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.
The Company is a patent commercialization company
focused on generating revenues from the monetization of intellectual property, or IP. Such monetization includes, but is not
limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a
licensing campaign, or through the settlement and litigation of patents. We intend to generate revenues and related cash flows
from the granting of intellectual property rights for the use of patented technologies that we own, that we manage for others,
or that others manage on our behalf. To date, we have generated minimal revenues and no assurance can be provided that our business
model will be successful.
The Company continually works 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 works 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
is working 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 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to 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 debt and equity offerings,
|
●
|
seeking additional funds raised through the sale of additional securities in the future,
|
●
|
seeking additional liquidity through credit facilities or other debt arrangements, and
|
●
|
increasing revenue from its patent portfolios, license fees and new business ventures.
|
Management believes the Company currently has sufficient funds to
meet its operating requirements for at least the next twelve months.
The Company’s ultimate success is dependent
on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The
Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to
execute its longer term business plan. The Company’s working capital amounted to approximately $3.6 million at
December 31, 2016, and net loss amounted to approximately $6.5 million and $51.5 million for the years ended December 31, 2016
and 2015, respectively. The Company had an approximately $141.7 million of accumulated deficit as of December 31, 2016.
Absent generation of sufficient revenue from the execution of the Company’s long term business plan, the Company will need
to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more severe
or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded
company or operations. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume
that such financing will be available to the Company on favorable terms, or at all.
Disputes regarding the assertion of patents
and other intellectual property rights are highly complex and technical. The Company may be forced to litigate against others to
enforce or defend its intellectual property rights or to determine the validity and scope of other parties’ proprietary rights.
The defendants or other third parties involved in the lawsuits in which the Company is involved may allege defenses and/or file
counterclaims or initiate inter 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.
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
Basis of Presentation and Principles of
Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology Corp. (“Nuta”), Spherix Portfolio
Acquisition II, Inc. (“SPXII”), Guidance IP, LLC (“Guidance”), Directional IP, LLC (“Directional”),
Spherix Management Services, LLC (“SMS”) and NNPT, LLC (“NNPT”). All significant intercompany
balances and transactions have been eliminated in consolidation.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Use of Estimates
The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses
during the period. The Company’s significant estimates and assumptions include the recoverability and useful lives of long-lived
assets, stock-based compensation, the valuation of derivative liabilities, and the valuation allowance related to the Company’s
deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be
affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible
that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from
those estimates and assumptions.
Segments
The Company operates in one operating segment
and, accordingly, no segment disclosures have been presented herein.
Concentration of Cash
The Company maintains cash balances at two
financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments
with original maturities of three months or less when purchased to be cash and cash equivalents. As of December 31, 2016 and 2015,
the Company had $0.1 million in cash and cash equivalents. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
Marketable Securities
Marketable securities are classified as
trading and are carried at fair value. The Company’s marketable securities consist of corporate bonds and highly liquid
mutual funds and exchange-traded & closed-end funds which are valued at quoted market prices. During the year ended
December 31, 2016 and 2015, the Company incurred realized losses of approximately $95,000 and $91,000, respectively, and
unrealized loss of approximately $243,000 and unrealized gains of approximately $19,000, 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, 2016 and 2015, the Company earned dividend income of approximately $19,000 and
$52,000, 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, 2016 and 2015. The market
value of marketable securities held as of December 31, 2016 and 2015 were $6.0 million and $3.4 million, respectively.
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)
Property and Equipment
Property and equipment are stated at cost and
include office furniture and equipment and computer hardware and software. The Company computes depreciation and amortization under
the straight-line method and typically over the following estimated useful lives of the related assets:
●
|
Office furniture and equipment
|
3 to 10 years
|
●
|
Computer hardware and software
|
3 to 5 years
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to 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. 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. Due to the continuous decline in stock price during 2016, the Company performed
an additional impairment test for intangible assets at December 31, 2016 and recorded $2.7 million of impairment charges to its
intangible assets (see Note 5).
Convertible Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable
preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as
temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
The Company accounts for convertible
preferred stock with detachable warrants in accordance with ASC 470:
Debt
and allocated proceeds received to the convertible
preferred stock and detachable warrants based on relative fair values. The Company evaluated the classification of its convertible
preferred stock and warrants and determined that such instruments meet the criteria for equity classification. The Company recorded
the related issuance costs and value ascribed to the warrants as a reduction of the convertible preferred stock.
The Company has
also evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815,
Derivatives and
Hedging
, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock
could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with
an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has
an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized
the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon
conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per
share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock (see Note
8).
As the convertible preferred stock may be converted immediately, the Company recognized the BCF as a deemed dividend
in the consolidated statements of operations.
Treasury Stock
The Company accounts for the treasury stock using the cost method,
which treats it as a reduction in stockholders’ equity.
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. There was no goodwill
impairment in 2016.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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).
Stock-based Compensation
The Company accounts for share-based payment
awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under
the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the
Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally
vest over a one- to five-year period.
The fair value of stock options granted was
determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term
of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration
for all individuals within the grant. The expected volatility assumption is computed based on the standard deviation
of the Company’s underlying stock price's daily logarithmic returns.
The Company’s model includes a zero dividend
yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The
Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such
restrictions.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Income Taxes
The Company uses the asset and liability method
of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method,
income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax
consequences of temporary difference resulting from matters that have been recognized in the Company’s financial statement
or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities measured at the enacted tax rates in effect for the year in which these items are expected
to reverse. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence,
it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Net Loss per Share
Basic loss per share is computed by dividing
the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period.
Net income (loss) attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment
of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible
preferred stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential
common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the
exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock
and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred
stock and the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
The following table summarizes the earnings
(loss) per share calculation (in thousands, except per share amount):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,476
|
)
|
|
$
|
(51,465
|
)
|
Deemed dividend related to immediate accretion of beneficial conversion feature of convertible preferred stock
|
|
|
-
|
|
|
|
(323
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
31,480
|
|
|
|
9,485
|
|
Net income
(loss) available to common stockholders
|
|
$
|
25,004
|
|
|
$
|
(42,303
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
3,700,090
|
|
|
|
1,693,365
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1.75
|
)
|
|
$
|
(30.39
|
)
|
Deemed dividend related to immediate accretion of beneficial conversion feature of convertible preferred stock
|
|
|
-
|
|
|
|
(0.19
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
8.51
|
|
|
|
5.60
|
|
Net income
(loss) available to common stockholders
|
|
$
|
6.76
|
|
|
$
|
(24.98
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,476
|
)
|
|
$
|
(51,465
|
)
|
Deemed dividend related to immediate accretion of beneficial conversion feature of convertible preferred stock
|
|
|
-
|
|
|
|
(323
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
31,480
|
|
|
|
9,485
|
|
Net income
(loss) available to common stockholders
|
|
$
|
25,004
|
|
|
$
|
(42,303
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding,
|
|
|
3,700,090
|
|
|
|
1,693,365
|
|
Weighted average effect of dilutive securities
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
296
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
130,562
|
|
|
|
-
|
|
Restricted stock units
|
|
|
7,418
|
|
|
|
-
|
|
Weighted
average diluted shares outstanding
|
|
|
3,838,366
|
|
|
|
1,693,365
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1.69
|
)
|
|
$
|
(30.39
|
)
|
Deemed dividend related to immediate accretion of beneficial conversion feature of convertible preferred stock
|
|
|
-
|
|
|
|
(0.19
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
8.20
|
|
|
|
5.60
|
|
Net income
(loss) available to common stockholders
|
|
$
|
6.51
|
|
|
$
|
(24.98
|
)
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2016 and 2015 are as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
530,277
|
|
Warrants to purchase common stock
|
|
|
1,251,709
|
|
|
|
2,304,888
|
|
Options to purchase common stock
|
|
|
309,037
|
|
|
|
289,380
|
|
Total
|
|
|
1,563,672
|
|
|
|
3,124,545
|
|
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 Company adopted this ASU on January 1, 2017. The adoption of this standard did not 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
early adopted the provisions of ASU 2014-15 during the year ended December 31, 2014.
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to 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.
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 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 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 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
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 consolidated statements of cash flows.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350):
Simplifying the Accounting for
Goodwill Impairment
. ASU No. 2017-04
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 is required to
be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 4. Property and Equipment
The components of property and equipment as of December 31, 2016
and 2015, at cost are ($ in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Computers
|
|
$
|
16
|
|
|
$
|
12
|
|
Office furniture and equipment
|
|
|
97
|
|
|
|
97
|
|
Leasehold improvements
|
|
|
229
|
|
|
|
229
|
|
Total cost
|
|
|
342
|
|
|
|
338
|
|
Accumulated depreciation and amortization
|
|
|
(336
|
)
|
|
|
(333
|
)
|
Property and equipment, net
|
|
$
|
6
|
|
|
$
|
5
|
|
The Company’s depreciation expense for the years ended December
31, 2016 and 2015 was $2,592 and $1,089, respectively.
Note 5. Intangible Assets
Patent Portfolio
The Company’s intangible assets with
finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible
assets were subject to amortization. The net carrying amounts related to acquired intangible assets as of December 31, 2016 are
as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period
(years)
|
|
Patent Portfolios at December 31, 2014, net
|
|
$
|
55,004
|
|
|
|
5.62
|
|
Amortization expenses
|
|
|
(6,317
|
)
|
|
|
|
|
Impairment loss
|
|
|
(38,888
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2015, net
|
|
$
|
9,799
|
|
|
|
4.63
|
|
Amortization expenses
|
|
|
(2,135
|
)
|
|
|
|
|
Impairment loss
|
|
|
(2,713
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2016, net
|
|
$
|
4,951
|
|
|
|
3.65
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortization expenses related to acquired
intangible assets for the years ended December 31, 2016 and 2015 are as follows ($ in thousands):
|
|
For the Years Ended December 31,
|
|
Date Acquired and Description
|
|
2016
|
|
|
2015
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
104
|
|
|
$
|
303
|
|
9/10/13 - North South patent portfolio
|
|
|
31
|
|
|
|
84
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
2,000
|
|
|
|
5,930
|
|
|
|
$
|
2,135
|
|
|
$
|
6,317
|
|
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 amount 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 Company’s stock price continued to
decrease during 2016. The Company’s performed an impairment test of intangible assets at December 31, 2016. 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, 2016. As a result,
the Company performed an analysis to determine if the carrying amount 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, 2016 was approximately
$5.0 million, which was comparable to the aggregate market capitalization of the Company as of that date. The Company recorded
an additional $2.7 million of impairment charge against its patent portfolio at December 31, 2016. The new cost basis of the patent
portfolio of $5.0 million will be amortized over its weighted average remaining useful life of 3.65 years.
The future amortization of these intangible
assets was based on the adjusted carrying amount. Future amortization of all patents is as follows ($ 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, 2017
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2018
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2019
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2020
|
|
|
71
|
|
|
|
22
|
|
|
|
639
|
|
|
|
732
|
|
Year Ended December 31, 2021
|
|
|
71
|
|
|
|
22
|
|
|
|
-
|
|
|
|
93
|
|
Thereafter
|
|
|
4
|
|
|
|
3
|
|
|
|
-
|
|
|
|
7
|
|
Total
|
|
$
|
359
|
|
|
$
|
113
|
|
|
$
|
4,479
|
|
|
$
|
4,951
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to 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 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 6. 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 December 31, 2016 and 2015 ($ in thousands):
|
|
Fair value measured at December 31, 2016
|
|
|
|
Total carrying value
at December 31,
|
|
|
Quoted prices in
active markets
|
|
|
Significant other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - corporate bonds
|
|
$
|
6,025
|
|
|
$
|
211
|
|
|
$
|
5,814
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
702
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
702
|
|
|
|
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
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There were no transfers between Level 1, 2 or 3 for the years ended
December 31, 2016 and 2015.
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 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 December 31, 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, 2016 and 2015 is as follows:
Date of valuation
|
|
December 31, 2016
|
|
December 31, 2015
|
Risk-free interest rate
|
|
1.93%
|
|
0.16% - 1.76%
|
Expected volatility
|
|
100% - 133.79%
|
|
100% - 115.35%
|
Expected life (in years)
|
|
3.93 - 4.06
|
|
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to 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 for the year ended
December 31, 2016 and 2015 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Beginning balance
|
|
$
|
2,959
|
|
|
$
|
-
|
|
Recognition of warrant liabilities
|
|
|
-
|
|
|
|
3,228
|
|
Fair value adjustment of warrant liabilities
|
|
|
(2,257
|
)
|
|
|
(269
|
)
|
Ending balance
|
|
$
|
702
|
|
|
$
|
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 clients. 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 year ended December
31, 2016 and 2015, the Company recorded approximately $290,000 and $31,000, respectively, in revenue related to the amortization
of the license.
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 capital
contribution of approximately $31.5 million, short term deferred revenue $1.1 million and long term deferred revenue of $3.7 million.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of information with respect the RPX transaction on May
23, 2016 is as follows:
Assumptions
|
|
|
|
|
Stock price on May 22, 2016
|
|
$
|
2.06
|
|
|
|
|
|
|
Series H Assumptions
|
|
|
|
|
Series H Shares
|
|
|
381,967
|
|
Series H - Liquidation preference
|
|
$
|
83.50
|
|
Series H -Carrying value
|
|
$
|
31,894,245
|
|
|
|
|
|
|
Equivalent common shares - Series H
|
|
|
201,035
|
|
Fair Value of Series H preferred
|
|
$
|
414,133
|
|
|
|
|
|
|
Contribution/Deemed dividend
|
|
$
|
31,480,112
|
|
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 year ended December 31, 2016, the Company recorded approximately
$587,000 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. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Amended and 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
2016 activity
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.
2015 activity
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, $985,000 was 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2016 and December 31, 2015 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
|
|
December 31,
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 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, 2016 and 2015, no shares of Series A Preferred Stock were issued and outstanding.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. In December 2015, the one remaining share of Series C Preferred Stock was surrendered by
the stockholder for cancellation. As of December 31, 2016 and 2015, no shares of Series 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.
As of December 31, 2016 and 2015, 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.
As of December 31, 2016 and 2015, 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.
As of December 31, 2016 and 2015, no shares
of Series F-1 Preferred Stock remained issued and outstanding.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 December 31, 2016 and 2015, none and
381,967 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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, 2016 and 2015, no 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 a 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, 2016 and 2015, no shares of Series J Preferred Stock are issued and outstanding.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Since January 1, 2016, stockholders have converted
1,240 shares of Series K Preferred Stock into 326,315 shares of Common Stock.
As of December 31, 2016 and 2015, none and
1,240 shares, respectively, of Series K Preferred Stock are issued and outstanding.
Warrants
A summary of warrant activity for year ended
December 31, 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
|
|
|
(854,577
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of December 31, 2016
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
|
|
|
|
|
3.91
|
|
Exercisable as of December 31, 2016
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
$
|
-
|
|
|
|
3.91
|
|
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, 2016, there were 282 fully vested options
outstanding and 239 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, 2016, 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”).
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2016, there were 207,092 options
outstanding and 227,118 shares available for grant under the 2014 Plan.
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.
On November 14, 2016, 78 options granted on
November 15, 2011 expired.
During the year ended December 31, 2016, 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. The aggregate grant date fair value of these options was approximately $36,000.
The fair value of options granted in 2016 and
2015 was estimated using the following assumptions:
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
Exercise price
|
|
$1.42 - $1.98
|
|
$4.18 - $32.87
|
Expected stock price volatility
|
|
122.4% - 141.3%
|
|
117.2% - 130.4%
|
Risk-free rate of interest
|
|
0.96% - 1.15%
|
|
0.74% - 1.08%
|
Term (years)
|
|
4.34 - 9.65
|
|
1.9 - 3.0
|
A summary of option activity under the Company’s
employee stock option plan for year ended December 31, 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
|
|
|
23,682
|
|
|
|
1.89
|
|
|
|
-
|
|
|
|
5.2
|
|
Employee options expired
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
-
|
|
|
|
4.1
|
|
Options vested and expected to vest
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
-
|
|
|
|
4.1
|
|
Options vested and exercisable
|
|
|
302,199
|
|
|
$
|
84.35
|
|
|
$
|
-
|
|
|
|
4.1
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of options that the Company granted
to non-employees for the year ended December 31, 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 December 31, 2016
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.4
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.4
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.4
|
|
Stock-based compensation associated with the amortization of stock
option expense was $35,000 and $0.2 million for the years ended December 31, 2016 and 2015, respectively.
Estimated future stock-based compensation expense
relating to unvested stock options is approximately $5,000.
Restricted Stock Awards
2016 activity
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.
In December 2016, in accordance with the
employment agreements, the Company determined to pay Mr. Reiner and Mr. Dotson an annual bonus of $60,000 and $91,255, respectively,
in shares of common stock in respect of their performance for the 2016 fiscal year which, as of the closing price of December 21,
2016, would have constituted a total of 122,972 shares. The shares were issued on December 8, 2016. The fair value of the 122,972
shares issued was based upon the closing price as of December 8, 2016.
2015 activity
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2016 is as follows:
|
|
Number of Units
|
|
|
Weighted Average
Grant Day Fair Value
|
|
Nonvested at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
287,085
|
|
|
|
1.86
|
|
Vested
|
|
|
(287,085
|
)
|
|
|
1.86
|
|
Nonvested at December 31, 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
conditions. One-half (1/2) of the RSU grant shall vest if as of December 31, 2016 the Company has pro-forma cash of at least five
million dollars ($5,000,000) (cash plus any cash used for a Board-approved extraordinary acquisition or transaction reconstituting
the Company’s core operations, less accrued bonuses) and one-half (1/2) shall vest if there is consummation by December 31,
2016 of a Board-approved extraordinary acquisition or transaction reconstituting the Company’s core operations. In addition,
the RSU grant shall immediately vest in full if by December 31, 2016 there is (i) a “Change in Control Transaction”
during the term of the Mr. Hayes’ employment and or (ii) a termination of his services hereunder by the Company other than
for “Cause” or by Mr. Hayes for “Good Reason”.
A summary of the restricted stock award activity
for the year ended December 31, 2016 is as follows:
|
|
Number of Units
|
|
|
Weighted Average
Grant Day Fair Value
|
|
Nonvested at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
118,512
|
|
|
|
1.08
|
|
Vested
|
|
|
(59,256
|
)
|
|
|
-
|
|
Forfeited
|
|
|
(59,256
|
)
|
|
|
-
|
|
Nonvested at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
As of December 31, 2016, the Company had unrecognized
stock-based compensation expense related to restricted stock unit awards of approximately $0.
Stock-based Compensation Expense
Stock-based compensation expense for the year
ended December 31, 2016 and 2015 was comprised of the following ($ in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Employee restricted stock units
|
|
$
|
121
|
|
|
$
|
-
|
|
Employee restricted stock awards
|
|
|
151
|
|
|
|
132
|
|
Employee stock option awards
|
|
|
35
|
|
|
|
155
|
|
Non-employee restricted stock awards
|
|
|
255
|
|
|
|
84
|
|
Total compensation expense
|
|
$
|
562
|
|
|
$
|
371
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9. Related Party Transactions
Executive Officer Agreements
2016 activity
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.
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. One-half of the grant shall vest if as
of December 31, 2016, the Corporation has pro-forma cash of at least five million dollars ($5,000,000) (cash plus any cash used
for a Board-approved extraordinary acquisition or transaction reconstituting the Company’s core operations, less accrued
bonuses) and one-half shall vest upon the achievement of certain agreed milestones. As of December 31, 2016, 59,256 restricted
stock units were vested and 59,256 restricted stock units were forfeited.
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 currently appointed as a member of the Audit, Compensation and Nominating committees. 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.
2015 activity
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2016 and 2015, the Company incurred $80,800
and $42,287, respectively, consulting expenses related to this agreement. Mr. Goldberg was also appointed as a director of the
Company. Mr. Goldberg resigned as a director of the Company on October 26, 2016 and as of August 2016, Mr. Goldberg no longer serves
as a consultant to the Company.
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.
Note 11. Commitments and Contingencies
Financing of Directors’ and Officers’ Insurance
The Company financed its Directors’ and
Officers’ insurance policy for approximately $0.2 million. Payments are due monthly and the policy is for 12 months. Finance
charges for the 12-month period are nominal. As of December 31, 2016, the Company owed approximately $0.1 million and
such amounts were recorded in accrued expenses. The Company has made regular payments in accordance with this insurance policy.
Leases
Future minimum rental payments required as
of December 31, 2016, including Bethesda office lease obligation are as follows ($ in thousands):
|
|
Lease Payments
|
|
Year Ended December 31, 2017
|
|
|
220
|
|
Year Ended December 31, 2018
|
|
|
45
|
|
|
|
$
|
265
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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 was set for 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 we 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, 2016, we timely filed our reply brief. On January
12, 2017, we settled the case with Uniden and Uniden took a license under the Asserted Patents. The appeal to the Federal Circuit
continues with the Patent Office as an adverse party. On February 13, 2017, the Federal Circuit scheduled the oral argument for
March 9, 2017. The Court heard our argument on March 9, 2017. On March 15, 2017, the Court issued an Order asking the Patent and
Trademark Office to submit additional briefing on several issues to clarify the basis for its decision of patent invalidity by April 15, 2017.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
International License Exchange of America,
LLC 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 (the “Court”) for infringement of U.S. Patent No.
RE40,999 (the ‘999 Patent”). In the Complaint, we sought relief in the form of a finding of infringement of the ‘999
Patent, damages sufficient to compensate us for Fairpoint’s infringement together with pre-and post-judgment interest and
costs, a declaration that the case is exceptional under 35 U.S.C. § 285, and the Company’s attorney’s fees. On
October 13, 2016, Fairpoint filed its answer with no counterclaims. On November 16, 2016, International License Exchange of America,
LLC, a wholly-owned subsidiary of Equitable (“ILEA”), filed a motion to substitute itself as the plaintiff, consistent
with our Monetization Agreement with Equitable. On November 17, 2016, the Court granted ILEA’s motion.
International License Exchange of America,
LLC Litigations
Under our Monetization Agreement with Equitable,
ILEA has filed the patent infringement litigations listed below. The defendants in these cases have not yet filed answers to the
complaints.
|
o
|
On August 12, 2016, litigation against Cincinnati Bell, Inc., case number 1:16-cv-00715-RGA, in the U.S. District Court for
the District of Delaware, related to alleged infringement of U.S. Patent No. RE40,999 (“the ‘999 patent”), U.S.
Patent No. 6,970,461, and U.S. Patent No. 7,478,167. On March 8, 2017, Cincinnati Bell filed a motion to dismiss, alleging lack
of personal jurisdiction and improper venue.
|
|
o
|
On August 12, 2016, litigation against Frontier Communications Corporation, case number 1:16-cv-00714-RGA, in the U.S. District
Court for the District of Delaware, related to alleged infringement of the ‘999 patent.
|
|
o
|
On August 12, 2016, litigation against Echostar Corporation, case number 1:16-cv-00716-RGA, in the U.S. District Court for
the District of Delaware, related to alleged infringement of the ‘999 patent.
|
|
o
|
On August 15, 2016, litigation against ATN International, Inc. Commnet Wireless, LLC Choice Communications LLC, and Choice
Communications, LLC (“Choice Wireless”), case number: 1:16-cv-00718-RGA, in the U.S. District Court for the District
of Delaware, related to alleged infringement of the ‘999 patent.
|
|
o
|
On August 15, 2016, litigation against Sprint Corporation and Clearwire Corporation case number 1:16-cv-00719-RGA, in the U.S.
District Court for the District of Delaware, related to alleged infringement of the ‘999 patent.
|
|
o
|
On August 16, 2016, litigation against ViaSat, Inc., case number 1:16-cv-00720-RGA, in the U.S. District Court for the District
of Delaware, related to alleged infringement of the ‘999 patent. On March 7, 2017, ViaSat filed a motion to dismiss, alleging
failure to state a plausible claim of patent infringement.
|
|
o
|
On September 9, 2016, litigation against Fortinet Inc., case number 1:16-cv-00795-RGA, in the U.S. District Court for the District
of Delaware, related to alleged infringement of the ‘999 patent. On March 7, 2017, Fortinet filed its answer to the Complaint.
|
|
o
|
On September 9, 2016, litigation against GTT Communications, Inc., case number 1:16-cv-00796-RGA, in the U.S. District Court
for the District of Delaware, related to alleged infringement of the ‘999 patent.
|
|
o
|
On November 22, 2016, litigations against Alcatel-Lucent SA and Alcatel-Lucent USA Inc., case number 1:16-cv-01077-RGA, in
the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent and U.S. Patent
Nos. 7,158,515; 6,222,848; 6,578,086; and 6,697,325.
|
Counterclaims
In the ordinary course of business, we, or
with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed
on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated
by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can
provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results
from operations.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12. Income Taxes
The income tax provision consists of the following ($ in thousands):
dollars in thousands
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
3,578
|
|
|
|
16,374
|
|
Increase in valuation allowance
|
|
|
3,578
|
|
|
|
(16,374
|
)
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(50
|
)
|
|
|
837
|
|
Increase in valuation allowance
|
|
|
50
|
|
|
|
(837
|
)
|
Change in Valuation Allowance
|
|
|
(3,578
|
)
|
|
|
(17,211
|
)
|
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, 2016 and 2015:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Statutory Federal Rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State Taxes, Net of Federal Tax Benefit
|
|
|
2.97
|
%
|
|
|
2.52
|
%
|
Other Permanent Differencee
|
|
|
1.01
|
%
|
|
|
0.01
|
%
|
State rate change effect
|
|
|
6.88
|
%
|
|
|
-0.75
|
%
|
Fair Value of Warrants
|
|
|
11.85
|
%
|
|
|
0.00
|
%
|
Increase due to change in NOL and other true ups
|
|
|
(1.47
|
)%
|
|
|
-2.35
|
%
|
|
|
|
|
|
|
|
|
|
Change in Valuation Allowance
|
|
|
-55.25
|
%
|
|
|
-33.43
|
%
|
Income Taxes Provision (Benefit)
|
|
|
0.0
|
|
|
|
0.0
|
|
At December 31, 2016 and 2015, the Company’s deferred tax
assets and liabilities consisted of the effects of temporary differences attributable to the following ($ in thousands):
dollars in thousands
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net-operating loss carryforward
|
|
$
|
12,971
|
|
|
$
|
10,290
|
|
Stock based compensation
|
|
|
8,413
|
|
|
|
8,101
|
|
Patent portfolio and other
|
|
|
17,796
|
|
|
|
17,211
|
|
Total Deferred Tax Assets
|
|
|
39,180
|
|
|
|
35,602
|
|
Valuation allowance
|
|
|
(39,180
|
)
|
|
|
(35,602
|
)
|
Deferred Tax Asset, Net of Allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2016 and 2015. As
of December 31, 2016, the change in valuation allowance is approximately $6.0 million.
As of December 31, 2016, the Company had
federal and state net operating loss carryovers (“NOLs”) of approximately $37.5 million, which expire from 2029
through 2036. 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’s net operating loss includes
approximately $3.0 million of previously unidentified loss benefits, net of limitations under section 382 of the Internal
Revenue Code and similar state provisions. The deferred tax asset balance at December 31, 2015 and related valuation
allowance has been revised to include the amount of the benefit. The Company has determined that the amount of the revision
is insignificant to the Company’s previously reported financial position and results of operations. The effect of any
subsequent ownership change may lower annual limitation and further decrease available NOL carryover 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, 2016 and 2015, no liability for unrecognized tax
benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2016 and 2015.
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, 2016, 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 13. Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the consolidated financial statements are issued. Based upon the evaluation, the Company
did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated
financial statements other than disclosed.