Notes to Condensed Consolidated Financial
Statements
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”)
is an intellectual property company incorporated in the State of Delaware that owns patented and unpatented intellectual property.
The Company was formed in 1967 as a scientific research company and for much of its history pursued drug development including
through Phase III clinical studies which were discontinued. Through the Company’s acquisition of patents and patent applications
developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”) and Harris Corporation from North
South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities and is a significant owner of
intellectual property assets.
The Company is a patent commercialization company
focused on generating revenues from the monetization of intellectual property, or IP. Such monetization includes, but is not
limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a
licensing campaign, or through the settlement and litigation of patents. We intend to generate revenues and related cash flows
from the granting of intellectual property rights for the use of patented technologies that we own, or that we manage for others.
To date, we have generated minimal revenues and no assurance can be provided that our business model will be successful.
The Company continually work to enhance its
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. The Company then work with the inventors or other
entities to commercialize the IP.
In March 2016, the Company entered into an
agreement (which was subsequently amended in April and May 2016) with Equitable IP Corporation (“Equitable”) to facilitate
the monetization of its patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement, the Company
will work together with Equitable to further develop and revise its ongoing litigation plan. See Note 4 for additional details
surrounding the Monetization Agreement.
Reverse Stock Split and Amendment to Certificate
of Incorporation
The Company’s common stock is listed
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 30 consecutive business days preceding receipt of such letter, the Common Stock had no longer met 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 initially 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.
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
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 also 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.
Immediately following the Reverse Stock Split,
the number of outstanding shares of Common Stock were reduced from 48,259,430 shares to 2,539,847. All per share amounts and outstanding
shares of Common Stock including stock options, restricted stock and warrants, have been retroactively adjusted in these condensed
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 condensed 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Note 2. Liquidity and Financial Condition
The Company continues to incur ongoing administrative
and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While the Company
continues to implement its business strategy, it intends to finance its activities through:
·
|
managing current cash and cash equivalents on hand from the Company’s past equity offerings,
|
·
|
seeking additional funds raised through the sale of additional securities in the future,
|
·
|
seeking additional liquidity through credit facilities or other debt arrangements, and
|
·
|
increasing revenue from its patent portfolios, license fees and new business ventures.
|
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 condensed 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 amounted to approximately $4.4 million at
September 30, 2016, and net loss amounted to approximately $0.4 million and $2.6 million for the three and nine months ended September
30, 2016, respectively. The Company had an approximately $137.8 million of accumulated deficit as of September 30, 2016. 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Public Underwriting
On August 8, 2016, the Company closed on an
underwritten public offering of 1,592,357 shares of the Company’s common stock at a price to the public of $1.57 per share
(the “Offering Price”). Under the terms of the Underwriting Agreement, the Company granted the representative
of the underwriters a 30-day option to purchase up to 231,349 additional shares of its common stock (the 30-day underwriters option
expired unexercised). The net proceeds to the Company were $2.1 million, after deducting the underwriting discount and other estimated
offering expenses payable by the Company.
Note 3. Summary of Significant Accounting Policies
Significant Accounting Policies
There have been no material changes in the
Company’s significant accounting policies other than described below to those previously disclosed in the 2015 Annual Report
on Form 10-K filed with the U.S. Securities and Exchange Commission on March 29, 2016.
Basis of Presentation and Principles of
Consolidation
The accompanying condensed consolidated financial
statements of the Company are unaudited and do not include all of the information and disclosures generally required for annual
financial statements. In the opinion of management, the statements contain all material adjustments (consisting of normal recurring
accruals) necessary to present fairly the Company’s condensed consolidated financial position as of September 30, 2016, and
the condensed consolidated results of its operations for the three and nine months ended September 30, 2016 and 2015, and the condensed
consolidated results of its cash flows for the nine months ended September 30, 2016 and 2015. This report should be read in conjunction
with the Company’s 2015 Annual Report on Form 10-K, which does contain the complete information and disclosure for the year
ended December 31, 2015.
The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The accompanying condensed consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US
GAAP”). This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue
and expenses during the period. The Company’s significant estimates and assumptions include the recoverability and useful
lives of long-lived assets, stock-based compensation, the valuation of derivative liabilities, 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.
Reclassification
Certain reclassifications have been made to
prior year amounts to conform to the current year presentation on the condensed consolidated statements of cash flows.
Marketable Securities
Marketable securities are classified as trading
and are carried at fair value. The Company’s marketable securities consist of corporate bonds as of September 30, 2016, and consisted
of highly liquid mutual funds and exchange-traded & closed-end funds during 2015.
During the three months ended September 30,
2016 and 2015, the Company incurred realized gain of approximately $56,000 and $0, respectively, and unrealized losses of approximately
$91,000 and $0, respectively, on its investments in marketable securities, which are included in other income, net on the
condensed consolidated statements of operations. In addition, during the three months ended September 30, 2016
and 2015, the Company earned dividend income of approximately $2,000 and $7,000, respectively, which is included in other income,
net on the condensed consolidated statement of operations.
During the nine months ended September 30,
2016 and 2015, the Company incurred realized gain of approximately $66,000 and realized loss of $61,000, respectively, and unrealized
losses of approximately $62,000 and unrealized gain of $45,000, respectively, on its investments in marketable securities,
which are included in other income, net on the condensed consolidated statements of operations. In addition, during the
nine months ended September 30, 2016 and 2015, the Company earned dividend income of approximately $19,000 and $48,000,
respectively, which is included in other income, net on the condensed consolidated statement of operations. The
fair values of marketable securities held as of September 30, 2016 and December 31, 2015 were approximately $7.0
million and $3.4 million, respectively.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
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. There were no indicators of impairment during the first nine months of 2016.
Accounting for Warrants
The Company accounts for the issuance of common
stock purchase warrants issued in connection with its previously consummated 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 condensed 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 condensed consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes
valuation model (see Note 5).
Convertible Preferred Stock
The Company has 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. As the convertible preferred stock may be converted immediately, the Company recognized
the BCF as a deemed dividend in the condensed consolidated statements of operations.
Net Loss per Share
Basic loss per share is computed by dividing
the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period.
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The following table summarizes the earnings
(loss) per share calculation (in thousands, except per share amount):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(446
|
)
|
|
$
|
(2,726
|
)
|
|
$
|
(2,573
|
)
|
|
$
|
(47,120
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
31,480
|
|
|
|
-
|
|
Net (loss) income available to common stockholders
|
|
$
|
(446
|
)
|
|
$
|
(2,726
|
)
|
|
$
|
28,907
|
|
|
$
|
(47,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
4,163,245
|
|
|
|
1,744,394
|
|
|
|
3,312,969
|
|
|
|
1,586,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(0.11
|
)
|
|
|
(1.56
|
)
|
|
|
(0.78
|
)
|
|
|
(29.70
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
9.50
|
|
|
|
-
|
|
Net (loss) income available to common stockholders
|
|
$
|
(0.11
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
8.72
|
|
|
$
|
(29.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(446
|
)
|
|
$
|
(2,726
|
)
|
|
$
|
(2,573
|
)
|
|
$
|
(47,120
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
31,480
|
|
|
|
-
|
|
Net (loss) income available to common stockholders
|
|
$
|
(446
|
)
|
|
$
|
(2,726
|
)
|
|
$
|
28,907
|
|
|
$
|
(47,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding,
|
|
|
4,163,245
|
|
|
|
1,744,394
|
|
|
|
3,312,969
|
|
|
|
1,586,373
|
|
Weighted average effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
260
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
173,418
|
|
|
|
-
|
|
Restricted stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
17,088
|
|
|
|
-
|
|
Weighted average diluted shares outstanding
|
|
|
4,163,245
|
|
|
|
1,744,394
|
|
|
|
3,503,735
|
|
|
|
1,586,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(0.11
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(29.70
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
8.98
|
|
|
|
-
|
|
Net (loss) income available to common stockholders
|
|
$
|
(0.11
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
8.25
|
|
|
$
|
(29.70
|
)
|
Securities that could potentially dilute loss
per share in the future that were included in the computation of diluted loss per share at September 30, 2016 and 2015 are as follows:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
265,517
|
|
Warrants to purchase common stock
|
|
|
1,251,709
|
|
|
|
410,780
|
|
Non-vested restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
Non-vested restricted stock units
|
|
|
59,256
|
|
|
|
-
|
|
Options to purchase common stock
|
|
|
289,380
|
|
|
|
289,405
|
|
Total
|
|
|
1,603,271
|
|
|
|
965,702
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01,
Recognition and Measurement
of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 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 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 2016-01 will have on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 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 condensed consolidated financial position and results
of operations.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The purpose
of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. The amendments in ASU 2016-08
are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the
impact of ASU 2016-08 on the condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”).
Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital
(“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in
the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax
benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax benefits as
an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase
the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification
for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income
tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum
statutory tax rate in the employee’s applicable jurisdiction(s). ASU 2016-09 requires a company to classify the cash paid
to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity
on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition,
companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards
as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change,
as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with
early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact
that ASU 2016-09 will have on its condensed consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue
from Contracts with Customer
(“ASU 2016-10”). The new guidance is an update to ASC 606 and provides clarity
on: identifying performance obligations and licensing implementation. For public companies, ASU 2016-10 is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating
the impact that ASU 2016-10 will have on its condensed consolidated financial statements.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU
2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale
debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized
for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal
of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020. Early adoption
will be available on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its
condensed consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement
of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
, which addresses eight specific cash flow issues
with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is
currently evaluating the impact of this new pronouncement on its condensed consolidated statements of cash flows.
Note 4. Intangible Assets
Patent Portfolio and Patent Rights
The Company’s intangible assets with
finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible
assets were subject to amortization. The gross carrying amounts related to acquired intangible assets as of September 30, 2016
are as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period
(years)
|
|
Patent Portfolios and Patent Rights at December 31, 2015, net
|
|
$
|
9,799
|
|
|
|
4.63
|
|
Amortization expenses
|
|
|
(1,598
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at September 30, 2016, net
|
|
$
|
8,201
|
|
|
|
3.89
|
|
The amortization expenses related to acquired
intangible assets for the three and nine months ended September 30, 2016 and 2015 are as follows ($ in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
Date Acquired and Description
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
26
|
|
|
$
|
35
|
|
|
$
|
78
|
|
|
$
|
268
|
|
9/10/13 - North South patent portfolio
|
|
|
8
|
|
|
|
10
|
|
|
|
23
|
|
|
|
74
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
502
|
|
|
|
677
|
|
|
|
1,497
|
|
|
|
5,252
|
|
|
|
$
|
536
|
|
|
$
|
722
|
|
|
$
|
1,598
|
|
|
$
|
5,594
|
|
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
|
|
Three Months Ended December 31, 2016
|
|
$
|
26
|
|
|
$
|
8
|
|
|
$
|
502
|
|
|
$
|
536
|
|
Year Ended December 31, 2017
|
|
|
104
|
|
|
|
30
|
|
|
|
1,995
|
|
|
|
2,129
|
|
Year Ended December 31, 2018
|
|
|
104
|
|
|
|
31
|
|
|
|
1,995
|
|
|
|
2,130
|
|
Year Ended December 31, 2019
|
|
|
104
|
|
|
|
31
|
|
|
|
1,995
|
|
|
|
2,130
|
|
Year Ended December 31, 2020
|
|
|
104
|
|
|
|
31
|
|
|
|
995
|
|
|
|
1,130
|
|
Thereafter
|
|
|
110
|
|
|
|
36
|
|
|
|
-
|
|
|
|
146
|
|
Total
|
|
$
|
552
|
|
|
$
|
167
|
|
|
$
|
7,482
|
|
|
$
|
8,201
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Equitable Agreement
In March 2016, the Company entered into an
agreement (which was subsequently amended) with Equitable IP Corporation (“Equitable”) to facilitate the monetization
of the Company’s patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement, the Company
has worked together with Equitable to develop and revise the Company’s ongoing litigation plan. Under the Monetization Agreement,
Equitable is obligated to use its best, commercially reasonable efforts to monetize the Company’s patents. To that end, Equitable
has filed ten currently pending litigations. The Company will share net monetization revenue derived from all monetization activity
equally with Equitable. To facilitate the litigation plan, approximately 186 of over 330 of the Company’s patents and applications
have been assigned to Equitable, which will pay all maintenance and prosecution fees going forward. No assigned patents may be
transferred by Equitable to a third party without the Company’s consent. In the event that all terms of the Monetization
Agreement are met by December 2017, the Company will further assign approximately 140 additional patents and applications to Equitable
for monetization. The Company has retained a grant-back license to practice all transferred patents.
The Company concluded that the Monetization
Agreement did not constitute a sale of the patents. The Company’s retention of the right to use the patents, the requirement
for the Company’s consent to any sale, and the significant economic benefits the Company retained with respect to the litigation,
licensing, and sale proceeds, did not meet the sale of patent criteria. The Monetization Agreement has been treated as an
agreement to outsource its licensing activities to an outside servicer, for contingent fees based on the success of the servicer’s
efforts. As such, the Company will not remove the patents from its condensed consolidated balance sheet, and will record its share
of litigation, licensing, and sales proceeds, if any, when those proceeds are received, or when due if the other revenue recognition
criteria are met under ASC 605,
Revenue Recognition
.
Note 5. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash
equivalents, accounts and other receivables, accounts payable and accrued liabilities are carried at cost, which management believes
approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets
and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value.
The Company uses three levels of inputs that
may be used to measure fair value:
Level 1 - quoted prices in active
markets for identical assets or liabilities
Level 2 - quoted prices for similar
assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable
(for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s
assets and liabilities that are measured at fair value at September 30, 2016 and December 31, 2015 ($ in thousands):
|
|
Fair value measured at September 30, 2016
|
|
|
|
Total carrying value at
September 30,
|
|
|
Quoted prices in active
markets
|
|
|
Significant other
observable inputs
|
|
|
Significant unobservable
inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - corporate bonds
|
|
$
|
6,968
|
|
|
$
|
-
|
|
|
$
|
6,968
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
904
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
904
|
|
|
|
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
|
|
There were no transfers between Level 1, 2
or 3 during the nine months ended September 30, 2016.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
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 “fair value adjustments for warrant liabilities” in
the Company’s condensed consolidated statements of operations.
On July 21, 2015, the Company issued warrants
to purchase an aggregate of 370,263 shares of common stock (the “July 2015 Warrants”) to the investors in the July
2015 Financing. The July 2015 Warrants became 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 up to 1,052,624 shares of common stock and Series B warrants to purchase up to 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. 852,624 shares of Series A warrants expired on May 24, 2016, and no Series A Warrants
remain outstanding as of September 30, 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 condensed 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 September 30, 2016 is as follows:
Date of valuation
|
|
September 30, 2016
|
Risk-free interest rate
|
|
0.45% - 1.14%
|
Expected volatility
|
|
100% - 147.10%
|
Expected life (in years)
|
|
0.07 - 4.31
|
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
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 as of September 30, 2016 and 2015 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Beginning balance
|
|
$
|
2,959
|
|
|
$
|
-
|
|
Recognition of warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
Fair value adjustment of warrant liabilities
|
|
|
(2,055
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
904
|
|
|
$
|
-
|
|
Note 6. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Restated Certificate of Incorporation
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).
Common Stock
On August 8, 2016, the Company closed on an
underwritten public offering of 1,592,357 shares of the Company’s common stock at a price to the public of $1.57 per share. Under
the terms of the Underwriting Agreement, the Company granted the representative of the underwriters a 30-day option to purchase
up to 231,349 additional shares of its common stock (the 30-day underwriters option expired unexercised). The net proceeds to the
Company were $2.1 million, after deducting the underwriting discount and other estimated offering expenses payable by the Company.
Preferred Stock
The Company had designated separate series
of its capital stock as of September 30, 2016 and December 31, 2015 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Par Value
|
|
|
Conversion Ratio
|
Series "A"
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.0001
|
|
|
N/A
|
Series "C"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “D"
|
|
|
4,725
|
|
|
|
4,725
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “D-1"
|
|
|
834
|
|
|
|
834
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “F-1"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “H"
|
|
|
-
|
|
|
|
381,967
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “I”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
1.05:1
|
Series “J”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “K”
|
|
|
-
|
|
|
|
1,240
|
|
|
|
0.0001
|
|
|
263.16:1
|
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
In January 2015, Rockstar transferred its remaining
outstanding Series H Preferred Stock to RPX Clearinghouse LLC, an affiliate of RPX, but retained certain recovery benefits set
forth in the 2013 Patent Purchase Agreement between the Company and Rockstar.
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.
In connection with a second, separate, licensing
agreement, on May 23, 2016, RPX transferred to the Company for cancellation of 100% of the remaining 381,967 shares of Series H
Preferred Stock held by RPX, having a total carrying amount of $31,894,244 at the time the stock was issued to Rockstar (see Note
7 for further details).
As of September 30, 2016, no shares of Series
H Preferred Stock remained 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 does 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 by such holder. 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.
During the nine months ended September 30,
2016, 1,240 shares of Series K Preferred Stock were converted into 326,315 shares of Common Stock. As of September 30, 2016, no
shares of Series K Preferred Stock remained issued and outstanding.
Warrants
A summary of warrant activity for the nine
months ended September 30, 2016 is presented below:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life
(in years)
|
|
Outstanding as of December 31, 2015
|
|
|
2,304,888
|
|
|
$
|
7.98
|
|
|
$
|
-
|
|
|
|
2.83
|
|
Exercised
|
|
|
(200,000
|
)
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(853,179
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
1,251,709
|
|
|
$
|
10.15
|
|
|
|
|
|
|
|
4.16
|
|
Exercisable as of September 30, 2016
|
|
|
1,251,709
|
|
|
$
|
10.15
|
|
|
$
|
-
|
|
|
|
4.16
|
|
Stock Options
Also approved by the Company’s Stockholders
on February 26, 2016 was an amendment to the Company’s 2014 Equity Incentive Plan, which increased the number of shares of
common stock authorized to be issued pursuant to the 2014 Plan from 4,161,892 to 8,250,000 prior to effectuation of the 1:19 reverse
stock split, proportionately reducing the total share authorization under the plan to 434,210 shares.
During the nine months ended September 30,
2016, pursuant to and subject to the available number of shares reserved under the 2014 Plan, the Company issued 19,735 options
to five of the Company’s directors. The aggregate grant date fair value of these options was approximately $31,000.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
A summary of option activity under the Company’s
employee stock option plan for the nine months ended September 30, 2016 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2015
|
|
|
286,487
|
|
|
$
|
89.07
|
|
|
$
|
-
|
|
|
|
5.0
|
|
Employee options granted
|
|
|
19,735
|
|
|
|
1.98
|
|
|
|
-
|
|
|
|
4.6
|
|
Outstanding as of September 30, 2016
|
|
|
306,222
|
|
|
$
|
83.46
|
|
|
$
|
-
|
|
|
|
4.3
|
|
Options vested and expected to vest
|
|
|
306,222
|
|
|
$
|
83.46
|
|
|
$
|
-
|
|
|
|
4.3
|
|
Options vested and exercisable
|
|
|
296,357
|
|
|
$
|
86.17
|
|
|
$
|
-
|
|
|
|
4.3
|
|
A summary of option activity under the Company’s
non-employee stock option plan for the nine months ended September 30, 2016 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2015
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
5.4
|
|
Non-employee options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.7
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.7
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.7
|
|
Stock-based compensation associated with the
amortization of stock option expense was approximately $5,000 and $64,000 for the three months ended September 30, 2016 and 2015,
and was approximately $26,000 and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively. Unamortized
stock-based compensation expense amounted to approximately $9,000 at September 30, 2016, and will be amortized over 0.59 years.
Restricted Stock Awards
In December 2015, the Company entered into
a consulting agreement with a third party for consulting services. The Company agreed to pay the consultant $50,000 in shares of
the Company’s common stock, which were issued in two equal parts. The first $25,000 (8,771 shares) of restricted stock was
issued in January 2016, and the second $25,000 (or 10,870 shares) of restricted stock was issued in June 2016.
In December 2015, the Company determined to
pay each of Mr. Reiner and Mr. Dotson, in accordance with their respective employment agreements, $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.
On January 26, 2016, the Company issued 652
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 $1,487.
On February 4, 2016, the Company entered into
a consulting agreement with a third party. The Company has agreed to pay the consultant three cash retainer payments for a total
of $70,000, and granted $100,000 in shares of restricted stock. On February 4, 2016, the Company issued 42,445 restricted shares
based on the average closing price for the 10 trading days immediately prior to February 4, 2016. The restricted stock award vested
immediately.
On February 26, 2016, the Company granted each
of two consultants 7,895 shares of restricted common stock for consulting services. The restricted stock award vested on March
31, 2016 based upon the closing price on February 26, 2016. The grant date fair value of each restricted stock award was $15,000,
respectively.
On June 22, 2016, the Company granted two consultants
10,870 and 43,479 shares of restricted common stock for consulting services, respectively. The restricted stock award vested immediately.
The grant date fair value of restricted stock was $25,000 and $100,000, respectively.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
A summary of the restricted stock award activity
for the nine months ended September 30, 2016 is as follows:
|
|
Number of Units
|
|
|
Weighted Average
Grant Day Fair
Value
|
|
Nonvested at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
164,113
|
|
|
|
1.52
|
|
Vested
|
|
|
(164,113
|
)
|
|
|
1.52
|
|
Nonvested at September 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Restricted Stock Units
On May 20, 2016, Mr. Hayes was granted an award
of restricted stock units totaling 118,512 shares of common stock, which will vest upon the achievement of agreed upon performance
milestones.
A summary of the restricted stock award activity
for the nine months ended September 30, 2016 is as follows:
|
|
Number of Units
|
|
|
Weighted Average
Grant Day Fair
Value
|
|
Nonvested at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
118,512
|
|
|
|
1.52
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Nonvested at September 30, 2016
|
|
|
118,512
|
|
|
$
|
1.52
|
|
As of September 30, 2016, the Company had unrecognized
stock-based compensation expense related to restricted stock unit awards of approximately $50,000, which is expected to be
recognized over the remaining weighted-average vesting period of 0.25 years.
Stock-based Compensation
Stock-based compensation for the three and
nine months ended September 30, 2016 and 2015 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Employee restricted stock awards
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11
|
|
Employee restricted stock units
|
|
|
49
|
|
|
|
-
|
|
|
|
72
|
|
|
|
-
|
|
Employee stock option awards
|
|
|
5
|
|
|
|
64
|
|
|
|
26
|
|
|
|
154
|
|
Non-employee restricted stock awards
|
|
|
-
|
|
|
|
25
|
|
|
|
255
|
|
|
|
58
|
|
Total compensation expense
|
|
$
|
54
|
|
|
$
|
89
|
|
|
$
|
353
|
|
|
$
|
223
|
|
Note 7. May 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. 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. During the three and nine
months ended September 30, 2016, the Company recorded approximately $73,000 and $217,000, respectively, in revenue related to the
amortization of the license.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
On May 23, 2016, the Company, and RPX, entered
into a second, separate, Patent License Agreement (the “RPX License”) under which the Company granted RPX the right
to sublicense various patent rights only to current RPX clients (as of May 23, 2016). In exchange for the rights granted by the
Company under the RPX License, the Company received the following consideration: (i) a cash payment made to the Company in May
2016 in the amount of $4,355,000; and (ii) cancellation of 100% of the remaining 381,967 shares of the Company’s outstanding
Series H Convertible Preferred Stock currently held by RPX, having a total carrying amount of $31,894,244 at the time the stock
was issued to Rockstar Consortium US LP (“Rockstar”).
In consideration of the above, the Company
granted RPX the rights to grant to its current clients: (i) a fully paid portfolio license, to the extent such parties did not
already have licenses to the Company’s patents; (ii) a covenant-not-to-sue current RPX clients for supply of chipsets; (iii)
a standstill of litigation involving any patents acquired in the next five years (“Standstill”).
The Company also granted to Alcatel-Lucent
a license to the portfolio acquired from the Harris Corporation.
Under a separate agreement between the Company
and RPX, the Company granted RPX the ability to grant to VTech Telecommunications Ltd. (“VTech”) a sublicense for a
fully paid portfolio license in exchange for an additional $20,000 in cash consideration.
The license granted under the terms of the
RPX License described herein does not extend to entities/companies that are not clients of RPX and provide chipsets or other hardware
to current RPX clients.
The carrying value of Series H Convertible
Preferred Stock on the extinguishment date was estimated at approximately $31.9 million. The fair value on the same date was estimated
at approximately $414,000 based upon equivalent common shares that the Series H Convertible Preferred Stock could have converted
into at the closing price on May 23, 2016. This resulted in the Company receiving cash from RPX of $4.4 million, a deemed dividend
of approximately $31.5 million, short term deferred revenue $1.1 million and long term deferred revenue of $3.7 million. The deferred
revenue will be amortized over a 5-year service period as the RPX License includes a standstill agreement which requires Spherix
to provide the licensee with the right to use any future acquired patents for five years. During the three and nine months ended
September 30, 2016, the Company recorded approximately $241,000 and $346,000, respectively, in revenue related to the amortization
of the license.
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.
Note 8. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the Company actively pursues
legal remedies to enforce its intellectual property rights and to stop unauthorized use of use technology. From time to time, the
Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. There
were no pending material claims or legal matters as of the date of this report other than the following matters:
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Spherix Incorporated
v. VTech Telecommunications Ltd. et al., Case No. 3:13-cv-03494-M, in the United States District Court for the Northern District
of Texas
On August 30,
2013, we initiated litigation against VTech Telecommunications Ltd. and VTech Communications, Inc. (collectively “VTech”)
in
Spherix Incorporated v. VTech Telecommunications Ltd. et al
., Case No. 3:13-cv-03494-M, in the United States District
Court for the Northern District of Texas (“the Court”) for infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 5,892,814;
6,614,899; and 6,965,614 (collectively, the “Asserted Patents”). The complaint alleges that VTech has manufactured,
sold, offered for sale and/or imported technology that infringes the Asserted Patents. We seek relief in the form of a finding
of infringement of the Asserted Patents, an accounting of all damages sustained by us as a result of VTech’s infringement,
actual damages, enhanced damages under 35 U.S.C. Section 284, attorney’s fees and costs. On November 11, 2013, VTech filed
its Answer with counterclaims requesting a declaration that the Asserted Patents are non-infringed and invalid. On December 5,
2013, we filed our Answer to the counterclaims, in which we denied that the Asserted Patents were non-infringed and invalid. On
May 22, 2014, the Court entered a Scheduling Order for the case setting trial to begin on January 11, 2016. On June 3, 2014, in
an effort to narrow the case, the parties filed a stipulation dismissing without prejudice all claims and counterclaims related
to U.S. Patent No. 5,752,195. On September 4, 2014, VTech Communications, Inc., together with Uniden America Corporation, filed
a request for
inter partes
review (“IPR”) of two of the Asserted Patents in the United States Patent and Trademark
Office. On March 3, 2015, the Patent Trial and Appeal Board (“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, we filed an Amended Complaint with Jury Demand and the parties filed a Settlement Conference Report informing the Court
that the parties have not yet resumed settlement negotiations. The Court has ordered the parties to hold a settlement conference
not later than December 28, 2015. On April 15, 2015, we filed a Motion to Compel Production of Technical Documents against Defendants.
On April 20, 2015, we filed an Opposed Motion for Leave to Serve Supplemental Infringement Contentions. Also on April 20, 2015,
Defendants filed their Amended Answer to our Amended Complaint with their counterclaims. On May 1, 2015, we filed our Answer to
the counterclaims. On May 5, 2015, the parties filed a Joint Stipulation and Motion to Modify the Scheduling Order. On May 6, 2015,
the Court entered the Stipulation, in which the Court estimated the trial date to occur in July of 2016 and ordered the parties
to be ready for trial on or after June 22, 2016. Our patent owner’s response to the petition in the IPR was timely filed
on May 26, 2015. 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. Our deadline
to file a Notice of Appeal of the PTAB’s decision to the United States Court of Appeals for the Federal Circuit (“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.
The parties timely filed a Joint Status Report on March 31, 2016, in which they requested that the stay remain in effect pending
the Federal Circuit issuing a ruling in connection with the appeal of IPR2014-01431 relating to the ‘599 Patent. On April
1, 2016, we filed our Patent Owner’s Notice of Appeal in IPR2014-01431. On April 11, 2016, the Court granted the parties’
motion to continue the stay. On May 23, 2016, we granted RPX Corporation the ability to grant to VTech a sublicense for a fully
paid portfolio license, including a license to the Asserted Patents. On June 15, 2016, the parties filed a joint motion to dismiss
with prejudice
all claims and counterclaims asserted in the case. On June 21, 2016, the Court
granted the joint motion to dismiss. On June 17, 2016, we filed a motion with the Federal Circuit requesting that VTech be withdrawn
as a party to the appeal. On June 21, 2016, the Federal Circuit granted the motion to withdraw VTech as a party.
Spherix Incorporated v. Uniden Corporation
et al., Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas
On August 30, 2013, we initiated litigation
against Uniden Corporation and Uniden America Corporation (collectively “Uniden”) in
Spherix Incorporated v. Uniden
Corporation et al.
, Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas (“the
Court”) for infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 6,614,899; and 6,965,614 (collectively, the “Asserted
Patents”). The complaint alleges that Uniden has manufactured, sold, offered for sale and/or imported technology that infringes
the Asserted Patents. We seek relief in the form of a finding of infringement of the Asserted Patents, an accounting of all damages
sustained by us as a result of Uniden’s infringement, actual damages, enhanced damages under 35 U.S.C. Section 284, attorney’s
fees and costs. On April 15, 2014, Uniden filed its Answer with counterclaims requesting a declaration that the patents at issue
are non-infringed and invalid. On April 28, 2014, we filed our Answer to the counterclaims, in which we denied that the patents
at issue were non-infringed and invalid. On May 22, 2014, the Court entered a scheduling order for the case setting trial to begin
on February 10, 2016. On June 3, 2014, in an effort to narrow the case, the parties filed a stipulation dismissing without prejudice
all claims and counterclaims related to U.S. Patent No. 5,752,195. On September 4, 2014, Uniden America Corporation, together with
VTech Communications, Inc., filed a request for
inter partes
review (“IPR”) of two of the Asserted Patents in
the United States Patent and Trademark Office. On March 3, 2015, the 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, we filed an Amended Complaint with Jury Demand
and the parties filed a Settlement Conference Report informing the Court that the parties have not yet resumed settlement negotiations.
The Court has ordered the parties to hold a settlement conference not later than January 20, 2016. On April 9, 2015, the parties
filed a Joint Motion to Modify Patent Scheduling Order. On April 10, 2015, the Court granted the Motion. On April 20, 2015, Defendants
filed their Amended Answer to our Amended Complaint with their counterclaims. On May 1, 2015, we filed our Answer to the counterclaims.
Our patent owner’s response to the petition in the IPR was timely filed on May 26, 2015. 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. Our deadline to file a Notice of Appeal of the PTAB’s decision to the United States
Court of Appeals for the Federal Circuit (“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. The parties timely filed a Joint Status Report on March 31, 2016, in which
they requested that the stay remain in effect pending the Federal Circuit issuing a ruling in connection with the appeal of IPR2014-01431
relating to the ‘599 Patent. On April 1, 2016, we filed our Patent Owner’s Notice of Appeal in IPR2014-01431. On April
11, 2016, the Court granted the parties’ motion to continue the stay. On July 18, 2016, we timely filed our Opening
Brief in our appeal to the Federal Circuit. Uniden’s reply brief was filed on August 30, 2016. On September 26, 2106, we
timely filed our reply brief. The Federal Circuit is soon expected to calendar oral argument, which is anticipated to occur in
the next few months.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Spherix Incorporated v. Fairpoint Communications,
Inc., Case No. 1:16-cv-00305-RGA, in the United States District Court for the District of Delaware
On April 26, 2016, we initiated litigation
against Fairpoint Communications, Inc. in
Spherix Incorporated v. Fairpoint Communications, Inc.
, Case No. 1:16-cv-00305-RGA,
in the United States District Court for the District of Delaware for infringement of U.S. Patent No. RE40,999 (the ‘999 Patent”).
We are seeking relief in the form of a finding of infringement of the ‘999 Patent, damages sufficient to compensate us for
Defendants’ infringement together with pre-and post-judgment interest and costs, a declaration that the case is exceptional
under 35 U.S.C. § 285, and our attorney’s fees.
Spherix Incorporated v. Level 3 Communications,
Inc. et al., Case No. 1:16-cv-00307-RGA, in the United States District Court for the Eastern District of Virginia
On April 26, 2016, we initiated litigation
against Level 3 Communications, Inc. and TW Telecom, Inc. in
Spherix Incorporated v. Level 3 Communications, Inc. et al.
,
Case No. 1:16-cv-00307-RGA, in the United States District Court for the District of Delaware for infringement of U.S. Patent No.
RE40,999 (the ‘999 Patent”). We are seeking relief in the form of a finding of infringement of the ‘999 Patent,
damages sufficient to compensate us for Defendants’ infringement together with pre-and post-judgment interest and costs,
a declaration that the case is exceptional under 35 U.S.C. § 285, and our attorney’s fees. On July 21, 2016, we filed
a motion to dismiss the litigation without prejudice to re-filing the same allegations. On July 25, 2016, the Court closed the
case.
Counterclaims
In the ordinary course of business, we, along
with our wholly-owned subsidiaries, will initiate litigation against parties whom we believe have infringed on our intellectual
property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated by the defendants.
Currently, as stated above, defendants in the case
Spherix Incorporated v. Uniden Corporation
have filed counterclaims against
us. We have evaluated the counterclaims and believe they are without merit and have not recorded a loss provision relating to such
matters. We can provide no assurance that the outcome of these claims will not have a material adverse effect on our financial
position and results from operations.
Note 9. Compensatory Arrangements
On May 20, 2016, the Company entered into a
new employment agreement with the Company’s CEO, Anthony Hayes (the “Employment Agreement”) retroactively effective
to April 1, 2016. Pursuant to the terms of the Agreement, Mr. Hayes will be paid an annual base salary of $350,000 (“Base
Salary”) and a target annual bonus opportunity equal to a maximum of 100% of the Base Salary upon the achievement of certain
milestones as agreed to by the Compensation Committee of the Board of Directors. There has been no increase in the dollar amounts
of the base salary or maximum target bonus amounts from the prior effective employment agreement of Mr. Hayes. In the event that
Mr. Hayes’ employment is terminated by the Company without “cause” or by Mr. Hayes for “good reason”
(each as defined in the Employment Agreement), Mr. Hayes will be entitled to receive, subject to his execution and non-revocation
of a separation and release agreement, a separation payment in the amount of one year’s base salary at the then-current rate
payable, plus any payment on a pro-rated basis for any bonus earned in connection with any bonus plan to which he was a participant
at the date of such termination within thirty days of such termination.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The employment agreement with Mr. Hayes also
contains customary confidentiality, noncompetition, non-solicitation and non-disparagement provisions.
In addition, as previously disclosed, Mr. Hayes
was granted an award of restricted stock units totaling 118,512 shares of common stock, which will vest upon the achievement of
certain agreed upon milestones.
On August 24, 2016, the Board of Directors
of the Company appointed Mr. Eric Weisblum to serve as director of the Company, effective upon his acceptance of such position.
Mr. Weisblum is not currently expected to be appointed as a member of any of the Board committees, although the Board is continuing
to evaluate whether Mr. Weisblum may be appointed to a Board committee in the future. There is no written agreement or understanding
between Mr. Weisblum and any other person pursuant to which Mr. Weisblum was appointed as a director. Mr. Weisblum is not a party
to any transactions that would require disclosure under Item 404(a) of Regulation S-K and has not entered into any material plan,
contract, arrangement or amendment in connection with his election to the Board. Mr. Weisblum is eligible to participate in all
compensatory arrangements from time to time in effect for the Company’s other Board members.
Note 10. Assignment and Assumption of Rights
Agreement with TOI
On June 16, 2012, the Company and Transfer
Online, Inc. (“TOI”) entered into an Assignment and Assumption of Rights Agreement (the “Assignment”) to
that certain Rights Agreement, effective January 1, 2013 (valid through December 31, 2017, referred to herein as the “Rights
Agreement”) originally entered into between the Company and Equity Stock Transfer (“EST”), and previously filed
by the Company on Form 8-K with the Securities and Exchange Commission on January 30, 2013. The Assignment of the Rights Agreement
replaced EST as the Rights Agent and to appoint TOI as the successor Rights Agent on July 15, 2016.