Item 7.
|
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-K. 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.
Overview
Spherix Incorporated is a technology development
company committed to the fostering of innovative ideas. 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. Such monetization included, but was 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, commercializing the IP, or through the settlement
and litigation of patents.
Since March 1, 2013, the Company has received
limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have
been transitioning to a technology development company. The Company made no investments in new IP during 2017 and 2018 and started
the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter of 2017, and with its agreement with DatChat,
Inc. in March 2018.
We are a technology development company
committed to the fostering of innovative ideas. 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.
Such monetization included, but was 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, commercializing the IP, or through the settlement and litigation of patents.
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 technology development
and monetizing related intellectual property.
Since March 1, 2013, the Company has received
limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have
been transitioning to a technology development company. The Company made no investments in new IP during 2017 and 2018 and started
the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter of 2017, and with its agreement with DatChat,
Inc. in March 2018.
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.
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.
On February 15, 2019, Hoth announced the pricing of its initial public offering (“IPO) of 1,250,000
shares of its common stock at an initial offering price to the public of $5.60 per share. All shares of common stock were
offered by Hoth. In addition, Hoth granted the underwriters a 30-day option to purchase up to an additional 187,500 shares
of common stock at the initial public offering price, less the underwriting discount, to cover over-allotments, if any.
Hoth’s common
stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”. The
IPO closed on February 20, 2019.
Critical Accounting Policies
Accounting for Warrants
We account for the issuance of common stock
purchase warrants issued in connection with the equity offerings in accordance with the provisions of Accounting Standards Codification
(“ASC”) 815,
Derivatives and Hedging
(“ASC 815”). We classify as equity any contracts that
(i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement). We classify as assets or liabilities any contracts
that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance of
registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative
liabilities. We classify these derivative warrant liabilities on the consolidated balance sheet as a current liability.
We assess the classification of our common
stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability classification. The
warrants are reported on the consolidated balance sheets as a warrant liability at fair value using the Black-Scholes
valuation method. Changes in the estimated fair value of the warrants result in the consolidated statement of operations
as “change in the fair value of warrant liabilities”.
Convertible Preferred Stock
We account for convertible preferred stock
with detachable warrants in accordance with ASC 470:
Debt
and allocated proceeds received to the convertible preferred stock
and detachable warrants based on relative fair values. We evaluated the classification of our convertible preferred stock and warrants
and determined that such instruments meet the criteria for equity classification. We recorded the related issuance costs and value
ascribed to the warrants as a reduction of the convertible preferred stock.
We have also evaluated our convertible preferred stock and warrants in accordance with the provisions of ASC
815,
Derivatives and Hedging,
including consideration of embedded derivatives requiring bifurcation. The issuance of the
convertible preferred stock generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security
is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion
option has an effective strike price that is less than the market price of the underlying stock at the commitment date. We recognized
the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon
conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per
share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock. As the
convertible preferred stock may be converted immediately, we have disclosed the BCF as a deemed dividend on the consolidated statements
of operations.
Stock-based Compensation
We account for share-based payment awards
exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under our
long-term incentive plans are granted with an exercise price equal to no less than the market price of our stock at the date of
grant and expire up to ten years from the date of grant. These options generally vest over a one- to five-year period.
The fair value of stock options granted
was determined on the grant date by using a Black-Scholes model valuation with assumptions for risk free interest rate, the expected
term, expected volatility, and expected dividend yield. The risk-free interest rate is based on U.S. Treasury zero-coupon
yield curve over the expected term of the option. The expected term assumption is determined using the weighted average
midpoint between vest and expiration for all individuals within the grant. The volatility rate was computed based on
the standard deviation of our underlying stock price’s daily logarithmic returns. Our model includes a zero dividend yield
assumption, as we have not historically paid nor do we anticipate paying dividends on our common stock. Our model does
not include a discount for post-vesting restrictions, as we have not issued awards with such restrictions.
The periodic expense is then determined
based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. Our
estimate of pre-vesting forfeitures is primarily based on our historical experience and is adjusted to reflect actual forfeitures
as the options vest.
Fair Value of Financial Instruments
Financial instruments, including 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. We measure 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. We
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We use 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)
Intangible Assets - Patent Portfolios
Intangible assets include our patent portfolios
with original estimated useful lives ranging from 6 months to 12 years. We amortize the cost of the intangible assets over their
estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including legal costs, are also
capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
We monitor the carrying value of long-lived
assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. If a change in circumstance occurs, we will perform a test of recoverability
by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot
be separately and independently identified for a single asset, we will determine whether impairment has occurred for the group
of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future
cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. We tested
our intangible assets for impairment at the end of December 31, 2018 and 2017. An impairment charge of approximately $2.2 million
and nil was taken during the year ended December 31, 2018 and 2017, respectively.
Recently Issued Accounting Pronouncements
See Note 3 to the consolidated financial
statements for a discussion of recent accounting standards and pronouncements.
Results of Operations
Fiscal Year Ended December 31, 2018
Compared to Fiscal Year Ended December 31, 2017
For the year ended December 31, 2018 and
2017, revenue was approximately $28,000 and $1.2 million, respectively. The $28,000 for the year ended December 31, 2018 is a settlement
from monetization pursuant to agreement with Equitable. The $1.2 million for the year ended December 31, 2017 primarily 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 or the other patents in its portfolio in
the future.
For the year ended December 31, 2018 and
2017, we incurred a loss from operations of $6.9 million and $3.8 million, respectively. The increase in net loss was primarily
attributed to $2.2 million increase in impairment of intangible assets, $1.2 million decrease in revenue, $0.5 million increase
in professional fees and $0.1 million increase in acquisition costs related to the DatChat Merger, and was partially offset by
$1.0 million decrease in compensation and related expenses.
For the year ended December 31, 2018 and 2017, other income was approximately $8.6 million and $0.5 million,
respectively. The increase in other income was primarily attributed to $7.8 million increase in fair value of our investment in
Hoth and $0.9 million increase in change in fair value of warrant liabilities, and was partially offset by $0.6 million decrease
in other income.
Liquidity and Capital Resources
We continue to incur ongoing administrative
and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While we continue
to implement our business strategy, we intends to finance our activities through:
●
|
managing current cash and cash equivalents on hand from our 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.
|
Our ultimate success is dependent on our ability
to obtain additional financing and generate sufficient cash flow to meet our obligations on a timely basis. Our 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. Our working capital amounted to approximately
$1.8 million at December 31, 2018. Absent generation of sufficient revenue from the execution of our long-term business plan, we
will need to obtain additional debt or equity financing, especially if we experience downturns in our business that are more severe
or longer than anticipated, or if we experience significant increases in expense levels resulting from being a publicly-traded
company or operations. If we attempt to obtain additional debt or equity financing, we cannot assume that such financing
will be available to the Company on favorable terms, or at all.
Because of recurring operating losses, net
operating cash flow deficits, and an accumulated deficit, there is substantial doubt about our ability to continue as a going concern
within one year from the date of this filing. The consolidated financial statements have been prepared assuming that we will
continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Cash Flows from Operating Activities
-
For the year ended December 31, 2018 and 2017, net cash used in operations was $2.7 million and $3.3 million, respectively. The
cash used in operating activities for the year ended December 31, 2018 primarily resulted from $8.2 million change in fair value
of our investment in Hoth and $0.7 million change in fair value of warrant liabilities, and partially offset by a net income of
$1.7 million, impairment of goodwill and intangible assets of $2.2 million and amortization of patent portfolio expenses of $1.4
million. The cash used in operating activities for the year ended December 31, 2017 primarily resulted from a net loss of $3.3
million.
Cash Flows from Investing Activities
-
For the year ended December 31, 2018, net cash used in investing activities was approximately $0.2 million. The cash used
in investing activities primarily resulted from our purchase of marketable securities for the year ended December 31, 2018 of $14.3
million, purchase of investment at fair value of $0.9 million, and was partially offset by our sale of marketable securities of
$15.1 million. For the year ended December 31, 2017, net cash provided by investing activities was approximately $1.3 million.
The cash provided by investing activities primarily resulted from our sale of marketable securities for the year ended December
31, 2017 of $14.2 million, partially offset by our investment in Hoth for $0.7 million and by our purchase of marketable securities
of $12.3 million.
Cash Flows from Financing Activities
–
Net cash provided by financing activities for the year ended December 31, 2018 was approximately $2.7 million, which
related to issuance of 2,222,222 shares of its common stock. Net cash flows provided by financing activities during the year ended
December 31, 2017 was $2.1 million, which related to the net proceeds from an underwritten public offering of 1,250,000 shares
of our common stock.
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 $1.8 million at December
31, 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.
In connection with the consummation of
the initial public offering of Hoth, the Company entered into a lock-up agreement with Hoth pursuant to which the Company
has agreed not to sell any shares of Hoth common stock or common stock equivalents beneficially owned or acquired by Spherix (the
“Spherix Securities”) until February 20, 2022, which is the 36 month anniversary of the consummation of Hoth’s
initial public offering, provided, however (i) Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute
to its shareholders or otherwise dispose of, directly or indirectly, up to an aggregate of 10% of the initially issued Spherix
Securities, provided further that the recipients of the Spherix Securities shall not be permitted to resell such Spherix Securities
until six months after the date of the Initial Public Offering, (ii) beginning 12 months after the date of Hoth’s initial
public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or
otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities, (iii) beginning
24 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge,
dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially
issued Spherix Securities and (iv) beginning 36 months after the date of the Hoth initial public offering, Spherix may offer, sell,
contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly,
the Spherix Securities without any restrictions.
Contractual obligations
None.
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Financial statements and supplementary data required by this
Item 8 follow.
Index to Financial Statements Page
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board
of Directors of
Spherix Incorporated
Opinion on the Financial
Statements
We have audited the accompanying
consolidated balance sheets of Spherix Incorporated and Subsidiaries (the “Company”) as of December 31, 2018 and 2017,
the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years
in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph –
Going Concern
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has
a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audit
s
. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Marcum
llp
Marcum
llp
We have served as the Company’s auditor since
2013
.
New York, NY
March 11, 2019
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands except per share amounts)
|
|
December 31
2018
|
|
|
December 31
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
|
$
|
197
|
|
Marketable securities
|
|
|
2,700
|
|
|
|
3,998
|
|
Prepaid expenses and other assets
|
|
|
188
|
|
|
|
150
|
|
Total current assets
|
|
|
2,905
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1
|
|
|
|
3
|
|
Patent portfolios and patent rights, net
|
|
|
—
|
|
|
|
3,578
|
|
Investments
|
|
|
10,345
|
|
|
|
1,020
|
|
Deposit
|
|
|
—
|
|
|
|
26
|
|
Total assets
|
|
$
|
13,251
|
|
|
$
|
8,972
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
132
|
|
|
$
|
56
|
|
Accrued salaries and benefits
|
|
|
732
|
|
|
|
695
|
|
Warrant liabilities
|
|
|
82
|
|
|
|
822
|
|
Payable to DatChat
|
|
|
207
|
|
|
|
—
|
|
Short-term deferred revenue
|
|
|
—
|
|
|
|
957
|
|
Short-term lease liabilities
|
|
|
—
|
|
|
|
48
|
|
Total current liabilities
|
|
|
1,153
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
—
|
|
|
|
2,288
|
|
Total liabilities
|
|
|
1,153
|
|
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series D: 4,725 shares issued and outstanding at December 31, 2018 and 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Series D-1: 834 shares issued and outstanding at December 31, 2018 and 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 December 31, 2018 and 2017, respectively; 8,542,530 and 6,234,898 shares outstanding at December 31, 2018 and 2017, respectively
|
|
|
1
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
152,444
|
|
|
|
149,425
|
|
Treasury stock, at cost, 12 shares at December 31, 2018 and 2017
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Accumulated deficit
|
|
|
(140,083
|
)
|
|
|
(145,055
|
)
|
Total stockholders’ equity
|
|
|
12,098
|
|
|
|
4,106
|
|
Total liabilities and stockholders’ equity
|
|
$
|
13,251
|
|
|
$
|
8,972
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands)
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
28
|
|
|
$
|
1,236
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
1,405
|
|
|
|
1,373
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
1,012
|
|
|
|
2,059
|
|
Professional fees
|
|
|
1,569
|
|
|
|
1,038
|
|
Impairment of intangible assets
|
|
|
2,173
|
|
|
|
—
|
|
Rent
|
|
|
81
|
|
|
|
92
|
|
Depreciation expense
|
|
|
38
|
|
|
|
3
|
|
Acquisition costs
|
|
|
230
|
|
|
|
—
|
|
Other selling, general and administrative
|
|
|
394
|
|
|
|
493
|
|
Total operating expenses
|
|
|
6,902
|
|
|
|
5,058
|
|
Loss from operations
|
|
|
(6,874
|
)
|
|
|
(3,822
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
Other (expenses) income , net
|
|
|
(333
|
)
|
|
|
291
|
|
Change in fair value of investment
|
|
|
8,194
|
|
|
|
345
|
|
Change in fair value of warrant liabilities
|
|
|
740
|
|
|
|
(120
|
)
|
Total other income
|
|
|
8,601
|
|
|
|
516
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
(0.60
|
)
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,058,165
|
|
|
|
5,538,568
|
|
Diluted
|
|
|
8,061,091
|
|
|
|
5,538,568
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders’ Equity
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at January 1, 2017
|
|
|
4,943,929
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
147,331
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(141,749
|
)
|
|
$
|
5,318
|
|
Repurchase of restricted stock units to pay for employee withholding
taxes
|
|
|
35,969
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
Issuance common stock in equity raise, net of offering cost
|
|
|
1,250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,095
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,095
|
|
Stock-based compensation
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,306
|
)
|
|
|
(3,306
|
)
|
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
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
320
|
|
Cumulative effect of the changes related to adoption of ASC 606
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,727
|
|
|
|
1,727
|
|
Balance at December 31, 2018
|
|
|
8,542,530
|
|
|
$
|
1
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,444
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(140,083
|
)
|
|
$
|
12,098
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
1,405
|
|
|
|
1,373
|
|
Change in fair value of investment
|
|
|
(8,194
|
)
|
|
|
(345
|
)
|
Change in fair value of warrant liabilities
|
|
|
(740
|
)
|
|
|
120
|
|
Stock-based compensation
|
|
|
320
|
|
|
|
23
|
|
Depreciation expense
|
|
|
38
|
|
|
|
3
|
|
Realized loss on marketable securities
|
|
|
400
|
|
|
|
328
|
|
Unrealized loss (gain) on marketable securities
|
|
|
117
|
|
|
|
(240
|
)
|
Impairment of intangible assets
|
|
|
2,173
|
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(38
|
)
|
|
|
(15
|
)
|
Deposit
|
|
|
—
|
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
74
|
|
|
|
(67
|
)
|
Accrued salaries and benefits
|
|
|
37
|
|
|
|
249
|
|
Deferred revenue
|
|
|
—
|
|
|
|
(1,216
|
)
|
Accrued lease liabilities
|
|
|
(48
|
)
|
|
|
(179
|
)
|
Net cash used in operating activities
|
|
|
(2,729
|
)
|
|
|
(3,272
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(14,280
|
)
|
|
|
(12,274
|
)
|
Sale of marketable securities
|
|
|
15,061
|
|
|
|
14,213
|
|
Purchase of investments
|
|
|
(922
|
)
|
|
|
(675
|
)
|
Release of deposit
|
|
|
26
|
|
|
|
—
|
|
Purchase of property and equipment
|
|
|
(36
|
)
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
|
|
(151
|
)
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(180
|
)
|
|
|
63
|
|
Cash and cash equivalents, beginning of period
|
|
|
197
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
17
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
—
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Investment in DatChat
|
|
$
|
207
|
|
|
$
|
—
|
|
Investment in Mellow Scooters
|
|
$
|
2
|
|
|
$
|
—
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”)
is technology development committed to the fostering of innovative ideas. The Company was incorporated in 1967 in the State of
Delaware as a scientific research company, and for much of its history pursued drug development including through Phase III clinical
studies which were discontinued. Such monetization included, but was 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, commercializing the IP,
or through the settlement and litigation of patents.
The Company was formerly focused on commercializing
and monetizing patents by 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.
Since March 1, 2013, the Company has received
limited funds from its IP monetization. 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”). The Company made no investments in new IP during 2017
and 2018.
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, 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. Pursuant to the Securities Purchase Agreement, the
Company applied a total of approximately $293,000 prior advances towards its investment in DatChat (“Prior Incurred Amount”),
including $272,000 of compensation related costs and $21,000 professional fees. The Company also recorded approximately $207,000
compensation expenses payable to DatChat (“Payable to DatChat”) in addition to the $293,000 advances to reach the $500,000
maximum.
The breakdown of investment at Datchat
as December 31, 2018 are as follows ($ in thousands):
|
|
DatChat
Investment as of
December 31, 2018
|
|
Cash Payment
|
|
$
|
500
|
|
Prior Incurred Amount Made to DatChat
|
|
|
293
|
|
Payable to DatChat
|
|
|
207
|
|
Total
|
|
|
1,000
|
|
On November 23, 2018, the Company entered
into a Security Purchase Agreement with Mellow Scooters, LLC (“Mellow Scooters”), a leading-edge company that enables
anyone to own and operate a personal fleet of electric scooters and dockless bicycles to generate revenue. Mellow Scooters agreed
to sell 250 Units to the Company, representing 25% of its issued and outstanding limited liability company membership interests
for a subscription price of $106,000. The $106,000 consisted of (a) a cash payment of $30,000, (b) the forgiveness of prior advances
made to Mellow Scooters by the Company, and (c) an obligation of the Company to pay certain specific future expenses of Mellow
Scooters (amounts in clauses (b) and (c) not to exceed a maximum of $76,000 in the aggregate). As of December 31, 2018, the Company
has applied a total of approximately $74,000 prior advances towards its investment in Mellow Scooters, including $71,000 compensation
related cost and $3,500 professional fees. The Company also recorded $2,000 payable for professional fees of Mellow Scooter in
addition to the $74,000 advances to reach the $76,000 maximum.
The breakdown of investment at Mellow Scooters
as December 31, 2018 are as follows ($ in thousands):
|
|
Mellow Scooters
Investment as of
December 31, 2018
|
|
Cash Payment
|
|
$
|
30
|
|
Prior Incurred Amount Made to Mellow Scooters
|
|
|
74
|
|
Payable to Mellow Scooters
|
|
|
2
|
|
Total
|
|
|
106
|
|
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.
Note 2. Going Concern 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.
|
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 $1.8 million at December 31, 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.
Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there
is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this
filing. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or
the amounts and classification of liabilities that may result from the outcome of this uncertainty.
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.
Segments
The Company operates in one operating segment
and, accordingly, no segment disclosures have been presented herein.
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 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 and exchange-traded & closed-end funds which are valued at quoted market prices.
Fair Value of Financial Instruments
Financial instruments, including cash and cash
equivalents, 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)
Property and Equipment
Property and equipment are stated at cost
and include office furniture and equipment and computer hardware and software. The Company computes depreciation and amortization
under the straight-line method and typically over the following estimated useful lives of the related assets:
●
|
Office furniture and equipment
|
3 to 10 years
|
●
|
Computer hardware and software
|
3 to 5 years
|
Impairment of Long-lived Assets (Including
Patent Assets)
The Company monitors the carrying value
of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability
by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot
be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the
group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted
expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its
carrying value. The Company performed impairment tests for intangible assets at December 31, 2018 and 2017. An impairment charge
of approximately $2.2 million and nil was taken during the year ended December 31, 2018 and 2017, respectively.
Convertible Preferred
Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable
preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as
temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
The Company accounts for
convertible preferred stock with detachable warrants in accordance with ASC 470:
Debt
and allocated proceeds received
to the convertible preferred stock and detachable warrants based on relative fair values. The Company evaluated the classification
of its convertible preferred stock and warrants and determined that such instruments meet the criteria for equity classification.
The Company recorded the related issuance costs and value ascribed to the warrants as a reduction of the convertible preferred
stock.
The Company has also evaluated its convertible preferred stock and warrants in accordance with the provisions
of ASC 815,
Derivatives and Hedging
, including consideration of embedded derivatives requiring bifurcation. The issuance
of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt
or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception
because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment
date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares
of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the
fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible
preferred stock (see Note 8).
As the convertible preferred
stock may be converted immediately, the Company recognized the BCF as a deemed dividend in the consolidated statements of operations.
Treasury Stock
The Company accounts for the treasury stock using the cost method,
which treats it as a reduction in stockholders’ equity.
Revenue Recognition
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 December 31, 2018, there were no contract assets or liabilities associated with the Company’s
settlement and licensing agreements. During the year ended December 31, 2018, the Company only generated $28 thousand of revenue.
Inventor Royalties
Inventor royalties are expensed in the
period that the related revenues are recognized. In certain instances, pursuant to the terms of the underlying inventor agreements,
costs paid by the Company to acquire patents are recoverable from future net revenues. Patent acquisition costs that are recoverable
from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties
are earned by the inventor, as appropriate, and the related expense is included in amortization expense.
Accounting for Warrants
The Company accounts for the issuance of
common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives
and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement
or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement
or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company)
or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do
not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies
these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Company assessed the classification of common stock purchase warrants as of the date of each offering
and determined that such instruments met the criteria for liability classification. Accordingly, the Company classified the warrants
as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject
to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized
as “change in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of
the warrants has been estimated using a Black-Scholes valuation model (see Note 8).
Stock-based Compensation
The Company accounts for share-based payment
awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under
the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the
Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally
vest over a one- to five-year period.
The fair value of stock options granted
was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. The risk-free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term
of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration
for all individuals within the grant. The expected volatility assumption is computed based on the standard deviation
of the Company’s underlying stock price’s daily logarithmic returns.
The Company’s model includes a zero
dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The
Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such
restrictions.
The periodic expense is then determined
based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. In
addition to the assumptions used in the Black-Scholes option-pricing model, the amount of stock option expense the Company recognizes
in the consolidated statements of operations includes an estimate of stock option forfeitures. Under ASC 718, the Company is required
to estimate the level of forfeitures expected to occur and record compensation expense only for those awards that ultimately expect
will vest. The Company recognizes the effect of forfeitures in compensation expense when the forfeitures occur.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this
method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) deferred
tax consequences of temporary difference resulting from matters that have been recognized in the Company’s financial statement
or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities measured at the enacted tax rates in effect for the year in which these items are expected
to reverse. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it
is more likely than not that some portion or all of the deferred tax asset will not be realized.
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.
The following table summarizes the earnings (loss) per share
calculation (in thousands, except per share amount):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
8,058,165
|
|
|
|
5,538,568
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
0.21
|
|
|
|
(0.60
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
0.21
|
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding,
|
|
|
8,058,165
|
|
|
|
5,538,568
|
|
Weighted average effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
—
|
|
|
|
—
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
—
|
|
Weighted average diluted shares outstanding
|
|
|
8,061,091
|
|
|
|
5,538,568
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.21
|
|
|
$
|
(0.60
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
0.21
|
|
|
$
|
(0.60
|
)
|
Securities that could potentially dilute loss per share in the
future that were not included in the computation of diluted loss per share at December 31, 2018 and 2017 are as follows:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
2,926
|
|
Warrants to purchase common stock
|
|
|
1,249,754
|
|
|
|
1,249,754
|
|
Options to purchase common stock
|
|
|
528,427
|
|
|
|
328,490
|
|
Total
|
|
|
1,781,107
|
|
|
|
1,581,170
|
|
Recently Issued Accounting Standards
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 adopted ASU 2017-11 on January 1, 2019 and the
adoption did not have an impact on the Company’s consolidated financial statements.
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 adopted ASU 2018-07 on January 1, 2019 and the adoption did not have an impact on the Company’s
consolidated 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 consolidated financial statements. The Company anticipates its first presentation of changes in stockholders’
equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
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 consolidated Financial Statements.
Recently Adopted Accounting Standards
In May 2014, the FASB issued 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. Absent the adoption of ASC 606, the Company would have recorded approximately $1.0
million of deferred revenue for the year ended December 31, 2018.
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. Investments in Marketable Securities
The realized gain or loss,
unrealized gain or loss, and dividend income related to marketable securities for the year ended December 31, 2018 and 2017,
which are recorded as a component of other(expenses) income on the consolidated statements of operations, are as follows ($ in
thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Realized gain (loss)
|
|
$
|
(400
|
)
|
|
$
|
(328
|
)
|
Unrealized gain (loss)
|
|
|
(117
|
)
|
|
|
240
|
|
Dividend income
|
|
|
158
|
|
|
|
111
|
|
|
|
$
|
(359
|
)
|
|
$
|
23
|
|
Note 5. 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 1,700,000 shares of common stock (which has been
retroactively restated to reflect the 1-for-4 reverse stock split effected by Hoth on December 6, 2018), par value $0.0001 (the
“Shares”), of Hoth, for a purchase price of $675,000. Hoth is a development stage biopharmaceutical company focused
on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. Hoth’s
primary asset is a sublicense agreement with Chelexa Biosciences, Inc. (“Chelexa”) pursuant to which Chelexa has granted
Hoth an exclusive sublicense to use its BioLexa products for the treatment of eczema.
On February 15, 2019, Hoth announced the pricing of its initial public offering (“IPO) of 1,250,000
shares of its common stock at an initial offering price to the public of $5.60 per share. All shares of common stock were
offered by Hoth.
Hoth
’
s
common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol
“
HOTH
”
.
The IPO closed on February 20, 2019.
The Company records this investment at fair
value and records any change in fair value in the statements of operations (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 $1,000,000 strategic investment in DatChat. See Note 1 for further explanation.
As described in Note 3 to these consolidated
financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 concerning recognition and measurement of financial
assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an
adjusted cost method measurement alternative for its investment in DatChat.
Note 7. Intangible Assets
Patent Portfolio
The Company’s intangible assets with
finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible
assets were subject to amortization. The net carrying amounts related to acquired intangible assets are as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2016, net
|
|
$
|
4,951
|
|
|
|
3.65
|
|
Amortization expenses
|
|
|
(1,373
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2017, net
|
|
$
|
3,578
|
|
|
|
2.67
|
|
Amortization expenses
|
|
|
(1,405
|
)
|
|
|
|
|
Impairment loss
|
|
|
(2,173
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2018, net
|
|
$
|
—
|
|
|
|
—
|
|
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.
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 year ended 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. The Company recorded a $2.2 million impairment charge against its patent portfolio to write off the entire
remaining balance of the intangible assets during the year ended December 31, 2018.
There was no impairment charges recorded
during the year ended December 31, 2017.
Note 8. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried
at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures
the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable
inputs when measuring fair value.
The Company uses three levels of inputs
that may be used to measure fair value:
Level 1 - quoted prices in
active markets for identical assets or liabilities
Level 2 - quoted prices for
similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable
(for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s assets and
liabilities that are measured at fair value at December 31, 2018 and 2017 ($ in thousands):
|
|
Fair
value measured at December 31, 2018
|
|
|
|
|
|
|
Quoted
prices in
|
|
|
Significant
other
|
|
|
Significant
|
|
|
|
Total
at December 31,
|
|
|
active
markets
|
|
|
observable
inputs
|
|
|
unobservable
inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities - exchange traded funds
|
|
$
|
2,700
|
|
|
$
|
2,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments
at Hoth
|
|
$
|
9,214
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
warrant liabilities
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total carrying value at December
31,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual
and exchange traded funds
|
|
$
|
3,998
|
|
|
$
|
976
|
|
|
$
|
3,022
|
|
|
$
|
—
|
|
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 for the years
ended December 31, 2018 and 2017.
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 Valuation Techniques – Assets
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial
assets that are measured at fair value on a recurring basis:
|
|
Fair Value of Level 3 investment
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
1,020
|
|
|
$
|
—
|
|
Fair value of Hoth upon issuance
|
|
|
—
|
|
|
|
675
|
|
Change in fair value of Hoth
|
|
|
8,194
|
|
|
|
345
|
|
Ending balance
|
|
$
|
9,214
|
|
|
$
|
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. The
net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as change in fair
value of investment in the Consolidated Statements of Operations.
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 December 31, 2018 and 2017 is as follows:
Date of valuation
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.83
|
%
|
Expected volatility
|
|
|
75.00
|
%
|
|
|
75.00
|
%
|
Contractual life (in years)
|
|
|
0.17
|
|
|
|
1.50
|
|
The investment in Hoth Therapeutics as of December
31, 2018 was valued using the PWERM (Probability Weighted Expected Return Method). Under this method, an analysis of future values
of a company is performed for several likely scenarios. These scenarios included both a high and low range of values that were
provided to Hoth Therapeutics by their investment bankers. The price per share was $6.50 and $5.50, respectively. The value is
then discounted to the present using a risk-adjusted discount rate of 15%. The present values of the common stock under each scenario
are then weighted based on the probability of each scenario occurring to determine the value of the investment. A 10% probability
was placed on the high end and a 90% probability was placed on the low end.
The investment in Hoth Therapeutics as of December
31, 2017 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 December 31, 2017.
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):
|
|
|
|
|
Impairment Charges -
|
|
|
|
Net Carrying Value at
|
|
|
Year Ended December
|
|
|
|
December 31, 2018
|
|
|
31, 2018
|
|
Assets
|
|
|
|
|
|
|
Patent Portfolios, Net
|
|
$
|
—
|
|
|
$
|
2,173
|
|
|
|
|
|
|
Impairment Charges -
|
|
|
|
Net Carrying Value at
|
|
|
Year Ended December
|
|
|
|
December 31, 2017
|
|
|
31, 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.
Level 3 Valuation Techniques – Liabilities
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 December 31, 2018 and December 31,
2017 is as follows:
Date of valuation
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
2.48%
|
|
1.98%
|
|
Expected volatility
|
|
72.03% - 103.13%
|
|
100.00% - 132.21%
|
|
Contractual life (in years)
|
|
1.94-2.06
|
|
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 that are measured at fair value on a recurring
basis for the year ended December 31, 2018 and 2017 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
822
|
|
|
$
|
702
|
|
Fair value adjustment of warrant liabilities
|
|
|
(740
|
)
|
|
|
120
|
|
Ending balance
|
|
$
|
82
|
|
|
$
|
822
|
|
Note 9. RPX License Agreement
Under an agreement between the Company
and RPX Corporation (“RPX”), the Company granted RPX the ability to grant to VTech Telecommunications Ltd. (“VTech”)
a sublicense for a fully paid portfolio license in exchange for an additional $20,000 in cash consideration during the year ended
December 31, 2017.
The license granted under the terms of
the RPX License described herein does not extend to entities/companies that are not clients of RPX and provide chipsets or other
hardware to current RPX clients.
During the year ended December 31, 2018
and 2017, the Company recorded approximately $0 and $957,000, respectively, in revenue related to the amortization of the license.
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.
Note 10. Stockholders’ Equity and Convertible
Preferred Stock
Common Stock
2017 activity
On July 18, 2017, the Company entered into
an underwriting agreement with Laidlaw & Company (UK) Ltd. with respect to the issuance and sale of an aggregate of 1,250,000
shares of the Company’s common stock, par value $0.0001 per share, in a firm commitment underwritten public offering which
closed on July 24, 2017. Each share was sold for a price of $2.00 for aggregate gross proceeds of $2.5 million, with net proceeds
of approximately $2.1 million, after deducting the underwriting discounts and commissions (equivalent to 8% of gross proceeds)
and estimated offering expenses.
2018 activity
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.
The Company had designated separate series
of its capital stock as of December 31, 2018 and December 31, 2017 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Par Value
|
|
|
Conversion Ratio
|
Series “A”
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.0001
|
|
|
N/A
|
Series “C”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “D”
|
|
|
4,725
|
|
|
|
4,725
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “D-1”
|
|
|
834
|
|
|
|
834
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “F-1”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “H”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “I”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
1.05:1
|
Series “J”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “K”
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0001
|
|
|
263.16:1
|
Series D Convertible Preferred Stock
In connection with the acquisition of North
South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred Stock
(“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock has a
stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of Common Stock. Upon the liquidation,
dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled to receive,
for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or
(ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of
Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled to such number
of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible into at such time,
taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and the conversion
limitations described below. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock
splits, stock dividends, combination of shares and similar recapitalization transactions.
As of December 31, 2018 and 2017, 4,725
shares of Series D Preferred Stock remained issued and outstanding.
Series D-1 Convertible Preferred
Stock
The Company’s Series D-1 Convertible
Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1
Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share of Common Stock. Upon
the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be
entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i)
the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each
holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and
shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D-1 Preferred Stock
are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate
of Designation. The conversion ratio of the Series D-1 Preferred Stock is subject to adjustment in the event of stock splits,
stock dividends, combination of shares and similar recapitalization transactions. The Company commenced an exchange with holders
of Series D Convertible Preferred Stock pursuant to which the holders of the Company’s outstanding shares of Series D Preferred
Stock acquired in the Merger could exchange such shares for shares of the Company’s Series D-1 Preferred Stock on a one-for-one
basis.
As of December 31, 2018 and 2017, 834 shares
of Series D-1 Preferred Stock remained issued and outstanding.
Warrants
A summary of warrant activity for year
ended December 31, 2018 and 2017 is presented below:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.92
|
|
Outstanding as of December 31, 2018
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
1.92
|
|
Stock Options
2012 Plan
At December 31, 2018, there were 521 shares
available for grant under the 2012 Equity Incentive Plan.
2013 Plan
At December 31, 2018, there were 105,547
fully vested options outstanding and 41,821 shares available for grant under the Spherix Incorporated 2013 Equity Incentive Plan.
2014 Plan and Option Grants
At December 31, 2018, there were 422,880
options outstanding and 11,330 shares available for grant under the Spherix Incorporated 2014 Equity Incentive Plan.
The fair value of options granted in 2018
and 2017 was estimated using the following assumptions:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Exercise price
|
|
$1.04-$1.50
|
|
|
$
|
1.02
|
|
Expected stock price volatility
|
|
131.8%-132.2%
|
|
|
|
134.5
|
%
|
Risk-free rate of interest
|
|
2.65%-2.80%
|
|
|
|
1.4
|
%
|
Term (years)
|
|
9.13-9.34
|
|
|
|
4.42
|
|
A summary of option activity under the
Company’s employee stock option plan for year ended December 31, 2018 and 2017 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
325,597
|
|
|
$
|
78.20
|
|
|
$
|
5,999
|
|
|
|
3.2
|
|
Employee options granted
|
|
|
200,000
|
|
|
|
1.39
|
|
|
|
—
|
|
|
|
9.2
|
|
Outstanding as of December 31, 2018
|
|
|
525,597
|
|
|
$
|
48.96
|
|
|
$
|
—
|
|
|
|
4.9
|
|
Options vested and expected to vest
|
|
|
525,534
|
|
|
$
|
48.96
|
|
|
$
|
—
|
|
|
|
4.9
|
|
Options vested and exercisable
|
|
|
500,534
|
|
|
$
|
51.35
|
|
|
$
|
—
|
|
|
|
4.6
|
|
A summary of options that the Company granted
to non-employees for the year ended December 31, 2018 and 2017 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.4
|
|
Outstanding as of December 31, 2018
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.4
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.4
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.4
|
|
Stock-based compensation associated with
the amortization of stock option expense was $213,000 and $14,000 for the years ended December 31, 2018 and 2017, respectively.
Estimated future stock-based compensation
expense relating to unvested stock options is approximately $8,000. The weighted average remaining contractual term of exercisable
options is approximately 4.8 years at December 31, 2018.
Restricted Stock Awards
2017 activity
On October 11, 2017, the Company granted
a consultant 5,000 shares of restricted common stock for consulting services. The restricted stock award vested immediately. The
grant date fair value of restricted stock award was $8,400.
2018 activity
During 2018 approximately 84,410 shares with a fair value of approximately $106,000 was granted. These restricted
stock awards vested immediately.
Restricted Stock Units
On March 14, 2017, 35,969 restricted stock
units (“RSUs”) were delivered to Anthony Hayes. 23,287 shares of common stock were withheld (at the closing price of
the Company’s common stock on the NASDAQ Capital Market on March 14, 2017) to satisfy the tax obligation relating to the
vesting of the RSUs.
As of December 31, 2018, the Company did
not have unrecognized stock-based compensation expense related to restricted stock unit awards.
Stock-based Compensation Expense
Stock-based compensation expense for the
year ended December 31, 2018 and 2017 was comprised of the following ($ in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Employee restricted stock awards
|
|
$
|
107
|
|
|
$
|
—
|
|
Non-employee restricted stock awards
|
|
|
—
|
|
|
|
9
|
|
Employee stock option awards
|
|
|
213
|
|
|
|
14
|
|
Total compensation expense
|
|
$
|
320
|
|
|
$
|
23
|
|
Note 11. Commitments and Contingencies
Financing of Directors’ and Officers’ Insurance
The Company financed its Directors’
and Officers’ insurance policy for approximately $0.2 million. Payments are due monthly and the policy is for
12 months. Finance charges for the 12-month period are nominal. As of December 31, 2018, the Company owed
approximately $0.1 million and such amounts were recorded in accrued expenses. The Company has made regular payments in accordance
with this insurance policy.
Legal Proceedings
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of use 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
Optic153 LLC Litigations
Under our Monetization Agreement with Equitable,
Optic 153 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. Such case settled in November of 2018 and the Company received its pro rata portion
of the aggregate settlement amount of $200,000. A Notice of Voluntary Dismissal was filed on November 15, 2018 and the Court
closed the case.
|
Counterclaims
In the ordinary course of business, we,
or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed
on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated
by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can
provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results
from operations.
Note 12. Income Taxes
The income tax provision consists of the following ($ in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
(517
|
)
|
|
|
14,376
|
|
Decrease in valuation allowance
|
|
|
517
|
|
|
|
(14,376
|
)
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
(92
|
)
|
|
|
(1,416
|
)
|
(Decrease) Increase in valuation allowance
|
|
|
92
|
|
|
|
1,416
|
|
Change in valuation Allowance
|
|
|
610
|
|
|
|
(12,960
|
)
|
Income Tax Provision (Benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a reconciliation of the U.S. federal statutory
rate to the effective income tax rates for the years ended December 31, 2018 and 2017:
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. Statutory Federal Rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Federal tax rate change
|
|
|
—
|
%
|
|
|
(456.08
|
)%
|
State Taxes, Net of Federal Tax Benefit
|
|
|
3.91
|
%
|
|
|
2.28
|
%
|
Other Permanent Differences
|
|
|
1.76
|
%
|
|
|
3.12
|
%
|
State rate change in effect
|
|
|
—
|
%
|
|
|
—
|
%
|
Fair Value of Warrants
|
|
|
8.99
|
%
|
|
|
(1.23
|
)%
|
Increase due to true up of State NOL
|
|
|
—
|
|
|
|
26.00
|
|
Decrease due to change in Federal NOL and other true ups
|
|
|
(0.36
|
)%
|
|
|
(0.12
|
)%
|
Change in Valuation Allowance
|
|
|
(35.30
|
)%
|
|
|
392.03
|
%
|
Income Tax Provision (Benefit)
|
|
|
0.0
|
|
|
|
0.0
|
|
At December 31, 2018 and 2017, the Company’s deferred
tax assets and liabilities consisted of the effects of temporary differences attributable to the following ($ in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net-operating loss carryforward
|
|
$
|
12,163
|
|
|
$
|
9,608
|
|
Stock based compensation
|
|
|
5,444
|
|
|
|
5,368
|
|
Patent portfolio and other
|
|
|
11,201
|
|
|
|
11,317
|
|
Total Deferred Tax assets
|
|
|
28,808
|
|
|
|
26,293
|
|
Valuation allowance
|
|
|
(26,831
|
)
|
|
|
(26,220
|
)
|
Deferred Tax Asset, Net of valuation allowance
|
|
$
|
1,977
|
|
|
$
|
73
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Fair value adjustment of investment
|
|
|
(1,977
|
)
|
|
|
(73
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
On December 22, 2017, “H.R.1”,
formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among other items, H.R.1 reduces the federal corporate
tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company revalued its net
deferred tax asset at the new lower tax rate and has reduced the value of the deferred tax asset before valuation allowance by
$15.08 million.
Upon completion of our 2018 U.S. income
tax return in 2019 we may identify additional re-measurement adjustments to our recorded deferred tax liabilities. We will continue
to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will
be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting
Bulletin No. 118
After the enactment of the Act, the SEC
issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the Act. In our financial statements for the period ended December 31, 2017, we
calculated an estimate of the impact of the Act related to the remeasurement of our net U.S. deferred tax asset due to the change
in U.S. federal corporate income tax rate. The provisional amount recorded was deferred tax expense of $12.960 million, but which
was fully and equally offset by a deferred tax benefit related to a corresponding reduction in our valuation allowance. The Company
had previously recorded a valuation allowance against the deferred tax asset so this adjustment had no impact on the financial
statements for the period ended December 31, 2017. During the quarter ended December 31, 2018, the completed the accounting for
the income tax effects of the Act, which resulted in an in an immaterial change in the net deferred tax asset, before valuation
allowance, as of the enactment date.
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and taxing strategies in making this assessment. The Company has determined that, based on objective
evidence currently available, it is more likely than not that, with the exception of an Alternative Minimum Tax (AMT) carryforward,
the deferred tax assets will not be realized in future periods. Accordingly, the Company has provided a partial-valuation allowance
for the deferred tax assets with the exception of the AMT credit carryforward at December 31, 2018. As of December 31, 2018, the
change in valuation allowance is approximately $610 thousand.
Under the Tax cuts and Jobs Act
corporations are no longer subject to the Alternative Minimum Tax (AMT), effective for taxable years beginning after Dec. 31,
2017. However, where a corporation has an AMT credit from a prior taxable year, the corporation will continue to carry the
credit forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before
2022. Generally, 50 percent of the corporation’s AMT Credit carried forward to one of these years will be claimable
and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will
be refundable. The Company has an AMT credit carryforward of $40,842 as of December, 31, 2018. The Company will request
the following refunds for the tax years ended December 31, 2019 through December 31, 2021:
Tax Year Ended:
|
|
|
AMT Credit Refund Request
|
|
|
|
|
|
|
December 31, 2019
|
|
|
$
|
20,421
|
|
December 31, 2020
|
|
|
|
10,211
|
|
December 31, 2021
|
|
|
|
10,210
|
|
|
|
|
$
|
40,842
|
|
As of December 31, 2018, the Company had
federal and state net operating loss carryovers (“NOLs”) of approximately $52.53 million, which expire from 2019 through
2038. The NOL carryover may be subject to limitation under Internal Revenue Code section 382, should there be a greater than
50% ownership change as determined under the regulations.
As required by the provisions of ASC 740,
the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold,
the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected
to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized
benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit
because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not
recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties
related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general
and administrative expense in the statement of operations. As of December 31, 2018 and 2017, no liability for unrecognized tax
benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2018 and 2017.
The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal
and state income tax returns. As of December 31, 2018, the Company’s U.S. and state tax returns (California, Delaware, Maryland,
New York, New York City, Virginia, Pennsylvania and Texas) remain subject to examination by tax authorities beginning with the
tax return filed for the year ended December 31, 2015, however, there were no audits pending in any of the above-mentioned jurisdictions
during 2018. The Company believes that its income tax positions would be sustained upon an audit and does not anticipate any adjustments
that would result in material changes to its consolidated financial position.
Note 13. Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the consolidated financial statements are issued. Based upon the evaluation, the
Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in
the consolidated financial statements other than disclosed.
Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard
|
On January 11, 2019, the Company received
written notice (the “Notice”) from the Listing Qualifications Department (the “Staff”) of The NASDAQ Stock
Market LLC (“Nasdaq”) indicating that, based upon the Company’s non-compliance with Nasdaq Listing Rule 5620(a),
which requires an issuer to hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal
year-end (the “Annual Meeting Rule”), the Company would be required to submit a plan to regain compliance with the
Annual Meeting Rule for the Staff’s consideration by no later than February 25, 2019. The Notice has no immediate impact
on the Company’s listing or trading in the Company’s securities on Nasdaq.
The Company has been provided an extension
of up to 180 calendar days from the Company’s fiscal year end, through July 1, 2019, to evidence compliance with the Annual
Meeting Rule. As announced to the Company’s stockholders on a Current Report on Form 8-K filed on February 6, 2019, the Company
has established April 15, 2019 as the date of the Company’s 2019 annual meeting of stockholders.