
31
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
109
|
|
|
$
|
197
|
|
Marketable
securities
|
|
|
3,409
|
|
|
|
3,998
|
|
Prepaid
expenses and other assets
|
|
|
76
|
|
|
|
150
|
|
Total
current assets
|
|
|
3,594
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
1
|
|
|
|
3
|
|
Patent portfolios and
patent rights, net
|
|
|
1,500
|
|
|
|
3,578
|
|
Investments at fair
value
|
|
|
2,725
|
|
|
|
1,020
|
|
Deposit
|
|
|
26
|
|
|
|
26
|
|
Total
assets
|
|
$
|
7,846
|
|
|
$
|
8,972
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
68
|
|
|
$
|
56
|
|
Accrued
salaries and benefits
|
|
|
578
|
|
|
|
695
|
|
Warrant
liabilities
|
|
|
262
|
|
|
|
822
|
|
Payable
to DatChat
|
|
|
348
|
|
|
|
—
|
|
Short-term
deferred revenue
|
|
|
—
|
|
|
|
957
|
|
Short-term
lease liabilities
|
|
|
—
|
|
|
|
48
|
|
Total
current liabilities
|
|
|
1,256
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Long-term
deferred revenue
|
|
|
—
|
|
|
|
2,288
|
|
Total
liabilities
|
|
|
1,256
|
|
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Series D: 4,725
shares issued and outstanding at September 30, 2018 and December 31, 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Series D-1: 834
shares issued and outstanding at September 30, 2018 and December 31, 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001
par value, 100,000,000 shares authorized; 8,542,542 and 6,234,910 shares issued at September 30, 2018 and December 31, 2017,
respectively; 8,542,530 and 6,234,898 shares outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
1
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
152,438
|
|
|
|
149,425
|
|
Treasury stock, at cost, 12 shares at September
30, 2018 and December 31, 2017
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Accumulated
deficit
|
|
|
(145,585
|
)
|
|
|
(145,055
|
)
|
Total
stockholders’ equity
|
|
|
6,590
|
|
|
|
4,106
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
7,846
|
|
|
$
|
8,972
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
($
in thousands except per share amounts)
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
314
|
|
|
$
|
—
|
|
|
$
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
346
|
|
|
|
346
|
|
|
|
1,027
|
|
|
|
1,027
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
206
|
|
|
|
488
|
|
|
|
903
|
|
|
|
1,371
|
|
Professional fees
|
|
|
210
|
|
|
|
280
|
|
|
|
1,202
|
|
|
|
815
|
|
Impairment of intangible assets
|
|
|
1,051
|
|
|
|
—
|
|
|
|
1,051
|
|
|
|
—
|
|
Rent
|
|
|
16
|
|
|
|
21
|
|
|
|
57
|
|
|
|
70
|
|
Depreciation expense
|
|
|
21
|
|
|
|
1
|
|
|
|
38
|
|
|
|
2
|
|
Acquisition costs
|
|
|
19
|
|
|
|
—
|
|
|
|
230
|
|
|
|
—
|
|
Other selling, general and administrative
|
|
|
82
|
|
|
|
137
|
|
|
|
282
|
|
|
|
372
|
|
Total operating expenses
|
|
|
1,951
|
|
|
|
1,273
|
|
|
|
4,790
|
|
|
|
3,657
|
|
Loss from operations
|
|
|
(1,951
|
)
|
|
|
(959
|
)
|
|
|
(4,790
|
)
|
|
|
(2,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income, net
|
|
|
(35
|
)
|
|
|
6
|
|
|
|
(225
|
)
|
|
|
299
|
|
Change in fair value of investment
|
|
|
—
|
|
|
|
345
|
|
|
|
680
|
|
|
|
345
|
|
Change in fair value of warrant liabilities
|
|
|
95
|
|
|
|
1,067
|
|
|
|
560
|
|
|
|
(259
|
)
|
Total other income
|
|
|
60
|
|
|
|
1,418
|
|
|
|
1,015
|
|
|
|
385
|
|
Net (loss) income
|
|
$
|
(1,891
|
)
|
|
$
|
459
|
|
|
$
|
(3,775
|
)
|
|
$
|
(2,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.44
|
)
|
Diluted
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,542,530
|
|
|
|
5,998,920
|
|
|
|
7,894,936
|
|
|
|
5,304,201
|
|
Diluted
|
|
|
8,542,530
|
|
|
|
6,009,042
|
|
|
|
7,894,936
|
|
|
|
5,304,201
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
($
in thousands except per share amounts)
(Unaudited)
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Treasury Stock
|
|
|
Accumulated
Deficit
|
|
|
Total Stockholder’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
6,234,898
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
149,425
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(145,055
|
)
|
|
$
|
4,106
|
|
Issuance common stock in equity raise, net of offering cost
|
|
|
2,222,222
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,699
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,700
|
|
Stock-based compensation
|
|
|
85,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
314
|
|
Cumulative effect of the changes related to adoption of ASC 606
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,775
|
)
|
|
|
(3,775
|
)
|
Balance at September 30, 2018
|
|
|
8,542,530
|
|
|
$
|
1
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,438
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(145,585
|
)
|
|
$
|
6,590
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
($
in thousands)
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,775
|
)
|
|
$
|
(2,320
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
1,027
|
|
|
|
1,027
|
|
Change in fair value of investment
|
|
|
(680
|
)
|
|
|
(345
|
)
|
Change in fair value of warrant liabilities
|
|
|
(560
|
)
|
|
|
259
|
|
Stock-based compensation
|
|
|
314
|
|
|
|
13
|
|
Depreciation expense
|
|
|
38
|
|
|
|
2
|
|
Realized loss on marketable securities
|
|
|
361
|
|
|
|
303
|
|
Unrealized loss (gain) on marketable securities
|
|
|
14
|
|
|
|
(262
|
)
|
Impairment of intangible assets
|
|
|
1,051
|
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
74
|
|
|
|
93
|
|
Accounts payable and accrued expenses
|
|
|
12
|
|
|
|
(75
|
)
|
Accrued salaries and benefits
|
|
|
(117
|
)
|
|
|
(177
|
)
|
Deferred revenue
|
|
|
—
|
|
|
|
(932
|
)
|
Accrued lease liabilities
|
|
|
(48
|
)
|
|
|
(133
|
)
|
Net cash used in operating activities
|
|
|
(2,289
|
)
|
|
|
(2,547
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(13,310
|
)
|
|
|
(11,283
|
)
|
Sale of marketable securities
|
|
|
13,524
|
|
|
|
12,533
|
|
Purchase of investments at fair value
|
|
|
(677
|
)
|
|
|
(675
|
)
|
Purchase of property and equipment
|
|
|
(36
|
)
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
|
|
(499
|
)
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash from issuance common stock, net of offering cost
|
|
|
2,700
|
|
|
|
2,095
|
|
Repurchase of restricted stock units to pay for employee withholding taxes
|
|
|
—
|
|
|
|
(24
|
)
|
Net cash provided by financing activities
|
|
|
2,700
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(88
|
)
|
|
|
99
|
|
Cash and cash equivalents, beginning of period
|
|
|
197
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
109
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
—
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
Investment in DatChat
|
|
$
|
348
|
|
|
$
|
—
|
|
See
accompanying notes to condensed consolidated financial statements
Note
1. Organization and Description of Business
Organization
and Description of Business
Spherix
Incorporated (the “Company”) is an intellectual property company incorporated in the State of Delaware that owns patented
and unpatented intellectual property. The Company was formed in 1967 as a scientific research company and for much
of its history pursued drug development including through Phase III clinical studies which were discontinued. Through
the Company’s acquisition of patents and patent applications developed by Nortel Networks Corporation from Rockstar Consortium
US, LP (“Rockstar”) and Harris Corporation from North South Holdings Inc. (“North South”) in 2013, the
Company has expanded its activities.
The
Company is a patent commercialization company focused on generating revenues from the monetization of intellectual property, or
IP. Such monetization includes, but is not limited to, acquiring IP from patent holders in order to maximize the value of
the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents. We
intend to generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies
that we own, that we manage for others, or that others manage on our behalf. To date, we have generated minimal revenues and no
assurance can be provided that our business model will be successful.
In
addition to our patent monetization efforts, since the fourth quarter of 2017, we have been transitioning to focus our efforts
as a technology development company. These efforts have focused on biotechnology research and blockchain technology research.
The Company’s biotechnology research development includes investments in Hoth Therapeutics Inc. and the proposed merger
with CBM BioPharma, Inc. (“CBM”).
Hoth
Therapeutics is a development stage biopharmaceutical company focused on proprietary therapeutics for patients suffering from
indications such as atopic dermatitis, also known as eczema. To treat indications impacting more than 32 million Americans, Hoth
is working to develop and commercialize the BioLexa™ Platform, a proprietary, patented, drug compound platform developed
at the University of Cincinnati. The BioLexa™ Platform has achieved positive results at preclinical studies conducted
at the University of Miami.
In
addition to Hoth, the Company is proposing a merger with CBM. In October 2018, the Company entered into an agreement and plan
of merger, subject to shareholder approval, with CBM BioPharma, Inc. (“CBM”), a pharmaceutical company focusing on
the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to
receive an aggregate of 15,000,000 shares of the Company’s common stock with CBM continuing as the surviving corporation
in the merger.
In the field of blockchain research, the Company previously entered into an agreement and plan of merger,
subject to shareholder approval, with DatChat, Inc. (the “DatChat Merger”), a secure messaging application that utilizes
blockchain technology. After further negotiations, the Company determined not to pursue a merger with DatChat and on August 8,
2018, entered into a Securities Purchase Agreement with DatChat pursuant to which the Company and DatChat agreed to terminate the
DatChat Merger and the Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of (a) a cash payment
of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation of the Company to pay
certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in
the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 4.37% of the issued and
outstanding common stock of DatChat. Pursuant to the Securities Purchase Agreement, the Company
applied
a total of approximately $152,000 prior advances towards its investment in DatChat (“Prior Incurred Amount”), including
$131,000 of compensation related costs and $21,000 professional fees. The Company also recorded approximately $348,000 compensation
expenses payable to DatChat (“Payable to DatChat”) in addition to the $152,000 advances to reach the $500,000 maximum.
The
breakdown of investment at Datchat as September 30, 2018 are as follows ($ in thousands):
|
|
DatChat Investment as of September 30, 2018
|
|
Cash Payment
|
|
$
|
500
|
|
Prior Incurred Amount Made to DatChat
|
|
|
152
|
|
Payable to DatChat
|
|
|
348
|
|
Total
|
|
|
1,000
|
|
Note
2. Liquidity and Financial Condition
The
Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding
(non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities
through:
●
|
managing current cash and
cash equivalents on hand from the Company’s past debt and equity offerings,
|
●
|
seeking additional funds raised through the
sale of additional securities in the future,
|
●
|
seeking additional liquidity through credit
facilities or other debt arrangements, and
|
●
|
increasing revenue from its patent portfolios,
license fees and new business ventures.
|
Management
believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months.
The
Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow
to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital
to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies
and help advance innovation. The Company’s working capital amounted to approximately $2.3 million at September 30,
2018. Absent generation of sufficient revenue from the execution of the Company’s long-term business plan, the Company will
need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more
severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being
a publicly-traded company or operations. If the Company attempts to obtain additional debt or equity financing, the
Company cannot assume that such financing will be available to the Company on favorable terms, or at all.
Disputes
regarding the assertion of patents and other intellectual property rights are highly complex and technical. The Company may be
forced to litigate against others to enforce or defend its intellectual property rights or to determine the validity and scope
of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which the Company
is involved may allege defenses and/or file counterclaims or initiate inter-party reviews in an effort to avoid or limit liability
and damages for patent infringement or cause the Company to incur additional costs as a strategy. If such efforts are
successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents.
The patents could be declared invalid by a court or the United States Patent and Trademark Office, in whole or in part, or the
costs of the Company can increase. Recent rulings also create an increased risk that if the Company is unsuccessful in litigation
it could be responsible to pay the attorneys’ fees and other costs of defendants by lowering the standard for legal fee
shifting sought by defendants in patent cases.
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology
Corp. (“Nuta”), Spherix Portfolio Acquisition II, Inc. (“SPAII”), Guidance IP, LLC (“Guidance”),
Directional IP, LLC (“Directional”), Spherix Management Services, LLC (“SMS”), Spherix Delaware Merger
Sub Inc. (“Merger Sub”), Spherix Merger Subsidiary, Inc (“SMSI”) and NNPT, LLC (“NNPT”). All significant intercompany balances and transactions
have been eliminated in consolidation.
Use
of Estimates
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that affect
certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the period. The Company’s significant estimates and
assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation of derivative
liabilities, the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain
of the Company’s estimates, including the carrying amount of the intangible assets, could be affected by external conditions,
including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could
have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company
considers all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents.
As of September 30, 2018 and December 31, 2017, the Company had $0.1 million and 0.2 million, respectively, in cash and cash equivalents.
The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Marketable
Securities
Marketable
securities are classified as trading and are carried at fair value. The Company’s marketable securities consist of corporate
bonds and highly liquid mutual funds which are valued at quoted market prices.
The
realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and nine months
ended September 30, 2018 and 2017 are as follows ($ in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Realized gain (loss)
|
|
$
|
(86
|
)
|
|
$
|
(174
|
)
|
|
$
|
(361
|
)
|
|
$
|
(303
|
)
|
Unrealized gain (loss)
|
|
|
3
|
|
|
|
124
|
|
|
|
(14
|
)
|
|
|
262
|
|
Dividend income
|
|
|
44
|
|
|
|
18
|
|
|
|
121
|
|
|
|
72
|
|
|
|
$
|
(39
|
)
|
|
$
|
(32
|
)
|
|
$
|
(254
|
)
|
|
$
|
31
|
|
The
Company reinvested such dividend income into its marketable securities during the nine months ended September 30, 2018 and 2017.
The fair values of such marketable securities held as of September 30, 2018 and December 31, 2017 were $3.4 million and $4.0 million,
respectively.
The
marketable securities were classified as a Level 2 financial instrument at September 30, 2018 (see Note 8).
Investment
The
Company records its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”) at fair value. As of September
30, 2018, the fair value of this investment was $1,700,000. The Company also records its investment in TheBit Daily LLC, a Delaware
limited liability company (“TheBit Daily”) at fair value. As of September 30, 2018, the fair value of this investment
was $25,000. In addition, the Company made an $1,000,000 investment in DatChat on August 8, 2018. These investments were classified
as a Level 3 financial instrument at September 30, 2018 (see Note 8).
While
the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date.
The
decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis
and applied to an entire instrument. The net gains or losses, if any, are recognized as an unrealized gain on investment in the
Condensed Consolidated Statements of Operations.
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Net income (loss) attributable to common stockholders includes the effect of the deemed
capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial
conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of
the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes
the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation
of net loss per share if their effect would be anti-dilutive.
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share
at September 30, 2018 and 2017 are as follows:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
2,926
|
|
Warrants to purchase common stock
|
|
|
1,249,754
|
|
|
|
1,251,709
|
|
Options to purchase common stock
|
|
|
528,490
|
|
|
|
328,716
|
|
Total
|
|
|
1,781,170
|
|
|
|
1,583,351
|
|
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement when the services have been provided to the customer, the sales price is fixed
or determinable and collectability is probable. Our material revenue stream is related to revenue generated from its settlement
and licensing agreements. The appropriate recognition of revenue is determined as one performance obligation and revenue is recognized
upon delivery of the final performance obligations, including the license for past and future use and the release.
The
Company recognizes revenue under ASC 606,
Revenue from Contracts with Customers
. The core principle of the new revenue
standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
●
|
Step 1: Identify the contract
with the customer
|
●
|
Step 2: Identify the performance
obligations in the contract
|
●
|
Step 3: Determine the transaction
price
|
●
|
Step 4: Allocate the transaction
price to the performance obligations in the contract
|
●
|
Step 5: Recognize revenue
when the company satisfies a performance obligation
|
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services
in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition
of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
●
|
The
customer can benefit from the good or service either on its own or together with other resources that are readily available
to the customer (i.e., the good or service is capable of being distinct).
|
●
|
The entity’s
promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e.,
the promise to transfer the good or service is distinct within the context of the contract).
|
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
|
Constraining estimates of
variable consideration
|
●
|
The existence of a significant
financing component in the contract
|
●
|
Consideration payable to
a customer
|
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
As
of September 30, 2018, there were no contract assets or liabilities associated with the Company’s settlement and licensing
agreements. During the nine months ended September 30, 2018, the Company did not generate any revenue.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes FASB ASC Topic 840,
Leases (Topic
840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and
lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will
determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term
of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with
a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted
for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after
December 15, 2018, with early adoption permitted upon issuance. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial position and results of operations.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
, (ASU 2017-11). Part I of this update addresses the complexity
of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument
or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from
Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content
is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain
nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not
have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related
disclosures.
In
June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 simplifies several aspects of
the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock
Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is
effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that
fiscal year. The Company is currently assessing the effect this guidance may have on its financial statements.
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification,
amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the
amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under
the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided
in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of
each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5,
2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes
to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove
certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3
fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of
this guidance to have a material impact on its condensed consolidated Financial Statements.
Recently
Adopted Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition
principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective
approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company
adopted the new standard effective January 1, 2018, using the modified retrospective approach. The Company has determined that
its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time
when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s
deferred revenue related to its licenses was eliminated and accumulated deficit as of January 1, 2018 was decreased by approximately
$3.2 million so that the Company will not recognize revenue on earnings statements in the future as to its license.
In
January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No.
2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation
of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the
accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No.
2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The Company adopted the provisions of ASU 2016-01 on January 1, 2018. The adoption of this update did not
impact the Company’s consolidated financial statements and related disclosures.
In
May 2017, the Financial Accounting Standards Board (the FASB) issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
, (ASU 2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and
(2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment
award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted
ASU 2017-09 on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position
or results of operations.
Note
4. Investment in Hoth Therapeutics, Inc.
On
June 30, 2017 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of
6,800,000 shares of common stock, par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. Company
records this investment at fair value and recorded changes in fair value in the statement of operations (see Note 8).
Note
5. Investment in TheBit Daily LLC
On
March 23, 2018, Spherix Incorporated purchased 8.0% of the issued and outstanding limited liability company membership interests
of TheBit Daily LLC, a development stage media and education platform focused on the blockchain and cryptocurrency space, for
a subscription price of $25,000.
The
Company records this investment at fair value and changes in fair value are recorded (see Note 8).
Note
6. Investment in DatChat, Inc.
On August 8, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase
Agreement”) with DatChat. Under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment
in DatChat. See Note 1 for further explanation.
As described in Note 3 to these condensed consolidated financial statements, effective January 1, 2018,
the Company adopted ASU 2016-01 concerning recognition and measurement of financial assets and financial liabilities. In adopting
this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative
for its investment in DatChat. The Company records its investment at fair value and changes in fair value are recorded in
the statement of operations (see Note 8).
Note
7. Intangible Assets
Patent
Portfolio and Patent Rights
The
Company’s intangible assets with finite lives consist of its patents and patent rights. For all periods presented, all of
the Company’s identifiable intangible assets were subject to amortization. The carrying amounts related to acquired intangible
assets as September 30, 2018 are as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2017, net
|
|
$
|
3,578
|
|
|
|
2.67
|
|
Amortization expenses
|
|
|
(1,027
|
)
|
|
|
|
|
Impairment loss
|
|
|
(1,051
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at September 30, 2018, net
|
|
$
|
1,500
|
|
|
|
1.00
|
|
The
amortization expenses related to acquired intangible assets for the nine months ended September 30, 2018 and 2017 are as follows
($ in thousands):
|
|
Amortization Expense for the Three Months Ended September 30,
|
|
|
Amortization Expense for the Nine Months Ended September 30,
|
|
Date Acquired and Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
54
|
|
|
$
|
53
|
|
9/10/13 - North South patent portfolio
|
|
|
5
|
|
|
|
5
|
|
|
|
16
|
|
|
|
16
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
323
|
|
|
|
323
|
|
|
|
957
|
|
|
|
958
|
|
|
|
$
|
346
|
|
|
$
|
346
|
|
|
$
|
1,027
|
|
|
$
|
1,027
|
|
The
Company reviews its patent portfolio for impairment as a single asset group whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. During the third quarter of 2018, the Company determined that certain events occurred
that were indicators of a potential impairment. In accordance with ASC 360-10, the Company first estimated the future undiscounted
cash flows anticipated to be generated by the patent portfolio based on the Company’s current usage and future plans for
the patent portfolio over its remaining weighted average useful life. Given the short-term nature of the patents the undiscounted
cash flows approximate discounted cash flows. The analysis concluded that the carrying amount of the patent portfolio was not
recoverable at September 30, 2018. As a result, the Company performed an analysis to determine if the carrying value of the patent
portfolio exceeded its fair value. As a result, the Company determined that the fair value of the patent portfolio at September
30, 2018 was $1.5 million. The Company recorded a $1.1 million impairment charge against its patent portfolio in the third quarter
of 2018. The new cost basis of the patent portfolio of $1.5 million will be amortized over its weighted average remaining useful
life of 1.00 years.
The
future amortization of these intangible assets was based on the adjusted carrying amount. Future amortization of all patents is
as follows ($ in thousands):
|
|
|
Rockstar
|
|
|
North South
|
|
|
Rockstar
|
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Total
|
|
|
|
|
24-Jul-13
|
|
|
10-Sep-13
|
|
|
31-Dec-13
|
|
|
Amortization
|
|
Nine Months Ended December 31, 2018
|
|
|
|
42
|
|
|
|
15
|
|
|
|
321
|
|
|
|
378
|
|
Year Ended December 31, 2019
|
|
|
|
129
|
|
|
|
42
|
|
|
|
951
|
|
|
|
1,122
|
|
Total
|
|
|
$
|
171
|
|
|
$
|
57
|
|
|
$
|
1,272
|
|
|
$
|
1,500
|
|
Note
8. Fair Value of Financial Assets and Liabilities
Financial
instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are
carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company
measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
following table presents the Company’s assets and liabilities that are measured at fair value at September 30, 2018 and
December 31, 2017 ($ in thousands):
|
|
Fair value measured at September 30, 2018
|
|
|
|
Total carrying value at September 30,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
3,409
|
|
|
$
|
—
|
|
|
$
|
3,409
|
|
|
$
|
—
|
|
Investments at Hoth
|
|
$
|
1,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,700
|
|
Investments at TheBit Daily
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
Investments at DatChat
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
262
|
|
|
|
Fair value measured at December 31, 2017
|
|
|
|
Total carrying value at December
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
31, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
3,998
|
|
|
$
|
—
|
|
|
$
|
3,998
|
|
|
$
|
—
|
|
Investments at Hoth
|
|
$
|
1,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
822
|
|
There
were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2018.
Level
2 Valuation Techniques
The
fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that
the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A
significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result
in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change
in fair value of warrant liabilities” in the Company’s consolidated statements of operations.
The
Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded
at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the
Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the
option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance
of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted
for as derivative liabilities.
A
summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the
Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and
as of September 30, 2018 and December 31, 2017 is as follows:
Date of valuation
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
2.81%
|
|
|
|
1.98%
|
|
Expected volatility
|
|
|
69.41% - 106.63%
|
|
|
|
100.00% - 132.21%
|
|
Expected life (in years)
|
|
|
2.19-2.31
|
|
|
|
2.94 - 3.06
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility
in the Black-Scholes model is based on an expected volatility of 100% for both periods which represents the percentage required
to be used when valuing the cash settlement feature as contractually stated in the form of warrant. The general expected volatility
is based on standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life
of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that
the Company has not historically paid dividends on its common stock and does not expect to pay dividends on its common stock in
the future.
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for
the nine months ended September 30, 2018 and 2017 that are measured at fair value on a recurring basis ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Beginning balance
|
|
$
|
822
|
|
|
$
|
702
|
|
Fair value adjustment of warrant liabilities
|
|
|
(560
|
)
|
|
|
259
|
|
Ending balance
|
|
$
|
262
|
|
|
$
|
961
|
|
The
Company owns approximately 34% of common shares in Hoth as of September 30, 2018. The value of the Company’s investment
in Hoth increased by approximately $0.7 million during the nine months ended September 30, 2018.
The following table sets forth a summary of the changes in the fair value of the Company’s Level
3 financial assets for the nine months ended September 30, 2018 and 2017 that are measured at fair value on a recurring basis:
|
|
Fair Value of Level 3 investment
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
1,020
|
|
|
$
|
—
|
|
Purchase of investment in TheBit Daily LLC at fair value
|
|
|
25
|
|
|
|
—
|
|
Purchase of investment in DatChat at fair value
|
|
|
1,000
|
|
|
|
|
|
Fair value of Hoth upon issuance
|
|
|
—
|
|
|
|
675
|
|
Change in fair value of Hoth
|
|
|
680
|
|
|
|
345
|
|
Ending balance
|
|
$
|
2,725
|
|
|
$
|
1,020
|
|
While the Company believes its valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The decision to elect the fair value option,
which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument.
A summary of quantitative information
with respect to the valuation methodology and significant unobservable inputs used for the Company’s valuation in Hoth that
are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of September 30, 2018 and December 31,
2017 is as follows:
Date of valuation
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
2.24
|
%
|
|
|
1.39
|
%
|
Expected volatility
|
|
|
75.00
|
%
|
|
|
75.00
|
%
|
Expected life (in years)
|
|
|
1.00
|
|
|
|
1.00
|
|
The investment in Hoth Therapeutics was
valued using a hybrid probability weighted expected return method, with scenarios including (1) Hoth continuing to operate as
a private company through an estimated potential exit date, and (2) Hoth undergoing an IPO in the near future. The private-company
scenario utilizes a reverse option pricing method (backsolve) based on the recent Series A transaction. Key inputs to the backsolve,
in addition to the Series A price, include volatility (75.00%) and expected maturity (1.0 years). The IPO scenario is based on
initial value indications proposed by investment bankers. The primary inputs, in addition to the pre-money value indications,
include the estimated time to IPO (end of November) and a discount rate of 15%. The valuation conclusion is sensitive to the probability
weightings assigned to each scenario. The weightings (1/3 IPO scenario, 2/3 private company scenario), were determined according
to management expectations regarding exit opportunities, based on what was known or knowable as of September 30, 2018.
The costs of its investment in the BitDaily
and DatChat approximate fair value as there have been no significant changes to its investment since the date of purchase.
Intangible Assets Measured at Fair
Value on a Non-Recurring Basis using Level 3 Inputs
The
following tables presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis
(in thousands):
|
|
Net carrying value at December 31, 2017
|
|
|
Impairment Charges -
Nine months ended
September 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Patent Portfolios, net
|
|
$
|
1,500
|
|
|
$
|
1,051
|
|
|
|
Net carrying value at December 31, 2017
|
|
|
Impairment Charges -
Nine months ended
September 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Patent Portfolios, net
|
|
$
|
3,578
|
|
|
$
|
—
|
|
The Company’s intangible assets are measured at fair value on a non-recurring basis using Level
3 inputs. See Note 7 for valuation techniques for patents.
Note 9. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Common Stock
On March 19, 2018, the Company closed
a public offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of the
Company’s registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement
(the “Agreement”) between the Company and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts
basis with respect to the offering (the “Placement Agent”), that was entered into on March 14, 2018. The Company sold
2,222,222 shares of its common stock in the offering at a purchase price of $1.35 per share.
Warrants
A summary of warrant activity for the
nine months ended September 30, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Contractual
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Life
|
|
|
|
|
|
Warrants
|
|
|
|
Exercise
Price
|
|
|
|
Total
Intrinsic Value
|
|
|
|
(in
years)
|
|
Outstanding
as of December 31, 2017
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.92
|
|
Outstanding
as of September 30, 2018
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
2.17
|
|
Exercisable as of September
30, 2018
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.17
|
|
Stock Options
On February 16, 2018, pursuant to and
subject to the available number of shares reserved under the 2014 Plan, the Company issued an aggregate of 150,000 options to
purchase common stock of the Company to three of its directors. The aggregate grant date fair value of these options was approximately
$0.2 million. These stock options vested over six months.
On May 3, 2018, a new director was granted
options to purchase 50,000 shares of the Company’s common stock, at an exercise price of $1.04 per share, which options
vested 50% at May 3, 2018 with the remaining 50% vesting at May 3, 2019. The aggregate grant date fair value of these options
was approximately $46,000. These stock options vest over twelve months.
A summary of option activity under the
Company’s employee stock option plan for the nine months ended September 30, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Remaining Contractual
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
325,597
|
|
|
$
|
78.20
|
|
|
$
|
5,999
|
|
|
|
3.2
|
|
Employee options granted
|
|
|
200,000
|
|
|
|
1.39
|
|
|
|
—
|
|
|
|
9.4
|
|
Outstanding as of September 30, 2018
|
|
|
525,597
|
|
|
$
|
48.97
|
|
|
$
|
—
|
|
|
|
5.1
|
|
Options vested and expected to vest
|
|
|
525,597
|
|
|
$
|
48.97
|
|
|
$
|
—
|
|
|
|
5.1
|
|
Options vested and exercisable
|
|
|
500,597
|
|
|
$
|
51.36
|
|
|
$
|
—
|
|
|
|
4.9
|
|
A summary of option activity under the
Company’s non-employee stock option plan for the nine months ended September 30, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Remaining Contractual
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.4
|
|
Outstanding as of September 30, 2018
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.7
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.7
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.7
|
|
Stock-based compensation associated with
the amortization of stock option expense was approximately $28,000 and $2,000 for the three months ended September 30, 2018 and
2017, and was approximately $208,000 and $13,000 for the nine months ended September 30, 2018 and 2017, respectively.
Restricted Stock Awards
On February 16, 2018, the Company granted
three of its directors 20,000 shares of restricted common stock each. The grant date fair value of each restricted stock award
was approximately $27,000. These restricted stock awards vested immediately.
On April 26, 2018, the Company issued
25,410 shares of its common stock to an employee for services pursuant to an employment agreement. The grant date fair value of
this restricted stock award was approximately $27,000 (based upon the closing price of the Company’s common stock on April
26, 2018). This restricted stock award vested immediately.
Stock-based Compensation
Stock-based compensation for the nine
months ended September 30, 2018 and 2017 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employee restricted stock awards
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106
|
|
|
$
|
—
|
|
Employee stock option awards
|
|
|
28
|
|
|
|
2
|
|
|
|
208
|
|
|
|
13
|
|
Total compensation expense
|
|
$
|
28
|
|
|
$
|
2
|
|
|
$
|
314
|
|
|
$
|
13
|
|
Unamortized stock-based compensation expense
was approximately $14,000 at September 30, 2018.
Note 10. Commitments and Contingencies
Legal Proceedings - Potential Gain
Contingencies
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of patented technology.
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of business. There were no pending material claims or legal matters as of the date of this report other than the following matters:
International License Exchange of America,
LLC Litigations
Under our Monetization Agreement with
Equitable, ILEA filed the patent infringement litigation below.
|
●
|
On May 15, 2017, litigation against ADTRAN, Inc. case number 1:17-cv-00562-RGA,
in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent and U.S.
Patent Nos. 5,959,990; 6.970,461; 7,478,167; 7,274,704; and 7,277,533. On January 22, 2018, ILEA filed a notice of voluntary
dismissal and the court terminated the case.
|
Optic153 LLC Litigations
Under our Monetization Agreement with
Equitable, Optic153 LLC, an Equitable subsidiary, has filed the following litigations relating to patents acquired under the terms
of settlement of one of our prior litigations:
|
●
|
On March 15, 2018, litigation against Lumentum Operations LLC, Case No. 1:18-cv-00406-VAC-CJB,
in the in the U.S. District Court for the District of Delaware, related to alleged infringement of U.S. Patent No. 6,587,261.
Lumentum’s Answer is currently due on November 6, 2018.
|
Counterclaims
In the ordinary course of business, we,
or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have
infringed on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims
initiated by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed,
we can provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position
and results from operations.
Note 11. Recent Events
CBM Merger
On October 10, 2018, the Company entered
into an Agreement and Plan of Merger (the “
Merger Agreement
”), by and among the Company, Spherix Delaware Merger
Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Spherix (“
Merger Sub
”), CBM, and Scott Wilfong
in the capacity as the representative from and after the effective time of the Merger (as defined below) (the “
Effective
Time
”) for the stockholders of CBM as of immediately prior to the Effective Time (the “
Stockholder Representative
”).
Pursuant to the Merger Agreement and subject
to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Merger Agreement, Merger
Sub will merge with and into CBM (the “Merger”), with CBM continuing as the surviving corporation in the Merger.
Subject
to the terms and conditions set forth in the Merger Agreement, at the Effective Time: (i) all shares of capital stock of CBM (the
“CBM Stock”) issued and outstanding immediately prior to the Effective Time will be converted into the right to receive
the Stockholder Merger Consideration (as defined below)
.
As consideration for the Merger, the Company
shall deliver to the stockholders of CBM an aggregate of 15,000,000 shares of Company common stock (the “Stockholder Merger
Consideration”), with each share of Company common stock valued at $1.10 per share. At or prior to the Closing, the Company,
the Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow
Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the parties (the “Escrow
Agreement”), pursuant to which the Company shall deposit with the Escrow Agent 1,500,000 shares from the Stockholder Merger
Consideration otherwise deliverable to the stockholders of CBM who own beneficially and of record greater than 10% of the CBM
common stock issued and outstanding immediately prior to the Closing (each a “Significant Company Stockholder”) (including
any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or
converted, the “Escrow Shares”), to be held in a segregated escrow account (the “Escrow Account”) and
disbursed by the Escrow Agent. Each stockholder of CBM Stockholder at the Effective Time (each, a “CBM Stockholder”)
shall receive its pro rata share of the Stockholder Merger Consideration (less, in the case of each of the Significant Company
Stockholders, its pro rata portion of the Escrow Shares held in the Escrow Account) based on the number of shares of CBM Stock
owned by such CBM Stockholder as compared to the total number of shares of CBM Stock owned by all CBM Stockholders as of immediately
prior to the Effective Time. The Escrow Shares shall serve as a security for, and a source of payment of, the indemnity rights
of the Company indemnified parties.
In the event that this Agreement is terminated
by the Company pursuant to certain sections of the Agreement, then the Company may be required to deliver to CBM certificate(s)
representing an aggregate of 400,000 shares of the Company’s Common Stock within two (2) business days of termination.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read this discussion together
with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. The following
discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties.
These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All
references to “we,” “us,” “our” and the “Company” refer to Spherix Incorporated,
a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise.
Overview
We are an intellectual property company
that owns patented and unpatented intellectual property. Spherix Incorporated was formed in 1967 as a scientific research company
and for much of our history pursued drug development including through Phase III clinical studies which were largely discontinued
in 2012. In 2012 and 2013, we shifted our focus to being a firm that owns, develops, acquires and monetizes intellectual property
assets. Through our acquisitions of 108 patents and patent applications from Rockstar Consortium US, LP and acquisition of several
hundred patents issued to Harris Corporation as a result of our acquisition of North South, we have expanded our activities in
wireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality and cellular.
Our activities generally include the acquisition
and development of patents through internal or external research and development. In addition, we seek to acquire existing rights
to intellectual property through the acquisition of already issued patents and pending patent applications, both in the United
States and abroad. We may alone, or in conjunction with others, develop products and processes associated with our intellectual
property and license our intellectual property to others seeking to develop products or processes or whose products or processes
infringe our intellectual property rights through legal processes. Using our patented technologies, we employ strategies seeking
to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We will continue to
seek to obtain patents from inventors and patent owners to monetize patent portfolios.
In addition to our patent monetization
efforts, since the fourth quarter of 2017, we have been transitioning to focus our efforts as a technology development company.
The Company made no investments in new IP during 2017 and started the transition with its investment in Hoth Therapeutics, Inc.
during the third quarter of 2017.
In March 2018, the Company entered into
an agreement and plan of merger, subject to shareholder approval, with DatChat, Inc. (the “DatChat Merger”), a secure
messaging application that utilizes blockchain technology, as amended on May 3, 2018. After further negotiations, the Company
determined not to pursue a merger with DatChat and on August 8, 2018, entered into a securities purchase agreement (the “Securities
Purchase Agreement”) with DatChat pursuant to which the Company and DatChat agreed to terminate the DatChat Merger and each
of the parties to the Merger Agreement agreed to release and discharge and hold harmless each of the other parties with respect
to the transaction contemplated by the Merger Agreement.
In addition to the termination, under
the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of
(a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation of
the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum
of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 4.37%
of the issued and outstanding common stock of DatChat.
DatChat agreed to certain covenants, including
the covenant in the event that DatChat completes (i) a public offering of its securities pursuant to an effective registration
statement or (ii) a merger, consolidation, transfer or share exchange transaction pursuant to which DatChat becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, (each, a “Going Public Event”), and until the time
that the Company holds no shares of DatChat, DatChat agreed to certain covenants, including the covenant to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all reports required to be filed by DatChat pursuant
to the Exchange Act of 1934, as amended the “Exchange Act”), provided that, if after becoming subject to the Exchange
Act, DatChat is thereafter no longer required to file reports pursuant to the Exchange Act, DatChat will, for as long as the Company
owns shares of DatChat, prepare and furnish to the Company and make publicly available in accordance with Rule 144(c) such information
as is required for the Company to sell such shares, including without limitation, under Rule 144. Under the Securities Purchase
Agreement, DatChat further covenants that it will take such further action as the Company may reasonably request, to the extent
required from time to time to enable the Company to sell its DatChat shares without registration under the Securities Act of 1933,
as amended, including, without limitation, within the requirements of the exemption provided by Rule 144.
DatChat also agreed that, from and after
a Going Public Event, and subject to certain exceptions, neither DatChat nor any other person acting on its behalf will provide
the Company with any information that constitutes, or that DatChat reasonably believes constitutes, material non-public information,
unless prior thereto, the Company shall have consented to the receipt of such information and agreed with DatChat to keep such
information confidential.
In October 2018, the Company entered into
an agreement and plan of merger, subject to shareholder approval, with CBM BioPharma, Inc. (“CBM”), a pharmaceutical
company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted
into the right to receive an aggregate of 15,000,000 shares of the Company’s common stock with CBM continuing as the surviving
corporation in the merger.
Results of Operations
Three months ended September 30, 2018
compared to three months ended September 30, 2017
During the three months ended September
30, 2018 and 2017, revenue was approximately $0 and $0.3 million, respectively. $0.3 million in 2017 represented the amortization
of deferred revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November
23, 2015 and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional
intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to
use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to
its licenses was eliminated through a debit adjustment in the amount of approximately $3.2 million through the accumulated deficit
at the beginning of 2018. The Company will not recognize revenue from the RPX license in the future.
During the three months ended September
30, 2018 and 2017, we incurred a loss from operations of approximately $2.0 million and $1.0 million, respectively. The increase
in the net loss from operations was primarily attributed to $1.1 million increase in impairment of intangible assets, $19,000
increase in acquisition costs related to the DatChat Merger and $21,000 increase in depreciation expense, and was partially offset
by $0.3 million decrease in compensation expense, $70,000 decrease in professional fees and $55,000 decrease in in other selling,
general and administrative expenses.
During the three months ended September
30, 2018, other income was approximately $60,000 as compared to other income of approximately $1.4 million for the comparable
prior period. The decrease in other income in 2018 was primarily attributed to $0.3 million decrease in fair value of our investment
in Hoth, and $1.0 million decrease in change in fair value of warrant liabilities.
Due to the above, net loss was $1.9 million
in the three months ended September 30, 2018 compared to net income of $0.5 million in the three months ended September 30, 2017.
Nine months ended September 30, 2018
compared to nine months ended September 30, 2017
During the nine months ended September
30, 2018 and 2017, revenue was approximately $0 and $1.0 million, respectively. $1.0 million represents the amortization of deferred
revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23,
2015 and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional
intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to
use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to
its licenses was eliminated through a debit in the amount of approximately $3.2 million through the accumulated deficit at the
beginning of 2018. The Company will not recognize revenue from the RPX license in the future.
During the nine months ended September
30, 2018 and 2017, we incurred a loss from operations of approximately $4.8 million and $2.7 million, respectively. The increase
in net loss was primarily attributed to $1.1 increase in impairment of intangible assets, $1.0 million decrease in revenue, $0.4
million increase in professional fees and $0.2 million increase in acquisition costs related to the DatChat Merger, and was partially
offset by $0.5 million decrease in compensation and related expenses.
During the nine months ended September
30, 2018, total other income was approximately $1.0 million as compared to other income of approximately $0.4 million for the
comparable prior period. The increase in other income was primarily attributed to $0.3 million increase in fair value of our investment
in Hoth and $0.8 million increase in change in fair value of warrant liabilities, and was partially offset by $0.5 million decrease
in other income.
Due to the above, the net loss was $3.8
million in the nine months ended September 30, 2018 compared to net loss of $2.3 million in the nine months ended September 30,
2017.
Liquidity and Capital Resources
We continue to incur ongoing administrative
and other expenses, including public company expenses, in excess of corresponding revenue.
We intend to finance our activities through:
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managing current cash and cash equivalents on hand from our past equity offerings,
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seeking additional funds raised through the sale of additional securities in the future,
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seeking additional liquidity through credit facilities or other debt arrangements, and
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increasing revenue from the monetization of its patent portfolios, license fees and new business
ventures.
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Cash Flows from Operating Activities
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For the nine months ended September 30, 2018 and 2017, net cash used in operations was approximately $2.3 million and $2.5
million, respectively. The cash used in operating activities for the nine months ended September 30, 2018 primarily resulted from
a net loss of $3.8 million, $0.7 million change in fair value of our investment in Hoth and $0.6 million change in fair value
of warrant liabilities, and partially offset by impairment of goodwill and intangible assets of $1.1 million and amortization
of patent portfolio expenses of $1.0 million. The cash used in operating activities for the nine months ended September 30, 2017
primarily resulted from $0.3 million change in fair value of warrant liabilities and $1.2 million of changes in assets and liabilities,
and partially offset by amortization of patent portfolio expenses of $1.0 million.
Cash Flows from Investing Activities
- For the nine months ended September 30, 2018 and 2017, net cash used in investing activities was approximately $0.5 million
and net cash provided by investing activities was approximately $0.6 million, respectively. The cash used in investing activities
primarily resulted from our purchase of marketable securities for the nine months ended September 30, 2018 of $13.3 million, purchase
of investment at fair value of $0.7 million, and was partially offset by our sale of marketable securities of $13.5 million. The
cash provided by investing activities primarily resulted from our sale of marketable securities for the nine months ended September
30, 2017 of $12.5 million, partially offset by our purchase of marketable securities of $11.3 million.
Cash Flows from Financing Activities
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Cash provided by financing activities for the nine months ended September 30, 2018 was approximately $2.7 million, which
related to issuance of 2,222,222 shares of its common stock. Cash provided by financing activities for the nine months ended September
30, 2017 was approximately $2.1 million, which related to issuance of shares of common stock in an equity raise.
The Company’s ultimate success is
dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely
basis. The Company’s business will require significant amounts of capital to sustain operations and make the investments
it needs to execute its longer-term business plan. The Company’s working capital amounted to approximately $2.3 million
at September 30, 2018. Absent generation of sufficient revenue from the execution of the Company’s long-term business plan,
the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business
that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting
from being a publicly-traded company or operations. If the Company attempts to obtain additional debt or equity financing, the
Company cannot assume that such financing will be available to the Company on favorable terms, or at all.
We have filed a shelf registration statement
on Form S-3 with the SEC. The registration statement, which has been declared effective, was filed in reliance on Instruction
I.B.6 of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration
statement during any twelve-month period. At the time we sell securities pursuant to the registration statement, the amount of
securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction
I.B.6 may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day
during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities
under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position
at that time and the availability and terms of alternative sources of capital.
On March 19, 2018, we closed on a public
offering of common stock for gross proceeds of approximately $3.0 million and net proceeds of approximately $2.7 million. The
offering was a shelf takedown off of our registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to
a placement agency agreement between us and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts basis
with respect to the offering (“Laidlaw”), that was entered into on March 14, 2018. We sold 2,222,222 shares of our
common stock in the offering at a purchase price of $1.35 per share.
Disputes regarding the assertion of patents
and other intellectual property rights are highly complex and technical. We may be forced to litigate against others to enforce
or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary rights.
The defendants or other third parties involved in the lawsuits in which we are involved may allege defenses and/or file counterclaims
or initiate inter parties reviews in an effort to avoid or limit liability and damages for patent infringement. If such efforts
are successful, they may have an impact on the value of the patents and preclude us from deriving revenue from the patents, the
patents could be declared invalid by a court or the United States Patent and Trademark Office, in whole or in part.
Should we be unsuccessful in our efforts
to execute our business plan, it could become necessary for us to reduce expenses, curtail operations or explore various alternative
business opportunities or possibly suspend or discontinue our business activities.
Rockstar will be entitled to receive a
contingent recovery percentage of future profits (“Participation Payments”) from licensing, settlements and judgments
against defendants with respect to patents purchased under the First Patent Purchase Agreement; however, no payment is required
unless the Company receives a recovery. The Participation Payments under the First Patent Purchase Agreement are equal to zero
percent until the Company recovers with respect to patents purchased under the First Patent Purchase Agreement at least (a) $8.0
million or (b) if we recover less than $17.0 million, an amount equal to $5.0 million plus $3.0 million times a fraction equal
to total recoveries minus $10.0 million, divided by $7.0 million (clause (a) or (b), as applicable, being the “Initial Return”),
in each case net of certain expenses. Once we obtain recoveries in excess of the Initial Return, we are required to make a payment
to Rockstar of $13.0 million, payable only from the proceeds of such recovery, within six months after such recovery. In addition,
no later than 30 days after the end of each quarter in which we make such a recovery, we are required to pay to Rockstar a percentage
of such recovery, net of certain expenses, scaling from 30% if such cumulative recoveries net of certain expenses are less than
or equal to $50.0 million, to 70% to the extent cumulative recoveries net of certain expenses are in excess of $1.0 billion.
Rockstar will also be entitled to receive
Participation Payments from licensing, settlements and judgments against defendants with respect to patents purchased under the
Second Patent Purchase Agreement; however, no payment is required unless we receive a recovery. The Participation Payments under
the Second Patent Purchase Agreement are equal to zero percent until we recover with respect to patents purchased under the Second
Patent Purchase Agreement at least $120.0 million, net of certain expenses. Once we obtain recoveries in excess of that amount,
we are required to pay to Rockstar 50% of our recovery in excess of that amount, no later than 30 days after the end of each quarter
in which we make such a recovery.
Our ability to fund these Participation
Payments or the $13.0 million contingent payment will depend on the liquidity of our assets, recoveries, alternative demands for
cash resources and access to capital at the time. Furthermore, our obligation to fund Participation Payments could adversely impact
our liquidity and financial position. As of the date of this report, we have not made any such Participation Payments.
Off-balance sheet arrangements.
None.