Financial statements and supplementary data required by this
Item 8 follow.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”)
is an intellectual property company incorporated in the State of Delaware that owns patented and unpatented intellectual property. The
Company was formed in 1967 as a scientific research company and for much of its history pursued drug development including through
Phase III clinical studies which were discontinued. Through the Company’s acquisition of patents and patent applications
developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”) and Harris Corporation from North
South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities and is a significant owner of
intellectual property assets.
The Company is a patent commercialization
company whose operations are focused on the monetization of its intellectual property (“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. The Company intends to generate revenues and related cash flows from the granting of intellectual
property rights for the use of patented technologies that it owns, or that it manages for others, or through the settlement and
litigation of patents.
The Company continually works to enhance
the portfolio of intellectual property through acquisition and strategic partnerships. The Company’s mission is to partner
with inventors, or other entities, who own undervalued intellectual property (“IP”). The Company then works with the
inventors or other entities to commercialize the IP. Currently, the Company owns over 290 patents and patent applications.
Reverse Stock Split and Amendment to
Certificate of Incorporation
The Company’s common stock is quoted
on the NASDAQ Capital Market under the symbol “SPEX.” One of the requirements for continued listing on the NASDAQ Capital
Market is maintenance of a minimum closing bid price of $1.00 per share. On March 24, 2015, the Company received a letter (the
“Notice”) from the Listing Qualifications Staff of The NASDAQ Stock Market LLC (“NASDAQ”) notifying the
Company that, based upon the closing bid price of the Company’s common stock, $0.0001 par value per share (the “Common
Stock”) for the last 30 consecutive business days, the Common Stock no longer meets the requirement to maintain a minimum
closing bid price of $1.00 per share, as set forth in NASDAQ Listing Rule 5550(a)(2).
In accordance with NASDAQ’s Listing
Rule 5810(c)(3)(A), the Company had a period of 180 calendar days, or until September 21, 2015, to regain compliance with the Rule.
After determining that it would not be in compliance with the Rule by September 21, 2015, the Company notified NASDAQ and applied
for an extension of the cure period, as permitted under the original notification. In accordance with NASDAQ Listing Rule 5810(c)(3)(A),
NASDAQ granted a second grace period of 180 calendar days, or until March 21, 2016, to regain compliance with the minimum closing
bid price requirement for continued listing. In order to regain compliance, the minimum closing bid price per share of the Company’s
Common Stock must be at least $1.00 for a minimum of ten consecutive business days.
On February 26, 2016, the Company’s
stockholders approved an amendment to the Company’s certificate of incorporation and authorized the Company’s Board
of Directors, if in their judgment they deemed it necessary, to effect a reverse stock split of Common Stock at a ratio in the
range of 1-for-12 to 1-for-24. The Company implemented this reverse stock split on March 4, 2016 with a ratio of 1-for-19 (the
“Reverse Stock Split”). No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who
otherwise would have been entitled to receive a fractional share in connection with the Reverse Stock Split received a cash payment
in lieu thereof. The par value and other terms of the common stock were not affected by the Reverse Stock Split. In addition, the
amendment to the Company’s certificate of incorporation that effected the Reverse Stock Split simultaneously reduced the
number of authorized shares of Common Stock from 200,000,000 to 100,000,000.
The Company’s Common Stock began
trading at its post-Reverse Stock Split price at the beginning of trading on March 4, 2016.
On March 18, 2016, the Company received
a letter from NASDAQ indicating that it had regained compliance with the minimum bid price requirement under NASDAQ Listing Rule
5550(a)(2) for continued listing on The NASDAQ Capital Market. The Company’s common stock continues to be listed on the NASDAQ
Capital Market.
The Reverse Stock Split reduced the number
of outstanding shares of Common Stock from 48,259,430 shares to 2,539,847 shares as of December 31, 2015. All per share amounts
and outstanding shares of Common Stock including stock options, restricted stock and warrants, have been retroactively adjusted
in these consolidated financial statements for all periods presented to reflect the 1-for-19 Reverse Stock Split. Further, exercise
prices of stock options and warrants have been retroactively adjusted in these consolidated financial statements for all periods
presented to reflect the 1-for-19 Reverse Stock Split. Numbers of shares of the Company’s preferred stock were not affected
by the Reverse Stock Split; however, the conversion ratios have been adjusted to reflect the Reverse Stock Split.
Note 2. Liquidity and Financial Condition
The Company continues to incur ongoing
administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While
the Company continues to implement its business strategy, it intends to finance its activities through:
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managing current cash and cash equivalents on hand from the Company’s past debt and equity offerings,
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●
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seeking additional funds raised through the sale of additional securities in the future,
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●
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seeking additional liquidity through credit facilities or other debt arrangements, and
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●
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increasing revenue from its patent portfolios, license fees and new business ventures.
|
As a result of the Company’s recurring
operating losses and net operating cash flow deficits, there is substantial doubt about the Company’s ability to continue
as a going concern. The consolidated financial statements have been prepared assuming the Company will continue as a
going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
The Company’s ultimate success is
dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The
Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to
execute its longer term business plan. The Company’s working capital deficit amounted to approximately $0.6 million
at December 31, 2015, and net loss attributable to common stockholders amounted to approximately $42.3 million for the year ended
December 31, 2015. The Company had a $135.3 million of accumulated deficits as of December 31, 2015. The
Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital
and other financing requirements for the foreseeable future. Absent generation of sufficient revenue from the execution
of the Company’s business plan, the Company will need to obtain additional debt or equity financing, especially if the Company
experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant
increases in expense levels resulting from being a publicly-traded company or operations. If the Company attempts to
obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the Company on favorable
terms, or at all.
Disputes regarding the assertion of patents
and other intellectual property rights are highly complex and technical. The Company may be forced to litigate against others to
enforce or defend its intellectual property rights or to determine the validity and scope of other parties’ proprietary rights.
The defendants or other third parties involved in the lawsuits in which the Company is involved may allege defenses and/or file
counterclaims or initiate inter parties reviews in an effort to avoid or limit liability and damages for patent infringement or
cause the Company to incur additional costs as a strategy. If such efforts are successful, they may have an impact on
the value of the patents and preclude the Company from deriving revenue from the patents. The patents could be declared invalid
by a court or the United States Patent and Trademark Office, in whole or in part, or the costs of the Company can increase. Recent
rulings also create an increased risk that if the Company is unsuccessful in litigation it could be responsible to pay the attorneys’
fees and other costs of defendants by lowering the standard for legal fee shifting sought by defendants in patent cases.
As a result, a negative outcome of any
such litigation, or one or more claims contained within any such litigation, could materially and adversely impact the Company’s
business. Additionally, the Company anticipates that legal fees which are not included in contingency fee arrangements, experts
and other expenses will be material and could have an adverse effect on its financial condition and results of operations if its
efforts to monetize its patents are unsuccessful.
In addition, the costs of enforcing the
Company’s patent rights may exceed its recoveries from such enforcement activities. Accordingly, in order for
the Company to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and
monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues,
including any profit sharing arrangements with inventors or prior owners of the patents. The Company’s failure to monetize
its patent assets or the occurrence of unforeseen circumstances that could have a negative impact on the Company’s liquidity
could significantly harm its business.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles
of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Biospherics Incorporated, Nuta Technology Corp.
(“Nuta”), Spherix Portfolio Acquisition I, Inc. (“SPXI”), Spherix Portfolio Acquisition II, Inc. (“SPXII”),
Guidance IP, LLC (“Guidance”), CompuFill LLC (“CompuFill”), Directional IP, LLC (“Directional”)
and NNPT, LLC (“NNPT”). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US
GAAP”). This requires management to make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the period. The Company’s significant estimates and assumptions include
the recoverability and useful lives of long-lived assets, stock-based compensation, derivative liabilities, and the valuation
allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the
carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company and general
economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s
estimates and could cause actual results to differ from those estimates and assumptions.
Concentration of Cash
The Company maintains cash balances at
two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments
with original maturities of three months or less when purchased to be cash and cash equivalents. As of December 31, 2015 and 2014,
the Company had $0.1 million and $0.8 million in cash and cash equivalents, respectively. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk on cash.
Marketable Securities
Marketable securities are classified
as trading and are carried at fair value. The Company’s marketable securities consist of highly liquid mutual funds and
exchange-traded & closed-end funds which are valued at quoted market prices. During the year ended December 31, 2015 and
2014, the Company incurred realized losses of approximately $91,000 and $49,000, respectively, and unrealized gains of
approximately $19,000, and unrealized loss of approximately $54,000, respectively, on its investments in marketable
securities, which are included in other income, net on the consolidated statements of operations. In addition, during
the year ended December 31, 2015 and 2014, the Company earned dividend income of approximately $52,000 and $92,000,
respectively, which is included in other income, net on the consolidated statement of operations. The Company reinvested
such dividend income into its marketable securities during the years ended December 31, 2015 and 2014. The cost of marketable
securities held as of December 31, 2015 and 2014 were $3.4 million and $3.5 million, respectively.
Intangible Assets – Patent Portfolios
Intangible assets include the Company’s
patent portfolios with original estimated useful lives ranging from six months to 12 years. The Company amortizes the
cost of the intangible assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including
legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
Patents include the cost of patents or
patent rights (hereinafter, collectively “patents”) acquired from third-parties or acquired in connection with business
combinations. Patent acquisition costs are amortized utilizing the straight-line method over their remaining economic
useful lives, ranging from one to ten years. Certain patent application and prosecution costs incurred to secure additional patent
claims, that based on management’s estimates are deemed to be recoverable, are capitalized and amortized over the remaining
estimated economic useful life of the related patent portfolio.
Goodwill
Goodwill is the excess of cost of an acquired
entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is
subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances
change that indicate the carrying amount may be impaired. Accounting Standards Codification (“ASC”) Topic 350 provides
an entity with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If,
after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the two-step
impairment test is necessary, a fair-value-based test is applied at the reporting unit level, which is generally one level below
the operating segment level. The test compares the fair value of an entity's reporting units to the carrying value of those reporting
units. This test requires various judgments and estimates.
The Company estimates the fair value of
the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment of goodwill
is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities
of the reporting unit. An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired. The Company
tests goodwill for impairment at least annually in conjunction with the preparation of its annual business plan, or more frequently
if events or circumstances indicate it might be impaired. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating
that impairment may exist. During the year ended December 31, 2015, the Company recorded a $1.7 million of impairment charge to
its goodwill. Refer to Note 5 for further discussion of the goodwill impairment test performed by the Company at June 30, 2015.
Impairment of Long-lived Assets (Including
Patent Assets)
The Company monitors the carrying value
of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability
by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot
be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the
group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted
expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its
carrying value. The Company determined it was necessary to test its intangible assets for impairment during the second quarter
of 2015. Due to the decline in stock price which the Company considered a triggering event, at December 31, 2015, the Company performed
an additional impairment test for intangible assets. During the year ended December 31, 2015, the Company recorded a $38.9 million
of impairment charges to its intangible assets (see Note 5). There was no impairment of long-lived assets in 2014.
Property and Equipment
Property and equipment are stated at cost
and include office furniture and equipment and computer hardware and software. The Company computes depreciation and amortization
under the straight-line method and typically over the following estimated useful lives of the related assets:
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Office furniture and equipment
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3 to 10 years
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Computer hardware and software
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3 to 5 years
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Revenue Recognition
Revenue is recognized when
(i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms
of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.
In general, revenue arrangements
provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights
for patented technologies owned by the Company. These rights may include some combination of the following: (i) the grant of a
non-exclusive, retroactive and future license, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims,
and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending
until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee
possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment.
Inventor Royalties
Inventor royalties are expensed in the
period that the related revenues are recognized. In certain instances, pursuant to the terms of the underlying inventor agreements,
costs paid by the Company to acquire patents are recoverable from future net revenues. Patent acquisition costs that are recoverable
from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties
are earned by the inventor, as appropriate, and the related expense is included in amortization expense.
Accounting for Warrants
The Company accounts for the issuance of
common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives
and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement
or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement
or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company)
or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do
not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies
these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Company assessed the classification
of common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability
classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments
to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants
are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities”
in the consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation
model (see Note 6).
Fair Value of Financial Instruments
Financial instruments, including cash and
cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are carried at cost, which management
believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial
assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value.
The Company uses three levels of inputs
that may be used to measure fair value:
Level 1 — quoted prices in active markets for
identical assets or liabilities
Level 2 — quoted prices for similar assets
and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for
example, cash flow modeling inputs based on assumptions)
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this
method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) deferred
tax consequences of temporary difference resulting from matters that have been recognized in the Company’s financial statement
or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation
allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
Net Loss per Share
Basic loss per share is computed by dividing
the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares
outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock
options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using
the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and the exercise
of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
Securities that could potentially dilute loss per share in the
future that were not included in the computation of diluted loss per share at December 31, 2015 and 2014 are as follows:
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As of December 31,
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2015
|
|
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2014
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Convertible preferred stock
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|
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530,277
|
|
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271,413
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Warrants to purchase common stock
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2,304,888
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|
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40,452
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Options to purchase common stock
|
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289,380
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278,863
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Total
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3,124,545
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590,728
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Stock-based Compensation
The Company accounts for share-based payment
awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under
the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the
Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally
vest over a one- to ten-year period.
The fair value of stock options granted
was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term
of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration
for all individuals within the grant. The expected volatility assumption is computed based on the standard deviation
of the Company’s underlying stock price's daily logarithmic returns.
The Company’s model includes a zero
dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The
Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such
restrictions.
The periodic expense is then determined
based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. The
Company estimates of pre-vesting forfeitures is primarily based on the Company’s historical experience and is adjusted to
reflect actual forfeitures as the options vest.
Treasury Stock
The Company accounts for the treasury stock using the cost method,
which treats it as a reduction in stockholders’ equity. In February 2014, the Company retired 9 shares of treasury stock.
Convertible
Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable
preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as
temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
The
Company accounts for convertible preferred stock with detachable warrants in accordance with ASC 470:
Debt
and allocated
proceeds received to the convertible preferred stock and detachable warrants based on relative fair values. The Company evaluated
the classification of its convertible preferred stock and warrants and determined that such instruments meet the criteria for equity
classification. The Company recorded the related issuance costs and value ascribed to the warrants as a reduction of the convertible
preferred stock.
The Company
has also evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815,
Derivatives
and Hedging
, including consideration of embedded derivatives requiring bifurcation.
The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which
arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the
money at inception because the conversion option has an effective strike price that is less than the market price of the underlying
stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which
is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion
price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in
a discount on the convertible preferred stock (see Note 8).
As the convertible preferred stock may be converted immediately,
the Company recognized the BCF as a deemed dividend in the consolidated statements of operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers
(“ASU 2014-09”), which requires an entity to recognize revenue at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for transferring goods or services to customers. ASU 2014-09 will replace
most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective in the annual period
ending December 31, 2017, including interim periods within that annual period. Early application is not permitted. The standard
permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact
of its pending adoption of this standard on its consolidated financial statements and related disclosures.
In June 2014 the FASB issued ASU No. 2014-12,
Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period
. This ASU requires that a performance target that affects
vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in
this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier
adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern
. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in
the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue
as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically,
the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including
interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain
disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express
statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year
after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for
public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. The Company
has elected to early adopt the provisions of ASU 2014-15 during the year ended December 31, 2014. Management’s
evaluations regarding the events and conditions that raise substantial doubt regarding the Company’s ability to continue
as a going concern have been disclosed in Note 2.
In November 2015, the FASB issued ASU No.
2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes. The standard
is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,
with early adoption permitted. As of December 31, 2015, the Company elected to early adopt the pronouncement on a prospective basis.
Adoption of this amendment did not have an effect on the Company's financial position or results of operations, and prior periods
were not retrospectively adjusted.
In January 2016, the FASB issued ASU No.
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 requires equity
investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment
of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates
the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value
that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business
entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial
liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial
statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective
for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company is currently evaluating the impact ASU No. 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
, which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for
the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard
is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The
adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and
results of operations.
Note 4. Property and Equipment
The components of property and equipment as of December 31,
2015 and 2014, at cost are ($ in thousands):
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Computers
|
|
$
|
12
|
|
|
$
|
10
|
|
Office furniture and equipment
|
|
|
97
|
|
|
|
97
|
|
Leasehold improvements
|
|
|
229
|
|
|
|
229
|
|
Total cost
|
|
|
338
|
|
|
|
336
|
|
Accumulated depreciation and amortization
|
|
|
(333
|
)
|
|
|
(332
|
)
|
Property and equipment, net
|
|
$
|
5
|
|
|
$
|
4
|
|
The Company’s depreciation expense for the years ended
December 31, 2015 and 2014 was $1,089 and $402, respectively.
Note 5. Goodwill and Intangible Assets
Patent Portfolio
The Company’s intangible assets with
finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible
assets were subject to amortization. The net carrying amounts related to acquired intangible assets as of December 31, 2015 are
as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period
(years)
|
|
Patent Portfolios at December 31, 2013, net
|
|
$
|
64,835
|
|
|
|
6.62
|
|
Amortization expenses
|
|
|
(9,831
|
)
|
|
|
|
|
Patent Portfolios at December 31, 2014, net
|
|
$
|
55,004
|
|
|
|
5.62
|
|
Amortization expenses
|
|
|
(6,317
|
)
|
|
|
|
|
Impairment loss
|
|
|
(38,888
|
)
|
|
|
|
|
Patent Portfolios at December 31, 2015, net
|
|
$
|
9,799
|
|
|
|
4.63
|
|
The amortization expenses related to acquired
intangible assets for the years ended December 31, 2015 and 2014 are as follows ($ in thousands):
|
|
For the Years Ended December 31,
|
|
Date Acquired and Description
|
|
2015
|
|
|
2014
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
303
|
|
|
$
|
470
|
|
9/10/13 - North South patent portfolio
|
|
|
84
|
|
|
|
130
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
5,930
|
|
|
|
9,231
|
|
|
|
$
|
6,317
|
|
|
$
|
9,831
|
|
The Company reviews its patent portfolio
for impairment as a single asset group whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. During the second quarter of 2015, the Company determined that certain events occurred (i.e. decline in common stock
price) that were indicators of a potential impairment. In accordance with ASC 360-10, the Company first estimated the future undiscounted
cash flows anticipated to be generated by the patent portfolio based on the Company’s current usage and future plans for
the patent portfolio over its remaining weighted average useful life. The analysis concluded that the carrying amount of the patent
portfolio was not recoverable at June 30, 2015. As a result, the Company performed an analysis to determine if the carrying value
of the patent portfolio exceeded its fair value. Considering that the patent portfolio is the Company’s most significant
asset and is the foundation of all of its operations, the Company determined that the most appropriate measurement of fair value
of the asset group was the aggregate market value of the Company’s common stock. As a result, the Company determined that
the fair value of the patent portfolio at June 30, 2015 was approximately $14.6 million, which was comparable to the aggregate
market capitalization of the Company as of that date. The Company recorded a $35.5 million impairment charge against its patent
portfolio in the second quarter of 2015.
Due to the continuing decrease in the Company’s
stock price, the Company’s performed an additional impairment test of intangible assets at December 31, 2015. In accordance
with ASC 360-10, the Company first estimated the future undiscounted cash flows anticipated to be generated by the patent portfolio
based on the Company’s current usage and future plans for the patent portfolio over its remaining weighted average useful
life. The analysis concluded that the carrying amount of the patent portfolio was not recoverable at December 31, 2015. As a result,
the Company performed an analysis to determine if the carrying value of the patent portfolio exceeded its fair value. Considering
that the patent portfolio is the Company’s most significant asset and is the foundation of all of its operations, the Company
determined that the most appropriate measurement of fair value of the asset group was the aggregate market value of the Company’s
common stock. As a result, the Company determined that the fair value of the patent portfolio at December 31, 2015 was approximately
$9.8 million, which was comparable to the aggregate market capitalization of the Company as of that date. The Company recorded
an additional $3.4 million of impairment charge against its patent portfolio at December 31, 2015. The new cost basis of the patent
portfolio of $9.8 million will be amortized over its weighted average remaining useful life of 4.63 years.
The future amortization of these intangible
assets was based on the adjusted carrying amount. Future amortization of all patents is as follows ($ in thousands):
|
|
Rockstar
|
|
|
North South
|
|
|
Rockstar
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Total
|
|
|
|
24-Jul-13
|
|
|
10-Sep-13
|
|
|
31-Dec-13
|
|
|
Amortization
|
|
Year Ended December 31, 2016
|
|
$
|
104
|
|
|
$
|
31
|
|
|
$
|
2,000
|
|
|
$
|
2,135
|
|
Year Ended December 31, 2017
|
|
|
104
|
|
|
|
30
|
|
|
|
1,995
|
|
|
|
2,129
|
|
Year Ended December 31, 2018
|
|
|
104
|
|
|
|
30
|
|
|
|
1,995
|
|
|
|
2,129
|
|
Year Ended December 31, 2019
|
|
|
104
|
|
|
|
31
|
|
|
|
1,994
|
|
|
|
2,129
|
|
Year Ended December 31, 2020
|
|
|
104
|
|
|
|
31
|
|
|
|
995
|
|
|
|
1,130
|
|
Thereafter
|
|
|
110
|
|
|
|
37
|
|
|
|
-
|
|
|
|
147
|
|
Total
|
|
$
|
630
|
|
|
$
|
190
|
|
|
$
|
8,979
|
|
|
$
|
9,799
|
|
Goodwill
The Company’s market capitalization
is sensitive to the volatility of the Company’s stock price. During the six months ended June 30, 2015, the market price
of the Common Stock decreased from $21.47 to $9.12. The decline in stock price experienced by the Company was deemed a “triggering”
event requiring that goodwill be tested for impairment as of June 30, 2015.
The Company performed its goodwill impairment
test as of June 30, 2015. The Company performed the first step of the goodwill impairment test as of June 30, 2015 in order to
identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The
fair value of the reporting unit is based upon the Company’s market capitalization on the measurement date, June 30, 2015
and also on July 15, 2015 (date of the July 2015 Financing as discussed in Note 8). The Company believes that this is the most
appropriate valuation technique for determining the fair value of the reporting unit. Most importantly, the Company’s common
shares are publicly traded on NASDAQ, and therefore active quoted market prices can be readily observed, and the Company has a
widely distributed shareholder base which provides for a substantial amount of daily trading volume. As such, the Company believes
that the quoted market price is a good representation of a fair value of one share of the Company, or a fractional interest in
the Company.
In performing the second step of the goodwill
impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the implied fair
value of goodwill, the Company assigns the fair value of the reporting unit to all of the assets and liabilities associated with
the reporting unit as if the reporting unit had been acquired in a business combination. Based on the estimated implied fair value
of goodwill, the Company recorded an impairment charge of $1.7 million to reduce the carrying value of goodwill to its implied
fair value, which was determined to be zero. This impairment charge is included in the impairment of goodwill and intangible assets
in the consolidated statement of operations for the year ended December 31, 2015.
Note 6. Fair Value of Financial Assets
and Liabilities
Financial instruments, including cash and
cash equivalents, prepaid expenses and other receivables, accounts payable and accrued liabilities are carried at cost, which management
believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial
assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value.
The Company uses three levels of inputs
that may be used to measure fair value:
Level 1 — quoted prices
in active markets for identical assets or liabilities
Level 2 — quoted prices
for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are
unobservable (for example, cash flow modeling inputs based on assumptions)
The following table presents the Company's assets and liabilities
that are measured at fair value at December 31, 2015 and 2014 ($ in thousands):
|
|
Fair value measured at December 31, 2015
|
|
|
|
Total carrying value
at December 31,
|
|
|
Quoted prices in
active markets
|
|
|
Significant other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual funds
|
|
$
|
3,392
|
|
|
$
|
3,392
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
2,959
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,959
|
|
|
|
Fair value measured at December 31, 2014
|
|
|
|
Total carrying
value at
December 31,
|
|
|
Quoted prices
in active
markets
|
|
|
Significant other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual funds
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
There were no transfers between Level 1, 2 or 3 for the years
ended December 31, 2015 and 2014.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of
the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires
significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are
analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A significant decrease in the volatility
or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the
Company’s consolidated statements of operations.
On July 21, 2015, the Company issued the
July 2015 Warrants to purchase aggregate of 370,263 shares of common stock to the investors in the July 2015 Financing. The July
2015 Warrants become exercisable on January 22, 2016 at an exercise price of $8.17 per share. The warrants require, at the option
of the holder, a net-cash settlement following certain fundamental transactions (as defined in the July 2015 Warrants) at the Company
and therefore are classified as liabilities. The July 2015 Warrants have been recorded at their fair value using the Black-Scholes
valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates
transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.
On December 7, 2015, the Company issued
Series A warrants to purchase of 1,052,624 shares of common stock and Series B warrants to purchase 842,099 shares of common stock
contained in December Offering. Series A Warrants have an exercise price of $3.80 per share and are exercisable at any time between
December 7, 2015 and May 6, 2016. Series B Warrants have an exercise price of $4.75 per share and are exercisable at any time between
December 7, 2015 and December 6, 2020. The Warrants require the issuance of registered shares upon exercise, do not expressly preclude
an implied right to cash settlement and are therefore accounted for as derivative liabilities. The Company classifies these
derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Series A and Series B warrants have
been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value
at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual
terms, maturity, risk free rates, as well as volatility.
A summary of quantitative information with
respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that
are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of December 31, 2015 is as follows:
Date of valuation
|
|
July 21, 2015
|
|
December 7, 2015
|
|
December 31, 2015
|
Risk-free interest rate
|
|
1.69
|
%
|
0.57 - 1.67%
|
|
0.16% - 1.76%
|
Expected volatility
|
|
100.00
|
%
|
114.80%
|
|
100% - 115.35%
|
Expected life (in years)
|
|
5.5
|
|
0.5 - 5.0
|
|
0.3 - 5.1
|
Expected dividend yield
|
|
-
|
|
-
|
|
-
|
The risk-free interest rate was based on
rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based
on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement
feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s
underlying stock price's daily logarithmic returns. The expected life of the warrants was determined by the expiration date of
the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common
stock, and does not expect to pay dividends on its common stock in the future.
The following table sets forth a summary
of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring
basis for the year ended December 31, 2015 and 2014 ($ in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
48
|
|
Recognition of warrant liabilities
|
|
|
3,228
|
|
|
|
-
|
|
Fair value adjustment of warrant liabilities
|
|
|
(269
|
)
|
|
|
(48
|
)
|
Ending balance
|
|
$
|
2,959
|
|
|
$
|
-
|
|
Note 7. RPX License Agreement
On November 23, 2015, the Company and RPX
Corporation (“RPX”) entered into a Patent License Agreement (the “RPX License Agreement”) under which the
Company granted RPX the right to sublicense various patent license rights to certain RPX members. The consideration to the Company
included: (i) the transfer to the Company for cancellation of its remaining outstanding Series I Redeemable Convertible Preferred
Stock (the “Series I Preferred Stock”), as to which a $5,000,000 mandatory redemption payment would have been due from
the Company on or by December 31, 2015; (ii) the transfer to the Company for cancellation of 13%, or 57,076 shares, of its Series
H Convertible Preferred Stock (the “Series H Preferred Stock”) then held by RPX, having a total carrying amount of
$4,765,846 at the time the stock was issued to Rockstar; (iii) cancellation of the only outstanding security interest on 101 of
the Company’s patents and patent applications that originated at Nortel Networks (“Nortel”) and were purchased
by the Company from Rockstar, which security interest had previously been transferred to RPX by Rockstar (“RPX Security Interest”);
and (iv) $300,000 in cash to the Company.
ASC 260-10-S99-2,
Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock
, requires the gain or loss on extinguishment
of equity-classified preferred stock to be included in net income per common stockholder used to calculate earnings per share (similar
to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred
to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted
from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.
The carrying value of Series I Preferred
Stock and Series H Preferred Stock on the extinguishment date was estimated at approximately $5.0 million and $4.8 million, respectively.
This resulted in the Company receiving cash from RPX of $0.3 million, a deemed dividend of approximately $9.5 million, short term
deferred revenue $0.3 million and long term deferred revenue of $0.3 million. The deferred revenue was amortized quarterly.
While the license granted to RPX is non-exclusive
and the duration of the license is for the life of the patents, the Company’s ongoing obligations in the arrangement is to
provide certain specific RPX licensors with a non-exclusive license to any new patents that may be acquired by or exclusively licensed
to the Company during the two-year period following the effective date of the agreement. Therefore, the Company will recognize
$0.6 million revenue ratably over the two-year period that it is obligated to provide these RPX licensees with licenses to such
new patents. At December 31, 2015, the Company recorded approximately $31,000 in revenue.
Note 8. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Amended and Restated Certificate
of Incorporation
On April 24, 2014, the Company filed an
Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, which was previously approved
by the stockholders at a meeting held on February 6, 2014. The Amended and Restated Certificate of Incorporation, among
other things, increased the 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 the Company to indemnify its directors, officer and agents and advance expenses to such persons to the fullest extent
permitted by Delaware law.
On March 4, 2016, the Company implemented
a Reverse Stock Split with a ratio of 1-for-19. The par value and other terms of the common stock were not affected by the Reverse
Stock Split. In addition, the amendment to the Company’s certificate of incorporation that effected the Reverse Stock Split
simultaneously reduced the number of authorized shares of Common Stock from 200,000,000 to 100,000,000 (see Note 1).
Preferred Stock
On April 23, 2014, the Company filed a
Certificate of Elimination with the Secretary of State of the State of Delaware eliminating its 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 preferred stock. No shares of the foregoing series of preferred stock were outstanding. On May 28, 2014, the Company
designated 20,000,000 shares of preferred stock as Series J Convertible Preferred Stock (“Series J Preferred Stock”).
On December 2, 2015, the Company designated 1,240 shares of preferred stock as Series K Convertible Preferred Stock (“Series
K Preferred Stock”). The Company had designated separate series of its capital stock as of December 31, 2015 and December
31, 2014 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of December 31,
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Par Value
|
|
|
Conversion Ratio
|
Series "A"
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.0001
|
|
|
N/A
|
Series "C"
|
|
|
-
|
|
|
|
1
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “D"
|
|
|
4,725
|
|
|
|
4,725
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “D-1"
|
|
|
834
|
|
|
|
834
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “F-1"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “H"
|
|
|
381,967
|
|
|
|
439,043
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “I”
|
|
|
-
|
|
|
|
35,541
|
|
|
|
0.0001
|
|
|
1.05:1
|
Series “J”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “K”
|
|
|
1,240
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
263.16:1
|
Series A Participating Preferred Stock
The Company’s board of directors
has designated 500,000 shares of its preferred stock as Series A Participating Preferred Stock (“Series A Preferred Stock”).
On January 1, 2013, the Company 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 the Company or to deprive its stockholders
of their interest in the long-term value of the Company. These rights seek to achieve these goals by forcing a potential
acquirer to negotiate with the board of directors (or to 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 the Company’s 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 the Company’s common stock.
Each right entitles the registered holder
to purchase nineteen one-hundredths of a share (a “Unit”) of the Company’s 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 10% or more of the Company’s 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 10% or more of the Company’s
common stock. The 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. As of December 31, 2015 and 2014, no shares of Series A Preferred Stock were issued and outstanding.
Series C Convertible Preferred Stock
On March 6, 2013, the Company and certain
investors that participated in the Company’s November 2012 private placement transaction entered into separate Warrant Exchange
Agreements pursuant to which those investors exchanged common stock purchase warrants for 229,337 shares of the Company’s
Series C Convertible Preferred Stock (“Series C Preferred Stock”). Each share of Series C Preferred Stock
is convertible into one-nineteenth of a share of Common Stock at the option of the holder. The Series C 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 Preferred Stock. During the year ended December 31, 2013, 229,336 shares of Series C Preferred
Stock were converted into 12,070 shares of common stock. In December 2015, the one remaining share of Series C Preferred Stock
was surrendered by the stockholder for cancellation. As of December 31, 2015 and 2014, none and one share of Series C Preferred
Stock remained issued and outstanding, respectively.
Series D Convertible Preferred Stock
In connection with the acquisition of North
South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred Stock
(“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock
has a stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of Common Stock. Upon the
liquidation, dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled
to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated
value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each
holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled
to such number of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible into
at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and
the conversion limitations described below. 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 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 the Company. The conversion
ratio of the Series D Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares
and similar recapitalization transactions.
During the year ended December 31, 2014,
1,222,857 shares of Series D Preferred Stock were exchanged for Series D-1 Convertible Preferred Stock. As of December
31, 2015 and 2014, 4,725 shares of Series D Preferred Stock remained issued and outstanding.
Series D-1 Convertible Preferred Stock
The Company’s Series D-1 Convertible
Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series
D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share of Common Stock. Upon
the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be
entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i)
the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each
holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and
shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D-1 Preferred Stock
are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate
of Designation. 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 issued and outstanding Common Stock. The conversion ratio of the Series D-1 Preferred
Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization
transactions. The Company commenced an exchange with holders of Series D Convertible Preferred Stock pursuant to which
the holders of the Company’s outstanding shares of Series D Preferred Stock acquired in the Merger could exchange such shares
for shares of the Company’s Series D-1 Preferred Stock on a one-for-one basis.
On January 27, 2014, the Company entered
into a lockup agreement with certain holders of an aggregate of 79,376 shares of Common Stock and shares of Common Stock issuable
upon conversion of shares of Series D-1 Preferred Stock, which are included in the Company’s Registration Statement on Form
S-1 (File No.333-192737) (the “Lockup Agreement” and such 79,376 shares, the “Locked Up Shares”). The
holders of the Locked Up Shares have agreed, for so long as such holders own such shares, not to sell any Locked Up Shares unless
either (i) if such sale price is at least $114.00 per share, the cumulative amount sold by such holder (including the anticipated
sale) does not exceed such holder's pro rata portion of 60% of the composite aggregate trading volume of the Common Stock during
the period beginning on the date that the Registration Statement is declared effective and ending on the date of sale (the “Lockup
Measuring Period) or (ii), if the sale price is less than $114.00 per share, the cumulative amount sold by such holder does not
exceed such holder's pro rata portion of 20% of the composite aggregate trading volume during the Lockup Measuring Period.
During the year ended December 31, 2014,
(a) 1,222,857 shares of Series D Preferred Stock were exchanged for Series D-1 Preferred Stock and (b) 1,281,288 shares of Series
D-1 Preferred Stock were converted into 674,362 shares of Common Stock. As of December 31, 2015 and 2014, 834 shares
of Series D-1 Preferred Stock remained issued and outstanding.
Series F-1 Convertible Preferred Stock
The Company’s Series F-1 Convertible
Preferred Stock (“Series F-1 Preferred Stock”) was established on November 22, 2013. Each share of Series
F-1 Preferred Stock was convertible, at the option of the holder at any time, into one-nineteenth of a share of Common Stock and
had a stated value of $0.0001. Such conversion ratio was subject to adjustment in the event of stock splits, stock dividends,
combination of shares and similar recapitalization transactions. Each share of Series F-1 Preferred Stock was entitled to
91% of the number of shares of Common Stock into which the Series F-1 was convertible (subject to beneficial ownership limitations)
and voted together with holders of Common Stock. The Company was prohibited from effecting the conversion of the Series
F-1 Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99% in the
aggregate of the 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 F-1 Preferred Stock.
During the year ended December 31, 2014,
156,250 shares of Series F-1 Preferred Stock were converted into 8,223 shares of Common Stock. As of December 31, 2015 and 2014,
no shares of Series F-1 Preferred Stock remained issued and outstanding.
Series H Convertible Preferred Stock
On December 31, 2013, the Company designated
459,043 shares of preferred stock as Series H Preferred Stock. On December 31, 2013, the Company 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-nineteenths of a share 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.
The Company is 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 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 the Company’s 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 were not immediately convertible and did not
possess any voting rights until such a time as the Company had obtained stockholder approval of the issuance, pursuant to NASDAQ
Listing Rule 5635. On April 16, 2014, the Company obtained the required stockholder approval and, as a result, all
outstanding shares of Series H Preferred Stock are convertible and possess voting rights in accordance with its terms. On
May 28, 2014, 20,000 shares of Series H Preferred Stock were converted into 10,526 shares of Common Stock.
In January 2015, Rockstar transferred its
remaining outstanding Series H Preferred Stock to RPX Clearinghouse LLC, an affiliate of RPX.
According to the RPX License Agreement
disclosed in Note 7, on November 23, 2015, RPX transferred to the Company for cancellation 57,076 shares of Series H Preferred
Stock then held by RPX, having a total carrying amount of $4,765,846 at the time the stock was issued to Rockstar.
As of December 31, 2015 and 2014, 381,967
and 439,043 shares of Series H Preferred Stock remained issued and outstanding, respectively.
Series I Redeemable Convertible Preferred
Stock
On December 31, 2013, the Company designated
119,760 shares of preferred stock as Series I Preferred Stock. On December 31, 2013, the Company issued approximately
$20 million (or 119,760 shares) of Series I Preferred Stock to Rockstar. Each share of Series I Preferred Stock was
convertible into twenty-nineteenths of a share of Common Stock and had a stated value of $167.00. The conversion ratio
was subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The
holder was prohibited from converting the Series I Preferred Stock to the extent that, as a result of such conversion, the holder
beneficially owned 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 the Company’s 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 its 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 were convertible, subject
to applicable beneficial ownership limitations. The Series I Preferred Stock provided for a liquidation preference of
$167.00 per share.
The Series I Preferred Stock contained
a mandatory redemption date of December 31, 2015 as to 100% of the Series I Preferred Stock then outstanding, 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 September 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, the Company
was required to pay the holder a Redemption Payment equal to the lesser of (i) such number of shares of Series I Preferred Stock
as had a stated value of $5.0 million; or (ii) such number of shares of Series I Preferred Stock as should, together with all voluntary
and mandatory redemptions and conversions to Common Stock occurring prior to the applicable Partial Redemption Date, had an aggregate
stated value of $5.0 million; or (iii) the remaining shares of Series I Preferred Stock issued and outstanding if such shares had
an aggregate stated value of less than $5.0 million, in an amount of cash equal to its stated value plus all accrued but unpaid
dividends, distributions and interest thereon, unless such holder of Series I Preferred Stock, in its sole discretion, elected
to waive such Redemption Payment or convert such shares of Series I Preferred Stock (or a portion thereof) into Common Stock. No
interest or dividends were payable on the Series I Preferred Stock unless the Company failed to make the first $5.0 million Partial
Redemption Payment due September 30, 2014, then interest should accrue on the outstanding stated value of all outstanding shares
of Series I Preferred Stock at a rate of 15% per annum from January 1, 2014. The Company’s obligations to pay
the Redemption Payments and any interest payments in connection therewith were secured pursuant to the terms of a Security Agreement
under which the Rockstar patent portfolio serves as collateral security. No action can be taken under the Security Agreement
unless the Company had failed to make a second redemption payment of $5.0 million due December 31, 2014, which payment was made. The
Security Agreement contains additional usual and customary events of default under which the holder could take action, including
a sale to a third party or reduction of secured amounts via transfer of the Rockstar patent portfolio to the holder.
Additionally, in the event the Company
consummated a Fundamental Transaction (as defined below), the Company should be 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 the Company with cash and cash equivalents on hand of $5.0 million and up until the
net proceeds leave the Company with cash and cash equivalents on hand of $7.5 million and (ii) 100% of the net proceeds of the
Fundamental Transaction thereafter. “Fundamental Transaction” means directly or indirectly, in one or more related
transactions: (a) the Company of any subsidiary realizes 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 the Company and not just in respect
of the patents) during any fiscal quarter in an amount which would cause the cash or cash equivalents of the Company to exceed
$5,000,000, (b) the Company consolidates or merges with or into (whether or not the Company or any of its subsidiaries is the surviving
corporation) any other person, or (c) the Company or any of its subsidiaries sells, leases, licenses, assigns, transfers, conveys
or otherwise disposes of all or substantially all of its respective properties or assets to any other Person, provided that, in
the event of a Fundamental Transaction under clause (b) or (c), neither such Fundamental Transaction may proceed without the consent
of the holders holding a majority of the shares of Series I Preferred Stock unless (A) all shares of Series I Preferred Stock held
by the holders are redeemed with interest upon closing of such Fundamental Transaction, and (B) all shares of Common Stock of the
Company then held by the holders are redeemed or otherwise purchased for cash or freely tradable securities of a publicly traded
company at a price at or above the then-current market value of such Common Stock.
The shares of Series I Preferred Stock
were not immediately convertible and did not possess any voting rights until such a time as the Company had obtained stockholder
approval of the issuance, pursuant to NASDAQ Listing Rule 5635. On April 16, 2014, the Company obtained the required stockholder
approval and, as a result, all outstanding shares of Series I Preferred Stock are convertible and possess voting rights in accordance
with its terms.
In June 2014, the Company redeemed 84,219
shares of Series I Preferred Stock. In accordance with this Redemption Payment, the Company paid Rockstar $14.1 million.
In January 2015, Rockstar transferred its
remaining outstanding Series I Preferred Stock, as well as its other stock in the Company to RPX Clearinghouse LLC.
In June 2015, the Company redeemed 5,601
shares of Series I Preferred Stock. In accordance with this redemption, the Company paid RPX $0.9 million.
On November 23, 2015, as per RPX License
Agreement disclosed in Note 7, RPX transferred to the Company for cancellation all remaining 29,940 shares of Series I Preferred
Stock, as to which a $5,000,000 mandatory redemption payment would have been due from the Company on or by December 31, 2015.
As of December 31, 2015 and 2014, none
and 35,514 shares of Series I Preferred Stock remained issued and outstanding, respectively.
Series J Convertible Preferred Stock
On May 28, 2014, the Company designated
20,000,000 shares of preferred stock as Series J Preferred Stock. On May 28, 2014, the Company entered into an placement agency
agreement with Laidlaw & Company (UK) Ltd., as the placement agent, which provided for the issuance and sale in a registered
direct public offering (the “Series J Offering”) by the Company of 10,000,000 shares of Series J Preferred Stock which
were convertible into a total of 526,315 shares of Common Stock. The Series J Preferred Stock in the Series J Offering was sold
at a public offering price of $2.00 per share. The net offering proceeds to the Company from the sale of the shares were approximately
$18.4 million, after deducting placement agent fees ($1.32 million), legal fees ($0.18 million) and escrow fee ($0.04 million).
The sale of the Series J Preferred Stock was made pursuant to a subscription agreement between the Company and certain investors
in the Series J Offering.
The shares of Series J Preferred Stock
carry a liquidation preference equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder
of Common Stock if such holder had converted the Series J Preferred Stock immediately prior to such liquidation, dissolution or
winding up. Each holder of Series J Preferred Stock is entitled to vote on all matters submitted to stockholders of the Company
and is entitled to a vote of 67.3% of the number of votes for each share of Common Stock into which the Series J Preferred Stock
is convertible owned at the record date for the determination of stockholders entitled to vote on such matter. Subject to certain
ownership limitations as described below, shares of Series J Preferred Stock are convertible at any time at the option of the holder
into shares of Common Stock in an amount equal to one-nineteenths of a share of Common Stock for each one share of Series J Preferred
Stock surrendered. Subject to limited exceptions, holders of shares of Series J Preferred Stock do not have the right
to convert any portion of their Series J Preferred Stock that would result in the holder, together with its affiliates, beneficially
owning in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to its conversion;
notwithstanding the foregoing, some Investors elected to have the 9.99% beneficial ownership limitation to initially be 4.99%.
As of December 31, 2014, all 10,000,000
shares of Series J Preferred Stock had been converted into 526,315 shares of Common Stock. As of December 31, 2015 and 2014, no
shares of Series J Preferred Stock are issued and outstanding.
Series K Convertible Preferred Stock
On December 2, 2015, the Company designated
1,240 shares of preferred stock as Series K Preferred Stock. On December 7, 2015, the Company issued 1,240 shares of
Series K Preferred Stock in December 2015 Offering. Each share of Series K Preferred Stock is convertible into five
thousand-nineteenths of a share of Common Stock and has a stated value of $1,000. The conversion ratio is subject to
adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The
Series K Preferred do not generally have any voting rights but are convertible into shares of Common Stock. At no time may shares
of Series K Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of the 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 the Company. The conversion ratio of the Series K Preferred Stock is subject to adjustment
in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.
As of December 31, 2015, 1,240 shares of
Series K Preferred Stock are issued and outstanding.
Common Stock
Offerings of Common Stock and Warrants
On March 26, 2014, the Company sold an
aggregate of $4,446,000 of its securities in a private offering made solely to accredited investors (the “March 26 Offering”)
pursuant to subscription agreements, dated as of March 26, 2014. Pursuant to the March 26 Offering, investors purchased
(i) 62,401 shares of Common Stock and (ii) five-year warrants to purchase an aggregate of 31,152 shares of Common Stock at an exercise
price of $116.85 per share. The warrants became exercisable on the six-month anniversary of the date of issuance by
payment to the Company of the exercise price of $116.85 per share, or if a registration statement covering the Common Stock underlying
the warrants is not then in effect, on a cashless basis. Each warrant may be callable at $0.19 per warrant upon the
consummation of a Company financing with a per-share offering price of at least $152.00 and net proceeds to the Company from such
offering of at least $15 million.
Pursuant to the terms of the subscription
agreements, the Company registered with the United States Securities and Exchange Commission (“SEC”) all shares of
Common Stock and the shares of Common Stock underlying the warrants issued in the March 26 Offering (including the Placement Agent
Warrant described below) on Form S-3, which was declared effective on May 16, 2014.
The Company incurred aggregate costs associated
with the March 26 Offering of approximately $572,000, and issued a five-year warrant to purchase 6,240 shares of common stock to
the placement agent at an exercise price of $88.73 per share of common stock (the “Placement Agent Warrant”). The
Placement Agent Warrant became exercisable on the six-month anniversary of the date of issuance.
On July 15, 2015, the Company entered into
a placement agency agreement with Chardan Capital Markets, LLC as placement agent (the “Placement Agent”), relating
to the July 2015 Financing, which was a registered direct offering to select institutional Investors of 301,026 shares of the Company’s
Common Stock, $0.0001 par value per share, and Common Stock Purchase Warrants to purchase up to an aggregate of 370,263 shares
of Common Stock.
Pursuant to the Placement Agency Agreement,
the Company paid the Placement Agent a cash fee of 8.0% of the gross proceeds from the July 2015 Financing and $25,000 for its
expenses related to the offering. The Placement Agent had no commitment to purchase any of the shares of Common Stock or Warrants
and was acting only as an agent in obtaining indications of interest from investors who purchased the shares of Common Stock and
Warrants directly from the Company.
In addition, on July 15, 2015, the Company
and the investors in the July 2015 Financing entered into a securities purchase agreement (the “Securities Purchase Agreement”)
relating to the issuance and sale of the Offered Shares and the warrants. The Offered Shares and warrants were sold in units, with
each unit consisting of one-nineteenth of an Offered Share and a warrant to purchase 0.06 shares of Common Stock. The purchase
price per unit was $4.864. The Warrants provide for an exercise price of $8.17 per share and became exercisable on January 22,
2016 and have a term of five years thereafter. The exercise price of the Warrants will also be adjusted in the event of stock splits
and reverse stock splits. Except upon at least 61 days’ prior notice from the holder to the Company, 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 the Company’s 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%.
The Securities Purchase Agreement further
provides that, subject to certain exceptions, until the warrants issued in the July 2015 Financing are no longer outstanding, the
Company will not affect or enter into a variable rate transaction. The Securities Purchase Agreement also provides the investors
an 18-month right of participation for an amount up to 100% of such subsequent financing common stock (or common stock equivalents
or a combination thereof), on the same terms and conditions of such transaction.
The net proceeds to the Company from the
July 2015 Financing, after deducting Placement Agent fees and the Company’s estimated offering expenses, and excluding the
proceeds, if any, from the exercise of the Warrants, were approximately $1.3 million. The July 2015 Financing closed on July 21,
2015. As disclosed in Note 6, the warrants issued in the July 2015 Financing were required to be accounted for as derivative liabilities
as a result certain net cash settlement provisions in control of the holder. As a result, of the total net proceeds received, $985,000was
allocated to the warrants on the closing date of the July 2015 Financing.
On December 2, 2015, the Company entered
into a purchase agreement with investors to sell an aggregate of 13.8 million Class A Units (consisting of one-nineteenth of a
share of Common Stock, a Series A Warrant and a Series B). Included in the sale were 1,240 Class B Units issuable to those investors
whose purchase of Class A Units in this offering would otherwise result in such investor beneficially owning more than 4.99% of
the Company’s outstanding Common Stock immediately following the consummation of the December 2015 Offering. Each Class B
Unit consisted of one share of Series K Preferred Stock, with a stated value of $1,000 per share and convertible into shares of
Common Stock (on a 1 for 263 basis) at the public offering price of the Class A Units, together with the equivalent number of Series
A warrants and Series B warrants as would have been issued to such purchaser if they had purchased Class A Units based on the public
offering price.
The Company received net proceeds of approximately
$3.4 million from the December 2015 Offering after deducting placement agent fees and offering expenses. The December 2015 Offering
closed on December 7, 2015. Of the total proceeds received, $2.2 million were allocated to the fair value of the warrants issued
on the grant date.
Beneficial Conversion Feature
In the December 2015 Offering, the Company
issued 1,240 shares of Series K Preferred Stock, together with Series A warrants for the purchase of 326,313 shares of Common Stock
and Series B warrants for the purchase of 261,051 shares of Common Stock contained in the Class B Units (the “Class B Unit
Warrants”). Series A Warrants have an exercise price of $3.80 per share and are exercisable at any time between December
7, 2015 and May 6, 2016. Series B Warrants have an exercise price of $4.75 per share and are exercisable at any time between December
7, 2015 and December 6, 2020.
The Company assessed the Series K Preferred
Stock under ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”), ASC Topic 815, “Derivatives
and Hedging” (“ASC 815”), and ASC Topic 470, “Debt” (“ASC 470”). The preferred stock
contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative.
However, the Company determined that the Series K Preferred Stock is an “equity host” (as described by ASC 815) for
purposes of assessing the embedded derivative for potential bifurcation and that the optional conversion feature is clearly and
closely associated to the preferred stock host; therefore, the embedded derivative does not require bifurcation and separate recognition
under ASC 815. The Company determined there to be a beneficial conversion feature (“BCF”) requiring recognition at
its intrinsic value. Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the
BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock.
As of December 31, 2015 the Company recorded
a deemed dividend of approximately $323,000 related to the beneficial conversion feature with the issuance of the Series K Preferred
Stock in the consolidated statements of operations.
Common Stock Grants
In April 2014, the Company issued Rockstar
12,606 shares of common stock with a grant date fair value of approximately $0.7 million for registration penalty as discussed
below in Note 10.
On July 10, 2014, the Company issued 6,579
shares of fully registered common stock for the accrued settlement of the contractual dispute with a financial advisor. The aggregate
fair value of the stock grant was $225,000 based upon the closing price of the Company’s common stock on July 1, 2014.
Warrants
A summary of warrant activity for year
ended December 31, 2015 is presented below:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Outstanding as of January 1, 2015
|
|
|
40,452
|
|
|
$
|
260.34
|
|
|
$
|
-
|
|
|
|
4.03
|
|
Issued
|
|
|
2,264,986
|
|
|
|
4.87
|
|
|
|
-
|
|
|
|
2.82
|
|
Expired
|
|
|
(550
|
)
|
|
|
5,700.00
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
2,304,888
|
|
|
$
|
32.94
|
|
|
$
|
-
|
|
|
|
2.83
|
|
Exercisable as of December 31, 2015
|
|
|
2,304,888
|
|
|
$
|
32.94
|
|
|
$
|
-
|
|
|
|
2.83
|
|
Stock Options
2012 Plan
In late 2012, the Company adopted the 2012
Equity Incentive Plan (the “2012 Plan”) which permits issuance of incentive stock options, non-qualified stock options
and restricted stock. The 2012 Plan replaced a prior incentive stock plan. At December 31, 2015, there were 360 fully vested options
outstanding and 161 shares available for grant under the 2012 Plan.
2013 Plan
In April 2013, the Company’s board
of directors adopted the Spherix Incorporated 2013 Equity Incentive Plan (the “2013 Plan”), an omnibus equity incentive
plan pursuant to which the Company may grant equity and cash and equity-linked awards to certain management, directors, consultants
and others. The plan was approved by the Company’s stockholders in August 2013.
The 2013 Plan authorized approximately
15% of the Company’s fully-diluted Common Stock at the time approved (not to exceed 147,368 shares) be reserved for issuance
under the Plan, after giving effect to the shares of the Company’s capital stock issuable under the Nuta Merger.
At December 31, 2015, there were 105,610 fully vested options
outstanding and 41,758 shares available for grant under the 2013 Plan.
2014 Plan and Option Grants
On January 28, 2014, the Company approved
the adoption of a director compensation program (the “Program”) for non-employee directors pursuant to and subject
to the available number of shares reserved under the Spherix Incorporated 2014 Equity Incentive Plan (the “2014 Plan”).
At December 31, 2015, there were 183,410
options outstanding and 35,636 shares available for grant under the 2014 Plan.
On May 28, 2014, Mr. Harvey Kesner resigned
as a director of the Company. Pursuant to this resignation, the Company's Board of Directors approved the accelerated vesting of
44,078 previously granted stock options to vest on the date of Mr. Kesner's resignation. As a result, the Company recorded
an immediate one-time charge of $5.4 million of additional stock-based compensation expense in June 2014 related to this modification.
On December 15, 2014, Mr. Edward Karr resigned
as a director of the Company. Pursuant to this resignation, the Company's Board of Directors approved the accelerated vesting of
7,236 previously granted stock options to vest on the date of Mr. Karr’s resignation. As a result, the Company recorded
an immediate one-time charge of approximately $0.1 million of additional stock-based compensation expense in December 2014 related
to this modification.
On April 3, 2014, pursuant to and subject
to the available number of shares reserved under the Company’s 2014 Equity Incentive Plan, the Company issued 26,315 non-qualified
options with a term of five years and an exercise price of $54.34 to Anthony Hayes, director and the Chief Executive Officer of
the Company. 50% of the options vested immediately, and the remaining 50% vesting upon the Company’s receipt of gross proceeds
of at least $30 million by April 3, 2015 from an offering of its securities (the “Performance Condition”). Since the
Performance Condition was not satisfied by April 3, 2015, 13,157 options were forfeited. As a result, the Company reversed $0.4
million of option expense related to this grant in April 2015.
On May 24, 2015, 176 options granted on
May 25, 2010 expired.
In August 2015, pursuant to and subject
to the available number of shares reserved under the 2014 Plan, the Company issued 23,682 options to five of the Company’s
directors. These stock options are vested within one year of the date of grant.
The grant date fair value of stock options
granted during the year ended December 31, 2015 was approximately $69,000. The fair value of the Company’s common stock
was based upon the publicly quoted price on the date that the final approval of the awards was obtained. The Company
does not expect to pay dividends in the foreseeable future so therefore the expected dividend yield is 0%. The expected
term for stock options granted with service conditions represents the average period the stock options are expected to remain outstanding
and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting
Bulletin No. 110 for “plain vanilla” options. The expected term for stock options granted with performance
and/or market conditions represents the estimated period estimated by management by which the performance conditions will be met. The
Company obtained the risk-free interest rate from publicly available data published by the Federal Reserve. During the
third quarter of 2015, the Company adjusted its methodology in estimating its historical volatility percentage from a computation
that was based on a comparison of average volatility rates of similar companies to a computation based on the standard deviation
of the Company’s own underlying stock price's daily logarithmic returns. The fair value of options granted in
2015 and 2014 was estimated using the following assumptions:
|
|
For the Years Ended December 31,
|
|
|
2015
|
|
2014
|
Exercise price
|
|
$4.18 - $32.87
|
|
$25.46 - $110.77
|
Expected stock price volatility
|
|
117.2% - 130.4%
|
|
77.7% - 90.6%
|
Risk-free rate of interest
|
|
0.74% - 1.08%
|
|
0.76% - 1.80%
|
Term (years)
|
|
1.9 - 3.0
|
|
2.5 - 5.5
|
A summary of option activity under the
Company’s employee stock option plan for year ended December 31, 2015 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
Outstanding as of January 1, 2015
|
|
|
275,970
|
|
|
$
|
94.37
|
|
|
$
|
-
|
|
|
|
6.0
|
|
Employee options granted
|
|
|
23,682
|
|
|
|
9.53
|
|
|
|
-
|
|
|
|
4.4
|
|
Employee options forfeited
|
|
|
(13,157
|
)
|
|
|
54.34
|
|
|
|
-
|
|
|
|
-
|
|
Employee options expired
|
|
|
(8
|
)
|
|
|
4,332.00
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
286,487
|
|
|
$
|
89.07
|
|
|
$
|
-
|
|
|
|
5.0
|
|
Options vested and expected to vest
|
|
|
286,487
|
|
|
$
|
89.07
|
|
|
$
|
-
|
|
|
|
5.0
|
|
Options vested and exercisable
|
|
|
284,514
|
|
|
$
|
89.66
|
|
|
$
|
-
|
|
|
|
5.0
|
|
A summary of options that the Company granted to non-employees
for the year ended December 31, 2015 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
Outstanding as of January 1, 2015
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
6.4
|
|
Non-employee options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
5.4
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
5.4
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
5.4
|
|
Stock-based compensation associated with the amortization of
stock option expense was $0.2 million and $12.6 million for the years ended December 31, 2015 and 2014, respectively.
Estimated future stock-based compensation
expense relating to unvested stock options is approximately $4,000. The weighted average remaining vesting period of options outstanding
at December 31, 2015 is approximately 0.01 years.
Restricted Stock Awards
On January 23, 2014, the Company issued
105 shares of fully vested common stock to two consultants in return for services rendered. The grant date fair value of restricted
stock was $17,500.
On March 3, 2014 the Company issued 89
shares of fully vested common stock for consulting services. The grant date fair value of restricted stock was approximately $8,000.
On March 14, 2014, the Company granted
526 restricted shares to an employee of the Company. The restricted stock awards vest in 25% increments in quarterly
installments beginning March 14, 2014. As of December 31, 2014, 395 shares were vested and approximately $37,000 of expenses were
recorded under stock-based compensation expenses during the year ended December 31, 2014. On January 5, 2015, the Company issued
remaining 131 shares and recorded an approximately $9,000 of stock-based compensation expenses.
On April 15, 2014, the Company issued 526
shares of restricted common stock to a third party for consulting services. 263 shares were vested upfront, and the remaining 263
shares were vest on October 22, 2014. The Company recorded total expenses of $18,200 for this grant during the year ended December
31, 2014.
On May 13, 2014, the Company issued 2,631
shares of restricted common stock to a third party for consulting services. The restricted stock award vested immediately. The
grant date fair value of restricted stock was $62,000.
On June 9, 2014, the Company issued 313
shares of restricted common stock to a third party for consulting services. The restricted stock award vested immediately. The
grant date fair value of restricted stock was approximately $10,000.
On June 27, 2014, the Company issued 1,754
shares of restricted common stock to a third party for legal services. The restricted stock award vested immediately. The grant
date fair value of restricted stock was approximately $60,000.
On August 1, 2014, the Company issued 526
restricted shares to an employee of the Company. The restricted stock awards vest in 25% increments in quarterly installments
beginning August 1, 2014. At December 31, 2014, 264 shares were vested and approximately $11,400 of expenses were recorded under
stock-based compensation expenses during the year ended December 31, 2014. The remaining 262 shares were vested in 2015. The Company
recorded an approximately $2,000 of stock-based compensation expenses during the year ended December 31, 2015.
On June 10, 2015, the Company entered into
a consulting agreement with a third party for three months of consulting services. The Company agreed to pay the consultant a monthly
fee of $10,000, payable in shares of Common Stock for each month of the term. On August 6, 2015, the Company issued 822 and 1,350
common shares based on the closing price of Common Stock on June 10, 2015 and July 10, 2015, respectively. On October 6, 2015,
the Company issued 2,193 common shares based on the closing price of Common Stock on August 9, 2015.
On June 15, 2015, the Company entered into
a consulting agreement with a third party for public relations consulting services. The Company agreed to pay the consultant a
monthly fee of $5,000 for three months commencing on June 15, 2015, and granted 2,368 shares of restricted stock. The restricted
stock awards vested monthly for each of the three months following the grant date. On August 6, 2015, the Company issued 1,578
common shares and on October 6, 2015, the Company issued the remaining 789 shares of Common Stock. The Company recorded an approximately
$28,000 of stock-based compensation expenses for this grant during the year ended December 31, 2015.
On August 10, 2015, the Company entered
into a consulting agreement with Howard E. Goldberg, the Company’s director (see Note 9). In November 2015, the service expenses
exceed the quarterly retainers, which is $20,400. As per consulting agreement, $1,487 of service expenses will be paid in shares.
On January 26, 2016, 652 shares of restricted stock were issued based upon the closing price on that date.
In December 2015, the Company entered into
a consulting agreement with a third party for consulting services. The Company agreed to pay the consultant a $50,000 of the Company’s
common stock, which shall be issued in two equal parts. The first $25,000 should be issued at the closing price of December 22,
2015, and the second $25,000 will be issued six months later. On January 26, 2016, the Company granted 8,771 shares of restricted
stock to the consultant for the first $25,000 service expenses, which were recorded during the year ended December 31, 2015.
In December 2015, in accordance with the
employment agreements, the Company determined to pay each of Mr. Reiner and Mr. Dotson $60,000 in shares of common stock in respect
of their performance for the 2015 fiscal year which, as of the closing price of December 21, 2015, would have constituted a total
of 42,106 shares. The shares were issued in March 2016.
A summary of the restricted stock award
activity for the year ended December 31, 2015 is as follows:
|
|
Number of Units
|
|
|
Weighted Average
Grant Day Fair
Value
|
|
Nonvested at January 1, 2015
|
|
|
394
|
|
|
$
|
49.97
|
|
Granted
|
|
|
6,732
|
|
|
|
8.49
|
|
Vested
|
|
|
(7,126
|
)
|
|
|
5.30
|
|
Nonvested at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Stock-based Compensation Expense
Stock-based compensation expense for the
year ended December 31, 2015 and 2014 was comprised of the following ($ in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Employee restricted stock awards
|
|
$
|
132
|
|
|
$
|
49
|
|
Employee stock option awards
|
|
|
155
|
|
|
|
12,403
|
|
Non-employee restricted stock awards
|
|
|
84
|
|
|
|
176
|
|
Non-employee option awards
|
|
|
-
|
|
|
|
48
|
|
Total compensation expense
|
|
$
|
371
|
|
|
$
|
12,676
|
|
Note 9. Related Party Transactions
Executive Officer Agreements
As it relates to Mr. Hayes 2014 annual
bonus, during the year ended December 31, 2014, the Compensation Committee of the Board of Directors (the “Board”)
approved a bonus payout of $175,000 for services provided in 2014. The Company has included such bonus in accrued expenses
on the consolidated balance sheet as of December 31, 2014. Mr. Hayes waived the receipt of this accrued bonus during the year ended
December 31, 2015.
In February 2015, the members of the Compensation
Committee established milestones related to the target bonus per the Employment Agreement (a “Target Bonus”) for the
Company’s Chief Executive Officer, Mr. Anthony Hayes. The amount of the Target Bonus per the Agreement is (i) $350,000 in
cash, which shall be payable in a single lump-sum payment promptly following the consummation of a Qualifying Strategic Transaction
(or series of transactions), and (ii) a discretionary bonus to be determined by the Compensation Committee, in its sole discretion,
prior to the earlier of a proxy solicitation in 2015 in relation to a qualifying strategic transaction(s) or the consummation thereof.
Qualifying Strategic Transactions were defined as transaction(s) that would provide gross proceeds or borrowing capacity of at
least $12.0 million to the Company. The Target Bonus of $350,000 was included in accrued salaries and benefits in the first quarter
of 2015 as management determined at that time it was probable that a Qualifying Strategic Transaction would occur. In December
2015, the members of Compensation Committee reviewed the 2015 achievements and deemed that Mr. Hayes achieved the criteria for
his 2015 Target Bonus by consummating a number of strategic transactions prior to December 31, 2015 that together reached the applicable
bonus threshold. The Company accrued Mr. Hayes’ $350,000 bonus under accrued salaries and benefits on the consolidated balance
sheets, paid it to him in cash in January 2016.
On January 6, 2014, the Company’s
Board appointed Richard Cohen as its Chief Financial Officer, and Michael Pollack resigned as the interim Chief Financial Officer
of the Company, effective January 3, 2014. Mr. Cohen was served as the Company’s Chief Financial Officer pursuant to an agreement
with Chord Advisors LLC (“Chord”), of which Mr. Cohen was Chairman. In consideration for Mr. Cohen’s services,
the Company agreed to pay Chord a monthly fee of $20,000, $5,000 of which was initially payable in shares of the Company’s
common stock. In April 2014, the Company modified this agreement to pay Chord a monthly fee of $20,000 in cash. The previous $15,000
payable in shares was forgiven by Chord.
On June 30, 2015, the Board of the Company
accepted the resignation of Richard Cohen as Chief Financial Officer of the Company, effective immediately. In connection therewith,
the Company amended and restated its consulting agreement with Chord, an advisory firm that provides the Company with certain accounting
services, such that it would continue to provide the Company with certain financial accounting and advisory services, with the
monthly fee to Chord reduced from $20,000 to $10,000 per month since its affiliate would no longer serve as the Company’s
Chief Financial Officer.
In connection with the resignation of
Mr. Cohen, on June 30, 2015, the Board of Directors appointed Frank Reiner as the Interim Chief Financial Officer of the
Company, effective immediately. Pursuant to Mr. Reiner’s employment agreement with the Company, dated as of March 14,
2014, as amended, the term of Mr. Reiner’s employment is one year and automatically extends for additional one-year
terms unless no less than 60 days’ prior written notice of non-renewal is given by Mr. Reiner or the Company. Mr.
Reiner’s base salary under his employment agreement was $235,000 per year, but in connection with being named Interim
Chief Financial Officer, the Board of Directors authorized an amendment to Mr. Reiner’s employment agreement to
increase Mr. Reiner’s base salary to $271,000. Mr. Reiner is also entitled to receive an annual bonus if the
Compensation Committee of the Board determines that performance targets have been met. The amount of the annual bonus is
determined based on the Company’s gross proceeds from certain monetization of the Company’s intellectual
property. Mr. Reiner is also eligible to participate in all employee benefits plans from time to time in effect for the
Company’s other senior executive officers. In December 2015, the members of the Compensation Committee determined that,
under Mr. Reiner’s employment agreement, the Company has the obligation to pay Mr. Reiner $60,000 in shares of common
stock in respect of his performance for the 2015 fiscal year. The Company will also pay Mr. Reiner an annual bonus of $40,000
in cash in respect of his 2015 performance. For the 2014 fiscal year, Mr. Reiner achieved the target for an annual bonus
of $20,000 in cash and $20,000 in shares of common stock. The payment was deferred in 2015. The common stock portion of 2014
bonus shall be paid in cash lieu of in common stock. The Company accrued Mr. Reiner’s 2014 and 2015 cash bonus under
accrued salaries and benefits on the consolidated balance sheets. In January 2016, the Company paid Mr. Reiner $80,000 in
cash.
On August 10, 2015, the Company entered
into a consulting agreement with Mr. Howard E. Goldberg (d/b/a Forward Vision Associates, of which Mr. Goldberg is the sole proprietor
and owner), on an independent contractor basis, pursuant to which Mr. Goldberg will, among other services, provide advisory services
to the Company in areas including licensing, litigation and business strategies. The Company will pay Mr. Goldberg an agreed upon
quarterly retainer amount of $20,400 (calculated on an hourly basis) and, if applicable, upon exhaustion of each quarterly retainer,
at an hourly rate to be paid in equity (for the first 50 hours above the quarterly retainer), and subsequently (if applicable)
at an hourly rate thereafter in cash. The Company will reimburse Mr. Goldberg for actual out-of-pocket expenses. The consulting
agreement with Mr. Goldberg has an initial term of one year, unless consultant has completed the desired services by an earlier
date or unless the agreement is earlier terminated pursuant to its terms. The consulting agreement with Mr. Goldberg may be extended
by written agreement of both the Company and consultant. For the year ended December 31, 2015, the Company incurred $42,287 consulting
expenses related to this agreement, which included $1,487 of expenses paid in equity in January 2016. Mr. Goldberg was also appointed
as a director of the Company.
Note 10. Commitments and Contingencies
Financing of Directors’ and Officers’ Insurance
The Company financed its Directors’
and Officers’ insurance policy for approximately $0.2 million. Payments are due monthly and the policy is for
12 months. Finance charges for the 12-month period are nominal. As of December 31, 2015, the Company owed
approximately $0.1 million and such amounts were recorded in accrued expenses. The Company has made regular payments in accordance
with this insurance policy.
Leases
As of December 31, 2013, the Company had
office in Tysons Corner, Virginia, where it leased 837 square feet of office space with a $1,883 monthly lease payment under lease
agreement. Upon the expiration of this lease in August 2014, the Company’s Virginia operations were moved to Bethesda. The
Company also has offices in Bethesda, Maryland, where it leases 5,000 square feet of office space with a $13,090 monthly lease
payment under lease agreement. The Maryland lease runs from April 1, 2013 through March 31, 2018.
From December 2013 to July 2014, the Company
leased office space in New York, NY on a month-to-month basis at a monthly rate of $6,000.
In June 2014, the Company opened a new
office in Longview, Texas. The lease term of the Texas office runs from June 1, 2014 through May 31, 2015 at a monthly rate of
$1,958. In May 2015, the Company extended the lease term to May 31, 2016 at a monthly rate of $1,958.
In August 2014, the Company secured new
office space in New York City, with a $4,990 monthly cost for a 12-month period. In August 2015, the Company extended the lease
term to another 12-month period with a monthly cost of $5,240.
In December 2014, the Company determined
to accelerate the lease expense for Bethesda offices since the Bethesda facility was not adequate for the Company’s current
needs and future sublets were not considered probable. The Company recognized $0.2 million estimated short-term lease liabilities
and $0.4 million estimated long-term lease liabilities related to the acceleration of lease cost at December 31, 2014. As of December
31, 2015, the Company recorded $0.2 million of short-term lease liabilities and $0.2 million estimated long-term lease liabilities
on the consolidated balance sheets.
Future minimum rental payments required
as of December 31, 2015, including Bethesda office lease obligation are as follows ($ in thousands):
|
|
Lease Payments
|
|
Year Ended December 31, 2016
|
|
$
|
225
|
|
Year Ended December 31, 2017
|
|
|
183
|
|
Year Ended December 31, 2018
|
|
|
46
|
|
|
|
$
|
454
|
|
Legal Proceedings
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of our technology. From
time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of our business. There were no pending material claims or legal matters as of the date of this report other than the
following matters:
Guidance IP LLC v. T-Mobile Inc., Case
No. 2:14-cv-01066-RSM, in the United States District Court for the Western District of Washington
On August 1, 2013, the Company’s
wholly owned subsidiary Guidance initiated litigation against T-Mobile Inc. (“T-Mobile”) in
Guidance IP LLC v. T-Mobile
Inc.
, Case No. 6:13-cv-01168-CEH-GJK, in the United States District Court for the Middle District of Florida for infringement
of U.S. Patent No. 5,719,584 (the “Asserted Patent”). The complaint alleges that T-Mobile has manufactured, sold, offered
for sale and/or imported technology that infringes the Asserted Patent. The Company sought relief in the form of a finding of infringement
of the Asserted Patent, an accounting of all damages sustained by the Company as a result of T-Mobile’s infringement, actual
damages, enhanced damages under 35 U.S.C. Section 284, attorney’s fees and costs. On April 24, 2014, the United States District
Court for the Middle District of Florida transferred the case to the United States District Court for the Western District of Washington
(“the Court”). On July 14, 2014, the Court assigned the case a new case number, 2:14-cv-01066-RSM. On January 29, 2015,
the Court issued an Order requiring the parties to serve Initial Disclosures by February 26, 2015 and submit a Joint Status Report
and Discovery Plan to the Court by March 12, 2015, which were timely served and filed. At present, the dispute between the parties
has been resolved. On April 30, 2015, the parties filed a dismissal without prejudice of all claims, defenses and counterclaims,
with all attorneys’ fees, costs of court and expenses to be borne by each party incurring the same.
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, the Company 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. The Company is seeking relief in the form of a finding
of infringement of the Asserted Patents, an accounting of all damages sustained by the Company 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, the Company filed its Answer to the counterclaims, in which the Company 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 (“PTAB”) entered decisions instituting, on limited
grounds, IPR proceedings regarding a portion of the claims for the two Spherix patents. The PTAB also suggested an accelerated
IPR schedule to culminate in an oral hearing on or about September 28, 2015. The PTAB 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, the Company 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, the Company filed a Motion to Compel Production of Technical
Documents against Defendants. On April 20, 2015, the Company filed an Opposed Motion for Leave to Serve Supplemental Infringement
Contentions. Also on April 20, 2015, Defendants filed their Amended Answer to the Company’s Amended Complaint with their
counterclaims. On May 1, 2015, the Company filed its 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. The Company’s
patent owner’s response to the petition in the IPR was timely filed on May 26, 2015. On September 28, 2015, the hearing in
the IPR proceedings was held before the PTAB. On October 9, 2015, the parties filed a Joint Motion to stay the litigation pending
the issuance of the PTAB’s final written decisions in the IPR proceedings. On October 13, 2015, the Court granted the stay
and administratively closed the case until the PTAB issues its final written decisions. On February 3, 2016, the PTAB issued its
final decisions in the IPR proceedings, finding invalid eight of the 15 asserted claims of U.S. Patent No. 5,581,599 (“the
’599 Patent”) and all asserted claims of U.S. Patent No. 6,614,899. The Company’s deadline to file a Notice of
Appeal of the PTAB’s decision to the United States Court of Appeals for the Federal Circuit is April 6, 2016. On February
29, 2016, at the parties’ joint request, the Court ordered that the stay of the case remain in effect for 30 days so the
parties may work to resolve the case without further Court intervention. The Court also ordered the parties to file an updated
status report on or before March 31, 2016 advising the Court of their progress toward resolving this litigation without further
Court intervention and whether it is appropriate to reopen the case and lift the stay.
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, the Company 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. The Company is seeking relief in the form of a finding of infringement of the Asserted Patents,
an accounting of all damages sustained by the Company 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, the Company filed its Answer to the counterclaims,
in which the Company 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 PTAB entered decisions instituting,
on limited grounds, IPR proceedings regarding a portion of the claims for the two Spherix patents. The PTAB also suggested an accelerated
IPR schedule to culminate in an oral hearing on September 28, 2015. The PTAB 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, the Company filed its 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 the Company’s Amended Complaint with their counterclaims.
On May 1, 2015, the Company filed its Answer to the counterclaims. The Company’s patent owner’s response to the petition
in the IPR was timely filed on May 26, 2015. On July 9, 2015, the Court issued a modified Scheduling Order setting the Final Pretrial
Conference for February 2, 2016 and confirming the Trial Date beginning February 20, 2016. On September 9, 2015, the parties jointly
filed a motion to stay the case pending the decision in the two IPR proceedings. On September 10, 2015, the Court stayed the case
and ordered the parties to file a status report within 10 days of the Patent Office issuing its decision in the IPR proceedings.
On October 13, 2015, the Court ordered the case administratively closed until the PTAB issues its final written decisions. On February
3, 2016, the PTAB issued its final decisions in the IPR proceedings, finding invalid eight of the 15 asserted claims of U.S. Patent
No. 5,581,599 (“the ’599 Patent”) and all asserted claims of U.S. Patent No. 6,614,899. The Company’s deadline
to file a Notice of Appeal of the PTAB’s decision to the United States Court of Appeals for the Federal Circuit is April
6, 2016. On February 29, 2016, at the parties’ joint request, the Court ordered that the stay of the case remain in effect
for 30 days so the parties may work to resolve the case without further Court intervention. The Court also ordered the parties
to file an updated status report on or before March 31, 2016 advising the Court of their progress toward resolving this litigation
without further Court intervention and whether it is appropriate to reopen the case and lift the stay.
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, the Company 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. The Company is seeking relief in the form of a finding of infringement of the Asserted Patents, an accounting
of all damages sustained by the Company 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, the Company filed its amended complaint to reflect that certain
of the patents asserted were assigned to its wholly-owned subsidiary NNPT LLC (“NNPT”), based in Longview, Texas. By
the amended complaint, NNPT was added as a co-plaintiff with the Company. On August 5, 2014, Cisco filed a motion to dismiss certain
claims alleged in the amended complaint. On August 26, 2014, the Company 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 (see below). 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 eleven (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. 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 the Company’s amended complaint with counterclaims under the Sherman Act, breach of contract, breach of covenant
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. On July 13, 2015, the Company filed its oppositions to Cisco’s IPR petitions. On July
20, 2015, the Company filed a motion to dismiss or transfer certain of Cisco’s counterclaims. On September 22, 2015, the
PTAB issued orders instituting the two IPR proceedings, Nos. IPR2015-00999 and IPR2015-01001, as requested by Cisco. On November
23, 2015, the Company and RPX entered into the RPX License Agreement (see Note 7), which resolved all issues in this case. On December
3, 2015, the parties filed a Joint Motion to Dismiss, which the Court granted on December 4, 2015. On December 3, 2015, the parties
also filed a Joint Motion to Terminate in each of the two IPR proceedings, which the PTAB granted on December 4, 2015.
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, the Company 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. The Company is seeking
relief in the form of a finding of infringement of the Asserted Patents, an accounting of all damages sustained by the Company
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, the Company filed its amended complaint to reflect that certain of the patents asserted were assigned
to the Company’s wholly-owned subsidiary NNPT LLC, based in Longview, Texas. By the amended complaint, NNPT LLC was added
as a co-plaintiff with the Company. On August 8, 2014, Juniper filed a motion to dismiss certain claims alleged in the amended
complaint. On August 29, 2014, the Company filed its 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 eleven (11) patents continue.
Spherix has the ability to reallege “willful” infringement at a later time. On April 14, 2015, Juniper filed its Answer
to the Company’s 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. On November 23, 2015, the Company
and RPX entered into the RPX License Agreement (see Note 7), which resolved all issues in this case. On December 2, 2015, the parties
filed a Joint Motion to Dismiss, which the Court granted on December 4, 2015.
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 7, 2015, the Court reset the
Markman
hearing date for August 5, 2015. The
Markman
hearing was held on August
5, 2015 as scheduled. The parties held an initial mediation on August 6, 2015. On August 17, 2015, the Court issued its
Markman
Order. On August 20, 2015, the mediator filed a report with the Court reporting that the parties reached a settlement of the case
on August 14, 2015. On August 31, 2015, the parties filed a Joint Motion to Stay and Notice of Settlement. On September 9, 2015,
the Court stayed the case and set a status conference for October 2, 2015. On September 18, 2015, the parties filed in the PTAB
a joint motion to terminate the two IPR petitions file by Huawei, Nos. IPR2015-01382 and IPR2015-01390. On September 24, 2015,
the PTAB issued orders terminating the two IPR proceedings. On October 13, 2015, the Company received Huawei’s fully executed
copy of a confidential settlement and license agreement (the “Agreement”). The Agreement provides Huawei with a fully
paid-up, non-exclusive, irrevocable, worldwide license (without the right to sub-license) to make, sell and otherwise dispose of
certain specifically listed licensed products under eleven (11) of the Company’s patents (the “License”). Hence,
the License is not a license to the Company’s entire portfolio. The Company agreed that it will not bring suit or otherwise
assert a claim with respect to the licensed products. In exchange for a one-time cash payment to the Company in the amount of $295,000,
the Company will have granted the License and an irrevocable release in law and equity of all claims and liabilities involved in
the Litigation. On November 16, 2015, the parties file a Stipulation of Dismissal and the Court ordered the case dismissed on November
17, 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, the Company 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, the Company filed its Amended Complaint in the case in which the Company 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, the Company filed its 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 its Answer to the Company’s 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
granted Verizon’s motion for summary judgment as to indefiniteness and non-infringement. On July 30, 2015, the Company filed
a Notice of Appeal of the Court’s judgment in the United States Court of Appeals for the Federal Circuit. On August 31, 2015,
a settlement agreement between Spherix and Verizon was entered into, resolving all outstanding litigation between the two companies.
On September 4, 2015, the Company filed an unopposed motion to withdraw its Notice of Appeal. On September 8, 2015, the Court granted
the motion to withdraw the Notice of Appeal. On September 10, 2015, the parties filed a joint motion to terminated the IPR proceeding.
On September 14, 2015, the PTAB terminated Verizon’s petition.
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, the Company 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.
The Company is seeking relief in the form of a finding of infringement of the Asserted Patents, damages sufficient to compensate
the Company for Defendants’ infringement, together with pre-and post-judgment interest and costs, and the Company’s
attorney’s fees. On June 30, 2015, the Company filed its Amended Complaint to add allegations of infringement of U.S. Patent
Nos. RE45,521 and RE45,598. On July 15, 2015, Cisco filed a motion to transfer the case to the District of Delaware. On July 17,
2015, Verizon filed its Answer and Counterclaims to the Complaint. On July 17, 2015, the Court issued a Scheduling Order setting
the Final Pretrial Conference for November 19, 2015, with trial to be set within 4-8 weeks of the pretrial conference. On July
31, 2015, the Company filed its Opposition to Cisco’s motion to transfer. On August 5, 2015, the Court held an Initial Pretrial
Conference in the case to discuss the discovery plan for the case. On August 6, 2015, the Company filed its answer to Verizon's
counterclaims. On August 11, 2015, the Court issued its Scheduling Order regarding the discovery schedule, setting discovery to
be concluded by November 15, 2015. On August 31, 2015, a settlement agreement between Spherix and Verizon was entered into, resolving
all outstanding litigation between the two companies. Cisco was not a party to the agreement and the case continues against Cisco.
On September 1, 2015, the Company and Verizon filed a joint motion to dismiss the Verizon entities from the case. On September
2, 2015, the Court granted the motion to dismiss Verizon. On September 23, 2015, Cisco filed a Consent Motion to transfer the action
to the District of Delaware, and on September 25, 2015, the Court granted the motion. The case has been transferred to the District
of Delaware and assigned new case number 1:15-cv-00869-SLR “(Delaware Case”). On November 23, 2015, the Company and
RPX entered into the RPX License Agreement (see Note 7), which resolved all issues in the Delaware Case. On December 3, 2015, the
parties filed a Joint Motion to Dismiss, which the Court granted on December 4, 2015.
Cisco Systems, Inc. v. Spherix Incorporated,
1:15-cv-00559-SLR, in the United States District Court for the District of Delaware
On June 30, 2015, Cisco Systems, Inc. initiated
litigation against the Company in United States District Court for the District of Delaware, requesting a declaration of non-infringement
U.S. Patent No. RE45,598, which issued on June 30, 2015, and, with respect to that patent, alleging breach of contract, breach
of covenant of good faith and fair dealing implied in contract and promissory estoppel. On August 28, 2015, the Company filed motions
to dismiss the case in light of previously filed case, case No. 1:15-cv-0576-GBL-IDD, in the Eastern District of Virginia, which
involves U.S. Patent No. RE45,598. On November 23, 2015, the Company and RPX entered into the RPX License Agreement (see Note 7),
which resolved all issues in this case. On December 3, 2015, the parties filed a Joint Motion to Dismiss, which the Court granted
on December 4, 2015.
Counterclaims
In the ordinary course of business, the
Company, along with the Company’s wholly-owned subsidiaries, will initiate litigation against parties whom the Company believe
have infringed on 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
have filed counterclaims against the Company. The Company has evaluated
the counterclaims and believe they are without merit and have not recorded a loss provision relating to such matters. The Company
can provide no assurance that the outcome of these claims will not have a material adverse effect on the Company’s financial
position and results from operation.
Registration Penalty
As stipulated in the Registration Rider
of the December 2013 Rockstar patent acquisition agreement, the Company was required to both (i) file a registration statement
for the securities issued as consideration in the agreement by February 3, 2014 (unless a later date was consented to by Rockstar),
and (ii) such registration statement was to be declared effective by the SEC within 60 days after its filing. Failure to
comply with the registration requirement required that the Company issue to Rockstar additional consideration (“Additional
Rockstar Shares”) in the form of shares of common stock equal to five percent of the number of shares of common stock and
Series H Preferred Stock (taken together) issued to Rockstar (subject to certain beneficial ownership restrictions). Additionally,
if the issuance of “Additional Rockstar Shares” would have resulted in violation of certain beneficial ownership limitations,
then the issuance of such “Additional Rockstar Shares” would be deferred until such time as the issuance would not
cause Rockstar to exceed the applicable Beneficial Ownership set out with in the agreement.
The Company filed a registration statement
with the SEC that was not declared effective within the sixty-day time period stipulated in the Registration Rider. The registration
statement was not declared effective until April 16, 2014. As a result, in April 2014, the Company issued Rockstar 12,606
shares of common stock with a grant date fair value of approximately $0.7 million. The amount of expense recorded by the Company
was determined at the time the Company failed to have the registration statement declared effective, or April 4, 2014.
Note 11. Income Taxes
The income tax provision consists of the following ($ in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
16,374
|
|
|
|
5,453
|
|
Increase in valuation allowance
|
|
|
(16,374
|
)
|
|
|
(5,453
|
|
|
|
|
|
|
|
|
|
|
State and Local
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
837
|
|
|
|
(44
|
)
|
Increase in valuation allowance
|
|
|
(837
|
)
|
|
|
44
|
|
Change in valuation allowance
|
|
|
(17,211
|
)
|
|
|
(5,409
|
)
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The following is a reconciliation of the
U.S. federal statutory rate to the effective income tax rates for the years ended December 31, 2015 and 2014:
|
|
For the Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
U.S. statutory federal rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State income tax, net of federal benefit
|
|
|
(2.52
|
)
|
|
|
(3.43
|
)
|
Other Permanent Differences
|
|
|
(0.01
|
)
|
|
|
0.11
|
|
Change in Derivative Liability
|
|
|
-
|
|
|
|
(0.06
|
)
|
State rate change effect
|
|
|
0.75
|
|
|
|
-
|
|
Reduction due to change in NOL and other true ups
|
|
|
2.35
|
|
|
|
55.1
|
|
|
|
|
(33.43
|
)
|
|
|
17.72
|
|
Valuation Allowance
|
|
|
33.43
|
|
|
|
(17.72
|
)
|
Income tax provision (benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
At December 31, 2015 and 2014, the Company’s
deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following ($ in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,843
|
|
|
$
|
4,992
|
|
Stock-based compensation
|
|
|
8,014
|
|
|
|
8,087
|
|
Patent portfolio and other
|
|
|
17,298
|
|
|
|
2,865
|
|
Total deferred tax assets
|
|
|
33,155
|
|
|
|
15,944
|
|
Valuation allowance
|
|
|
(33,155
|
)
|
|
|
(15,944
|
)
|
Deferred tax assets, net of allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and taxing strategies in making this assessment. The Company has determined that, based on objective
evidence currently available, it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly,
the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2015 and 2014. As
of December 31, 2015, the change in valuation allowance is approximately $17.2 million.
As of December 31, 2015, the Company
had federal and state net operating loss carryovers (“NOLs”) of approximately $21.5 million, which expire
from 2033 through 2035. The NOL carryover may be subject to limitation under Internal Revenue Code section 382, should
there be a greater than 50% ownership change as determined under the regulations. The Company has performed a study with respect to Internal Revenue Code section 382 and has determined that
an ownership change occurred on September 10, 2013 and accordingly, a portion of the NOL carryovers may never be utilized. At this time, the Company estimates that post change
NOLs of $21.5 million are available for potential carryover without any limitations under IRC Section 382. The effect of any
subsequent ownership change would be the imposition of another annual limitation on the use of net operating loss
carryforwards attributable to periods before the subsequent change. Any subsequent limitation may result in expiration of
additional portions of the NOLs before utilization.
As required by the provisions of ASC 740,
the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold,
the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected
to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized
benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit
because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not
recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties
related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general
and administrative expense in the statement of operations. As of December 31, 2015 and 2014, no liability for unrecognized tax
benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2015 and 2014.
The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal
and state income tax returns. As of December 31, 2015, the Company’s U.S. and state tax returns (California, Delaware, Maryland,
New York, New York City Pennsylvania and Texas) remain subject to examination by tax authorities beginning with the tax return
filed for the year ended December 31, 2013. At this time, the Company's 2013 federal tax return has been selected for examination
by the Internal Revenue Service. The Company believes that its income tax positions would be sustained upon an audit and does not
anticipate any adjustments that would result in material changes to its consolidated financial position.
Note 12. Subsequent Events
The Company evaluates events that
have occurred after the balance sheet date but before the consolidated financial statements are issued. Based upon
the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the consolidated financial statements other than disclosed.
Amendment to 2014 Plan
On February 26, 2016, the Company’s
stockholders approved, and the Company adopted, an amendment to the 2014 Plan increasing the number of shares issuable thereunder
from 219,046 shares of Common Stock to 434,210 shares of Common Stock.
Conversions of Series K Preferred Stock
Since January 1, 2016, stockholders have
converted 1,190 shares of Series K Preferred Stock into 313,157 shares of Common Stock.
Stock Grants
In January 2016, the Company issued 652
shares of Common Stock to its director, Howard E. Goldberg, for $1,487 of 2015 service expenses, which exceeds the quarterly retainers.
In January 2016, the Company granted 8,771
shares of restricted stock to a third party for consulting services as per the consulting agreement executed in December 2015.
The shares issued at the closing price of December 22, 2015.
In February 2016, the Company entered into
a consulting agreement with a third party for six months of services. The Company agreed to pay the consultant a cash retainer
of $35,000 upon execution of agreement. A second cash retainer will be due in the amount of $25,000 on February 15, 2016. A third
cash retainer will be due in the amount of $10,000 on March 1, 2016. The Company also agreed to pay a one-time retain of $100,000,
payable in 42,445 shares of the company’s common stock based on the average closing price of the company’s common stock
on its principal exchange for ten trading days immediately prior to the execution of the consulting agreement.
In March 2016, the Company issued each
of Mr. Reiner and Mr. Dotson 21,053 shares of common stock in respect of their performance for the 2015 fiscal year.