Filed Pursuant
to 424(b)(5)
Registration
No. 333-198498
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 10, 2014)
5,719,532 Shares of Common Stock
Warrants to Purchase 7,035,024 Shares
of Common Stock
We are offering up to 5,719,532
shares of our common stock, par value $.0001 per share (“Common Stock”) and warrants to purchase up to 7,035,024
shares of our Common Stock in this offering (and the shares of Common Stock issuable from time to time upon exercise of these
warrants). The Common Stock and warrants will be sold in units (each a “Unit”), with each Unit consisting of one
share of Common Stock and a warrant to purchase 1.23 share of Common Stock at an exercise price of $0.43 per share of Common
Stock (“Warrant”). The shares of Common Stock and Warrants will be issued separately but can only be purchased
together in this offering. Units will not be issued or certificated.
Our common stock is listed on the NASDAQ
Capital Market under the ticker symbol “SPEX.” The last reported sale price of our common stock on the NASDAQ Capital
Market on July 15, 2015 was $0.426 per share.
The aggregate market value of our outstanding
common shares held by non-affiliates, or the public float, was approximately $18,282,175 based on 28,611,967 common shares outstanding,
of which 28,565,899 common shares were held by non-affiliates, and a per share price of $.64 based on the closing sale price of
our common shares on June 10, 2015. Other than the securities offered by this prospectus supplement, we have not offered
any securities pursuant to General Instruction I.B.6. of Form S-3 during the prior 12 calendar month period that ends on, and includes,
the date of this prospectus supplement.
Investing in our common stock involves
a high degree of risk. See “Risk Factors” beginning on page S-11 of this prospectus supplement and in the documents
incorporated by reference into this prospectus supplement or the accompanying prospectus and any free writing prospectus that we
have authorized for use in connection with this offering.
Neither the Securities and Exchange Commission,
any state securities commission, nor any other regulatory body has approved or disapproved of these securities or determined if
this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
We have retained Chardan Capital Markets,
LLC to act as our exclusive placement agent in connection with the arrangement of this transaction. We have agreed to pay the placement
agent the placement agent fee set forth in the table below, which assumes that we sell all of the Units we are offering. The placement
agent is not required to arrange for the sale of any specific number of Units or dollar amount but will use its “reasonable
best efforts” to arrange for the sale of the Units.
| | |
Per Share | | |
Total | |
| Offering price (1) | |
$ | 0.25600 | | |
$ | 1,464,200 | |
| Placement agent fees (2) | |
$ | 0.02048 | | |
$ | 117,136 | |
| Proceeds, before expenses, to us | |
$ | 0.23552 | | |
$ | 1,347,064 | |
| (1) |
The offering price of the Common Stock and Warrants are the result of arm’s length negotiations with third party
investors and through the placement agent in this offering. |
| (2) |
We have agreed to reimburse the placement agent for its expenses up to an amount of $25,000. We have also agreed to pay the placement agent a cash fee equal to 8% of the gross proceeds received in this offering. See “Plan of Distribution” on page S-39 of this prospectus supplement for more information regarding these arrangements. |
We estimate the total expenses of this offering,
excluding the placement agent fees, will be approximately $70,000. Because there is no minimum offering amount required as a condition
to closing in this offering, the actual offering amount, the placement agent fees and net proceeds to us, if any, in this offering
may be substantially less than the maximum offering amounts set forth above.
We expect to deliver the securities being
offered pursuant to this prospectus supplement on or about July 21, 2015.
Chardan Capital Markets, LLC
The date of this prospectus supplement is July
15, 2015.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The
first part is this prospectus supplement, which describes the specific terms of this offering and also adds to and updates
information contained in the accompanying prospectus and the documents incorporated by reference therein. The second part,
the accompanying prospectus, provides more general information. Generally, when we refer to this prospectus, we are referring
to both this prospectus supplement and the accompanying prospectus. To the extent there is a conflict between the information
contained in this prospectus supplement and the information contained in the accompanying prospectus or any document
incorporated by reference therein filed prior to the date of this prospectus supplement, you should rely on the information
in this prospectus supplement. In addition, if any statement in one of these documents is inconsistent with a statement in
another document having a later date—for example, a document incorporated by reference in the accompanying
prospectus—the statement in the document having the later date modifies or supersedes the earlier statement.
It is important that you read and consider
all of the information contained in this prospectus supplement and the accompanying prospectus in making your investment decision.
You should also read and consider the information in the documents to which we have referred you in “Incorporation of Certain
Information by Reference” on page S-42 of this prospectus supplement and “Where You Can Find More Information”
on page S-42 of this prospectus supplement.
The distribution of this prospectus supplement
and the accompanying prospectus and the offering of our securities in certain jurisdictions may be restricted by law. This prospectus
supplement and the accompanying prospectus do not constitute, and may not be used in connection with, an offer or solicitation
by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so to any person to whom it is unlawful to make such offer or solicitation. See the “Plan
of Distribution” section of this prospectus supplement beginning on page S-39.
We further note that the representations,
warranties and covenants made by us in any agreement that is filed as an exhibit to any document that is incorporated by reference
in this prospectus supplement or the accompanying prospectus were made solely for the benefit of the parties to such agreement,
including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to
be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as
of the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing
the current state of our affairs.
Unless otherwise stated, all references
in this prospectus supplement and the accompanying prospectus to “we,” “us,” “our,” “Spherix,”
the “Company” and similar designations refer to Spherix Incorporated and its subsidiaries on a consolidated basis.
References herein to “$” and “dollars” are to the currency of the United States of America.
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights certain information about
us, this offering and selected information contained elsewhere in or incorporated by reference in this prospectus supplement.
This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest
in our common stock. For a more complete understanding of our company and this offering, we encourage you to read and consider
carefully the more detailed information in this prospectus supplement and the accompanying prospectus, including the information
referred to under the heading “Risk Factors” in this prospectus supplement beginning on page S-11, the information
incorporated by reference in this prospectus supplement and the accompanying prospectus, and the information included in any free
writing prospectus that we have authorized for use in connection with this offering.
Our Business
Our Business Model
We are a patent commercialization company that realizes revenue
from the monetization of IP. Such monetization includes, but is not limited to, acquiring IP from patent holders in order
to maximize the value of the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation
of patents. We intend to generate revenues and related cash flows from the granting of intellectual property rights for the
use of patented technologies that we own, or that we manage for others.
We continually work to enhance our portfolio of intellectual
property through acquisition and strategic partnerships. Our mission is to partner with inventors, or other entities, who own undervalued
intellectual property. We then work with the inventors or other entities to commercialize the IP. Currently, we own
over 330 patents and patent applications.
Our Products and Services
We acquire IP from patent holders in order to maximize the value
of their patent holdings by conducting and managing a licensing campaign. Some patent holders tend to have limited internal resources
and/or expertise to effectively address the unauthorized use of their patented technologies or they simply make the strategic business
decision to outsource their intellectual property licensing. They can include individual inventors, large corporations, universities,
research laboratories and hospitals. Typically, we, or an operating subsidiary, acquires a patent portfolio in exchange for a combination
of an upfront cash payment, a percentage of our operating subsidiary's net recoveries from the licensing and enforcement of the
portfolio, or a combination of the two.
Competition
We expect to encounter significant competition from others seeking
to acquire interests in intellectual property assets and monetize such assets. This includes an increase in the number of competitors
seeking to acquire the same or similar patents and technologies that we may seek to acquire. Most of our competitors
have much longer operating histories, and significantly greater financial and human resources, than we do. Entities such as Vringo,
Inc. (NYSE MKT: VRNG), VirnetX Holding Corp (NYSE MKT: VHC), Acacia Research Corporation (NASDAQ: ACTG), RPX Corporation (NASDAQ:
RPXC), Marathon Patent Group, Inc. (NASDAQ: MARA) and others presently market themselves as being in the business of creating,
acquiring, licensing or leveraging the value of intellectual property assets. We expect others to enter the market as the true
value of intellectual property is increasingly recognized and validated. In addition, competitors may seek to acquire the same
or similar patents and technologies that we may seek to acquire, making it more difficult for us to realize the value of its assets.
We also compete with venture capital firms, strategic corporate
buyers and various industry leaders for technology acquisitions and licensing opportunities. Many of these competitors
may have more financial and human resources than we do. As we become more successful, we may find more companies entering
the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we
currently rely upon to generate future revenue.
Other companies may develop competing technologies that offer
better or less expensive alternatives to our patented technologies that we may acquire and/or out-license. Many potential
competitors may have significantly greater resources than we do. Technological advances or entirely different approaches
developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries
obsolete and/or uneconomical.
Intellectual Property and Patent Rights
Our intellectual property is primarily comprised of trade secrets,
patented know-how, issued and pending patents, copyrights and technological innovation.
Our portfolio is currently comprised of over 300 patents
and patent applications. Our patent portfolio includes both U.S. and foreign patents
and pending patent applications in the wireless communications and telecommunication sectors
including data, optical and voice technology, antenna technology, Wi-Fi, base station functionality, and
cellular. We also own patents related to artificial sweetener and prescription refill technology.
Most of our patents are publicly accessible on the Internet
website of the U.S. Patent and Trademark Office at www.uspto.gov.
The lives of our patent rights have a wide duration. Certain
patents have already expired and the latest patents do not expire until 2026.
Patent Enforcement Litigation
We may often be required to engage in litigation to enforce
our patents and patent rights. We are, or may become a party to ongoing patent enforcement related litigation, alleging infringement
by third parties of certain of the patented technologies owned or controlled by us. The material litigations in which
we are currently engaged are described in summary fashion below, which updates our quarterly report on Form 10-Q, filed on May
8, 2015.
Spherix Incorporated v. VTech Telecommunications
Ltd. et al., Case No. 3:13-cv-03494-M, in the United States District Court for the Northern District of Texas
On August 30, 2013, we initiated litigation
against VTech Telecommunications Ltd. and VTech Communications, Inc. (collectively “VTech”) in Spherix Incorporated
v. VTech Telecommunications Ltd. et al., Case No. 3:13-cv-03494-M, in the United States District Court for the Northern District
of Texas (“the Court”) for infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 5,892,814; 6,614,899; and 6,965,614
(collectively, the “Asserted Patents”). The complaint alleges that VTech has manufactured, sold, offered for sale and/or
imported technology that infringes the Asserted Patents. We seek relief in the form of a finding of infringement of the Asserted
Patents, an accounting of all damages sustained by us as a result of VTech’s infringement, actual damages, enhanced damages
under 35 U.S.C. Section 284, attorney’s fees and costs. On November 11, 2013, VTech filed its Answer with counterclaims requesting
a declaration that the Asserted Patents are non-infringed and invalid. On December 5, 2013, we filed our Answer to the counterclaims,
in which we denied that the Asserted Patents were non-infringed and invalid. On May 22, 2014, the Court entered a Scheduling Order
for the case setting trial to begin on January 11, 2016. On June 3, 2014, in an effort to narrow the case, the parties filed a
stipulation dismissing without prejudice all claims and counterclaims related to U.S. Patent No. 5,752,195. On September 4, 2014,
VTech Communications, Inc., together with Uniden America Corporation, filed a request for inter partes review (“IPR”)
of two of the Asserted Patents in the United States Patent and Trademark Office. On March 3, 2015, the Patent Trial and Appeal
Board (“Board”) entered decisions instituting, on limited grounds, IPR proceedings regarding a portion of the claims
for the two Spherix patents. The Board also suggested an accelerated IPR schedule to culminate in an oral hearing on or about September
28, 2015. The Board held a conference call with the parties on March 17, 2015 to finalize the IPR schedule. On October 27, 2014,
the Court held a Technology Tutorial Hearing for the educational benefit of the Court. The Markman hearing was held on November
21 and 26, 2014. Both the Technology Tutorial and the Markman hearing were held jointly with the Spherix Incorporated
v. Uniden Corporation et al. case (see below). On March 19, 2015, the Court issued its Markman order, construing a total
of 13 claim terms that had been disputed by the parties. On April 2, 2015, we filed an Amended Complaint with Jury Demand and the
parties filed a Settlement Conference Report informing the Court that the parties have not yet resumed settlement negotiations.
The Court has ordered the parties to hold a settlement conference not later than December 28, 2015. On April 15, 2015, we filed
a Motion to Compel Production of Technical Documents against Defendants. On April 20, 2015, we filed an Opposed Motion for Leave
to Serve Supplemental Infringement Contentions. Also on April 20, 2015, Defendants filed their Amended Answer to our Amended Complaint
with their counterclaims. On May 1, 2015, we filed our Answer to the counterclaims. On May 5, 2015, the parties filed a Joint Stipulation
and Motion to Modify the Scheduling Order. On May 6, 2015, the Court entered the Stipulation, in which the Court estimated the
trial date to occur in July of 2016 and ordered the parties to be ready for trial on or after June 22, 2016. Our patent owner’s
response to the petition in the IPR was timely filed on May 26, 2015.
Spherix Incorporated v. Uniden Corporation
et al., Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas
On August 30, 2013, we initiated litigation
against Uniden Corporation and Uniden America Corporation (collectively “Uniden”) in Spherix Incorporated v. Uniden
Corporation et al., Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas (“the
Court”) for infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 6,614,899; and 6,965,614 (collectively, the “Asserted
Patents”). The complaint alleges that Uniden has manufactured, sold, offered for sale and/or imported technology that infringes
the Asserted Patents. We seek relief in the form of a finding of infringement of the Asserted Patents, an accounting of all damages
sustained by us as a result of Uniden’s infringement, actual damages, enhanced damages under 35 U.S.C. Section 284, attorney’s
fees and costs. On April 15, 2014, Uniden filed its Answer with counterclaims requesting a declaration that the patents at issue
are non-infringed and invalid. On April 28, 2014, we filed our Answer to the counterclaims, in which we denied that the patents
at issue were non-infringed and invalid. On May 22, 2014, the Court entered a scheduling order for the case setting trial to begin
on February 10, 2016. On June 3, 2014, in an effort to narrow the case, the parties filed a stipulation dismissing without prejudice
all claims and counterclaims related to U.S. Patent No. 5,752,195. On September 4, 2014, Uniden America Corporation, together
with VTech Communications, Inc., filed a request for inter partes review (“IPR”) of two of the Asserted Patents
in the United States Patent and Trademark Office. On March 3, 2015, the Patent Trial and Appeal Board (“Board”) entered
decisions instituting, on limited grounds, IPR proceedings regarding a portion of the claims for the two Spherix patents. The
Board also suggested an accelerated IPR schedule to culminate in an oral hearing on or about September 28, 2015. The Board held
a conference call with the parties on March 17, 2015 to finalize the IPR schedule. On October 27, 2014, the Court held a Technology
Tutorial Hearing for the educational benefit of the Court. The Markman hearing was held on November 21 and 26, 2014, with
both hearings occurring jointly with the Spherix Incorporated v. VTech Telecommunications Ltd. et al. case (see above).
On March 19, 2015, the Court issued its Markman order, construing a total of 13 claim terms that had been disputed by the
parties. On April 2, 2015, we filed an Amended Complaint with Jury Demand and the parties filed a Settlement Conference Report
informing the Court that the parties have not yet resumed settlement negotiations. The Court has ordered the parties to hold a
settlement conference not later than January 20, 2016. On April 9, 2015, the parties filed a Joint Motion to Modify Patent Scheduling
Order. On April 10, 2015, the Court granted the Motion. On April 20, 2015, Defendants filed their Amended Answer to our Amended
Complaint with their counterclaims. On May 1, 2015, we filed our Answer to the counterclaims. Our patent owner’s response
to the petition in the IPR was timely filed on May 26, 2015.
Spherix Incorporated v. Cisco Systems
Inc., Case No. 1:14-cv-00393-SLR, in the United States District Court for the District of Delaware
On March 28, 2014, we initiated
litigation against Cisco Systems Inc. (“Cisco”) in Spherix Incorporated v. Cisco Systems Inc., Case No.
1:14-cv-00393- SLR, in the United States District Court for the District of Delaware for infringement of U.S. Patent Nos.
RE40467; 6,697,325; 6,578,086; 6,222,848; 6,130,877; 5,970,125; 6,807,174; 7,397,763; 7,664,123; 7,385,998; and 8,607,323
(collectively, the “Asserted Patents”). The complaint alleges that Cisco has manufactured, sold, offered for sale
and/or imported technology that infringes the Asserted Patents. We seek relief in the form of a finding of infringement of
the Asserted Patents, an accounting of all damages sustained by us as a result of Cisco’s infringement, actual damages,
enhanced damages under 35 U.S.C. Section 284, attorney’s fees and costs. On July 8, 2014, we filed an amended complaint
to reflect that certain of the patents asserted were assigned to our wholly-owned subsidiary NNPT LLC (“NNPT”),
based in Longview, Texas. By the amended complaint, NNPT was added as a co-plaintiff with us. On August 5, 2014, Cisco filed
a motion to dismiss certain claims alleged in the amended complaint. On August 26, 2014, we and NNPT filed an opposition to
Cisco’s motion to dismiss. On September 5, 2014, Cisco filed its reply brief regarding its motion to dismiss. On March
9, 2015, Cisco moved to consolidate certain claims relating to alleged obligations by the Company to license Cisco on two
unrelated patents, which Cisco had made against the Company on June 6, 2014 in the pending case Bockstar Technologies LLC
v. Cisco Systems, Inc., Case No. 1:13-cv-02020- SLR-SRF. On March 23, 2015, the Company filed its opposition to
Cisco’s motion to consolidate. On March 31, 2015, the Court granted Cisco’s motion to dismiss allegations of
“willful” infringement. Spherix’s allegations of patent infringement for the 11 patents continue. Spherix
has the ability to re-allege “willful” infringement at a later time. On April 3, 2015, Cisco Systems, Inc.
petitioned the U.S. Patent Office for an inter partes review (“IPR”) of Spherix patents 7,397,763 and
8,607,323. Spherix has three months to respond to the petitions. The remaining nine patents Spherix has asserted against
Cisco were not part of the petitions and the time for Cisco to petition the USPTO for an IPR on those remaining
patents expired on April 6, 2015. On April 10, 2015, Cisco withdrew its March 9, 2015 motion to consolidate claims from the Bockstar case.
On May 5, 2015, Cisco filed its Answer to our amended complaint with counterclaims under the Sherman Act, breach of
contract, breach of convenant of good faith and fair dealing implied in contract, promissory estoppel, and requesting a
declaration that the patents at issue are non-infringed and invalid. On June 10, 2015, the Court entered a Scheduling Order
for the case. The Court set the Markman hearing to occur in two phases, for two different sets of patents, to occur on
June 24, 2016 and September 8, 2016. The Court set trial to begin on January 16, 2018.
Spherix Incorporated v. Juniper Networks,
Inc., Case No. 1:14-cv-00578-SLR, in the United States District Court for the District of Delaware
On May 2, 2014, we initiated litigation
against Juniper Networks, Inc. (“Juniper”) in Spherix Incorporated v. Juniper Networks, Inc., Case No. 1:14-cv-
00578-SLR, in the United States District Court for the District of Delaware for infringement of U.S. Patent Nos. RE40467; 6,578,086;
6,130,877; 7,385,998; 7,664,123; and 8,607,323 (collectively, the “Asserted Patents”). The complaint alleges that Juniper
has manufactured, sold, offered for sale and/or imported technology that infringes the Asserted Patents. We seek relief in the
form of a finding of infringement of the Asserted Patents, an accounting of all damages sustained by us as a result of Juniper’s
infringement, actual damages, enhanced damages under 35 U.S.C. Section 284, attorney’s fees and costs. On July 8, 2014, we
filed an amended complaint to reflect that certain of the patents asserted were assigned to our wholly-owned subsidiary NNPT LLC,
based in Longview, Texas. By the amended complaint, NNPT LLC was added as a co-plaintiff with us. On August 8, 2014, Juniper filed
a motion to dismiss certain claims alleged in the amended complaint. On August 29, 2014, we filed our opposition to Juniper’s
motion to dismiss. On September 15, 2014, Juniper filed its reply brief regarding its motion to dismiss. On March 31, 2015, the
Court granted Juniper’s motion to dismiss allegations of “willful” infringement. Spherix’s allegations
of patent infringement for the 11 patents continue. Spherix has the ability to reallege “willful” infringement
at a later time. On April 14, 2015, Juniper filed its Answer to our amended complaint. On May 6, 2015, the Court held an in-person
Scheduling Conference in court and ordered the parties to submit the final proposed Scheduling Order to the Court. On May 28, 2015,
the Court entered a Scheduling Order for the case setting the Markman hearing for June 24, 2016 and trial to begin on May
15, 2017.
NNPT, LLC v. Huawei Investment &
Holding Co., Ltd. et al., Case No. 2:14-cv-00677-JRG-RSP, in the United States District Court for the Eastern District of Texas
On June 9, 2014, NNPT initiated litigation
against Futurewei Technologies, Inc., Huawei Device (Hong Kong) Co., Ltd., Huawei Device USA Inc., Huawei Investment & Holding
Co., Ltd., Huawei Technologies Co., Ltd., Huawei Technologies Cooperatif U.A., and Huawei Technologies USA Inc. (collectively “Huawei”),
in NNPT, LLC v. Huawei Investment & Holding Co., Ltd. et al. , Case No. 2:14-cv-00677-JRG-RSP, in the United States
District Court for the Eastern District of Texas (“the Court”), for infringement of U.S. Patent Nos. 6,578,086; 6,130,877;
6,697,325; 7,664,123; and 8,607,323 (collectively, the “Asserted Patents”). On September 8, 2014, Huawei filed its
answers to the complaint in which defendant Huawei Technologies USA asserted counterclaims requesting a declaration that the patents
at issue were non-infringed and invalid. On October 8, 2014, NNPT filed its Answer to the counterclaims, in which it denied that
the Asserted Patents were non-infringed and invalid. On January 20, 2015, the Court held a Scheduling Conference and set the Markman
hearing for July 17, 2015 and trial to begin on February 8, 2016. On January 28, 2015, the Court appointed as mediator for
the parties, Hon. David Folsom, former Chief Judge of the United States District Court for the Eastern District of Texas. On February
24, 2015, the Court issued its Docket Control Order setting the Markman hearing for July 17, 2015 and trial to begin on
February 8, 2016. The Court also set an August 14, 2015 deadline to complete mediation. On June 11, 2015, Huawei filed a request
for inter partes review (“IPR”) of two of the Asserted Patents in the United States Patent and Trademark Office.
On July 9, 2015, the court rescheduled the Markman hearing date from July 17, 2015 to August 5, 2015.
Spherix Incorporated v. Verizon Services
Corp. et al., Case No. 1:14-cv-00721-GBL-TCB, in the United States District Court for the Eastern District of Virginia
On June 11, 2014, we initiated litigation
against Verizon Services Corp.; Verizon South Inc.; Verizon Virginia LLC; Verizon Communications Inc.; Verizon Federal Inc.; Verizon
Business Network Services Inc.; and MCI Communications Services, Inc. (collectively, “Verizon”) in Spherix Incorporated
v. Verizon Services Corp. et al., Case No. 1:14-cv-00721-GBL-TCB, in the United States District Court for the Eastern District
of Virginia (“the Court”) for infringement of U.S. Patent Nos. 6,507,648; 6,882,800; 6,980,564; and 8,166,533. On July
2, 2014, we filed an Amended Complaint in the case in which we added allegations of infringement of U.S. Patent No. 7,478,167.
On August 15, 2014, Verizon filed a motion to dismiss, or in the alternative, a motion for a more definite statement. On September
9, 2014, the Court issued a Scheduling Order adopting the parties’ Joint Proposed Discovery Plan. According to the Scheduling
Order, the Markman hearing is currently scheduled for March 16, 2015. On September 12, 2014, we filed our opposition to
Verizon’s motion to dismiss, and on September 26, 2014, Verizon filed its reply brief. On October 3, 2014, the Court held
a hearing on the motion to dismiss and issued a Minute Entry stating that motion was denied. The Court stated that an Order would
follow. On October 17, 2014, Verizon filed an Answer to our Amended Complaint. The parties agreed to narrow the case by dismissing
without prejudice the claims under U.S. Patent Nos. 6,507,648 and 6,882,800, with each party to bear its own costs and attorneys’
fees as to the dismissed claims. The parties filed a joint motion to that effect on October 27, 2014, which was granted on October
30, 2014. The parties further agreed to narrow the case by dismissing without prejudice the claims under U.S. Patent Nos. 8,166,533
and 7,478,167, and filed a joint motion to that effect on November 6, 2014. On November 13, 2014, the Court granted the parties’
Joint Motion to Dismiss the ‘533 Patent and the ‘167 Patent without prejudice, with each party to bear its own costs
and attorneys’ fees as to the dismissed claims. On December 18, 2014, the Court set the case for a five day trial beginning
on May 18, 2015. On January 9, 2015, the Company and Verizon each filed their motions for summary adjudication and entry of proposed
claim constructions. On January 12, 2015, the Court set the motions for summary adjudication for hearing on March 16, 2015 along
with the Markman hearing. On January 22, 2015, the parties filed their oppositions to the motions for summary adjudication
and entry of proposed claim constructions, and on February 5, 2015, the parties filed their reply briefs. On March 16, 2015, the
Court held the Markman hearing as scheduled. On March 25, 2015, the Court reset the May 18, 2015 jury trial date to August
10, 2015. On March 25, 2015, the Court clarified that the trial will be held on August 10, 11, 12, 13 and 17 of 2015. On, June
11, 2015, Verizon filed a request for inter partes review (“IPR”) of the Asserted Patent in the United States
Patent and Trademark Office. On July 1, 2015, the Court issued its Markman Order and also granted Defendants’ summary
judgments of non-infringement and invalidity for indefiniteness.
Spherix Incorporated v. Verizon Services
Corp. et al., Case No. 1:15-cv-0576-GBL-IDD, in the United States District Court for the Eastern District of Virginia
On May 1, 2015, we initiated litigation
against Verizon Services Corp.; Verizon South Inc.; Verizon Virginia LLC; Verizon Communications Inc.; Verizon Federal Inc.; Verizon
Business Network Services Inc.; MCI Communications Services, Inc.; Cellco Partnership d/b/a Verizon Wireless; and Cisco Systems,
Inc. (collectively, “Defendants”) in Spherix Incorporated v. Verizon Services Corp. et al., Case No. 1:15-cv-0576-GBL-IDD,
in the United States District Court for the Eastern District of Virginia for infringement of U.S. Patent Nos. 5,959,990; 6,111,876;
RE40,999; RE44,775; RE45,065; RE45,081; RE45,095; and RE45,121 (collectively, the “Asserted Patents”). The complaint
alleges that Defendants has used, manufactured, sold, offered for sale and/or imported technology that infringes the Asserted Patents.
We seek relief in the form of a finding of infringement of the Asserted Patents, damages sufficient to compensate us for Defendants’
infringement, together with pre-and post-judgment interest and costs, and our attorney’s fees. On June 30, 2105, we filed
an Amended Complaint in which we added claims of infringement of two of our newly issued patents, RE45,521 and RE45,598, which
are in the same family as the Asserted Patents. Defendants have not yet filed an answer in the case.
Cisco Systems, Inc. v. Spherix Incorporated,
Case No. 1:15-00559-SLR, in the United States District Court for the District of Delaware
On June 30, 2015, Cisco Systems,
Inc. initiated litigation against us in Cisco Systems, Inc. v. Spherix Incorporated, Case No. 1:15-00559-SLR, in the
United States District Court for the District of Delaware. The complaint relates solely to U.S. Patent No. RE45,598, which we
added to Spherix Incorporated v. Verizon Services Corp. et al., Case No. 1:15-cv-0576-GBL-IDD, in the United States
District Court for the Eastern District of Virginia. The complaint, which was filed on the same day the patent issued,
requests a declaration of non-infringement of the patent and alleges breach of contract to license the patent on fair,
reasonable and non-discriminatory (or FRAND) terms, breach of covenant of good faith and fair dealing implied in contract to
license the patent on FRAND terms’ and promissory estoppel.
Counterclaims
In the ordinary course of business, we,
along with our wholly-owned subsidiaries, 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, as stated above, defendants in the cases Spherix Incorporated v. VTech Telecommunications Ltd.; Spherix Incorporated
v. Uniden Corporation; Spherix Incorporated v. Cisco Systems Inc., and NNPT, LLC v. Huawei Investment & Holding Co., Ltd. et
al. have filed counterclaims against us. We have evaluated the counterclaims and believe they are without merit and have not
recorded a loss provision relating to such matters.
Recent Developments
On June 30, 2015, the Board of Directors of the Company accepted
the resignation of Richard Cohen as Chief Financial Officer of the Company, effective immediately. Mr. Cohen did not resign due
to any disagreement with the Company or its management regarding any matters relating to the Company’s operations, policies
or practices. In connection with the resignation of Mr. Cohen, on June 30, 2015, the Board appointed Frank Reiner, 52, the Interim
Chief Financial Officer of the Company, effective immediately. Mr. Reiner has been employed by the Company since March 2014 as
the Vice President, Licensing and Finance of the Company, and will continue to serve the Company in that capacity. Prior to joining
the Company, Mr. Reiner served as Vice President Global Licensing at Kudelski Group between 2012 and 2013, Vice President Patent
Licensing at Flextronics International between 2011 and 2012 and as Partner at Intellectual Value Creation Services, LLC between
2009 and 2011. Mr. Reiner received a BS in Computer Science from Embry-Riddle Aeronautical University and an MBA from Villanova
University.
Corporate Background
Spherix Incorporated was formed in
1967 as a scientific research company and for much of our history pursued drug development, including through Phase III clinical
studies, which were largely discontinued in 2012. In 2012 and 2013, we shifted our focus to being a firm that owns,
develops, acquires and monetizes intellectual property assets. Through our acquisitions of 108 patents and patent applications
from Rockstar Consortium US, LP (“Rockstar”) and acquisition of several hundred patents issued to Harris Corporation
as a result of our acquisition of North South Holdings, Inc. (“North South”), we have expanded our activities in wireless
communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality and cellular.
Our principal executive offices are located
at 6430 Rockledge Drive, Suite 503, Bethesda, MD 20817, and our telephone number is (703) 992-9260. Our principal Internet address
is www.spherix.com. The information found on our Internet website is not part of or deemed incorporated by reference in this prospectus
supplement.
THE OFFERING
| Common stock offered by us: |
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5,719,532 of shares of our common stock. |
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| Common stock to be outstanding after this offering (excluding warrant shares): |
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34,331,499 |
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| Warrants offered by us |
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Warrants to purchase 7,035,024 shares of our Common Stock will be offered in this offering. The Warrants will
be exercisable during the period commencing six months and one day after the date of initial issuance, and ending 5.5 years
from the date of issuance, with an exercise price of $0.43 per share of Common Stock. This prospectus supplement
also relates to the offering of shares of Common Stock issuable upon exercise of the Warrants. The Warrants
offered hereunder will not be listed on any securities exchange or quoted through any automated quotation
system. |
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| Right of Participation |
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The investors will have a right of participation for a period of 18 months following the closing of this offering.
See Description of the Securities We are Offering. |
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| Use of Proceeds: |
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We currently intend to use the net proceeds to meet our working capital needs and general corporate
purposes. See “Use of Proceeds” on page S-36 of this prospectus supplement. |
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| Risk Factors: |
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Our business and an investment in our common stock involve significant risks. See “Risk Factors” beginning on page S-11 of this prospectus supplement for a discussion of factors you should read and carefully consider before investing in our common stock. |
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| NASDAQ Capital Market symbol: |
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“SPEX” |
Except as otherwise indicated, all
information in this prospectus supplement is based on 28,611,967 shares of common stock outstanding as of June 30, 2015 and excludes,
as of June 30, 2015, the following:
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5.05 million shares of common stock issuable upon the exercise of outstanding stock options, having a weighted average exercise price of $5.07 per share. |
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0.77 million shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $13.70 per share. |
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1.7 million shares of common stock reserved for future issuance under our equity plans. |
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29,940 shares of redeemable Series I Preferred Stock, each of which are convertible into 20
shares of common stock, at a stated value of $167 per common share; 439,043 shares of Series H Preferred Stock, each of
which are convertible into 10 shares of common stock at a stated value of $83.50 per share; 1 share of Series C Preferred
Stock; 4,725 shares of Series D Preferred Stock; 834 Series D-1 Preferred Stock. |
RISK FACTORS
An investment in our common stock involves a high degree
of risk. Before deciding whether to invest in our common stock, you should consider carefully the risks described below, together
with other information in this prospectus supplement, the accompanying prospectus, the information and documents incorporated by
reference, and in any free writing prospectus that we have authorized for use in connection with this offering. If any of these
risks actually occurs, our business, financial condition, results of operations or cash flow could be seriously harmed. This could
cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. The risks and uncertainties
described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently
see as immaterial, may also harm our business.
Risks Related to Our Business
Because we have a limited operating history to evaluate our
company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays
frequently encountered by an early-stage company.
Since we have a limited operating history in our current business
of patent licensing and monetization, it will make it difficult for investors and securities analysts to evaluate our business
and prospects. You must consider our prospects in light of the risks, expenses and difficulties we face as an early
stage company with a limited operating history. Investors should evaluate an investment in our company in light of the
uncertainties encountered by early-stage companies in an intensely competitive industry and in which the potential licenses and/or
defendants from which the Company seeks to obtain recoveries are largely well capitalized companies with resources (financial and
otherwise) significantly greater than the Company’s. There can be no assurance that our efforts will be successful
or that we will be able to become profitable.
We continue to incur operating losses and concluded that
our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31,
2014 and December 31, 2013, respectively.
We have incurred losses from operations in prior years, including
2014 and 2013. Our net loss for the years ended December 31, 2014 and December 31, 2013 was $30.5 million and $18.0
million, respectively. Our accumulated deficit was $83.8 million at December 31, 2014 and $53.3 million at December 31,
2013. We may not achieve profitable operations.
Our assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting resulted in our conclusion that, as of March 31, 2015, our internal
control over financial reporting was not effective, due to the Company’s lack of segregation of duties, and lack of
controls in place to ensure that all material transactions and developments impacting the financial statements are reflected. We
can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control over financial
reporting in the future.
We expect to need additional capital to fund our growing
operations, and if we are unable to obtain sufficient capital we may be forced to limit the scope of our operations.
We expect that as our business continues to grow we will need
additional working capital. If adequate additional debt and/or equity financing is not available on reasonable terms
or at all, we may not be able to continue to expand our business, and we will have to modify our business plans accordingly. These
factors would have a material and adverse effect on our future operating results and our financial condition.
If we reach a point where we are unable to raise needed additional
funds to continue as a going concern, we will be forced to cease our activities and dissolve the Company. In such an
event, we will need to satisfy various creditors and other claimants, severance, lease termination and other dissolution-related
obligations and we may not have sufficient funds to pay to our stockholders.
Our independent registered public accounting firm has expressed
doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
In their reports for each of our last two fiscal years, our
independent registered public accountants stated that our consolidated financial statements for the years ended December 31,
2014 and 2013, respectively, were prepared assuming that we would continue as a going concern. Our ability to continue
as a going concern, which may hinder our ability to obtain future financing, is an issue raised as a result of recurring losses
from operations. We continue to experience net operating losses. Our ability to continue as a going concern
is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional
funding from the sale of our securities, increasing sales or obtaining loans from various financial institutions where possible. Our
continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will
prove successful.
An impairment charge could have a material adverse effect
on our financial condition and results of operations.
Given the significant decline in stock price during the three
months ended June 30, 2015 (the closing market price of our common stock was as of March 31, 2015 and June 30, 2015 was $0.84 and
$0.48, respectively), we will be required to assess impairment of our intangible assets. We also are required to assess goodwill
for impairment if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its
book value. In addition, we are required to test our finite-lived intangible assets for impairment if events occur or circumstances
change that would indicate the remaining net book value of the finite-lived intangible assets might not be recoverable. These events
or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity's
market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our
business, potential government actions and other factors. If the fair market value of our reporting units or finite intangible
assets is less than their book value, we could be required to record an impairment charge. The amount of any impairment could be
significant and could have a material adverse effect on our reported financial results for the period in which the charge is taken.
The focus of our business is to monetize intellectual property,
including through licensing and enforcement. We may not be able to successfully monetize the patents which we acquire
and thus may fail to realize all of the anticipated benefits of such acquisition.
We acquired our patents and patent applications during 2013
in three transactions which significantly changed the focus of our business and operations. We currently own several
hundred patent assets and although we may seek to commercialize and develop products, alone or with others, there is no assurance
that we will be able to successfully commercialize or develop products and such commercialization and development is not a core
focus of our business. There is significant risk involved in connection with our activities in which we acquire and
seek to monetize the patent portfolios that we acquired from Rockstar and North South. Our new business is commonly
referred to as an NPE model (or “non-practicing entity”) since we do not currently commercialize or develop products
under the recently acquired patents. As an entity, we have limited prior experience as an NPE. The acquisition
of the patents and an NPE business model could fail to produce anticipated benefits, or could have other adverse effects that we
do not currently foresee. Failure to successfully monetize our patent assets or to operate an NPE business may have
a material adverse effect on our business, financial condition and results of operations.
In addition, the acquisition of patent portfolios is subject
to a number of risks, including, but not limited to the following:
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There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During that time lag, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial position; and |
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The integration of a patent portfolio will be a time consuming and expensive process that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisition. |
Therefore, there is no assurance that the monetization of the
patent portfolios we acquire will be successful, will occur timely or in a timeframe that is capable of prediction or will generate
enough revenue to recoup our investment.
We presently are reliant exclusively on the patent assets
we acquired from North South and Rockstar. If we are unable to commercialize, license or otherwise monetize such assets
and generate revenue and profit through those assets or by other means, there is a significant risk that our business will fail.
If our efforts to generate revenue from our patent portfolios
acquired from Rockstar and North South fail, we will have incurred significant losses. We may not seek and may be unable
to acquire additional assets and therefore may be wholly reliant on our present portfolios for revenue. If we are unable
to generate revenue from our current assets and fail to acquire any additional assets, our business will likely fail.
In connection with our business, we may commence legal proceedings
against certain companies whose size and resources could be substantially greater than ours; we expect such litigation to be time-consuming,
lengthy and costly which may adversely affect our financial condition and our ability to survive or operate our business, even
if the patents are valid and the cases we bring have merit.
To license or otherwise monetize our patent assets, we may be
required to commence legal proceedings against certain large and well established and well capitalized companies. For
instance, we are currently involved in litigation against Cisco Systems, Uniden, VTech Telecommunications, Verizon Services, Huawei
and Juniper Networks, each of whom is much larger and more well capitalized than we are. We may allege that such companies
infringe on one or more of our patents. Our viability could be highly dependent on the outcome of this litigation, and
there is a risk that we may be unable to achieve the results we desire from such litigation. The defendants in litigation
brought by us are likely to be much larger than us and have substantially more resources than we do, which would make success of
our litigation efforts subject to factors other than the validity of our patents or infringement claims asserted. The
inability to successfully enforce our patents against larger more well-capitalized companies could result in realization through
settlement or election to not pursue certain infringers, or less value from our patents, and could result in substantially lower
than anticipated revenue realized from infringements and lower settlement values.
We anticipate that legal proceedings against infringers of our
patents may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes
regarding the assertion of patents and other intellectual property rights are highly complex and technical. In addition,
courts and the laws are constantly changing in a manner that could increase our fees and expenses for pursuing infringers, and
also could result in our assumption of legal fees of defendants if we are unsuccessful. Once initiated, we may be forced
to litigate against others to enforce or defend our intellectual property rights or to determine the validity and scope of other
parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which we are involved
may allege defenses and/or file counterclaims in an effort to avoid or limit liability and damages for patent infringement. Potential
defendants could challenge our patents and our actions by commencing lawsuits seeking declaratory judgments declaring our patents
invalid, not infringed, or for improper or unlawful activities. If such defenses or counterclaims are successful, they
may preclude our ability to obtain damages for infringement or derive licensing revenue from the patents. A negative
outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact
our business. For example, on July 1, 2015, the United States District Court for the Eastern District of Virginia, the
Court issued a Markman Order interpreting certain key claims in favor of the defendants in one of our actions against Verizon,
resulting in the dismissal of our claims against Verizon with respect to one of our patents. Additionally, we anticipate that our
legal fees and other expenses will be material and will negatively impact our financial condition and results of operations and
may result in our inability to continue our business.
Parties who are alleged infringers of our patent rights may
also challenge the validity of our patents in proceedings before the United States Patent and Trademark Office. These
potential proceedings include ex parte reexaminations, inter partes review, or covered business method patent challenges. These
proceedings could result in certain of our patent claims being dismissed or certain of our patents being invalidated. We
would expend signification legal fees to defend against such actions.
We have been the subject of litigation and, due to the nature
of our business, may be the target of future legal proceedings that could have an adverse effect on our business and our ability
to monetize our patents.
In the ordinary course of business, we, along with our wholly-owned
subsidiaries, 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, defendants in the
cases Spherix Incorporated v. VTech Telecommunications Ltd.; Spherix Incorporated v. Uniden Corporation; Spherix Incorporated
v. Cisco Systems Inc., and NNPT, LLC v. Huawei Investment & Holding Co., Ltd. et al. have filed counterclaims
against us. We have evaluated the counterclaims and believe they are without merit.
We may seek to internally develop additional new inventions
and intellectual property, which would take time and be costly. Moreover, the failure to obtain or maintain intellectual
property rights for such inventions would lead to the loss of our investments in such activities.
Part of our business may include the internal development of
new inventions or intellectual property that we will seek to monetize. However, this aspect of our business would likely
require significant capital and would take time to achieve. Such activities could also distract our management team
from its present business initiatives, which could have a material and adverse effect on our business. There is also
the risk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss
of our investments in time and resources in such activities.
In addition, even if we are able to internally develop new inventions,
in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would heavily
rely upon, a proprietary position with respect to such inventions and intellectual property. However, there are significant
risks associated with any such intellectual property we may develop principally, including the following:
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patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents; |
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we may be subject to interference proceedings; |
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we may be subject to opposition proceedings in the U.S. or foreign countries; |
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any patents that are issued to us may not provide meaningful protection; |
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we may not be able to develop additional proprietary technologies that are patentable; |
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other companies may challenge patents issued to us; |
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other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; |
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other companies may design around technologies we have developed; and |
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enforcement of our patents could be complex, uncertain and very expensive. |
We cannot be certain that patents will be issued as a result
of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For
example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In
addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be
certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It
is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require
us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As
to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor
under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual
property rights for our inventions would lead to the loss our business.
Moreover, patent application delays could cause delays in recognizing
revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing
technologies are developed or introduced into the market.
New legislation, regulations or court rulings related to
enforcing patents could harm our new line of business and operating results, or could cause us to change our business model.
If Congress, the United States Patent and Trademark Office or
courts implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders,
these changes could negatively affect our business. For example, limitations on the ability to bring patent enforcement
claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases
in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent
or other intellectual property rights.
On September 16, 2011, the Leahy-Smith America Invents
Act (the “Leahy-Smith Act”), was signed into law. The Leahy-Smith Act includes a number of significant changes
to United States patent law. These changes include provisions that affect the way patent applications will be prosecuted
and may also affect patent litigation. The U.S. Patent Office has been developing regulations and procedures to govern
administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act recently
became effective. Accordingly, it is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation
of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding
the prosecution of patent applications and the enforcement or defense of our issued patents, all of which could have a material
adverse effect on our business and financial condition.
On June 4, 2013, the Obama Administration issued executive
orders and legislative recommendations. The legislative measures recommended by the Obama Administration include requiring
patentees and patent applicants to disclose the “Real Party-in-Interest”, giving district courts more discretion to
award attorney’s fees to the prevailing party, requiring public filing of demand letters such that they are accessible to
the public, and protecting consumers against liability for a product being used off-the shelf and solely for its intended use.
The executive orders require the United States Patent and Trademark
Office (the “USPTO”) to make rules to require the disclosure of the Real Party-in-Interest by requiring patent applicants
and owners to regularly update ownership information when they are involved in proceedings before the USPTO (e.g. specifying the
“ultimate parent entity”) and requiring the USPTO to train its examiners to better scrutinize functional claims to
prevent allowing overly broad claims.
On December 5, 2013, the United States House of Representatives
passed a patent reform titled the “Innovation Act” by a vote of 325-91. Representative Bob Goodlatte, with
bipartisan support, introduced the Innovation Act on October 23, 2013. The Innovation Act, as passed by the House,
has a number of major changes. Some of the changes include a heightened pleading requirement for the filing of patent
infringement claims. It requires a particularized statement with detailed specificity regarding how each asserted claim
term corresponds to the functionality of each accused instrumentality. The Innovation Act, as passed by the House, also
includes fee-shifting provisions which provide that, unless the non-prevailing party of a patent infringement litigation positions
were objectively reasonable, such non-prevailing party would have to pay the attorney’s fees of the prevailing party.
The Innovation Act also calls for discovery to be limited until
after claim construction. The patent infringement plaintiff must also disclose anyone with a financial interest in either
the asserted patent or the patentee and must disclose the ultimate parent entity. When a manufacturer and its customers
are sued at the same time, the suit against the customer would be stayed as long as the customer agrees to be bound by the results
of the case.
Representative Goodlatte reintroduced the Innovation Act as
H.R. 9 on February 2, 2015. The bill has 22 co-sponsors, made up of 11 Democrats and 11 Republicans. On February
5, 2015, the bill was referred to the House Committee on the Judiciary for further consideration, and on March 17, 2015, the bill
was referred to the House Subcommittee on Courts, Intellectual Property, and the Internet.
On March 3, 2015, S.632 known as the “Support Technology
and Research for Our Nations Growth Patents Act of 2015” (“the STRONG Act”) was introduced into the Senate by
Senator Christopher Coons. The STRONG Act prescribes a number of changes in current patent law, including how the USPTO and the
Patent Trial and Appeal Board (PTAB) handle post-issuance patent proceedings. One change proposed by the Act is that the PTAB construe
patent claims under the same “ordinary and customary meaning” standard in inter partes and post grant review proceedings
as applied in district court litigation. The Act also provides additional grounds for a patent owner to submit claim amendments
during a post-issuance review. The Act directs the Supreme Court to eliminate the model complaint for patent infringement. It also
authorizes state attorneys general to act in preventing bad faith demand letters from being sent to accused infringers. The Act
would allow such behavior to be treated as an unfair or deceptive act or practice in violation of the Federal Trade commission
Act.
On April 29, 2015, the Energy and Commerce Committee voted to
advance a bill to the full U.S. House of Representatives known as the “Targeting Rogue and Opaque Letters Act” (“the
TROL Act”) (H.R. 2045). This bill is aimed at halting misleading demand letters sent by patent “trolls.” The
bill would give the Federal Trade Commission and state attorneys general the authority to impose civil penalties on companies that
send misleading and bad faith letters to recipients demanding that they license patents.
Also on April 29, 2015, a group of bipartisan Senators introduced
S. 1137, another new patent reform bill titled, the “Protecting American Talent and Entrepreneurship” (“the PATENT
Act”). The bill includes provisions requiring patent plaintiffs to clearly identify each patent and claim allegedly infringed,
the products or processes, accused of infringing, and how the infringement occurs. The bill also provides that if end users of
a product are sued for infringement, the manufacturer can step-in to litigate and the suit against the users will be stayed. A
fee-shifting provision is also included that provides winning parties a chance to show that the losing party’s position and
conduct were not “objectively reasonable.”
On April 29, 2014, the U.S. Supreme Court relaxed the standard
for fee shifting in patent infringement cases. Section 285 of the Patent Act provides that attorneys’ fees
may be awarded to a prevailing party in a patent infringement case in “exceptional cases.”
In Octane Fitness, LLC v. Icon Health & Fitness,
Inc., the Supreme Court overturned the U.S. Court of Appeals for the Federal Circuit decisions limiting the meaning of “exceptional
cases.” The U.S. Supreme Court held that an exceptional case “is simply one that stands out from others
with respect to the substantive strength of a party’s litigation position” or “the unreasonable manner in which
the case was litigated.” The U.S. Supreme Court also rejected the “clear and convincing evidence”
standard for making this inquiry. The Court held that the standard should be a “preponderance of the evidence.”
In Highmark Inc. v. Allcare Health Mgmt. Sys., Inc.,
the U.S. Supreme Court held that a district court’s grant of attorneys’ fees is reviewable by the U.S. Court of
Appeals for the Federal Circuit only for “abuse of discretion” by the district court instead of the de novo standard
that gave no deference to the district court.
These pair of decisions lowered the threshold for obtaining
attorneys’ fees in patent infringement cases and increased the level of deference given to a district court’s fee-shifting
determination.
These two cases will make it much easier for district courts
to shift a prevailing party’s attorneys’ fees to a non-prevailing party if the district court believes that the case
was weak or conducted in an abusive manner. Defendants that get sued for patent infringement by non-practicing entities
may elect to fight rather than settle the case because these U.S. Supreme Court decisions make it much easier for defendants to
get attorneys’ fees.
On June 19, 2014, the U.S. Supreme Court decided Alice
Corp. v. CLS Bank International in which the Court addressed the question of whether patents related to software are
patent eligible subject matter. The Supreme Court did not rule that patents related to software were per se invalid
or that software-related inventions were unpatentable. The Supreme Court outlined a test that the courts and the USPTO
must apply in determining whether software-related inventions qualify as patent eligible subject matter. We must now
wait and see how the federal district courts and the USPTO will apply this ruling. The test outlined by the Supreme
Court could potentially affect the value of some of the patents we hold.
On January 20, 2015, the U.S. Supreme Court decided another
patent case, Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. In Teva, the Court overturned the long-standing
practice that claim construction decision made by district courts were given de novo review on appeal. Instead,
the Supreme Court held that when claim construction is based on extrinsic evidence, a district court’s findings of subsidiary
facts are to be reviewed for clear error, while its ultimate claim construction is to be reviewed de novo. This
change in how claim construction decisions are reviewed on appeal may have an impact on how parties handle patent litigation in
the district courts. This could increase our litigation expenses. The full impact of the Teva decision
on patent litigation at the district court level is yet to be determined.
On May 26, 2015, the U.S. Supreme Court decided Commil USA
LLC v. Cisco Systems, Inc. In this case, the Supreme Court held that a good faith belief that a patent is invalid does not
provide an accused infringer with a defense against a charge of inducing patent infringement. The Court stated that permitting
such a defense would undermine the statutory presumption of validity enjoyed by issued U.S. patents under 35 U.S.C. § 282.
The long term affect of this ruling is yet to be seen as it is implemented by the district courts. However, this ruling has eliminated
a defense available to parties accused of inducing patent infringement. This result could be beneficial to our patent enforcement
efforts.
It is impossible to determine the extent of the impact of any
new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws in their
current or modified forms. Compliance with any new or existing laws or regulations could be difficult and expensive,
affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results
of operations.
Our acquisitions of patent assets may be time consuming,
complex and costly, which could adversely affect our operating results.
Acquisitions of patent or other intellectual property assets,
which are critical to our business plan, are often time consuming, complex and costly to consummate. We may elect to
not pursue any additional patents while we focus our efforts on monetizing our existing assets. We may utilize many
different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As
a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations
even if the acquisition is ultimately not consummated, or if we determine to acquire additional patents or other assets. Even
if we are able to acquire particular patent assets, there is no guarantee that we will generate sufficient revenue related to those
patent assets to offset the acquisition costs, and we may be required to pay significant amounts of deferred purchase price if
we monetize those patents above certain thresholds. While we will seek to conduct confirmatory due diligence on the
patent assets we are considering for acquisition, we may acquire patent assets from a seller who does not have complete analysis
of infringements or claims, have valid or sole title or ownership to those assets, or otherwise provides us with flawed ownership
rights, including invalid or unenforceable assets. In those cases, we may be required to spend significant resources
to defend our interest in the patent assets and, if we are not successful, our acquisition may be worthless, in which case we could
lose part or all of our investment in the assets.
We may also identify patent or other intellectual property assets
that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize
and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated,
proves to be unprofitable for us. Acquisitions involving issuance of our securities could be dilutive to existing stockholders
and could be at prices lower than those prices reflected in the trading markets. These higher costs could adversely
affect our operating results and, if we incur losses, the value of our securities will decline.
In addition, we may acquire patents and technologies that are
in the early stages of adoption. Demand for some of these technologies will likely be untested and may be subject to
fluctuation based upon the rate at which our licensees or others adopt our patents and technologies in their products and services. As
a result, there can be no assurance as to whether technologies we acquire or develop will have value that can be realized through
licensing or other activities.
If we are unable to successfully monetize our patent assets,
or if we cannot obtain sufficient capital to see our legal proceedings to fruition, our business model may be subject to change.
Our current business model of monetizing patent assets primarily
through litigation against companies infringing on our intellectual property results in the potential for sporadic income. This
makes us dependent on successful outcomes of our litigation claims, as well as obtaining financing from third-party sources to
fund these litigations. If we are unable to generate revenue and are unable to raise additional capital on commercially reasonable
terms, or if changes in law make our current business model infeasible, then we may determine to change our business model in a
manner that would be anticipated to generate revenue on a more regular basis. If we determine to change our business model, it
may be difficult to predict our future prospects. Furthermore, we may incur significant expenses in any such shift in business
model, or our management may have to devote significant resources into developing, or may not be well suited for, any such new
business model.
We have ongoing financial obligations to certain stockholders
under the terms of our acquisition of certain patents from Rockstar. Our failure to comply with our obligations to these
stockholders could have a material adverse effect on the value of our assets, our financial performance and our ability to sustain
operations.
In connection with our agreement to acquire Rockstar patents
entered on December 31, 2013, the Company and Rockstar entered into a series of agreements which require us to redeem $20.0
million of stated value of Series I Redeemable Convertible Preferred Stock in $5 million increments on each of the 6, 12, 18 and
24 month anniversaries of the purchase. While as of July 15, 2015 we have redeemed $15.0 million of these shares, we
presently have inadequate cash to fund the remaining payment. In the event that such payment is not timely made, the
holders of our Series I Redeemable Convertible Preferred Stock may employ certain remedies, including the imposition of interest
at a rate of 15% per annum from the closing date on unpaid and unconverted amounts due, and to reduce the redemption obligations
through sale or recovery of patents we purchased from Rockstar in that acquisition at a value equal to unconverted amounts due
which have been pledged as collateral for such obligations in the case of certain defaults as set forth in our agreements with
Rockstar. Rockstar has filed a UCC-1 covering our redemption obligations and has the right to foreclose on the collateral. The
redemption obligation is also required to be satisfied in the event that we engage in certain capital raising transactions (among
other instances, where such transactions result in net proceeds to us in excess of $7.5 million) and from recoveries on other assets. The
obligation to utilize capital from financings and from other sources or the loss of patents to Rockstar upon a default could adversely
impact our liquidity and financial position.
In January 2015, Rockstar transferred its remaining outstanding
Series I Redeemable Convertible Preferred Stock, as well as its other stock in Spherix (including our Series H Convertible Preferred
Stock) to RPX Clearinghouse LLC (“RPX”), an affiliate of RPX Corporation. Since RPX’s business model is to lower
to risk of patent litigation against entities such as Spherix, RPX may take stances that are adverse to Spherix and its other stockholders.
In addition, RPX will be entitled to receive a contingent recovery
percentage of future profits from licensing, settlements and judgments against defendants with respect to patents purchased by
us from Rockstar. In particular, once we recover a certain amount of proceeds pertaining to the patents acquired from
Rockstar in June 2013, which amount will not exceed $8.0 million, net of certain expenses, we will be required to make a payment
of up to $13.0 million to Rockstar within six months of such recovery. Furthermore, once we recover a certain level
of proceeds pertaining to each portfolio of patents we acquired from Rockstar, we will be required to make participation payments
to RPX which, depending on how much we recover, could range from 30% of the amount we recover to 70% of the amount we recover in
any given quarter, net of certain expenses. Our ability to fund these payments, as well as other payments that may become
due in respect of our acquisition of patents from Rockstar in December 2013, will depend on the liquidity of our assets, recoveries,
alternative demands for cash resources and access to capital at the time. Furthermore, our obligation to fund these
payments could materially adversely impact our liquidity and financial position.
In certain acquisitions of patent assets, we may seek to
defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage
and could result in harm to our business.
We have limited capital and may seek to negotiate acquisitions
of patent or other intellectual property assets where we can defer payments, finance a portion of the acquisition price or have
an obligation to make contingent payments upon recovery of value from those assets. These types of debt financing, deferred
payment or contingent arrangements may not be as attractive to sellers of patent assets as receiving the full purchase price for
those assets in cash at the closing of the acquisition, and, as a result, we might not compete effectively against other companies
in the market for acquiring patent assets, many of whom have greater cash resources than we have. We may also finance
our activities by issuance of debt which could require interest and amortization payments which we may not have the ability to
repay, in which case we could be in default under the terms of loan agreements. We may pledge our assets as collateral
and if we are in default under our agreements, we could lose our assets through foreclosure or similar processes or become insolvent
or bankrupt in which case investors could lose their entire investment.
Any failure to maintain or protect our patent assets or other
intellectual property rights could significantly impair our return on investment from such assets and harm our brand, our business
and our operating results.
Our ability to operate our new line of business and compete
in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired patent assets and
other intellectual property. To protect our proprietary rights, we will rely on a combination of patent, trademark,
copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. No
assurances can be given that any of the measures we undertake to protect and maintain our assets will have any measure of success.
We will be required to spend significant time and resources
to maintain the effectiveness of our assets by paying maintenance fees and making filings with the USPTO. We may acquire
patent assets, including patent applications, which require us to spend resources to prosecute the applications with the USPTO
prior to issuance of patents. Further, there is a material risk that patent related claims (such as, for example, infringement
claims (and/or claims for indemnification resulting therefrom), unenforceability claims, or invalidity claims) will be asserted
or prosecuted against us, and such assertions or prosecutions could materially and adversely affect our business. Regardless
of whether any such claims are valid or can be successfully asserted, defending such claims could cause us to incur significant
costs and could divert resources away from our other activities.
Despite our efforts to protect our intellectual property rights,
any of the following or similar occurrences may reduce the value of our intellectual property:
| · |
our applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated; |
| · |
issued trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing other properties; |
| · |
our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or |
| · |
our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute. |
Moreover, we may not be able to effectively protect our intellectual
property rights in certain foreign countries where we may do business or enforce our patents against infringers in foreign countries. If
we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated,
and our business would be harmed.
Weak global economic conditions may cause infringing parties
to delay entering into licensing agreements, which could prolong our litigation and adversely affect our financial condition and
operating results.
Our business plan depends significantly on worldwide economic
conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty
about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial
news and declines in income or asset values. This response could have a material negative effect on the willingness
of parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering
into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business.
If we are not able to protect our intellectual property from
unauthorized use, it could diminish the value of our products and services, weaken our competitive position and reduce our revenue.
Our success depends in large part on our intellectual property
ownership. In addition, we believe that our trade secrets and non-patented technology may be key to identifying and
differentiating our products and services from those of our competitors. We may be required to spend significant resources
to monitor and police our intellectual property rights. If we fail to successfully enforce our intellectual property
rights, the value of our products and services could be diminished and our competitive position may suffer.
We rely on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Third-parties
could copy or otherwise obtain and use our property without authorization or develop similar information and property independently,
which may infringe upon our proprietary rights. We may not be able to detect infringement and may lose competitive position
in the market before we do so, including situations which may damage our ability to succeed in licensing negotiations or legal
proceedings such as patent infringement cases we may bring. In addition, competitors may design around our technologies
or develop competing technologies. Intellectual property protection may also be unavailable or limited in some foreign
countries.
If we resort to legal proceedings to enforce our intellectual
property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at
risk if we are unsuccessful in, or cannot afford to pursue, those proceedings, or that contingent fees could be a significant portion
of our recovery. We will also rely on trade secrets and contract law to protect some of our proprietary technology. We
will enter into confidentiality and invention agreements with inventors, employees and consultants and common interest agreements
with parties associated with our litigation efforts. Nevertheless, these agreements may not be honored and they may
not effectively protect our right to our privileged, confidential or proprietary information or our patented or un-patented trade
secrets and know-how. Others may independently develop substantially equivalent proprietary information and techniques
or otherwise gain access to our trade secrets and know-how.
We face evolving regulation of corporate governance and public
disclosure that may result in additional expenses and continuing uncertainty.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Dodd–Frank Wall Street Reform and Consumer Protection Act, SEC regulations
and NASDAQ Stock Market LLC rules are creating uncertainty for public companies. We are presently evaluating and monitoring
developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur
or the timing of these costs. These new or changed laws, regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest the resources
necessary to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If
our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or
governing bodies, due to ambiguities related to practice or otherwise, regulatory authorities may initiate legal proceedings against
us, which could be costly and time-consuming, and our reputation and business may be harmed.
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective internal controls over financial reporting are necessary
for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial
reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate
and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the
requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies,
procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting,
we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of
our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements
of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If
we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.
Our assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting resulted in our conclusion that, as of March 31, 2015, our internal
control over financial reporting was not effective, due to the Company’s lack of segregation of duties, and difficulty in
applying complex accounting principles, including fair value of derivatives, options and warrants as well as stock based compensation
accounting. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal
control over financial reporting in the future.
With respect to the year ended December 31, 2014 and the quarter
ended March 31, 2015, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness
of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management concluded
that our disclosure controls and procedures were not effective as of December 31, 2014 or March 31, 2015.
If we make acquisitions, it could divert management’s
attention, cause ownership dilution to our shareholders and be difficult to integrate.
Following our acquisition of North South in September 2013,
we have grown rapidly and we expect to continue to evaluate and consider future acquisitions. Acquisitions generally
involve significant risks, including difficulties in the assimilation of the assets, services and technologies we acquire or industry
overlay on which the patent assets read, diversion of management’s attention from other business concerns, overvaluation
of the acquired assets, and the acceptance of the acquired assets and/or claims. Acquisitions may not be successful,
which can have a number of adverse effects upon us including adverse financial effects and may seriously disrupt our management’s
time. The integration of acquired assets may place a significant burden on management and our internal resources. The
diversion of management attention and any difficulties encountered in the integration process could harm our business.
If we fail to manage our existing assets and patent inventory
and third party relationships (such as attorneys and experts) effectively, our revenue and profits could decline and should we
fail to acquire additional revenues from license fees, our growth could be impeded.
Our success depends in part on our ability to manage our existing
portfolios of patent assets and manage our third party relationships necessary to monetize our assets effectively. Our
attorneys and experts are not bound by long-term contracts that ensure us a consistent access to expertise necessary to enforce
our patents, which is crucial to our ability to generate license revenues and prosecute infringers. In addition, attorneys
and experts can change the cost of the services they provide, such as contingent fees that we are required to pay, and our arrangements
often required an increasing percentage of recoveries to be devoted to attorney’s fees depending on the length of time or
stage of the case prior to settlement or recovery, reducing the residual amount available to us following conclusion of a case. If
an attorney, seller, inventor or expert decides not to provide needed assistance in connection with a case, or provides assistance
to prospective licensees or defendants, we may not be able to timely replace this expertise with that from other sources or prevent
such assistance to others from damaging our claims and prospects for recovery or licensing thus resulting in potentially lost cases,
opportunities, or revenues and potentially diminishing the value of our patent assets. The ability to utilize attorneys,
sellers’ personnel, inventors or experts will depend on various factors, some of which are beyond our control.
Risks Related to Ownership of Our Common Stock
Our common stock may be delisted from The NASDAQ Capital
Market if we fail to become compliant with continued listing standards by September 21, 2015.
Our common stock is currently traded on The NASDAQ Capital Market
under the symbol “SPEX.” If we fail to meet any of the continued listing standards of The NASDAQ Capital
Market, our common stock could be delisted from The NASDAQ Capital Market. These continued listing standards include
specifically enumerated criteria, such as:
| · |
a $1.00 minimum closing bid price; |
| · |
stockholders’ equity of $2.5 million; |
| · |
500,000 shares of publicly-held common stock with a market value of at least $1 million; |
| · |
300 round-lot stockholders; and |
| · |
compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority. |
Over the past several years, including at certain times prior
to entering into our new line of business, we had several instances of NASDAQ deficiencies.
On April 20, 2012, the Company received a deficiency notice
from NASDAQ regarding the bid price of our common stock. Following a 1 for 20 reverse stock split, on October 8,
2012, NASDAQ provided confirmation to us that we regained compliance with Marketplace Rule 5550(a)(2) since the closing bid price
of its common stock had traded at $1.00 per share or greater for at least ten (10) consecutive business days. This was
the second time the Company employed a reverse stock split to avoid NASDAQ delisting.
On September 25, 2012, the Company received written notification
from NASDAQ advising that the minimum number of publicly held shares of our common stock had fallen below the minimum 500,000 shares
required for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Rule 5550(a)(4). As a result of our November
2012 private placement transaction, the Company was advised by NASDAQ that it regained compliance with Rule 5550(a)(4).
On December 31, 2012, our total stockholders’ equity
was $854,000, and was below the $2.5 million listing standard required by NASDAQ. In March 2013, we exchanged warrants
issued in November 2012 for Series C Preferred Stock, effectively increasing total stockholders’ equity to approximately
$2.8 million.
On March 24, 2015, we received a deficiency notice from
NASDAQ that the bid price of our common stock no longer met NASDAQ’s continued listing requirements. In
order to regain compliance with the NASDAQ listing rules, our common stock will need to have a closing bid price of at least
$1.00 per share for at least 10 consecutive trading days no later than September 21, 2015. We have been informed by NASDAQ
that they would likely grant us a second 180-day grace period, so long as we undertake to have a reverse stock split such
that we meet the minimum closing bid price requirement for 10 consecutive trading days prior to the end of such period. As of
July 15, 2015, the closing sale price of our common stock was $0.426 per share. If we do not effect a reverse stock split, or
if NASDAQ does not grant us an extension with respect to the effectuation of that reverse stock split, then it is likely that
our common stock will be delisted from the Nasdaq Capital Market. Furthermore, even if we do effect such a reverse stock
split, our stockholders may bring actions against us in connection with that reverse stock split that could divert management
resources, cause us to incur significant expenses or cause our common stock to be further diluted.
If we fail to comply with NASDAQ’s continued listing standards,
we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board
or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In
addition, delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially
adversely affect our ability to raise capital on terms acceptable to us, or at all.
Finally, delisting of our common stock could result in our common
stock becoming a “penny stock” under the Securities Exchange Act. The
principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the
shares but must trade it on an unsolicited basis. Penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies
information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide
the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and sales person in the transaction,
and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition,
the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer
must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the
secondary market for shares that become subject to those penny stock rules.
Our share price may be volatile and there may not be an active
trading market for our common stock.
There can be no assurance that the market price of our common
stock will not decline below its present market price or that there will be an active trading market for our common stock. The
market prices of technology or technology related companies have been and are likely to continue to be highly volatile. Fluctuations
in our operating results and general market conditions for technology or technology related stocks could have a significant impact
on the volatility of our common stock price. We have experienced significant volatility in the price of our common stock. From
January 1, 2013 through July 14, 2015, the share price of our common stock (on a split-adjusted basis) has ranged from a high
of $27.86 to a low of $0.37. The reason for the volatility in our stock is not well understood and may continue. Factors
that may have contributed to such volatility include, but are not limited to:
| · |
developments regarding regulatory filings; |
| · |
our funding requirements and the terms of our financing arrangements; |
| · |
technological innovations; |
| · |
introduction of new technologies by us or our competitors; |
| · |
material changes in existing litigation; |
| · |
changes in the enforceability or other matters surrounding our patent portfolios; |
| · |
government regulations and laws; |
| |
|
| · |
public sentiment relating to our industry; |
| · |
developments in patent or other proprietary rights; |
| · |
the number of shares issued and outstanding; |
| · |
the number of shares trading on an average trading day; |
| · |
performance of companies in the non-performing entity space generally; |
| · |
announcements regarding other participants in the technology and technology related industries, including our competitors; |
| · |
block sales of our shares by stockholders to whom we have sold stock in private placements, or the cessation of transfer restrictions with respect to those shares; and |
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market speculation regarding any of the foregoing. |
We could fail in future financing efforts or be delisted
from The NASDAQ Capital Market if we fail to receive stockholder approval when needed.
We are required under the NASDAQ rules to obtain stockholder
approval for any issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock
outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that
is not deemed to be a “public offering” by NASDAQ. Funding of our operations and acquisitions of assets
may require issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock
outstanding, but we might not be successful in obtaining the required stockholder approval for such an issuance. If
we are unable to obtain financing due to stockholder approval difficulties, such failure may have a material adverse effect on
our ability to continue operations.
Dividends on our common stock are not likely.
We have not paid dividends since our change in business and
we do not anticipate paying cash dividends on our common stock in the foreseeable future. Investors must look solely
to the potential for appreciation in the market price of the shares of our common stock to obtain a return on their investment.
Because of the Rights Agreement and “Anti-Takeover”
provisions in our Certificate of Incorporation and Bylaws, a third party may be discouraged from making a takeover offer that could
be beneficial to our stockholders.
Effective as of January 24, 2013, we adopted a shareholder
rights plan. The effect of this rights plan and of certain provisions of our Certificate of Incorporation, By-Laws,
and the anti-takeover provisions of the Delaware General Corporation Law, could delay or prevent a third party from acquiring us,
purchasing a significant portion of our stock or replacing members of our Board of Directors, or make more costly any attempt to
acquire control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These
factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in
the market price being lower than it would be without these provisions.
In addition, defendants in actions seeking to enforce our patents
may seek to influence our Board of Directors and stockholders by acquiring positions in the Company to force consideration of settlement
or licensing proposals that may be less desirable than other outcomes such as litigation with respect to our monetization or patent
enforcement activities. The effect of such influences on our Company or our corporate governance could reduce the value
of our monetization activities and have an adverse effect on the value of our assets. The effect of anti-takeover provisions
could impact the ability of prospective major stockholders (which may include parties adverse to us in our litigations) to obtain
influence in the Company or representation on the Board of Directors or acquire a significant ownership position and such result
may have an adverse effect on the Company and the value of its securities.
Furthermore, in the event we consummate certain fundamental
transactions, we are required to redeem such portion of the outstanding shares of Series I Preferred Stock as shall equal (i) 50%
of the net proceeds of the fundamental transaction after deduction of the amount of net proceeds required to leave us with cash
and cash equivalents on hand of $5.0 million and up until the net proceeds leave us with cash and cash equivalents on hand of $7.5
million and (ii) 100% of the net proceeds of the fundamental transaction thereafter. For these purposes, a fundamental transaction
includes, among other things, the realization by us of net proceeds from any financing, recovery, sale, license fee or other revenue
received by the Company (including on account of any intellectual property rights held by us and not just in respect of the patents)
during any fiscal quarter in an amount which would cause our cash or cash equivalents to exceed $5,000,000. Thus, a
significant portion of any amount we raise in a financing transaction or generate from monetization of our intellectual property
may need to be used to redeem all or a portion of our Series I Preferred Stock rather than being used to finance our operations. This
may also discourage third parties from entering into fundamental transactions with us that do not result in a complete change in
control.
We may be unable to issue securities under our shelf registration
statement, which may have an adverse effect on our liquidity.
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. Furthermore, Instruction
I.B.6. of Form S-3 requires that the issuer have at least one class of common equity securities listed and registered on a national
securities exchange. If we are not able to obtain compliance with applicable NASDAQ rules, we will no longer be able to rely upon
that Instruction. If we cannot sell securities under our shelf registration, we may be required to utilize more costly and time-consuming
means of accessing the capital markets, which could materially adversely affect our liquidity and cash position.
It may be difficult to predict our financial performance
because our quarterly operating results may fluctuate.
Our revenues, operating results and valuations of certain assets
and liabilities may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You
should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our
results of operations may fall below the expectations of market analysts and our own forecasts. If this happens, the
market price of our common stock may fall significantly. The factors that may affect our quarterly operating results
include the following:
| · |
fluctuations in results of our enforcement and licensing activities or outcome of cases; |
| · |
fluctuations in duration of judicial processes and time to completion of cases; |
| · |
the timing and amount of expenses incurred to negotiate with licensees, litigate cases and obtain settlements from infringers; |
| · |
the impact of our anticipated need for personnel and expected substantial increase in headcount; |
| · |
fluctuations in the receptiveness of courts and juries to significant damages awards in patent infringement cases and speed to trial in the jurisdictions in which our cases may be brought and the accepted royalty rates attributable to damages analysis for patent cases generally, including the royalty rates for industry standard patents which we may own or acquire; |
| · |
worsening economic conditions which cause revenues or profits attributable to infringer sales of products or services to decline; |
| · |
changes in the regulatory environment, including regulation of NPE activities or patenting practices, that may negatively impact our or infringers practices; |
| · |
the timing and amount of expenses associated with litigation, regulatory investigations or restructuring activities, including settlement costs and regulatory penalties assessed related to government enforcement actions; |
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Any changes we make in our Critical Accounting Estimates described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our periodic reports; |
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the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements, that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial measures; and |
| · |
costs related to acquisitions of technologies or businesses. |
If we fail to retain our key personnel, we may not be able
to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain
key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In
particular, Anthony Hayes, our Chief Executive Officer, is important to the management of our business and operations and the development
of our strategic direction. The loss of the services of any such individual and the process to replace any key personnel
would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
Certain of our stockholders may have actual or potential
interests that may depart from those of our other stockholders.
The interests of certain of our stockholders may differ from
the interests of other stockholders. For example, in January 2015, Rockstar transferred their remaining holdings of
our shares to an affiliate of RPX Corporation, whose primary business is to reduce patent-related risk and expense, including to
reduce the costs associated with defending intellectual property rights from NPEs such as the Company and whose clients may include
entities to whom we are adverse in patent enforcement litigation. There can be no assurance that our significant stockholders
will, in future matters submitted for stockholder approval, vote in favor of such matter, even if such matters are recommended
for approval by management or are in the best interest of stockholders, generally. As a result, in addition to their
positions with us, such persons will have the ability to vote their significant holdings in favor of proposals presented to our
stockholders for approval, including proposals to:
| · |
elect or defeat the election of our directors; |
| · |
amend or prevent amendment of our certificate of incorporation or bylaws; |
| · |
effect or prevent a merger, sale of assets or other corporate transaction; and |
| · |
control the outcome of any other matter submitted to the shareholders for vote. |
In addition, such holder’s stock ownership may discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock price. Our significant stockholders
could also utilize their significant ownership interest to seek to influence management and decisions of the Company, or to dispose
of our shares in a manner that creates downward pressure on our stock price, which in turn may make it more difficult for us to
raise capital or meet NASDAQ’s continued listing standards.
Because an increasing amount of our outstanding shares may
become freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our
business is performing well.
As of June 30, 2015, we had 28,611,967 outstanding shares
of common stock, of which our directors and executive officers owned 46,068 shares which are subject to the limitations of Rule
144 under the Securities Act. In general, Rule 144 provides that any non-affiliate of ours, who has held restricted
common stock for at least six-months, is entitled to sell their restricted stock freely, provided that we are then current in our
filings with the SEC.
An affiliate of the Company may sell after six months with the
following restrictions:
| · |
we are current in our filings; |
| · |
certain manner of sale provisions; |
| · |
filing of Form 144; and |
| · |
volume limitations limiting the sale of shares within any three-month period to a number of shares that does not exceed the greater of 1% of the total number of outstanding shares or, the average weekly trading volume during the four calendar weeks preceding the filing of a notice of sale. |
Because almost all of our outstanding shares are freely tradable
(subject to certain restrictions imposed by lockup agreements executed by the holders thereof) and the shares held by our affiliates
may be freely sold (subject to the Rule 144 limitations), sales of these shares could cause the market price of our common stock
to drop significantly, even if our business is performing well.
Risks Related to This Offering
Management will have broad discretion as to the use of the
net proceeds from this offering, and we may not use the proceeds effectively.
Our management will have broad discretion in the application
of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance
the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business,
delay the development of our product candidates and cause the price of our common stock to decline.
You will experience immediate and substantial dilution in
the net tangible book value per share of the common stock you purchase.
You will suffer substantial dilution in the net tangible book
value of the common stock you purchase in this offering. Based on the public offering of $1,500,000 of shares of our common stock
at the public offering price of $0.26 per share, and after deducting sales agent fees and estimated offering expenses payable
by us, and based on a net tangible book value of our common stock of $0.04 per share as of March 31, 2015, if you purchase shares
of common stock in this offering, you will suffer immediate and substantial dilution of $0.08 per share in the net tangible book
value of common stock. See the section entitled “Dilution” below for a more detailed discussion of the dilution you
will incur if you purchase common stock in this offering.
Fluctuations in the price of our common stock, including
as a result of actual or anticipated sales of shares by stockholders, may make our common stock more difficult to resell.
The market price and trading volume of our common stock have
been and may continue to be subject to significant fluctuations due not only to general stock market conditions, but also to a
change in sentiment in the market regarding the industry in which we operate, our operations, business prospects or liquidity or
this offering. From January 1, 2013 through July 14, 2015, the share price of our common stock (on a split-adjusted basis)
has ranged from a high of $27.86 to a low of $0.37. In addition to the risk factors discussed in our periodic reports and in this
prospectus supplement, the price and volume volatility of our common stock may be affected by actual or anticipated sales of common
stock by existing stockholders, including of shares purchased in this offering, whether in the market or in subsequent public offerings.
Stock markets in general may experience extreme volatility that is unrelated to the operating performance of listed companies.
These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our operating results.
These fluctuations in the market price and trading volume of our common stock may make it difficult to predict the market price
of our common stock in the future, cause the value of your investment to decline and make it more difficult to resell our common
stock.
You may experience future dilution as a result of future
equity offerings.
In order to raise additional capital, we may in the future offer
additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that
may not be the same as the price per share in this offering. We cannot assure you that we will be able to sell shares or other
securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors in
this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders,
including investors who purchase shares of common stock in this offering. The price per share at which we sell additional shares
of our common stock or securities convertible into common stock in future transactions may be higher or lower than the price per
share in this offering.
Our stockholders may be diluted by the exercise of outstanding
options or warrants to purchase common stock.
As of June 30, 2015, we had 5.05 million shares of common stock
issuable upon the exercise of outstanding stock options, at exercise prices ranging from $40.00 to $1.34 per share (with a weighted
average exercise price of $5.07 per share) and outstanding warrants to purchase 0.77 million shares of our common stock with a
weighted average exercise price of $13.70 per share). You may incur dilution upon the grant of shares upon exercise of such outstanding
options or warrants.
There is no public market for the warrants being offered
in this offering.
There is no established public trading market for the warrants
being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply for listing of
the warrants on any securities exchange or automated quotation system. Without an active market, the liquidity of the warrants
will be limited.
Holders of our warrants will have no rights as shareholders
until such holders exercise their warrants.
Until you acquire shares upon exercise of your warrants, you
will have no rights as shareholders with respect to the shares underlying such warrants. Upon exercise of your warrants, you will
be entitled to exercise the rights of a shareholder only as to matters for which the record date occurs after the exercise date.
SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION
This prospectus supplement and the accompanying
prospectus and the documents incorporated herein by reference contain, or will contain, certain forward-looking statements within
the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. These statements relate to anticipated
future events, future results of operations or future financial performance. These forward-looking statements include, but are
not limited to, statements relating to our ability to develop, market and sell products based on our technology, market, sell or
otherwise utilize our assets as part of our monetization strategy, the expected benefits and efficacy of our products, the availability
of substantial additional funding to support our operations, our ability to achieve our business, research, product development,
regulatory approval, marketing and distribution plans and strategies, market acceptance of our technology and product offerings,
our ability to attract and retain key personnel, our ability to protect our intellectual property, and estimates of our cash expenditures
and requirements. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,”
“will,” “should,” “intends,” “expects,” “plans,” “goals,”
“projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”
or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only
predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our
(or our industry’s) actual results, levels of activity or performance to be materially different from any future results,
levels of activity or performance expressed or implied by these forward-looking statements. The “Risk Factors” section
of this prospectus supplement and the accompanying prospectus sets forth detailed risks, uncertainties and cautionary statements
regarding our business and these forward-looking statements. You should consider these Risk Factors, as well as any Risk Factors
that we include in any of our future filings with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, incorporated by reference into this prospectus supplement and the accompanying prospectus before
making an investment decision. Any of the risks, as well as additional risks and uncertainties not currently known to us or that
we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
We cannot guarantee future results, levels
of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the
date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements
that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do
not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events
or circumstances or to reflect the occurrence of unanticipated events.
You should read this prospectus supplement,
the accompanying prospectus, the documents we have filed with the SEC that are incorporated by reference and any free writing prospectus
that we have authorized for use in connection with this offering completely and with the understanding that our actual future results
may be materially different from what we expect. We qualify all of the forward-looking statements in the foregoing documents by
these cautionary statements.
Unless required by law, we undertake no
obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus,
you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking
statements.
USE OF PROCEEDS
We estimate that the net proceeds to us
from the sale of the securities offered by this prospectus supplement and the accompanying prospectus will be approximately $1.3
million, after deducting the placement agent’s fees and estimated offering expenses and assuming that we will sell the maximum
number of securities offered hereby. There can be no assurance we will sell any or all of the securities offered hereby. Because
there is no minimum offering amount required as a condition to closing this offering, we may sell less than all of the securities
offered hereby, which may significantly reduce the amount of proceeds received by us.
We currently intend to use the net proceeds
to meet our working capital needs and general corporate purposes. The amounts and timing of the expenditures may vary significantly depending on numerous factors, including the
net proceeds to us from the sale of the securities offered under this prospectus supplement and our need for and ability to raise
additional capital. We reserve the right to change the use of proceeds as a result of certain contingencies, such as, but not limited
to, any future opportunities to evaluate, negotiate and complete one or more strategic transactions. Accordingly, our management
will have broad discretion in the application of the net proceeds of this offering. Pending use of the net proceeds, we intend
to invest the net proceeds in short-term, interest-bearing, investment-grade securities..
DIVIDEND POLICY
We have never declared or paid any dividends
on our common stock and do not anticipate paying any in the foreseeable future. We currently intend to retain all of our future
earnings, if any, to finance the operation and expansion of our business. Any future determination relating to our dividend policy
will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of
directors may deem relevant.
DILUTION
Our net tangible book value as of March
31, 2015 was approximately $1.23 million, or $0.04 per share of common stock. Net tangible book value per share is calculated
by dividing our total tangible assets, less total liabilities, by the number of shares of our common stock outstanding as of March
31, 2015. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the as-adjusted net tangible book value per share of our common stock immediately
after giving effect to this offering.
After giving effect to the sale of
$1,464,200 of shares of our common stock at an offering price of $0.256 per share and after deducting the sales agent fees and
estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2015 would have been
approximately $2.6 million, or $0.08 per share. This represents an immediate increase in net tangible book value of $0.032
per share to existing stockholders and immediate dilution in net tangible book value of $0.08 per share to new investors
participating in this offering at the offering price. The following table illustrates this dilution on a per share basis:
| Public offering price per share | |
| | | |
$ | 0.258 | |
| | |
| | | |
| | |
| Net tangible book value per share as of March 31, 2015 | |
$ | 0.04 | | |
| | |
| | |
| | | |
| | |
| Increase per share attributable to investors purchasing our common stock in this offering | |
$ | 0.032 | | |
| | |
| | |
| | | |
| | |
| As adjusted net tangible book value per share as of March 31, 2015, after giving effect to this offering | |
| | | |
$ | 0.08 | |
| | |
| | | |
| | |
| Dilution in net tangible book value per share to investors purchasing our common stock in this offering | |
| | | |
$ | 0.18 | |
The information and table above are
based on based on 28,611,967 shares of common stock outstanding as of March 31, 2015, but excludes the following:
| |
• |
5.05 million shares of common stock issuable upon the exercise of outstanding stock options, having a weighted average exercise price of $5.07 per share. |
| |
• |
0.77 million shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $13.70 per share. |
| |
• |
1.7 million shares of common stock reserved for future issuance under our equity plans. |
| |
• |
29,940 shares of redeemable Series I Preferred Stock, each of which are convertible into 20
shares of common stock, at a stated value of $167 per common share; 439,043 shares of Series H Preferred Stock, each of
which are convertible into 10 shares of common stock at a stated value of $83.50 per share; 1 share of Series C Preferred
Stock; 4,725 shares of Series D Preferred Stock; 834 Series D-1 Preferred Stock. |
To the extent options or warrants outstanding
as of March 31, 2015 have been or may be exercised or other shares have been issued, there may be further dilution to investors.
In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the
sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
DESCRIPTION OF THE SECURITIES WE ARE
OFFERING
In this offering, we are offering a maximum
of 5,719,532 Units, each consisting of (i) one share of our Common Stock and (ii) a Warrant to purchase 1.23 shares of our Common
Stock at an exercise price of $0.43 per share.
Units will not be issued or certificated.
The shares of Common Stock and Warrants are immediately separable and will be issued separately. This prospectus supplement also
relates to the offering of shares of our Common Stock issuable upon exercise, if any, of the Warrants.
Common Stock
The description of our Common Stock is contained
in our Registration Statement on Form S-3, effective November 14, 2014, including any further amendment or report filed hereafter
for the purpose of updating such description.
Warrants
The following is a brief summary of the
material terms of the Warrants and is subject in all respects to the provisions contained in the Warrants. The form of Warrant
will be filed with a Current Report on Form 8-K and reference is made thereto for a complete description of the Warrant.
Exercise Price. The exercise
price per share of Common Stock purchasable upon exercise of the Warrants is $0.43 per share of Common Stock being purchased. If
we, at any time while the warrants are outstanding, pay a stock dividend on our Common Stock or otherwise make a distribution on
any class of capital stock that is payable in shares of our Common Stock, subdivide outstanding shares of our Common Stock into
a larger number of shares or combine the outstanding shares of our Common Stock into a smaller number of shares, then, the number,
class and type of shares available under the Warrants and the exercise price will be correspondingly adjusted to give the holder
of the Warrant, on exercise for the same aggregate exercise price, the total number, class, and type of shares or other property
as the holder would have owned had the Warrant been exercised prior to the event and had the holder continued to hold such shares
until the event requiring adjustment.
Exercisability. Warrants may be exercised
beginning on the date that is six months after the date of original issuance and at any time up to the date that is 5 years from
the initial exercise date.
Cashless Exercise. If at any time
during the Warrant is not covered by an effective registration statement, the holder is permitted to effect a cashless exercise
of the Warrant (in whole or in part) by having the holder surrendering the Warrant to us, together with delivery to us of a duly
executed exercise notice, canceling a portion of the Warrant in payment of the purchase price payable in respect of the number
of shares of our Common Stock purchased upon such exercise.
Transferability. The Warrant
may be transferred at the option of the holder upon surrender of the Warrant with the appropriate instruments of transfer.
Exchange Listing. We do not
plan on making an application to list the Warrants on the NASDAQ Capital Market, any national securities exchange or other nationally
recognized trading system.
Rights as a Stockholder. Except
by virtue of such holder’s ownership of shares of our Common Stock, the holders of the Warrants do not have the rights or
privileges of holders of our Common Stock, including any voting rights, until they exercise their Warrants; provided, however,
that if we choose to engage in a rights offering or make a distribution of our assets to our common stockholders as a class, the
holders of the Warrants will have the right to participate in such distributions as if they had exercised the warrants.
Fundamental Transactions.
The Warrants will survive our acquisition or similar fundamental change of control transaction. In addition, upon a change
of control merger or a non-surviving merger of the Company, the holders of the Warrants will have the right to require us or
our successor to repurchase the Warrants at their then-current Black-Scholes option value.
Limits on Exercise of Warrants. Except
upon at least 61 days’ prior notice from the holder to us, the holder will not have the right to exercise any portion of
the Warrant if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our
Common Stock (including securities convertible into Common Stock) outstanding immediately after the exercise; provided, however,
that the holder may not increase this limitation at any time in excess of 9.99%.
PLAN OF DISTRIBUTION
Pursuant to a placement agency agreement
between us and Chardan Capital Markets, LLC (“Chardan Capital”) we have engaged Chardan Capital as our exclusive placement
agent to solicit offers to purchase the Units in this offering. The placement agent is not purchasing or selling any of the Units
we are offering, and it is not required to arrange the purchase or sale of any specific number of Units or dollar amount, but it
has agreed to use commercially reasonable efforts to arrange for the sale of the Units. The placement agent may retain sub-agents
and selected dealers in connection with this offering.
The placement agent proposes to arrange
for the sale of the Units we are offering pursuant to this prospectus supplement to one or more investors through securities purchase
agreements directly between the purchasers and us. All of the Units will be sold at the same price and, we expect, at a single
closing. We established the price following negotiations with prospective investors and the placement agent and with reference
to the prevailing market price of our Common Stock, recent trends in such price and other factors. It is possible that not all
of the Units we are offering pursuant to this prospectus supplement will be sold at the closing, in which case our net proceeds
would be reduced. We anticipate that the sale of the Units will be completed on the date indicated on the cover page of this prospectus
supplement, subject to customary closing conditions. On the closing date, the following will occur:
| |
· |
we will receive funds in the amount of the aggregate purchase price; |
| |
· |
Chardan Capital, as placement agent, will receive the placement agent fees in accordance with the terms of the placement agency agreement; and |
| |
· |
we will deliver the shares and warrants to the investors. |
In connection with this offering, the placement
agent may distribute this prospectus supplement and the accompanying prospectus electronically.
We will pay the placement agent a cash
fee equal to (i) eight percent (8%) of the gross proceeds from the sale of the Units in this offering. We have also
agreed to reimburse the placement agent for its expenses up to an amount of $25,000, including legal fees for its counsel.
The following table shows the per share and total placement agent fee we will pay to the placement agent in connection with
the sale of the Units, assuming the purchase of all of the Units we are offering.
| Per unit | |
$ | 0.02048 | |
| Total | |
$ | 117,136 | |
The estimated offering
expenses payable by us, excluding the placement agent fees, will be approximately $70,000, which includes legal and printing costs
and various other fees associated with registering and listing the Common Stock. After deducting certain fees due to the placement
agent and our estimated offering expenses, we expect the net proceeds from this offering to be approximately $1.3 million.
We have agreed to indemnify
the placement agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended. We have also
agreed to contribute to payments the placement agent may be required to make in respect of such liabilities.
The placement
agency agreement will be included as an exhibit to our Current Report on Form 8-K that we will file with the Commission in
connection with this offering.
We have agreed to certain lock-up provisions with regard to future sales of our Common Stock and other securities
convertible into or exercisable for Common Stock for a period of 60 days after the closing date of this offering.
Chardan Capital may
be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any commissions received by it
and any profit realized on the resale of the shares sold by it while acting as principal might be deemed to be underwriting discounts
or commissions under the Securities Act. As an underwriter, Chardan Capital would be required to comply with the requirements of
the Securities Act and the Exchange Act, including, without limitation, Rule 415(a)(4) under the Securities Act and Rule 10b-5
and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares by Chardan
Capital acting as principal. Under these rules and regulations, Chardan Capital:
| · | may not engage in any stabilization activity in connection with our securities; and |
| · | may not bid for or purchase any of our securities or attempt to induce any person to purchase any
of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution. |
Electronic Distribution
A prospectus supplement in electronic format
may be made available on websites or through other online services maintained by the placement agent of the offering, or by its
affiliates. Other than the prospectus supplement in electronic format, the information on the placement agent’s websites
and any information contained in any other website maintained by the placement agent is not part of this prospectus supplement
or the registration statement of which this prospectus supplement forms a part, has not been approved and/or endorsed by us or
the placement agent in its capacity as placement agent and should not be relied upon by investors.
Listing
Our Common Stock is listed on the Nasdaq
Capital Market under the symbol “SPEX.” The Warrants included in this offering are not listed on any exchange, a market
for them does not exist and we do not intend to list the Warrants on any market.
Selling Restrictions
No action has been taken in any jurisdiction
(except in the United States) that would permit a public offering of our Common Stock, or the possession, circulation or distribution
of this prospectus supplement, the accompanying prospectus or any other material relating to us or our Common Stock in any jurisdiction
where action for that purpose is required. Accordingly, our Common Stock may not be offered or sold, directly or indirectly, and
none of this prospectus supplement, the accompanying prospectus or any other offering material or advertisements in connection
with our Common Stock may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
The placement agent may arrange to sell
Common Stock offered hereby in certain jurisdictions outside the United States, either directly or through affiliates, where they
are permitted to do so.
Affiliations
The placement agent
and its affiliates have provided, and may in the future provide, various investment banking, financial advisory and other financial
services to us and our affiliates for which they have received, and in the future may receive, advisory or transaction fees, as
applicable. We have not paid the placement agent any compensation in the 180 days prior to the date of this prospectus supplement,
and we have no current arrangements to pay the placement agent any further sums except as set forth with respect to this offering.
LEGAL MATTERS
Certain legal matters will be passed upon
for us by Nixon Peabody LLP, New York, NY. Certain legal matters will be passed upon for Chardan Capital Markets, LLC. by Ellenoff
Grossman & Schole LLP, New York, New York.
EXPERTS
The consolidated financial statements incorporated
in this prospectus supplement by reference to our Annual Report on Form 10-K have been audited by Marcum LLP, an independent registered
public accounting firm, as stated in their report, which is incorporated herein by reference. Such financial statements have been
so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration
statement on Form S-3 (File No. 333-198498), of which this prospectus supplement and the accompanying prospectus are
a part, under the Securities Act, to register the shares of common stock offered by this prospectus supplement. However, this prospectus
supplement and the accompanying prospectus do not contain all of the information contained in the registration statement and the
exhibits and schedules to the registration statement. We encourage you to carefully read the registration statement and the exhibits
and schedules to the registration statement.
We file annual, quarterly and current reports,
proxy statements and other information electronically with the SEC. You may read and copy these reports, proxy statements and other
information at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference room. You can request copies of these documents
by writing to the SEC and paying a fee for the copying costs. The SEC also maintains an Internet website that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
The SEC’s Internet website can be found at http://www.sec.gov. In addition, we make available on or through our Internet
website copies of these reports as soon as reasonably practicable after we electronically file or furnish them to the SEC. Our
Internet website can be found at http://www.spherix.com.
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE
The SEC allows us to “incorporate
by reference” the information we file with them which means that we can disclose important information to you by referring
you to those documents rather than having to repeat the information in this prospectus supplement and the accompanying prospectus.
The information incorporated by reference is considered to be part of this prospectus supplement and the accompanying prospectus,
and later information that we file with the SEC will automatically update and supersede this information.
We incorporate by reference the documents
listed below and any future information filed (rather than furnished) with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Exchange Act between the date of this prospectus supplement and the termination of this offering, provided, however, that we
are not incorporating , in each case, any documents or information that we are deemed to furnish and not file in accordance with
Securities and Exchange Commission rules. The reports and other documents that we file after the date of this prospectus
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act will update, supplement and supersede the information in this
prospectus.
| |
• |
our annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 30, 2015 (File No. 000-05576); |
| |
• |
our quarterly report on Form 10-Q for the quarter ended March 31, 2015, filed with the SEC on May 8, 2015 (File No. 000-05576); |
| |
• |
our current reports on Form 8-K filed with the SEC on February 3, 2015, March 4, 2015, March 27, 2015, July 2, 2015, July 2, 2015, July 13, 2015 and July 15, 2015 (File No. 000-05576); |
| |
• |
Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on April 30, 2015, for the purpose of including the information required by Part III of Form 10-K (File No. 000-05576); and |
| |
• |
The description of our capital stock that is contained in our Registration Statement on Form 8-A, filed with the SEC on January 30, 2013. (File No. 000-05576). |
You may request and obtain a copy of any
of the filings incorporated herein by reference, at no cost, by writing or telephoning us at the following address or phone number:
Spherix Incorporated
6430 Rockledge Drive #503
Bethesda, Maryland 20817
Attention: Anthony Hayes, Chief Executive
Officer
Telephone: (646) 532-2964
You should rely only on the information incorporated by reference
or provided in this prospectus or any supplement. We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date
on the front of those documents.
We may not sell these securities or accept an offer to buy
these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is
not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
PROSPECTUS
SPHERIX INCORPORATED
$30,000,000
Common Stock
Preferred Stock
Warrants
Units
We may offer and sell, from time to time
in one or more offerings, any combination of securities that we describe in this prospectus having an aggregate initial offering
price of up to $30,000,000. We may also offer common stock or preferred stock upon exercise of warrants; and common stock upon
conversion of preferred stock or any combination thereof.
We will provide specific terms of these
offerings and securities in one or more supplements to this prospectus. We may also authorize one or more free writing prospectuses
to be provided to you in connection with these offerings. The accompanying prospectus supplement, and any documents incorporated
by reference, may also add, update or change information contained in this prospectus. You should read this prospectus, the accompanying
prospectus supplement, any documents incorporated by reference and any related free writing prospectus carefully before buying
any of the securities being offered.
Our common stock is traded on The NASDAQ
Capital Market under the symbol “SPEX.” On November 6 , 2014, the last reported sale price of our common stock on The
NASDAQ Capital Market was $1.29 . The applicable prospectus supplement will contain information, where applicable, as to any listing,
if any, on The NASDAQ Capital Market or any other securities market or other exchange covered by the applicable prospectus supplement.
The shares of common stock offered by us
may be sold directly by us, through dealers or agents designated from time to time, to or through underwriters or dealers or through
a combination of these methods on a continuous or delayed basis. See “Plan of Distribution” in this prospectus. We
may also describe the plan of distribution for any particular offering of our securities in a prospectus supplement. If any agents,
underwriters or dealers are involved in the sale of any securities in respect of which this prospectus is being delivered, we will
disclose their names and the nature of our arrangements with them in a prospectus supplement. The net proceeds we expect to receive
from any such sale will also be included in a prospectus supplement.
We are not eligible
to sell any securities pursuant to this prospectus as of the date of this prospectus due to the limitation in Instruction I.B.6.
of Form S-3. See “About this Prospectus” for additional information.
CONCURRENT OFFERINGS
On January 24, 2014, our Registration Statement on Form S-1
(File No. 333-192737) was declared effective under the Securities Act of 1933, as amended, with respect to the resale of 2,302,615
shares of our common stock, including 1,236,130 shares of common stock issuable upon conversion of outstanding shares of our Series
D-1 Convertible Preferred Stock. Sales of common stock by the selling stockholders pursuant to the Prospectus filed on January
28, 2014, the related Prospectus Supplement filed on February 19, 2014, and the Post-Effective Amendment on Form S-3, filed on
April 9, 2014 and declared effective by the Securities and Exchange Commission on April 11, 2014, or the potential of such sales,
could have an adverse effect on the market price of our common stock.
February 3, 2014, we filed a Registration
Statement on Form S-3 (File No. 333-193729) and amended such registration statement on April 9, 2014 and May 1, 2014, with respect
to the resale of 7,777,829 shares of our common stock, consisting of (i) 635,949 shares of common stock, (ii) 156,250 shares of
common stock issuable upon conversion of Series F-1 Convertible Preferred Stock, (iii) 4,590,430 shares of common stock issuable
upon conversion of outstanding shares of Series H Convertible Preferred Stock, and (iv) 2,395,200 shares of common stock issuable
upon conversion of Series I Convertible Redeemable Preferred Stock. Upon being declared effective by the Securities and Exchange
Commission, the sale of such 7,777,829 shares by the selling stockholders, or the potential of such sales, could have an adverse
effect on the market price of our common stock.
On May 16, 2014, our Registration Statement on Form S-3 (File
No. 333-195346) was declared effective under the Securities Act of 1933, as amended, with respect to (a) the resale of 1,778,409
shares of our common stock, including 592,794 shares of common stock underlying warrants, and (b) the primary sale, in one or more
offerings, of any combination of securities described in the prospectus included in the registration statement having an aggregate
initial offering price of up to $30,000,000. Sales of common stock by the selling stockholders pursuant to the prospectus included
in such registration statement or in a prospectus supplement, or the potential of such sales, could have an adverse effect on the
market price of our common stock. We sold 10,000,000 shares of Series J Convertible Preferred Stock (which shares were later converted
to shares of common stock) and issued an additional 125,000 shares of common stock pursuant to such registration statement. The
resale of such publicly tradable shares of our common stock, or the potential of such sales, could have an adverse effect on the
market price of our common stock.
Investing in our securities involves
various risks. See “Risk Factors” contained herein for more information on these risks. Additional risks will be described
in the related prospectus supplements under the heading “Risk Factors”. You should review that section of the related
prospectus supplements for a discussion of matters that investors in our securities should consider.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of
this prospectus or any accompanying prospectus supplement. Any representation to the contrary is a criminal offense.
The date of this prospectus is November
10 , 2014.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
This prospectus is part of a registration
statement that we filed with the U.S. Securities and Exchange Commission (the “SEC”) using a “shelf” registration
process. Under the shelf registration process, we may sell any combination of the securities described in this prospectus in one
or more offerings, up to a maximum aggregate initial offering price of $30,000,000.
The registration statement
to which this prospectus relates 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 this prospectus during any twelve month period. At the time we sell
securities pursuant to this prospectus, 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. Based on this calculation and primarily as a result of our sale of $20,000,000 of Series J Preferred
Stock on May 29, 2014, we are not eligible to sell any securities pursuant to this prospectus as of the date of this prospectus. This
limitation would cease to apply if the aggregate market value of our outstanding common stock held by non-affiliates were to exceed
$75 million as of any day.
This prospectus only provides you with a
general description of the securities we may offer. Each time we sell securities described in the prospectus we will provide a
supplement to this prospectus that will contain specific information about the terms of that offering, including the specific amounts,
prices and terms of the securities offered. The prospectus supplement may also add, update or change information contained in this
prospectus. To the extent there is a conflict between the information contained in this prospectus and the accompanying prospectus
supplement, you should rely on the information in the accompanying prospectus supplement, provided that if any statement in one
of these documents is inconsistent with a statement in another document having a later date—for example, a document incorporated
by reference in this prospectus or any accompanying prospectus supplement—the statement in the later-dated document modifies
or supersedes the earlier statement. You should carefully read both this prospectus and any accompanying prospectus supplement
or other offering materials, together with the additional information described under the heading “Where You Can Find More
Information.”
You should rely only on the information contained
or incorporated by reference in this prospectus, accompanying prospectus supplements and any related free writing prospectus. We
have not authorized anyone to provide you with different information. No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this prospectus, any accompanying prospectus supplement or any related
free writing prospectus.
This prospectus and any accompanying prospectus
supplement, free writing prospectus or other offering materials do not contain all of the information included in the registration
statement as permitted by the rules and regulations of the SEC. For further information, we refer you to the registration statement
on Form S-3, of which this prospectus is a part, including its exhibits. We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, therefore, file reports and other information
with the SEC. Statements contained in this prospectus and any accompanying prospectus supplement, free writing prospectus or other
offering materials about the provisions or contents of any agreement or other document are only summaries. If SEC rules require
that any agreement or document be filed as an exhibit to the registration statement, you should refer to that agreement or document
for its complete contents.
Neither the delivery of this prospectus nor any sale made
under it implies that there has been no change in our affairs or that the information in this prospectus is correct as of any date
after the date of this prospectus. You should assume that the information in this prospectus, any applicable prospectus supplement
or any related free writing prospectus is accurate only as of the date on the front of the document and that any information we
have incorporated by reference is accurate only as of the date of the document incorporated by reference, regardless of the time
of delivery of this prospectus, any accompanying prospectus supplement or any related free writing prospectus, or any sale of a
security.
In this prospectus, unless otherwise specified
or the context requires otherwise, we use the terms “Spherix,” the “Company,” “we,” “us”
and “our” to refer to Spherix Incorporated.
OUR BUSINESS
Overview
Spherix Incorporated (“we” or
the “Company”) is an intellectual property company that owns patented and unpatented intellectual property. We were
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. Through our acquisitions of approximately 108 patents and patent applications
from Rockstar Consortium US, LP (“Rockstar”) and acquisition of several hundred patents issued to Harris Corporation
as a result of our acquisition of North South Holdings Inc. (“North South”), we have expanded our activities in wireless
communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality, and cellular.
Our activities generally include the acquisition
and development of patents through internal or external research and development. In addition, we seek to acquire existing rights
to intellectual property through the acquisition of already issued patents and pending patent applications, both in the United
States and abroad. We may alone, or in conjunction with others, develop products and processes associated with our intellectual
property and license our intellectual property to others seeking to develop products or processes or whose products or processes
infringe our intellectual property rights through legal processes. Using our patented technologies, we employ strategies seeking
to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We will continue to
seek to obtain patents from inventors and patent owners to monetize patent portfolios.
On December 31, 2013, we acquired 101 patents
and patent applications from Rockstar. The patents had been developed by Nortel Networks (“Nortel”) and acquired by
Rockstar following Nortel’s bankruptcy in 2011. Rockstar was launched in 2011 as an intellectual property licensing company
and manages a patent portfolio related to Nortel’s pre-bankruptcy technology and businesses. Rockstar was formed and is owned
by Apple, Inc. (“Apple”), Microsoft Corporation (“Microsoft”), Sony Corporation (“Sony”), Blackberry
Limited (“Blackberry”) and LM Ericsson Telephone Company (“Ericsson”). The December 2013 acquisition includes
patents covering internet access, and video and data transmission, among other things. Many of the acquired Nortel/Rockstar patents
are believed to be standard essential patents, meaning they potentially cover various industry standards in wide use (although
there is no assurance that a court or third-party would agree with such description).
During August 2013, we acquired 222 patents
in the fields of wireless communications, satellite, solar, and radio frequency and 2 patents in the field of pharmaceutical distribution
from North South. The 222 patents had been developed by Harris Corporation, a leader in defense communications and electronics,
and were acquired by North South prior to our acquisition of North South.
During July 2013, we acquired 7 patents
in the field of mobile communications from Rockstar. This acquisition represented the first transaction believed to have been completed
by Rockstar with any publicly traded company.
We presently have active lawsuits pending
against Uniden, VTech, T-Mobile, CISCO Systems, Inc., Juniper Networks, Huawei, and Verizon and intend to bring additional lawsuits
during 2014.
We have incurred losses from operations
for the years ended December 31, 2013 and 2012. Our net loss was $18 million for the year ended December 31, 2013 and $19.5 million
for the six months ended June 30, 2014. Our accumulated deficit was $53.3 million at
December 31, 2013 and $72.8 million at June 30, 2014. Our loss from continuing operations for the year ended December 31, 2012
was $2.9 million and our net loss was $3.9 million for the year ended December 31, 2012. Our accumulated deficit was $35.3 million
at December 31, 2012.
Corporate Information
We were incorporated in Delaware in 1967.
Our principal executive office is located at 6430 Rockledge Drive, Suite 503, Bethesda, MD 20817 . Our telephone number is (703)
992-9260 and our website address is www.spherix.com. The information on our website is not a part of, and should not be construed
as being incorporated by reference into, this prospectus.
RISK FACTORS
An investment in our securities involves a high degree of
risk and should be considered only by those persons who are able to afford a loss of their entire investment. There are important
factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by any forward-looking statement. In particular, you should
consider the numerous risks outlined below. Those risk factors are not exhaustive. Additional risks we are not presently aware
of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of
these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your
investment. In assessing these risks, you should also refer to the other information contained or incorporated by reference into
this prospectus, including our financial statements and related notes.
Risks Related to Our Business
Because we have a limited operating history to evaluate
our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and
delays frequently encountered by an early-stage company.
Since we have a limited operating history in our current business
of patent licensing and monetization, it will make it difficult for investors and securities analysts to evaluate our business
and prospects. You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company
with a limited operating history. Investors should evaluate an investment in our company in light of the uncertainties encountered
by early-stage companies in an intensely competitive industry and in which the potential licenses and/or defendants from which
the Company seeks to obtain recoveries are largely well capitalized companies with resources (financial and otherwise) significantly
greater than the Company’s. There can be no assurance that our efforts will be successful or that we will be able to become
profitable.
We continue to incur operating losses and concluded that
our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31,
2013 and June 30, 2014, respectively.
We have incurred losses from operations in prior years, including
2013. Our net loss for the year ended December 31, 2013 and for the six months ended June 30, 2014 was $18 million and $19.5 million,
respectively. The Company’s accumulated deficit was $53.3 million at December 31, 2013 and $72.8 million at June 30, 2014.
We may not achieve profitable operations.
Our assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2013, our internal
control over financial reporting was not effective, due to the Company’s lack of segregation of duties, and difficulty in
applying complex accounting principles, including fair value of derivatives, options and warrants as well as stock based compensation
accounting. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control
over financial reporting in the future.
With respect to the quarter ended June 30, 2014, under the supervision
and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures. Based upon this evaluation and our conclusion that our internal control over financial reporting
was not effective as of December 31, 2013, our management concluded that our disclosure controls and procedures were not effective
as of June 30, 2014.
Because we expect to need additional capital to fund our
growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
We expect that as our business continues to grow we will need
additional working capital. If adequate additional debt and/or equity financing is not available on reasonable terms or at all,
we may not be able to continue to expand our business, and we will have to modify our business plans accordingly. These factors
would have a material and adverse effect on our future operating results and our financial condition.
If we reach a point where we are unable to raise needed additional
funds to continue as a going concern, we will be forced to cease our activities and dissolve the Company. In such an event, we
will need to satisfy various creditors and other claimants, severance, lease termination and other dissolution-related obligations.
The focus of our business is to monetize intellectual
property, including through licensing and enforcement. We may not be able to successfully monetize the patents which we acquire
and thus may fail to realize all of the anticipated benefits of such acquisition.
We acquired our patents and patent applications during 2013
in three transactions which significantly changed the focus of our business and operations. We currently own several hundred patent
assets and although we may seek to commercialize and develop products, alone or with others, there is no assurance that we will
be able to successfully commercialize or develop products and such commercialization and development is not a core focus of our
business. There is significant risk involved in connection with our activities in which we acquire and seek to monetize the patent
portfolios that we acquired from Rockstar and North South. Our new business would commonly be referred to as an NPE model (or “non-practicing
entity”) since we do not currently commercialize or develop products under the recently acquired patents. We have no prior
experience as an NPE. The acquisition of the patents and an NPE business model could fail to produce anticipated benefits, or could
have other adverse effects that we do not currently foresee. Failure to successfully monetize our patent assets or to operate an
NPE business may have a material adverse effect on our business, financial condition and results of operations.
In addition, the acquisition of patent portfolios is subject
to a number of risks, including, but not limited to the following:
| · | There is a significant time lag between acquiring a patent portfolio and recognizing revenue from
those patent assets. During that time lag, material costs are likely to be incurred that would have a negative effect on our results
of operations, cash flows and financial position; and |
| · | The integration of a patent portfolio will be a time consuming and expensive process that may disrupt
our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not
achieve anticipated synergies or other benefits from such acquisition. |
Therefore, there is no assurance that the monetization of the
patent portfolios we acquire will be successful, will occur timely or in a timeframe that is capable of prediction or will generate
enough revenue to recoup our investment.
We will be initially reliant exclusively on the patent
assets we acquired from North South and Rockstar. If we are unable to commercialize, license or otherwise monetize such assets
and generate revenue and profit through those assets or by other means, there is a significant risk that our business will fail.
If our efforts to generate revenue from our patent portfolios
acquired from Rockstar and North South fail, we will have incurred significant losses. We may not seek and may be unable to acquire
additional assets and therefore may be wholly reliant on our present portfolios for revenue. If we are unable to generate revenue
from our current assets and fail to acquire any additional assets, our business will likely fail.
In connection with our business, we may commence legal
proceedings against certain companies whose size and resources could be substantially greater than ours; we expect such litigation
to be time-consuming, lengthy and costly which may adversely affect our financial condition and our ability to survive or operate
our business, even if the patents are valid and the cases we bring have merit.
To license or otherwise monetize our patent assets, we may be
required to commence legal proceedings against certain large and well established and well capitalized companies. We may allege
that such companies infringe on one or more of our patents. Our viability could be highly dependent on the outcome of this litigation,
and there is a risk that we may be unable to achieve the results we desire from such litigation. The defendants in litigation brought
by us are likely to be much larger than us and have substantially more resources than we do, which would make success of our litigation
efforts subject to factors other than the validity of our patents or infringement claims asserted. The inability to successfully
enforce our patents against larger more well capitalized companies would result in realization through settlement or election to
not pursue certain infringers, or less value from our patents, and could result in substantially less revenue realized from infringements
and lower settlement values.
We anticipate that legal proceedings against infringers of our
patents may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding
the assertion of patents and other intellectual property rights are highly complex and technical. In addition, courts and the laws
are constantly changing in a manner that could make more costly the fees and expenses for pursuing infringers, and also could result
in our assumption of legal fees of defendants if we are unsuccessful. Once initiated, we may be forced to litigate against others
to enforce or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary
rights. The defendants or other third parties involved in the lawsuits in which we are involved may allege defenses and/or file
counterclaims in an effort to avoid or limit liability and damages for patent infringement. Potential defendants could challenge
our patents and our actions by commencing actions seeking declaratory judgments declaring our patents invalid, not infringed, or
for improper or unlawful activities. If such defenses or counterclaims are successful, they may preclude our ability to derive
licensing revenue from the patents. A negative outcome of any such litigation, or one or more claims contained within any such
litigation, could materially and adversely impact our business. Additionally, we anticipate that our legal fees and other expenses
will be material and will negatively impact our financial condition and results of operations and may result in our inability to
continue our business.
Parties who are alleged infringers of our patent rights may
also challenge the validity of our patents in proceedings before the United States Patent and Trademark Office. These potential
proceedings include ex parte reexaminations, inter partes review, or covered business method patent challenges. These
proceedings could result in certain of our patent claims being invalidated. We would expend signification legal fees to defend
against such actions.
We are the subject of litigation and, due to the nature
of our business, may be the target of future legal proceedings that could have an adverse effect on our business and our ability
to monetize our patents.
On January 17, 2014, an action was filed by several cable operators
in the United States District Court for the District of Delaware (No. 1:99-mc-09999) against Rockstar, Bockstar Technologies LLC,
Constellation Technologies LLC and the Company (collectively, the “Defendants”). The complaint (the “Complaint”)
was filed by Charter Communications, Inc., WideOpenWest Finance, LLC a/k/a WOW! Internet Cable & Phone, Knology, Inc.,
Cequel Communications, LLC d/b/a Suddenlink Communications and Cable one, Inc. (“Plaintiffs”). Plaintiffs are
in the communications, cable and/or wireline industries and allege that Rockstar has accused the Plaintiffs of practicing various
communication and networking technologies (including many well-established technical standards), related to those industries. The
complaint states that in many instances such technical standards are designed into the equipment Plaintiffs purchase from vendors,
and must be implemented to interoperate with other communications providers and their end user customers. Rockstar owns (and since
December 31, 2013, we own) patents alleged to be infringed by Plaintiffs activities. The relief sought against us is principally
for a declaratory judgment that Plaintiffs do not infringe the patents, requiring that the Plaintiffs be granted a patent license,
that we have misused the patents and we and the other defendants have waived and are estopped from enforcing the patents in the
marketplace, that we are liable to Plaintiffs for entering into an illegal conspiracy, and assessing corresponding damages, for
direct and consequential damages, attorney’s fees and costs.
On June 11, 2014, the Company and the Plaintiffs filed a joint
stipulation of dismissal in the action filed on January 17, 2014. As a result, the Plaintiffs’ allegations against the Company
are dismissed without prejudice, with each party to bear its own costs. The Plaintiffs and the Company also agreed, with respect
to all patents owned by the Company as of the date of the filing, to negotiate in good faith prior to bringing any action concerning
these patents or bringing an action for infringement of these patents. The parties agreed that any further actions related to these
patents will be brought solely in Delaware.
The Company may become subject to similar actions in the future
which will be costly and time consuming to defend, the outcome of which are uncertain.
We may seek to internally develop additional new inventions
and intellectual property, which would take time and be costly. Moreover, the failure to obtain or maintain intellectual property
rights for such inventions would lead to the loss of our investments in such activities.
Part of our business may include the internal development of
new inventions or intellectual property that we will seek to monetize. However, this aspect of our business would likely require
significant capital and would take time to achieve. Such activities could also distract our management team from its present business
initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this
regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources
in such activities.
In addition, even if we are able to internally develop new inventions,
in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would heavily
rely upon, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks
associated with any such intellectual property we may develop principally including the following:
| · | patent applications we may file may not result in issued patents or may take longer than we expect
to result in issued patents; |
| · | we may be subject to interference proceedings; |
| · | we may be subject to opposition proceedings in the U.S. or foreign countries; |
| · | any patents that are issued to us may not provide meaningful protection; |
| · | we may not be able to develop additional proprietary technologies that are patentable; |
| · | other companies may challenge patents issued to us; |
| · | other companies may have independently developed and/or patented (or may in the future independently
develop and patent) similar or alternative technologies, or duplicate our technologies; |
| · | other companies may design around technologies we have developed; and |
| · | enforcement of our patents would be complex, uncertain and very expensive. |
We cannot be certain that patents will be issued as a result
of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products.
For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition,
since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain
that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is
also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require
us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As
to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor
under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property
rights for our inventions would lead to the loss our business.
Moreover, patent application delays could cause delays in recognizing
revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing
technologies are developed or introduced into the market.
New legislation, regulations or court rulings related
to enforcing patents could harm our new line of business and operating results.
If Congress, the United States Patent and Trademark Office or
courts implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders,
these changes could negatively affect our business. For example, limitations on the ability to bring patent enforcement claims,
limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in
the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or
other intellectual property rights.
On September 16, 2011, the Leahy-Smith America Invents Act (the
“Leahy-Smith Act”), was signed into law. The Leahy-Smith Act includes a number of significant changes to United States
patent law. These changes include provisions that affect the way patent applications will be prosecuted and may also affect patent
litigation. The U.S. Patent Office is currently developing regulations and procedures to govern administration of the Leahy-Smith
Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act recently became effective. Accordingly,
it is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith
Act and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the
enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
On February 27, 2013, US Representatives DeFazio and Chaffetz
introduced HR845. In general, the bill known as the SHIELD Act (“Saving High-tech Innovators from Egregious Legal Disputes”),
seeks to assess legal fee liability to plaintiffs in patent infringement actions for defendant costs. In the event that the bill
becomes law, the potential obligation to pay the legal fees of defendants in patent disputes could have a material adverse effect
on our business or financial condition.
On June 4, 2013, the Obama Administration issued executive orders
and legislative recommendations. The legislative measures recommended by the Obama Administration include requiring patentees and
patent applicants to disclose the “Real Party-in-Interest”, giving district courts more discretion to award attorney’s
fees to the prevailing party, requiring public filing of demand letters such that they are accessible to the public, and protecting
consumers against liability for a product being used off-the shelf and solely for its intended use.
The executive orders require the United States Patent and Trademark
Office (the “USPTO”) to make rules to require the disclosure of the Real Party-in-Interest by requiring patent applicants
and owners to regularly update ownership information when they are involved in proceedings before the USPTO (e.g. specifying the
“ultimate parent entity”) and requiring the USPTO to train its examiners to better scrutinize functional claims to
prevent allowing overly broad claims.
On December 5, 2013, the United States House of Representatives
passed a patent reform titled the “Innovation Act” by a vote of 325-91. Representative Bob Goodlatte, with bipartisan
support, introduced the Innovation Act on October 23, 2013. The Innovation Act, as passed by the House, has a number of major changes.
Some of the changes include a heightened pleading requirement for the filing of patent infringement claims. It requires a particularized
statement with detailed specificity regarding how each asserted claim term corresponds to the functionality of each accused instrumentality.
The Innovation Act, as passed by the House, also includes fee-shifting provisions which provide that, unless the non-prevailing
party of a patent infringement litigation positions were objectively reasonable, such non-prevailing party would have to pay the
attorney’s fees of the prevailing party.
The Innovation Act also calls for discovery to be limited until
after claim construction. The patent infringement plaintiff must also disclose anyone with a financial interest in either the asserted
patent or the patentee and must disclose the ultimate parent entity. When a manufacturer and its customers are sued at the same
time, the suit against the customer would be stayed as long as the customer agrees to be bound by the results of the case.
On November 18, 2013, the Chairman of the Senate Judiciary Committee,
Senator Patrick Leahy (D-Vt.), with bipartisan support, introduced the Patent Transparency and Improvements Act of 2013 (the “Transparency
Act”) in the United States Senate. The Transparency Act had many provisions that were similar to the provisions of the Innovation
Act. On May 21, 2014, Senator Leahy issued a statement that he was removing the patent bill from the Senate Judiciary Committee
agenda because there is not sufficient support. Senator Leahy noted further that if the stakeholders are able to reach a more targeted
agreement that focuses on the problem of patent trolls, there will be a path for passage this year and that he would bring such
a bill immediately to the Senate Judiciary Committee.
On April 29, 2014, the U.S. Supreme Court relaxed the standard
for fee shifting in patent infringement cases. Section 285 of the Patent Act provides that attorneys’ fees may be awarded
to a prevailing party in a patent infringement case in “exceptional cases.”
In Octane Fitness, LLC v. Icon Health & Fitness, Inc.,
the Supreme Court overturned the U.S. Court of Appeals for the Federal Circuit decisions limiting the meaning of “exceptional
cases.” The U.S. Supreme Court held that an exceptional case “is simply one that stands out from others with respect
to the substantive strength of a party’s litigation position” or “the unreasonable manner in which the case was
litigated.” The U.S. Supreme Court also rejected the “clear and convincing evidence” standard for making this
inquiry. The Court held that the standard should a “preponderance of the evidence.”
In Highmark Inc. v. Allcare Health Mgmt. Sys., Inc.,
the U.S. Supreme Court held that a district court’s grant of attorneys’ fees is reviewable by the U.S. Court of Appeals
for the Federal Circuit only for “abuse of discretion” by the district court instead of the de novo standard
that gave no deference to the district court.
These pair of decisions lowered the threshold for obtaining
attorneys’ fees in patent infringement cases and increased the level of deference given to a district court’s fee-shifting
determination.
These two cases will make it much easier for district courts
to shift a prevailing party’s attorneys’ fees to a non-prevailing party if the district court believes that the case
was weak or conducted in an abusive manner. Defendants that get sued for patent infringement by non-practicing entities may elect
to fight rather than settle the case because these U.S. Supreme Court decisions make it much easier for defendants to get attorneys’
fees.
On June 19, 2014, the U.S. Supreme Court
decided Alice Corp. v. CLS Bank International in which the Court addressed the question of whether patents related to software
are patent eligible subject matter. The Supreme Court did not rule that patents related to software were per se invalid
or that software-related inventions were unpatentable. The Supreme Court outlined a test that the courts and the USPTO must apply
in determining whether software-related inventions qualify as patent eligible subject matter. We must now wait and see how the
federal district courts and the USPTO will apply this ruling. The test outlined by the Supreme Court could potentially affect the
value of some of the patents we hold.
It is impossible to determine the extent of the impact of any
new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws in their
current or modified forms. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the
manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations.
Our acquisitions of patent assets may be time consuming,
complex and costly, which could adversely affect our operating results.
Acquisitions of patent or other intellectual property assets
are critical to our business plan, are often time consuming, complex and costly to consummate. We may elect to not pursue any additional
patents while we focus our efforts on monetizing our existing assets. We may utilize many different transaction structures in our
acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant
operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not
consummated, if we determine to acquire additional patents or other assets. Even if we are able to acquire particular patent assets,
there is no guarantee that we will generate sufficient revenue related to those patent assets to offset the acquisition costs.
While we will seek to conduct confirmatory due diligence on the patent assets we are considering for acquisition, we may acquire
patent assets from a seller who does not have complete analysis of infringements or claims, have proper title or ownership to those
assets, or otherwise provides us with flawed ownership rights, including invalid or unenforceable assets. In those cases, we may
be required to spend significant resources to defend our interest in the patent assets and, if we are not successful, our acquisition
may be worthless, in which case we could lose part or all of our investment in the assets.
We may also identify patent or other intellectual property assets
that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize and negotiate
a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to be
unprofitable for us. Acquisitions involving issuance of our securities could be dilutive to existing stockholders and could be
at prices lower than those prices reflected in the trading markets. These higher costs could adversely affect our operating results
and, if we incur losses, the value of our securities will decline.
In addition, we may acquire patents and technologies that are
in the early stages of adoption. Demand for some of these technologies will likely be untested and may be subject to fluctuation
based upon the rate at which our licensees or others adopt our patents and technologies in their products and services. As a result,
there can be no assurance as to whether technologies we acquire or develop will have value that can be realized through licensing
or other activities.
We have ongoing financial obligations to Rockstar under
the terms of the December 2013 acquisition. Our failure to comply with our obligations to Rockstar could have a material adverse
effect on the value of our assets, our financial performance and our ability to sustain operations.
In connection with our agreement to acquire Rockstar patents
entered on December 31, 2013, the Company and Rockstar entered into a series of agreements which require us to redeem $20 million
of stated value of Series I Convertible Preferred Stock in $5 million increments on each of the 6, 12, 18 and 24 months anniversary
of the purchase. We presently have inadequate cash to fund all of such payments. In the event that such payments are not timely
made, Rockstar may employ certain remedies, including the imposition of interest at a rate of 15% per annum from the closing date
on unpaid and unconverted amounts due and after the 12 month anniversary can reduce the redemption obligations through sale or
recovery of patents in the acquisition at a value equal to unconverted amounts due which have been pledged as collateral for such
obligations. Rockstar has filed a UCC-1 covering our redemption obligations and the right to foreclose on the collateral. The redemption
obligation is also required to be satisfied in the event that we engage in certain capital raising transactions (among other instances,
where such transactions result in net proceeds to us in excess of $7.5 million) and from recoveries on other assets. The obligation
to utilize capital from financings and from other sources or the loss of patents to Rockstar upon a default could adversely impact
our liquidity and financial position.
During the quarter ended June 30, 2014, we redeemed 84,219 shares
of Series I Preferred Stock. In accordance with this redemption, we paid Rockstar $14.1 million. This payment fully satisfied the
redemption payments that were due on June 30, 2014 and December 31, 2014 and satisfied $4.1 million of the $5.0 million redemption
payment due on June 30, 2015.
In certain acquisitions of patent assets, we may seek
to defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage and could
result in harm to our business.
We have limited capital and may seek to negotiate acquisitions
of patent or other intellectual property assets where we can defer payments or finance a portion of the acquisition price. These
types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent assets as receiving the
full purchase price for those assets in cash at the closing of the acquisition, and, as a result, we might not compete effectively
against other companies in the market for acquiring patent assets, many of whom have greater cash resources than we have. We may
also finance our activities by issuance of debt which could require interest and amortization payments which we may not have the
ability to repay, in which case we could be in default under the terms of loan agreements. We may pledge our assets as collateral
and if we are in default under our agreements, we could lose our assets through foreclosure or similar processes or become insolvent
or bankrupt in which case investors could lose their entire investment.
Any failure to maintain or protect our patent assets or
other intellectual property rights could significantly impair our return on investment from such assets and harm our brand, our
business and our operating results.
Our ability to operate our new line of business and compete
in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired patent assets and
other intellectual property. To protect our proprietary rights, we will rely on a combination of patent, trademark, copyright and
trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. No assurances
can be given that any of the measures we undertake to protect and maintain our assets will have any measure of success.
We will be required to spend significant time and resources
to maintain the effectiveness of our assets by paying maintenance fees and making filings with the USPTO. We may acquire patent
assets, including patent applications, which require us to spend resources to prosecute the applications with the USPTO prior to
issuance of patents. Further, there is a material risk that patent related claims (such as, for example, infringement claims (and/or
claims for indemnification resulting therefrom), unenforceability claims, or invalidity claims) will be asserted or prosecuted
against us, and such assertions or prosecutions could materially and adversely affect our business. Regardless of whether any such
claims are valid or can be successfully asserted, defending such claims could cause us to incur significant costs and could divert
resources away from our other activities.
Despite our efforts to protect our intellectual property rights,
any of the following or similar occurrences may reduce the value of our intellectual property:
| · | our applications for patents, trademarks and copyrights may not be granted and, if granted, may
be challenged or invalidated; |
| · | issued trademarks, copyrights, or patents may not provide us with any competitive advantages when
compared to potentially infringing other properties; |
| · | our efforts to protect our intellectual property rights may not be effective in preventing misappropriation
of our technology; or |
| · | our efforts may not prevent the development and design by others of products or technologies similar
to or competitive with, or superior to those we acquire and/or prosecute. |
Moreover, we may not be able to effectively protect our intellectual
property rights in certain foreign countries where we may do business or enforce our patents against infringers in foreign countries.
If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated,
and our business would be harmed.
Weak global economic conditions may cause infringing parties
to delay entering into licensing agreements, which could prolong our litigation and adversely affect our financial condition and
operating results.
Our business plan depends significantly on worldwide economic
conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global
economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and
declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing
on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical
to our business plan, and our failure to do so could cause material harm to our business.
If we are not able to protect our intellectual property
from unauthorized use, it could diminish the value of our products and services, weaken our competitive position and reduce our
revenue.
Our success depends in large part on our intellectual property
ownership. In addition, we believe that our trade secrets and non patented technology may be key to identifying and differentiating
our products and services from those of our competitors. We may be required to spend significant resources to monitor and police
our intellectual property rights. If we fail to successfully enforce our intellectual property rights, the value of our products
and services could be diminished and our competitive position may suffer.
We rely on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Third-parties could
copy or otherwise obtain and use our property without authorization or develop similar information and property independently,
which may infringe upon our proprietary rights. We may not be able to detect infringement and may lose competitive position in
the market before we do so, including situations which may damage our ability to succeed in licensing negotiations or legal proceedings
such as patent infringement cases we may bring. In addition, competitors may design around our technologies or develop competing
technologies. Intellectual property protection may also be unavailable or limited in some foreign countries.
If we are forced to resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at
risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. We will also rely on trade secrets and contract
law to protect some of our proprietary technology. We will enter into confidentiality and invention agreements with inventors,
employees and consultants and common interest agreements with parties associated with our litigation efforts. Nevertheless, these
agreements may not be honored and they may not effectively protect our right to our privileged, confidential or proprietary information
or our patented or un-patented trade secrets and know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and know-how.
We face evolving regulation of corporate governance and
public disclosure that may result in additional expenses and continuing uncertainty.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and NASDAQ Stock Market LLC rules are
creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed
rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of these costs. For example,
compliance with the internal control requirements of Section 404 of the Sarbanes-Oxley Act has to date required the commitment
of significant resources to document and test the adequacy of our internal control over financial reporting. These new or changed
laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as
a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This
could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure
and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result,
we intend to invest the resources necessary to comply with evolving laws, regulations and standards, and this investment may result
in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities
to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies, due to ambiguities related to practice or otherwise, regulatory authorities may initiate
legal proceedings against us, which could be costly and time-consuming, and our reputation and business may be harmed.
If we fail to maintain an effective system of internal
controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business
may be harmed and our stock price may be adversely impacted.
Effective internal controls over financial reporting are necessary
for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports
or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness
of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act,
we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we
fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory
scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that
in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude
that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley
Act, our business may be harmed and our stock price may decline.
Our assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2013, our internal
control over financial reporting was not effective, due to the Company’s lack of segregation of duties, and difficulty in
applying complex accounting principles, including fair value of derivatives, options and warrants as well as stock based compensation
accounting. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control
over financial reporting in the future.
With respect to the quarter ended June 30, 2014, under the supervision
and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures. Based upon this evaluation and our conclusion that our internal control over financial reporting
was not effective as of December 31, 2013, our management concluded that our disclosure controls and procedures were not effective
as of June 30, 2014.
If we make acquisitions, it could divert management’s
attention, cause ownership dilution to our shareholders and be difficult to integrate.
Following our acquisition of North South in September 2013,
we have grown rapidly and we expect to continue to evaluate and consider future acquisitions. Acquisitions generally involve significant
risks, including difficulties in the assimilation of the assets, services and technologies we acquire or industry overlay on which
the patent assets read, diversion of management’s attention from other business concerns, overvaluation of the acquired assets,
and the acceptance of the acquired assets and/or claims. Acquisitions may not be successful, which can have a number of adverse
effects upon us including adverse financial effects and may seriously disrupt our management’s time. The integration of acquired
assets may place a significant burden on management and our internal resources. The diversion of management attention and any difficulties
encountered in the integration process could harm our business.
If we fail to manage our existing assets and patent inventory
and third party relationships (such as attorneys and experts) effectively, our revenue and profits could decline and should we
fail to acquire additional revenues from license fees, our growth could be impeded.
Our success depends in part on our ability to manage our existing
portfolios of patent assets and manage our third party data relationships necessary to monetize our assets effectively. Our attorneys
and experts are not bound by long-term contracts that ensure us a consistent access to expertise necessary to enforce our patents,
which is crucial to our ability to generate license revenues and prosecute infringers. In addition, attorneys and experts can change
the cost of the services they provide, such as contingent fees that we are required to pay, and our arrangements often required
an increasing percentage of recoveries to be devoted to attorney’s fees depending on the length of time or stage of the case
prior to settlement or recovery, reducing the residual amount available to us following conclusion of a case. If an attorney, seller,
inventor or expert decides not to provide needed assistance in connection with a case, or provides assistance to prospective licensees
or defendants, we may not be able to timely replace this expertise with that from other sources or prevent such assistance to others
from damaging our claims and prospects for recovery or licensing thus resulting in potentially lost cases, opportunities, or revenues
and potentially diminishing the value of our patent assets. The ability to utilize attorneys, sellers’ personnel, inventors
or experts will depend on various factors, some of which are beyond our control.
Our independent registered public accounting firm has
expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
In their report dated March 31, 2014, our independent registered
public accountants stated that our consolidated financial statements for the year ended December 31, 2013 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going concern, which may hinder our ability to obtain future
financing, is an issue raised as a result of recurring losses from operations. We continue to experience net operating losses.
Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from
outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and
grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting
such goals and there can be no assurances that such methods will prove successful.
Risks Related to Ownership of Our Common Stock
Our share price may be volatile and there may not be an
active trading market for our common stock.
There can be no assurance that the market price of our common
stock will not decline below its present market price or that there will be an active trading market for our common stock. The
market prices of technology or technology related companies have been and are likely to continue to be highly volatile. Fluctuations
in our operating results and general market conditions for technology or technology related stocks could have a significant impact
on the volatility of our common stock price. We have experienced significant volatility in the price of our common stock. From
January 1, 2011 through November 6, 2014 , the share price of our common stock (on a split-adjusted basis) has ranged from a high
of $218.00 to a low of $0.75 . The reason for the volatility in our stock is not well understood and may continue. Factors that
may have contributed to such volatility include, but are not limited to:
| · | developments regarding regulatory filings; |
| · | our funding requirements and the terms of our financing arrangements; |
| · | technological innovations; |
| · | introduction of new technologies by us or our competitors; |
| · | material changes in existing litigation; |
| · | changes in the enforceability or other matters surrounding our patent portfolios; |
| · | government regulations and laws; |
| · | developments in patent or other proprietary rights; |
| · | the number of shares issued and outstanding; |
| · | the number of shares trading on an average trading day; |
| · | announcements regarding other participants in the technology and technology related industries,
including our competitors; and |
| · | market speculation regarding any of the foregoing. |
Our common stock may be delisted from The NASDAQ Capital
Market if we fail to comply with continued listing standards.
Our common stock is currently traded on The NASDAQ Capital Market
under the symbol “SPEX.” If we fail to meet any of the continued listing standards of The NASDAQ Capital Market, our
common stock could be delisted from The NASDAQ Capital Market. These continued listing standards include specifically enumerated
criteria, such as:
| · | a $1.00 minimum closing bid price; |
| · | stockholders’ equity of $2.5 million; |
| · | 500,000 shares of publicly-held common stock with a market value of at least $1 million; |
| · | 300 round-lot stockholders; and |
| · | compliance with NASDAQ’s corporate governance requirements, as well as additional or more
stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority. |
Prior to our entering into our new line of business, we had
several instances of NASDAQ deficiencies.
On April 20, 2012, the Company received a deficiency notice
from NASDAQ regarding the bid price of our common stock. Following a 1 for 20 reverse stock split, on October 8, 2012, NASDAQ provided
confirmation to us that we regained compliance with Marketplace Rule 5550(a)(2) since the closing bid price of its common stock
had traded at $1.00 per share or greater for at least ten (10) consecutive business days. This was the second time the Company
employed a reverse stock split to avoid NASDAQ delisting.
On September 25, 2012, the Company received written notification
from NASDAQ advising that the minimum number of publicly held shares of our common stock had fallen below the minimum 500,000 shares
required for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Rule 5550(a)(4). As a result of our November 2012
private placement transaction, the Company was advised by NASDAQ that it regained compliance with Rule 5550(a)(4).
On December 31, 2012, our total stockholders’ equity was
$854,000, and was below the $2.5 million listing standard required by NASDAQ. In March 2013, we exchanged warrants issued in November
2012 for Series C Preferred Stock, effectively increasing total stockholders’ equity to approximately $2.8 million.
If we fail to comply with NASDAQ’s continued listing standards,
we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board
or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition,
delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely
affect our ability to raise capital on terms acceptable to us, or at all.
We could fail in future financing efforts or be delisted
from The NASDAQ Capital Market if we fail to receive stockholder approval when needed.
We are required under the NASDAQ rules to obtain stockholder
approval for any issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock
outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that
is not deemed to be a “public offering” by NASDAQ. Funding of our operations and acquisitions of assets may require
issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding,
but we might not be successful in obtaining the required stockholder approval for such an issuance. If we are unable to obtain
financing due to stockholder approval difficulties, such failure may have a material adverse effect on our ability to continue
operations.
Our shares of common stock are thinly traded and, as a
result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise
desire to liquidate their shares.
Our common stock has been “thinly-traded” meaning
that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively
small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that
is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we
become more seasoned and viable. In addition, we believe that due to the limited number of shares of our common stock outstanding,
an options market has not been established for our common stock, limiting the ability of market participants to hedge or otherwise
undertake trading strategies available for larger companies with broader shareholder bases which prevents institutions and others
from acquiring or trading in our securities. Consequently, there may be periods of several days or more when trading activity in
our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity
that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance
that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading
levels will be sustained.
Dividends on our common stock are not likely.
We do not anticipate paying cash dividends on our common stock
in the foreseeable future. Investors must look solely to the potential for appreciation in the market price of the shares of our
common stock to obtain a return on their investment.
Because of the Rights Agreement and “Anti-Takeover”
provisions in our Certificate of Incorporation and Bylaws, a third party may be discouraged from making a takeover offer that could
be beneficial to our stockholders.
Effective as of January 24, 2013, we adopted a new shareholder
rights plan. The effect of this rights plan and of certain provisions of our Certificate of Incorporation, By-Laws, and the anti-takeover
provisions of the Delaware General Corporation Law, could delay or prevent a third party from acquiring us or replacing members
of our Board of Directors, or make more costly any attempt to acquire control of the Company, even if the acquisition or the Board
designees would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing
to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.
In addition, defendants in actions seeking to enforce our patents
may seek to influence our Board of Directors and stockholders by acquiring positions in the Company to force consideration of settlement
or licensing proposals that may be less desirable than other outcomes such as litigation with respect to our monetization or patent
enforcement activities. The effect of such influences on our Company or our corporate governance could reduce the value of our
monetization activities and have an adverse affect on the value of our assets. The effect of Anti-Takeover provisions could impact
the ability of prospective defendants to obtain influence in the Company or representation on the Board of Directors or acquire
a significant ownership position and such result may have an adverse effect on the Company and the value of its securities.
If we cannot manage our growth effectively, we may not
establish or maintain profitability.
Businesses which grow rapidly often have difficulty managing
their growth. If our business continues to grow as rapidly as it has since September 2013 and as we anticipate, we will need to
expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support.
We cannot assure you that our management will be able to manage
our growth effectively or successfully. Our failure to meet these challenges could cause us to continue to lose money, which will
reduce our stock price.
It may be difficult to predict our financial performance
because our quarterly operating results may fluctuate.
Our revenues, operating results and valuations of certain assets
and liabilities may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control.
You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our
results of operations may fall below the expectations of market analysts and our own forecasts. If this happens, the market price
of our common stock may fall significantly. The factors that may affect our quarterly operating results include the following:
| · | fluctuations in results of our enforcement and licensing activities or outcome of cases; |
| · | fluctuations in duration of judicial processes and time to completion of cases; |
| · | the timing and amount of expenses incurred to negotiate with licensees and obtain settlements from
infringers; |
| · | the impact of our anticipated need for personnel and expected substantial increase in headcount; |
| · | fluctuations in the receptiveness of courts and juries to significant damages awards in patent
infringement cases and speed to trial in the jurisdictions in which our cases may be brought and the accepted royalty rates attributable
to damages analysis for patent cases generally, including the royalty rates for industry standard patents which we may own or acquire; |
| · | worsening economic conditions which cause revenues or profits attributable to infringer sales of
products or services to decline; |
| · | changes in the regulatory environment, including regulation of NPE activities or patenting practices
, that may negatively impact our or infringers practices; |
| · | the timing and amount of expenses associated with litigation, regulatory investigations or restructuring
activities, including settlement costs and regulatory penalties assessed related to government enforcement actions; |
| · | Any changes we make in our Critical Accounting Estimates described in the Management’s Discussion
and Analysis of Financial Condition and Results of Operations sections of our periodic reports; |
| · | the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements,
that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial
measures; and |
| · | costs related to acquisitions of technologies or businesses. |
If we fail to retain our key personnel, we may not be
able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain
key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular,
Anthony Hayes, our Chief Executive Officer, is important to the management of our business and operations and the development of
our strategic direction. The loss of the services of any such individual and the process to replace any key personnel would involve
significant time and expense and may significantly delay or prevent the achievement of our business objectives.
Our largest shareholders can exert significant control
over our business and affairs and may have actual or potential interests that may depart from those of our other shareholders.
Our largest outside stockholders own a substantial percentage
of our outstanding voting capital. The interests of such persons may differ from the interests of other stockholders. There can
be no assurance that our significant stockholders will, in future matters submitted for stockholder approval, vote in favor of
such matter, even if such matters are recommended for approval by management or are in the best interest of stockholders, generally.
As a result, in addition to their positions with us, such persons will have the ability to vote their significant holdings in favor
of proposals presented to our stockholders for approval, including proposals to:
| · | elect or defeat the election of our directors; |
| · | amend or prevent amendment of our certificate of incorporation or bylaws; |
| · | effect or prevent a merger, sale of assets or other corporate transaction; and |
| · | control the outcome of any other matter submitted to the shareholders for vote. |
In addition, such holder’s stock ownership may discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock price. Our significant stockholders could also
utilize their significant ownership interest to seek to influence management and decisions of the Company.
Because an increasing amount of our outstanding shares
may become freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even
if our business is performing well.
As of November 6 , 2014, we had outstanding 28,609,467
shares of common stock, of which our directors and executive officers own 23,224 shares which are subject to the limitations of
Rule 144 under the Securities Act. Of these shares, 10,000,000 represent shares of common stock issued upon the conversion of the
Series J Preferred Stock on June 2, 2014, which shares were issued in an offering registered under the Securities Act and are generally
freely tradable.
In general, Rule 144 provides that any non-affiliate of ours,
who has held restricted common stock for at least six-months, is entitled to sell their restricted stock freely, provided that
we are then current in our filings with the SEC.
An affiliate of the Company may sell after six months with the
following restrictions:
| · | we are current in our filings, |
| · | certain manner of sale provisions, |
| · | volume limitations limiting the sale of shares within any three-month period to a number of shares
that does not exceed the greater of 1% of the total number of outstanding shares or, the average weekly trading volume during the
four calendar weeks preceding the filing of a notice of sale. |
Because almost all of our outstanding shares are freely tradable
(subject to certain restrictions imposed by lockup agreements executed by the holders thereof) and the shares held by our affiliates
may be freely sold (subject to the Rule 144 limitations), sales of these shares could cause the market price of our common stock
to drop significantly, even if our business is performing well.
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking
statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets
or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our
current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that
could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking
statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,”
“plans,” “believes,” “seeks,” “may,” “should”, “could”
or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties
that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified
in their entirety by reference to the factors discussed throughout this prospectus.
You should read this prospectus and any
accompanying prospectus supplement and the documents that we reference herein and therein and have filed as exhibits to the registration
statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially
different from what we expect. You should assume that the information appearing in this prospectus and any accompanying prospectus
supplement is accurate as of the date on the front cover of this prospectus or such prospectus supplement only. Because the risk
factors referred to above, as well as the risk factors referred to on page 4 of this prospectus and incorporated herein by reference,
could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or
on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events
or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus
and any accompanying prospectus supplement, and particularly our forward-looking statements, by these cautionary statements.
USE OF PROCEEDS
Except as otherwise provided in the applicable
prospectus supplement, we intend to use the net proceeds from the sale of the securities offered by us in this prospectus for general
corporate purposes, which may include working capital, capital expenditures, research and development expenditures, regulatory
affairs expenditures, acquisitions of new intellectual properties, technologies and investments, monetization of our patents and
the repayment, refinancing, redemption or repurchase of future indebtedness or capital stock.
The intended application of proceeds from
the sale of any particular offering of securities using this prospectus will be described in the accompanying prospectus supplement
relating to such offering. The precise amount and timing of the application of these proceeds will depend on our funding requirements
and the availability and costs of other funds.
THE SECURITIES WE MAY OFFER
We may offer any of the following securities
from time to time:
| · | shares of our common stock; |
| · | shares of our preferred stock; |
| · | warrants to purchase shares of our preferred stock or common stock; or |
| · | any combination of our common stock, preferred stock, or warrants. |
When we use the term “securities” in this prospectus,
we mean any of the securities we may offer with this prospectus, unless we say otherwise. This prospectus, including the following
summary, describes the general terms that may apply to the securities; the specific terms of any particular securities that we
may offer will be described in a separate supplement to this prospectus.
Common Stock. We may offer shares of our common stock.
Our common stock is traded on The NASDAQ Capital Market under the symbol “SPEX.”
Preferred Stock. We may offer our preferred stock in
one or more series. For any particular series we offer, the applicable prospectus supplement will describe the specific designation;
the aggregate number of shares offered; the rate and periods, or manner of calculating the rate and periods, for dividends, if
any; the stated value and liquidation preference amount, if any; the voting rights, if any; the terms on which the series will
be convertible into or exchangeable for other securities or property, if any; the redemption terms, if any; and any other specific
terms.
Warrants. We may offer warrants to purchase our common
stock and preferred stock. For any particular warrants we offer, the applicable prospectus supplement will describe the underlying
security; the expiration date; the exercise price or the manner of determining the exercise price; the amount and kind, or the
manner of determining the amount and kind, of any security to be delivered by us upon exercise; and any other specific terms. We
may issue the warrants under warrant agreements between us and one or more warrant agents.
Units. We may offer units comprised of our common stock,
preferred stock and warrants in any combination. Each unit will be issued so that the holder of the unit is also the holder of
each security included in the unit.
This prospectus contains a summary of the
general terms of the various securities that we may offer. The prospectus supplement relating to any particular securities offered
will describe the specific terms of the securities, which may be in addition to or different from the general terms summarized
in this prospectus. Because the summary in this prospectus and in any accompanying prospectus supplement does not contain all of
the information that you may find useful, you should read the documents relating to the securities that are described in this prospectus
or in any accompanying prospectus supplement. Please read “Where You Can Find More Information” to find out how you
can obtain a copy of those documents.
The accompanying prospectus supplement will
also contain the terms of a given offering, the initial offering price and our net proceeds. Where applicable, a prospectus supplement
will also describe any material United States federal income tax consequences relating to the securities offered and indicate whether
the securities offered are or will be quoted or listed on any quotation system or securities exchange.
This prospectus may not be used to consummate
a sale of securities unless it is accompanied by a prospectus supplement.
DESCRIPTION OF CAPITAL STOCK
General
The following description of common stock
and preferred stock, summarizes the material terms and provisions of the common stock and preferred stock and is not complete.
For the complete terms of our common stock and preferred stock, please refer to our Amended and Restated Certificate of Incorporation,
which may be further amended from time to time, any certificates of designation for our preferred stock, and our amended and restated
bylaws, as amended from time to time. The Delaware General Corporation Law (“DCGL) may also affect the terms of these securities.
On April 24, 2014, we filed an Amended and
Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, which was previously approved by our
stockholders at our annual meeting held on February 6, 2014.
The Amended and Restated Certificate of Incorporation,
among other things, increases our authorized number of shares of common stock and preferred stock to 200,000,000 shares from 50,000,000
shares and to 50,000,000 shares from 5,000,000 shares, respectively. The Amended and Restated Certificate of Incorporation also
requires us to indemnify our directors, officer and agents and advance expenses to such persons to the fullest extent permitted
by Delaware law.
Additionally, on April 23, 2014, we filed
a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating our Series B Convertible Preferred
Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock and returning them to authorized but undesignated
shares of our preferred stock. None of the foregoing series of preferred stock were outstanding. On November 26, 2013, we issued
an aggregate of 304,250 shares of Series F-1 Convertible Preferred Stock in exchange for 304,250 shares of Series F Preferred Stock,
which shares were convertible into 304,250 shares of common stock. All shares of Series F-1 Convertible Preferred Stock have been
converted into common stock, and no shares of Series F-1 Convertible Preferred Stock remain outstanding. On June 2, 2014, we issued
10,000,000 shares of Series J Convertible Preferred Stock, which shares were convertible into a total of 10,000,000 shares of common
stock. All shares of Series J Convertible Preferred Stock have been converted into common stock, and no shares of Series J Convertible
Preferred Stock remain outstanding.
Our authorized capital stock consists of
200,000,000 shares of common stock, $0.0001 par value, and 50,000,000 shares of preferred stock, $0.0001 par value. The authorized
and unissued shares of common stock and the authorized and undesignated shares of preferred stock are available for issuance without
further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded. If the approval of our stockholders is not so required, our board
of directors may determine not to seek stockholder approval.
Common Stock
Subject to the rights of the preferred stock,
holders of common stock are entitled to receive such dividends as are declared by our board of directors out of funds legally available
for the payment of dividends. We presently intend to retain any earnings to fund the development of our business. Accordingly,
we do not anticipate paying any dividends on our common stock for the foreseeable future. Any future determination as to declaration
and payment of dividends will be made at the discretion of our board of directors.
In the event of the liquidation, dissolution,
or winding up of the Company, each outstanding share of our common stock will be entitled to share equally in any of our assets
remaining after payment of or provision for our debts and other liabilities.
Holders of common stock are entitled to one
vote per share on matters to be voted upon by stockholders. There is no cumulative voting for the election of directors, which
means that the holders of shares entitled to exercise more than fifty percent (50%) of the voting rights in the election of directors
are able to elect all of the directors.
Holders of common stock have no preemptive
rights to subscribe for or to purchase any additional shares of common stock or other obligations convertible into shares of common
stock which we may issue after the date of this prospectus.
All of the outstanding shares of common stock
are fully paid and non-assessable. Holders of our common stock are not liable for further calls or assessments.
The rights, preferences and privileges of
the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate in the future.
Preferred Stock
Our Amended and Restated Certificate of
Incorporation authorizes 50,000,000 shares of preferred stock. Our board of directors is authorized, without further stockholder
action, to establish various series of such preferred stock from time to time and to determine the rights, preferences and privileges
of any unissued series including, among other matters, any dividend rights, dividend rates, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms, the number of shares constituting any such series, and the description
thereof and to issue any such shares. Although there is no current intent to do so, our board of directors may, without stockholder
approval, issue shares of an additional class or series of preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of the common stock.
One of the effects of the preferred stock
may be to enable the board of directors to render more difficult or to discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of the management.
We will fix the rights, preferences, privileges and restrictions
of the preferred stock of each series in the certificate of designation relating to that series. We will file as an exhibit to
the registration statement of which this prospectus is a part, or will incorporate by reference from a current report on Form 8-K
that we file with the SEC, the certificate of designation that describes the terms of the series of preferred stock we are offering.
This description will include the terms of such preferred stock, including but not limited to, any or all of the following, as
required:
| · | the title and stated value; |
| · | the number of shares we are offering; |
| · | the liquidation preference per share; |
| · | the dividend rate, period and payment date and method of calculation for dividends; |
| · | whether dividends will be cumulative or non-cumulative and, if cumulative, the date from which
dividends will accumulate; |
| · | any contractual limitations on our ability to declare, set aside or pay any dividends; |
| · | the procedures for any auction and remarketing, if any; |
| · | the provisions for a sinking fund, if any; |
| · | the provisions for redemption or repurchase, if applicable, and any restrictions on our ability
to exercise those redemption and repurchase rights; |
| · | any listing of the preferred stock on any securities exchange or market; |
| · | whether the preferred stock will be convertible into our common stock, and, if applicable, the
conversion price, or how it will be calculated, and the conversion period; |
| · | whether the preferred stock will be exchangeable into debt securities, and, if applicable, the
exchange price, or how it will be calculated, and the exchange period; |
| · | voting rights, if any, of the preferred stock; |
| · | preemptive rights, if any; |
| · | restrictions on transfer, sale or other assignment, if any; |
| · | whether interests in the preferred stock will be represented by depositary shares; |
| · | a discussion of any material or special United States federal income tax considerations applicable
to the preferred stock; |
| · | the relative ranking and preferences of the preferred stock as to dividend rights and rights if
we liquidate, dissolve or wind up our affairs; |
| · | any limitations on issuance of any class or series of preferred stock ranking senior to or on a
parity with the series of preferred stock as to dividend rights and rights if we liquidate, dissolve or wind up our affairs; and |
| · | any other specific terms, preferences, rights or limitations of, or restrictions on, the preferred
stock. |
If we issue shares of preferred stock under
this prospectus, after receipt of payment therefor, the shares will be fully paid and non-assessable.
The Delaware General Corporation Law provides
that the holders of preferred stock will have the right to vote separately as a class on any proposal involving fundamental changes
in the rights of holders of that preferred stock. This right is in addition to any voting rights provided for in the applicable
certificate of designation.
Our board of directors may authorize the
issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the
holders of our common stock. Preferred stock could be issued quickly with terms designed to delay or prevent a change in control
of our Company or make removal of management more difficult. Additionally, the issuance of preferred stock could have the effect
of decreasing the market price of our common stock.
Series A Preferred Stock
Our board of directors has designated 500,000
shares of our preferred stock as Series A Participating Preferred Stock (“Series A Preferred Stock”).
On January 1, 2013, we adopted a stockholder
rights plan in which rights to purchase shares of Series A Preferred Stock were distributed as a dividend at the rate of one right
for each share of common stock. The rights are designed to guard against partial tender offers and other abusive and coercive tactics
that might be used in an attempt to gain control of Spherix or to deprive our stockholders of their interest in the long-term value
of Spherix. These rights seek to achieve these goals by forcing a potential acquirer to negotiate with our board of directors (or
go to court to try to force the Board of Directors to redeem the rights), because only the Board of Directors can redeem the rights
and allow the potential acquirer to acquire our shares without suffering very significant dilution. However, these rights also
could deter or prevent transactions that stockholders deem to be in their interests, and could reduce the price that investors
or an acquirer might be willing to pay in the future for shares of our common stock.
Each right entitles the registered holder
to purchase one one-hundredth of a share (a “Unit”) of our Series A Preferred Stock. Each Unit of Series A Preferred
Stock will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event of liquidation,
the holders of the Units of Series A Preferred Stock will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each Unit of Series A Preferred Stock will have 100 votes, voting together with the common stock. Finally,
in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Unit of Series
A Preferred Stock will be entitled to receive 100 times the amount received per share of common stock. These rights are protected
by customary anti-dilution provisions.
The rights will be exercisable only if a
person or group acquires ten percent (10%) or more of our common stock (subject to certain exceptions stated in the plan) or announces
a tender offer the consummation of which would result in ownership by a person or group of ten percent (10%) or more of our common
stock. Our board of directors may redeem the rights at a price of $0.001 per right. The rights will expire at the close of business
on December 31, 2017 unless the expiration date is extended or unless the rights are earlier redeemed or exchanged by the Company.
Series C Convertible Preferred Stock
On March 6, 2013, the Company and certain investors that participated
in the November 2012 private placement transaction entered into separate Warrant Exchange Agreements pursuant to which those investors
exchanged common stock purchase warrants acquired in the private placement transaction for shares of our Series C Convertible Preferred
Stock. Each share of Series C Convertible Preferred Stock is convertible into one (1) share of common stock at the option of the
holder. The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of Delaware of a Certificate
of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.
The exchanged Warrants were issued in November 2012 for an aggregate
of 483,657 shares of common stock. The warrants were exercisable through November 7, 2017 at an exercise price of $6.53 per share.
Pursuant to the Warrant Exchange Agreements, the investors received
in exchange for their warrants an aggregate of 229,337 shares of the Series C Convertible Preferred Stock, each of which is convertible
into one (1) share of common stock. This is the same number of shares of common stock that would have been issued upon a “cashless
exercise” of the exchanged warrants, as permitted by the terms of the warrants, based on the one-day volume weighted average
price of our common stock on February 28, 2013 of $12.6439 as reported by Bloomberg. We have agreed to register the shares of common
stock issuable upon conversion of the Series C Convertible Preferred Stock on the same basis as the shares of common stock issued
in the November 2012 private placement transaction.
As of November 6 , 2014, one share of Series
C Preferred Stock was issued and outstanding.
Series D Convertible Preferred Stock
On April 2, 2013, we entered into the Merger
Agreement with Nuta, North South and the shareholders of North South, as amended on August 30, 2013. On September 10, 2013, we
consummated the Merger. At the closing of the Merger, an aggregate of 491 issued and outstanding shares of North South’s
common stock were converted into the right to receive an aggregate of 1,203,153 shares of common stock and 500 shares of North
South’s Series A Preferred Stock and 107 shares of North South’s Series B Preferred Stock issued and outstanding were
converted into the right to receive an aggregate of 1,379,685 shares of our newly designated Series D Convertible Preferred Stock.
Each share of Series D Preferred Stock has
a stated value of $0.0001 per share and is convertible into ten (10) shares of common stock. Upon the liquidation, dissolution
or winding up of our 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 the Company’s common stock on an “as converted” basis. Each holder of Series D Preferred
Stock shall be entitled to vote on all matters submitted to our 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 are convertible into at such time, taking into account
the beneficial ownership limitations set forth in the governing Certificate of Designation and the Conversion Limit limitations
described below. At no time may shares of Series D Preferred Stock be converted if such conversion would cause the holder to hold
in excess of 4.99% of our issued and outstanding common stock, subject to an increase in such limitation up to 9.99% of the issued
and outstanding common stock on 61 days’ written notice to us. The conversion ratio of the Series D Preferred Stock is subject
to adjustment in the event of stock dividends, splits and fundamental transactions.
Additionally, subject to the beneficial
ownership limitations described above, holders of Series D Preferred Stock may not convert such shares in excess of the “Conversion
Limit”. The “Conversion Limit” is defined as that number of shares of common stock as shall equal 15% (the “Volume
Percentage”) of the greater of (i) the trading volume of our common stock on such conversion date or (ii) the average trading
volume of our common stock for ten trading days immediately prior to such conversion date. If our common stock trades at a price
of at least $12.00 per share on the conversion date, then the Volume Percentage for purposes of the foregoing calculation shall
equal 20%. Notwithstanding the foregoing, holders of the Series D Preferred Stock may convert such shares without regard to the
aforementioned conversion limit if our common stock trades at a minimum price of $15.00 per share on the conversion date.
As of November 6 , 2014, 4,725 shares
of Series D Preferred Stock were issued and outstanding.
Series D-1 Convertible Preferred Stock
Our 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 (10) shares of common stock. Upon the liquidation, dissolution or winding up of our 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 the Company’s
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 our 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 are convertible into at such time, taking into account the beneficial ownership limitations
set forth in the governing Certificate of Designation. At no time may shares of Series D-1 Preferred Stock be converted if such
conversion would cause the holder to hold in excess of 9.99% of our issued and outstanding common stock. The conversion ratio of
the Series D Preferred Stock is subject to adjustment in the event of stock dividends, splits and fundamental transactions. The
Company commenced an exchange with holders of Series D Convertible Preferred Stock pursuant to which the holders of our outstanding
shares of Series D Preferred Stock acquired in the Merger could exchange such shares for shares of our Series D-1 Preferred Stock
on a one-for-one basis.
As of November 6 , 2014, 834 shares
of Series D-1 Preferred Stock were issued and outstanding.
Series H Preferred Stock
On December 31, 2013, we designated 459,043
shares of preferred stock as Series H Preferred Stock. On December 31, 2013, we issued approximately $38.3 million of Series H
Preferred Stock (or 459,043 shares) to Rockstar. Each share of Series H Preferred Stock is convertible into ten (10) shares of
common stock and has a stated value of $83.50. The conversion ratio is subject to adjustment in the event of stock splits, stock
dividends, combination of shares and similar recapitalization transactions. We are prohibited from effecting the conversion of
the Series H Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99% (which
may be increased to 9.99% and subsequently to 19.99%, each upon 61 days’ written notice), in the aggregate, of our issued
and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon
the conversion of the Series H Preferred Stock. Holders of the Series H Preferred Stock shall be entitled to vote on all matters
submitted to our stockholders and shall be entitled to the number of votes equal to the number of shares of common stock into which
the shares of Series H Preferred Stock are convertible, subject to applicable beneficial ownership limitations. The Series H Preferred
Stock provides a liquidation preference of $83.50 per share.
The shares of Series H Preferred Stock are
not immediately convertible and do not possess any voting rights until such time as we have obtained stockholder approval of the
issuance, pursuant to NASDAQ Listing Rule 5635. On April 16, 2014, we obtained the required shareholder approval pursuant to NASDAQ
Listing Rule 5635 and, as a result, all outstanding shares of Series H Preferred Stock are convertible and possess voting rights
in accordance with its terms.
As of November 6 , 2014, 439,043 shares
of Series H Preferred Stock were issued and outstanding.
Series I Preferred Stock
On December 31, 2013, we designated 119,760
shares of preferred stock as Series I Preferred Stock. On December 31, 2013, we issued approximately $20 million (or 119,760 shares)
of Series I Preferred Stock to Rockstar. Each share of Series I Preferred Stock is convertible into 20 shares of our common stock
and has a stated value of $167. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination
of shares and similar recapitalization transactions. The holder is prohibited from converting the Series I Preferred Stock
to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99% (which may be increased to 9.99%
and subsequently to 19.99%, each upon 61 days’ written notice), in the aggregate, of our issued and outstanding shares of
common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series
I Preferred Stock. Holders of the Series I Preferred Stock shall be entitled to vote on all matters submitted to our stockholders
and shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series I Preferred
Stock are convertible, subject to applicable beneficial ownership limitations. The Series I Preferred stock provides for a liquidation
preference of $167 per share.
The Series I Preferred Stock has a mandatory
redemption date of December 31, 2015 as to 100% of the Series I Preferred Stock then outstanding and partial mandatory redemptions
prior thereto, requiring a minimum of 25% of the total number of shares of Series I Preferred Stock issued to be redeemed (less
the amount of any conversions occurring prior thereto) on or prior to each of June 30, 2014, December 31, 2014, June 30, 2015 and
December 31, 2015 (each, a “Partial Redemption Date” and each payment, a “Redemption Payment”). On each
Partial Redemption Date, we are required to pay Rockstar a Redemption Payment equal to the lesser of (i) such number of shares
of Series I Preferred Stock as have a stated value of $5,000,000; or (ii) such number of shares of Series I Preferred Stock as
shall, together with all voluntary and mandatory redemptions and conversions to common stock occurring prior to the applicable
Partial Redemption Date, have a stated value of $5,000,000; or (iii) the remaining shares of Series I Preferred Stock issued and
outstanding if such shares have a stated value of less than $5,000,000, in an amount of cash equal to its stated value plus all
accrued but unpaid dividends, distributions and interest thereon, unless Rockstar, in its sole discretion, elects to waive such
Redemption Payment or convert such shares (or a portion thereof) into common stock. No interest or dividends are payable on the
Series I Preferred Stock unless we fail to make the first $5,000,000 Partial Redemption Payment due June 30, 2014, then interest
shall accrue on the outstanding stated value of all outstanding shares of Series I Preferred Stock at a rate of fifteen (15%) per
annum from January 1, 2014. Our obligations to pay the Redemption Payments and any interest payments in connection therewith are
secured pursuant to the terms of a Security Agreement under which the Rockstar Patents serve as collateral security. No action
can be taken under the Security Agreement unless we have failed to make a second redemption payment of $5,000,000 due December
31, 2014. The Security Agreement contains additional usual and customary “Events of Default” (as such term is defined
in the Intellectual Property Security Agreement) under which Rockstar can take action, including a sale to a third party or reduction
of secured amounts via transfer of the Rockstar Patents to Rockstar.
Additionally, in the event we consummate
a Fundamental Transaction (as defined in the Certificate of Designation of Preferences, Rights and Limitations of Series I Convertible
Preferred Stock), we are required to redeem such portion of the outstanding shares of Series I Preferred Stock as shall equal (i)
50% of the net proceeds of the Fundamental Transaction after deduction of the amount of net proceeds required to leave us with
cash and cash equivalents on hand of $5,000,000 and up until the net proceeds leave us with cash and cash equivalents on hand of
$7,500,000 and (ii) 100% of the net proceeds of the Fundamental Transaction thereafter.
The shares of Series I Preferred Stock are
not immediately convertible and do not possess any voting rights until such time as we have obtained stockholder approval of the
issuance, pursuant to NASDAQ Listing Rule 5635. On April 16, 2014, we obtained the required shareholder approval pursuant to NASDAQ
Listing Rule 5635 and, as a result, all outstanding shares of Series I Convertible Preferred Stock are convertible and possess
voting rights in accordance with its terms.
In June 2014 , we redeemed 84,219 shares
of Series I Preferred Stock. In accordance with this redemption, we paid Rockstar $14.1 million. This payment fully satisfied the
Redemption Payments due on June 30, 2014 and December 31, 2014 and satisfied $4.1 million of the $5.0 million Redemption Payment
due on June 30, 2015.
As of November 6 , 2014, 35,541 shares of
Series I Preferred Stock were issued and outstanding.
Transfer Agent and Registrar
The transfer agent and registrar for our
common stock is Equity Stock Transfer, with an address at 110 Greene Street, Suite 403, New York, NY 10012.
Listing
Our common stock is listed on the NASDAQ
Capital Market under the symbol “SPEX”. We have not applied to list our common stock on any other exchange or quotation
system.
Limitations on Directors’ Liability
Our certificate of incorporation and bylaws
contain provisions indemnifying our directors and officers to the fullest extent permitted by Delaware law.
In addition, as permitted by Delaware law,
our certificate of incorporation provides that no director will be liable to us or our stockholders for monetary damages for breach
of the director’s fiduciary duty as a director. The effect of this provision is to restrict our rights and the rights of
our stockholders in derivative suits to recover monetary damages against a director for breach of the director’s fiduciary
duty as a director, except that a director will be personally liable for:
| · | any breach of his or her duty of loyalty to us or our stockholders; |
| · | acts or omissions not in good faith which involve intentional misconduct or a knowing violation
of law; |
| · | the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or |
| · | any transaction from which the director derived an improper personal benefit. |
This provision does not affect a director’s
liability under the federal securities laws.
To the extent that our directors, officers and controlling persons
are indemnified under the provisions contained in our certificate of incorporation or Delaware law against liabilities arising
under the Securities Act of 1933, we have been advised that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act of 1933 and is therefore unenforceable.
Provisions of our Certificate of Incorporation and Bylaws,
our Shareholder Rights Plan, and Delaware Law that May Have an Anti-Takeover Effect
Certain provisions
set forth in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, our Shareholder Rights Plan,
and Delaware law could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or
preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also prevent or frustrate
attempts by our stockholders to replace or remove our management.
Certificate of Incorporation and Bylaws
In particular, our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, among other things:
| · | authorize our board of directors to issue, without further action by the stockholders, up to 50,000,000
shares of undesignated preferred stock; |
| · | provide that stockholders must provide advance notice to nominate persons for election to our board
of directors or submit proposals for consideration at stockholder meetings; |
| · | specify that special meetings of our stockholders can be called only by our board of directors
or by any officer instructed by the board of directors to a call a special meeting; |
| · | provide that vacancies on the board of directors may be filled by a majority of directors in office,
although less than a quorum, or by the sole remaining director; and |
| · | provide the board of directors with the ability to alter the bylaws without stockholder approval. |
Shareholder Rights Plan
The terms of our Shareholder
Rights Plan are discussed above under the heading “Description of Capital Stock—Preferred Stock—Series A Preferred”
on page 20.
Delaware Takeover Statute
Section 203 of the DGCL prohibits a Delaware
corporation that is a public company from engaging in any “business combination” (as defined below) with any “interested
stockholder” (defined generally as an entity or person beneficially owning 15% or more of the outstanding voting stock of
the corporation and any entity or person affiliated with such entity or person) for a period of three years following the date
that such stockholder became an interested stockholder, unless:
| · | before such date, the board of directors of the corporation approved either the business combination
or the transaction that resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or |
| · | on or subsequent to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3%
of the outstanding voting stock that is not owned by the interested stockholder. |
Section 203 of the DCGL defines “business
combination” to include:
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation
involving the interested stockholder; |
| · | subject to certain exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; |
| · | any transaction involving the corporation that has the effect of increasing the proportionate share
of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
| · | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges
or other financial benefits provided by or through the corporation. |
Disclosure of SEC Position on Indemnification for Securities
Act Liabilities
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted for directors, officers and persons controlling us, we understand that it is
the SEC’s opinion that such indemnification is against public policy as expressed in the Securities Act and may therefore
be unenforceable.
DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of common stock and/or
preferred stock in one or more series. We may issue warrants independently or together with common stock and/or preferred stock,
and the warrants may be attached to or separate from these securities.
We will evidence each series of warrants by warrant certificates
that we may issue under a separate agreement. We may enter into the warrant agreement with a warrant agent. Each warrant agent
may be a bank that we select which has its principal office in the United States and a combined capital and surplus of at least
$50,000,000. We may also choose to act as our own warrant agent. We will indicate the name and address of any such warrant agent
in the applicable prospectus supplement relating to a particular series of warrants.
We will describe in the applicable prospectus supplement the
terms of the series of warrants, including, but not limited to:
| · | the offering price and aggregate number of warrants offered; |
| · | the currency for which the warrants may be purchased; |
| · | if applicable, the designation and terms of the securities with which the warrants are issued and
the number of warrants issued with each such security or each principal amount of such security; |
| · | if applicable, the date on and after which the warrants and the related securities will be separately
transferable; |
| · | in the case of warrants to purchase common stock or preferred stock, the number of shares of common
stock or preferred stock, as the case may be, purchasable upon the exercise of one warrant and the price at which these shares
may be purchased upon such exercise; |
| · | the warrant agreement under which the warrants will be issued; |
| · | the effect of any merger, consolidation, sale or other disposition of our business on the warrant
agreement and the warrants; |
| · | anti-dilution provisions of the warrants, if any; |
| · | the terms of any rights to redeem or call the warrants; |
| · | any provisions for changes to or adjustments in the exercise price or number of securities issuable
upon exercise of the warrants; |
| · | the dates on which the right to exercise the warrants will commence and expire or, if the warrants
are not continuously exercisable during that period, the specific date or dates on which the warrants will be exercisable; |
| · | the manner in which the warrant agreement and warrants may be modified; |
| · | the identities of the warrant agent and any calculation or other agent for the warrants; |
| · | federal income tax consequences of holding or exercising the warrants; |
| · | the terms of the securities issuable upon exercise of the warrants; |
| · | any securities exchange or quotation system on which the warrants or any securities deliverable
upon exercise of the warrants may be listed; and |
| · | any other specific terms, preferences, rights or limitations of or restrictions on the warrants. |
Before exercising their warrants, holders of warrants will not
have any of the rights of holders of the securities purchasable upon such exercise, including in the case of warrants to purchase
common stock or preferred stock, the right to receive dividends, if any, or, payments upon our liquidation, dissolution or winding
up or to exercise voting rights, if any.
Exercise of Warrants
Each warrant will entitle the holder to purchase the securities
that we specify in the applicable prospectus supplement at the exercise price that we describe in the applicable prospectus supplement.
Unless we otherwise specify in the applicable prospectus supplement, holders of the warrants may exercise the warrants at any time
up to 5:00 p.m. Eastern Time on the expiration date that we set forth in the applicable prospectus supplement. After the close
of business on the expiration date, unexercised warrants will become void.
Holders of the warrants may exercise the warrants by delivering
the warrant certificate representing the warrants to be exercised together with specified information, and paying the required
amount to the warrant agent in immediately available funds, as provided in the applicable prospectus supplement. We will set forth
on the reverse side of the warrant certificate, and in the applicable prospectus supplement, the information that the holder of
the warrant will be required to deliver to the warrant agent.
Until the warrant is properly exercised, no holder of any warrant
will be entitled to any rights of a holder of the securities purchasable upon exercise of the warrant.
Upon receipt of the required payment and the warrant certificate
properly completed and duly executed at the corporate trust office of the warrant agent or any other office indicated in the applicable
prospectus supplement, we will issue and deliver the securities purchasable upon such exercise. If fewer than all of the warrants
represented by the warrant certificate are exercised, then we will issue a new warrant certificate for the remaining amount of
warrants. If we so indicate in the applicable prospectus supplement, holders of the warrants may surrender securities as all or
part of the exercise price for warrants.
Enforceability of Rights By Holders of Warrants
Any warrant agent will act solely as our agent under the applicable
warrant agreement and will not assume any obligation or relationship of agency or trust with any holder of any warrant. A single
bank or trust company may act as warrant agent for more than one issue of warrants. A warrant agent will have no duty or responsibility
in case of any default by us under the applicable warrant agreement or warrant, including any duty or responsibility to initiate
any proceedings at law or otherwise, or to make any demand upon us. Any holder of a warrant may, without the consent of the related
warrant agent or the holder of any other warrant, enforce by appropriate legal action its right to exercise, and receive the securities
purchasable upon exercise of, its warrants in accordance with their terms.
Warrant Agreement Will Not Be Qualified Under Trust Indenture
Act
No warrant agreement will be qualified as an indenture, and
no warrant agent will be required to qualify as a trustee, under the Trust Indenture Act. Therefore, holders of warrants issued
under a warrant agreement will not have the protection of the Trust Indenture Act with respect to their warrants.
Calculation Agent
Calculations relating to warrants may be made by a calculation
agent, an institution that we may appoint as our agent for this purpose. The prospectus supplement for a particular warrant will
name the institution that we have appointed, if applicable, to act as the calculation agent for that warrant as of the original
issue date for that warrant. We may appoint a different institution to serve as calculation agent from time to time after the original
issue date without the consent or notification of the holders.
The calculation agent’s determination of any amount of
money payable or securities deliverable with respect to a warrant will be final and binding in the absence of manifest error.
DESCRIPTION OF UNITS
We may issue units comprised of one or more
of the other securities described in this prospectus in any combination. Each unit will be issued so that the holder of the unit
is also the holder of each security included in the unit. Thus, the holder of a unit will have the rights and obligations of a
holder of each included security. The unit agreement under which a unit is issued may provide that the securities included in the
unit may not be held or transferred separately, at any time or at any time before a specified date.
The applicable prospectus supplement will
describe:
| · | the designation and terms of the units and of the securities comprising the units, including whether
and under what circumstances those securities may be held or transferred separately; |
| · | any unit agreement under which the units will be issued; |
| · | any provisions for the issuance, payment, settlement, transfer or exchange of the units or of the
securities comprising the units; and |
| · | whether the units will be issued in fully registered or global form. |
The applicable prospectus supplement will
describe the terms of any units. The preceding description and any description of units in the applicable prospectus supplement
does not purport to be complete and is subject to and is qualified in its entirety by reference to the unit agreement and, if applicable,
collateral arrangements and depositary arrangements relating to such units.
PLAN OF DISTRIBUTION
We may sell the securities offered by this
prospectus from time to time in one or more transactions, including without limitation:
| · | directly to one or more purchasers; |
| · | to or through underwriters, brokers or dealers; |
| · | through a combination of any of these methods. |
A distribution of the securities offered
by this prospectus may also be effected through the issuance of derivative securities, including without limitation, warrants,
subscriptions, exchangeable securities, forward delivery contracts and the writing of options.
In addition, the manner in which we may
sell some or all of the securities covered by this prospectus, include, without limitation, through:
| · | a block trade in which a broker-dealer will attempt to sell as agent, but may position or resell
a portion of the block, as principal, in order to facilitate the transaction; |
| · | purchases by a broker-dealer, as principal, and resale by the broker-dealer for its account; |
| · | ordinary brokerage transactions and transactions in which a broker solicits purchasers; or |
| · | privately negotiated transactions. |
We may also enter into hedging transactions.
For example, we may:
| · | enter into transactions with a broker-dealer or affiliate thereof in connection with which such
broker-dealer or affiliate will engage in short sales of the common shares pursuant to this prospectus, in which case such broker-dealer
or affiliate may use common shares received from us, as applicable, to close out its short positions; |
| · | enter into option or other types of transactions that require us to deliver common shares to a
broker-dealer or an affiliate thereof, who will then resell or transfer the common shares under this prospectus; or |
| · | loan or pledge the common shares to a broker-dealer or an affiliate thereof, who may sell the loaned
shares or, in an event of default in the case of a pledge, sell the pledged shares pursuant to this prospectus. |
In addition, we may enter into derivative
or hedging transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated
transactions. In connection with such a transaction, the third parties may sell securities covered by and pursuant to this prospectus
and an applicable prospectus supplement or pricing supplement, as the case may be. If so, the third party may use securities borrowed
from us or others to settle such sales and may use securities received from us to close out any related short positions. We may
also loan or pledge securities covered by this prospectus and an applicable prospectus supplement to third parties, who may sell
the loaned securities or, in an event of default in the case of a pledge, sell the pledged securities pursuant to this prospectus
and the applicable prospectus supplement or pricing supplement, as the case may be.
A prospectus supplement with respect to
each offering of securities will state the terms of the offering of the securities, including:
| · | the name or names of any underwriters or agents and the amounts of securities underwritten or purchased
by each of them, if any; |
| · | the public offering price or purchase price of the securities and the net proceeds to be received
by us from the sale; |
| · | any delayed delivery arrangements; |
| · | any underwriting discounts or agency fees and other items constituting underwriters’ or agents’
compensation; |
| · | any discounts or concessions allowed or reallowed or paid to dealers; and |
| · | any securities exchange or markets on which the securities may be listed. |
The offer and sale of the securities described
in this prospectus by us, the underwriters or the third parties described above may be effected from time to time in one or more
transactions, including privately negotiated transactions, either:
| · | at a fixed price or prices, which may be changed; |
| · | at market prices prevailing at the time of sale; |
| · | at prices related to the prevailing market prices; or |
General
Any public offering price and any discounts,
commissions, concessions or other items constituting compensation allowed or reallowed or paid to underwriters, dealers, agents
or remarketing firms may be changed from time to time. Underwriters, dealers, agents and remarketing firms that participate in
the distribution of the offered securities may be “underwriters” as defined in the Securities Act. Any discounts or
commissions they receive from us and any profits they receive on the resale of the offered securities may be treated as underwriting
discounts and commissions under the Securities Act. We will identify any underwriters, agents or dealers and describe their commissions,
fees or discounts in the applicable prospectus supplement or pricing supplement, as the case may be.
Underwriters and Agents
If underwriters are used in a sale, they
will acquire the offered securities for their own account. The underwriters may resell the offered securities in one or more transactions,
including negotiated transactions. These sales may be made at a fixed public offering price or prices, which may be changed, at
market prices prevailing at the time of the sale, at prices related to such prevailing market price or at negotiated prices. We
may offer the securities to the public through an underwriting syndicate or through a single underwriter. The underwriters in any
particular offering will be mentioned in the applicable prospectus supplement or pricing supplement, as the case may be.
Unless otherwise specified in connection
with any particular offering of securities, the obligations of the underwriters to purchase the offered securities will be subject
to certain conditions contained in an underwriting agreement that we will enter into with the underwriters at the time of the sale
to them. The underwriters will be obligated to purchase all of the securities of the series offered if any of the securities are
purchased, unless otherwise specified in connection with any particular offering of securities. Any initial offering price and
any discounts or concessions allowed, reallowed or paid to dealers may be changed from time to time.
We may designate agents to sell the offered
securities. Unless otherwise specified in connection with any particular offering of securities, the agents will agree to use their
best efforts to solicit purchases for the period of their appointment. We may also sell the offered securities to one or more remarketing
firms, acting as principals for their own accounts or as agents for us. These firms will remarket the offered securities upon purchasing
them in accordance with a redemption or repayment pursuant to the terms of the offered securities. A prospectus supplement or pricing
supplement, as the case may be will identify any remarketing firm and will describe the terms of its agreement, if any, with us
and its compensation.
In connection with offerings made through
underwriters or agents, we may enter into agreements with such underwriters or agents pursuant to which they will receive our outstanding
securities in consideration for the securities being offered to the public for cash. In connection with these arrangements, the
underwriters or agents may also sell securities covered by this prospectus to hedge their positions in these outstanding securities,
including in short sale transactions. If so, the underwriters or agents may use the securities received from us under these arrangements
to close out any related open borrowings of securities.
Dealers
We may sell the offered securities to dealers
as principals. We may negotiate and pay dealers’ commissions, discounts or concessions for their services. The dealer may
then resell such securities to the public either at varying prices to be determined by the dealer or at a fixed offering price
agreed to with us at the time of resale. Dealers engaged by us may allow other dealers to participate in resales.
Direct Sales
We may choose to sell the offered securities
directly. In this case, no underwriters or agents would be involved.
Institutional Purchasers
We may authorize agents, dealers or underwriters
to solicit certain institutional investors to purchase offered securities on a delayed delivery basis pursuant to delayed delivery
contracts providing for payment and delivery on a specified future date. The applicable prospectus supplement or pricing supplement,
as the case may be, will provide the details of any such arrangement, including the offering price and commissions payable on the
solicitations.
We will enter into such delayed contracts
only with institutional purchasers that we approve. These institutions may include commercial and savings banks, insurance companies,
pension funds, investment companies and educational and charitable institutions.
Indemnification; Other Relationships
We may have agreements with agents, underwriters,
dealers and remarketing firms to indemnify them against certain civil liabilities, including liabilities under the Securities Act.
Agents, underwriters, dealers and remarketing firms, and their affiliates, may engage in transactions with, or perform services
for, us in the ordinary course of business. This includes commercial banking and investment banking transactions.
Market-Making, Stabilization and Other Transactions
There is currently no market for any of
the offered securities, other than our common stock which is listed on The NASDAQ Capital Market. If the offered securities are
traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors. While it is possible that an underwriter could inform us that
it intends to make a market in the offered securities, such underwriter would not be obligated to do so, and any such market-making
could be discontinued at any time without notice. Therefore, no assurance can be given as to whether an active trading market will
develop for the offered securities. We have no current plans for listing of the preferred stock or warrants on any securities exchange
or quotation system; any such listing with respect to any particular preferred stock or warrants will be described in the applicable
prospectus supplement or pricing supplement, as the case may be.
In connection with any offering of common
stock, the underwriters may purchase and sell common stock in the open market. These transactions may include short sales, syndicate
covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a short position. “Covered” short sales
are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option.
In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares
through the over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common
stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters
may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out
any naked short position by purchasing common stock in the open market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of
shares in the open market while the offering is in progress for the purpose of pegging, fixing or maintaining the price of the
securities.
In connection with any offering, the underwriters
may also engage in penalty bids. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when
the securities originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short
positions. Stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the securities to
be higher than it would be in the absence of the transactions. The underwriters may, if they commence these transactions, discontinue
them at any time.
LEGAL MATTERS
The validity of the issuance of the securities
offered hereby will be passed upon for us by Nixon Peabody LLP, New York, New York.
EXPERTS
The audited consolidated financial statements
as of December 31, 2013 and for the year then ended incorporated by reference in this prospectus and elsewhere in the registration
statement have been so incorporated by reference in reliance upon the report of Marcum LLP, which includes an explanatory paragraph
as to the Company’s ability to continue as a going concern, an independent registered public accounting firm, upon the authority
of said firm as experts in accounting and auditing in giving said report.
The audited financial statements as of and
for the year ended December 31, 2012 incorporated by reference in this prospectus and elsewhere in the registration statement have
been so incorporated by reference in reliance upon the report of Grant Thornton LLP, independent registered public accountants,
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a
registration statement on Form S-3 filed under the Securities Act. As permitted by the SEC’s rules, this prospectus and any
prospectus supplement, which form a part of the registration statement, do not contain all the information that is included in
the registration statement. You will find additional information about us in the registration statement. Any statements made in
this prospectus or any prospectus supplement concerning legal documents are not necessarily complete and you should read the documents
that are filed as exhibits to the registration statement or otherwise filed with the SEC for a more complete understanding of the
document or matter.
We file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read, without charge, and copy the documents we file at the SEC’s
public reference rooms in Washington, D.C. at 100 F Street, NE, Room 1580, Washington, DC 20549. You can request copies of these
documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public at no cost from the SEC’s website at http://www.sec.gov.
INCORPORATION OF DOCUMENTS BY REFERENCE
We incorporate by reference the filed documents
listed below, except as superseded, supplemented or modified by this prospectus, and any future filings we will make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
| · | our Annual Report on Form 10-K for the fiscal year ended December 31, 2013; |
| · | our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013; |
| · | our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014; |
| · | our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014; |
| · | our Current Report on Form 8-K filed on January 2, 2014; |
| · | our Current Report on Form 8-K filed on January 6, 2014; |
| · | our Current Report on Form 8-K filed on January 7, 2014; |
| · | our Current Report on Form 8-K filed on January 9, 2014; |
| · | our Current Report on Form 8-K filed on January 14, 2014; |
| · | our Current Report on Form 8-K filed on January 24, 2014; |
| · | our Current Report on Form 8-K filed on January 27, 2014; |
| · | our Current Report on Form 8-K filed on February 3, 2014; |
| · | our Current Report on Form 8-K filed on February 7, 2014; |
| · | our Current Report on Form 8-K filed on February 10, 2014; |
| · | our Current Report on Form 8-K filed on February 12, 2014; |
| · | our Current Report on Form 8-K filed on February 20, 2014; |
| · | our Current Report on Form 8-K filed on March 7, 2014; |
| · | our Current Report on Form 8-K filed on March 17, 2014; |
| · | our Current Report on Form 8-K filed on March 27, 2014; |
| · | our Current Report on Form 8-K filed on March 27, 2014; |
| · | our Current Report on Form 8-K filed on March 31, 2014; |
| · | our Current Report on Form 8-K filed on April 2, 2014; |
| · | our Current Report on Form 8-K filed on April 16, 2014; |
| · | our Current Report on Form 8-K filed on April 18, 2014; |
| · | our Current Report on Form 8-K filed on April 21, 2014; |
| · | our Current Report on Form 8-K filed on April 25, 2014; |
| · | our Current Report on Form 8-K filed on May 5, 2014; |
| · | our Current Report on Form 8-K filed on May 15, 2014; |
| · | our Current Report on Form 8-K filed on May 27, 2014; |
| · | our Current Report on Form 8-K filed on May 29, 2014; |
| · | our Current Report on Form 8-K filed on May 29, 2014; |
| · | our Current Report on Form 8-K/A filed on June 2, 2014; |
| · | our Current Report on Form 8-K filed on June 3, 2014; |
| · | our Current Report on Form 8-K filed on June 4, 2014; |
| · | our Current Report on Form 8-K filed on June 5, 2014; |
| · | our Current Report on Form 8-K filed on June 11, 2014; |
| · | our Current Report on Form 8-K filed on June 12, 2014; |
| · | our Current Report on Form 8-K filed on June 12, 2014; |
| · | our Current Report on Form 8-K filed on June 13, 2014; |
| · | our Current Report on Form 8-K filed on June 17, 2014; |
| · | our Current Report on Form 8-K filed on June 20, 2014; |
| · | our Current Report on Form 8-K filed on July 10, 2014; |
| · | our Current Report on Form 8-K filed on October 1, 2014; |
| · | our Preliminary Proxy Statement on Schedule 14A filed on March 7, 2014 and amended on March 24,
2014; |
| · | our Definitive Proxy Statement on Schedule 14A filed on March 28, 2014; and |
| · | The description of our capital stock that is contained in our Registration Statement on Form 8-A,
filed with the SEC on January 30, 2013. |
We also incorporate by reference all additional
documents that we file with the SEC under the terms of Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act that are made after
the initial filing date of this registration statement of which this prospectus is a part. We are not, however, incorporating,
in each case, any documents or information that we are deemed to furnish and not file in accordance with SEC rules. The reports
and other documents that we file after the date of this prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act will update, supplement and supersede the information in this prospectus. You may request and obtain a copy of any of the filings
incorporated herein by reference, at no cost, by writing or telephoning us at the following address or phone number:
Spherix Incorporated
6430 Rockledge Drive
Suite 503
Bethesda, MD 20817
Attn.: Chief Executive Officer
Tel: (703) 992-9260
www.spherix.com
PROSPECTUS
5,719,532 of
Shares Common Stock
and Warrants for
up to 7,035,024 Shares of Common Stock
PROSPECTUS SUPPLEMENT
Chardan
Capital Markets, LLC
July 15, 2015
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