Item 1. Financial Statements
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
178
|
|
|
$
|
197
|
|
Marketable securities
|
|
|
4,634
|
|
|
|
3,998
|
|
Prepaid expenses and other assets
|
|
|
146
|
|
|
|
150
|
|
Total current assets
|
|
|
4,958
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2
|
|
|
|
3
|
|
Patent portfolios and patent rights, net
|
|
|
2,897
|
|
|
|
3,578
|
|
Investments at fair value
|
|
|
1,725
|
|
|
|
1,020
|
|
Deposit
|
|
|
26
|
|
|
|
26
|
|
Total assets
|
|
$
|
9,608
|
|
|
$
|
8,972
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
206
|
|
|
$
|
56
|
|
Accrued salaries and benefits
|
|
|
592
|
|
|
|
695
|
|
Warrant liabilities
|
|
|
357
|
|
|
|
822
|
|
Short-term deferred revenue
|
|
|
—
|
|
|
|
957
|
|
Short-term lease liabilities
|
|
|
—
|
|
|
|
48
|
|
Total current liabilities
|
|
|
1,155
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
—
|
|
|
|
2,288
|
|
Total liabilities
|
|
|
1,155
|
|
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series D: 4,725 shares issued and outstanding at June 30, 2018 and December 31, 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Series D-1: 834 shares issued and outstanding at June 30, 2018 and December 31, 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 100,000,000 shares authorized; 8,542,542 and 6,234,910 shares issued at June 30, 2018 and December 31, 2017, respectively; 8,542,530 and 6,234,898 shares outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
1
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
152,410
|
|
|
|
149,425
|
|
Treasury stock, at cost, 12 shares at June 30, 2018 and December 31, 2017
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Accumulated deficit
|
|
|
(143,694
|
)
|
|
|
(145,055
|
)
|
Total stockholders’ equity
|
|
|
8,453
|
|
|
|
4,106
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,608
|
|
|
$
|
8,972
|
|
See accompanying notes to condensed consolidated
financial statements
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of
Operations
($ in thousands except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
311
|
|
|
$
|
—
|
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
343
|
|
|
|
343
|
|
|
|
681
|
|
|
|
681
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
342
|
|
|
|
294
|
|
|
|
697
|
|
|
|
883
|
|
Professional fees
|
|
|
395
|
|
|
|
250
|
|
|
|
992
|
|
|
|
535
|
|
Rent
|
|
|
19
|
|
|
|
27
|
|
|
|
41
|
|
|
|
49
|
|
Depreciation expense
|
|
|
17
|
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
Acquisition costs
|
|
|
66
|
|
|
|
—
|
|
|
|
211
|
|
|
|
—
|
|
Other selling, general and administrative
|
|
|
80
|
|
|
|
174
|
|
|
|
200
|
|
|
|
236
|
|
Total operating expenses
|
|
|
1,262
|
|
|
|
1,088
|
|
|
|
2,839
|
|
|
|
2,384
|
|
Loss from operations
|
|
|
(1,262
|
)
|
|
|
(777
|
)
|
|
|
(2,839
|
)
|
|
|
(1,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income , net
|
|
|
(93
|
)
|
|
|
121
|
|
|
|
(190
|
)
|
|
|
293
|
|
Change in fair value of investment
|
|
|
680
|
|
|
|
—
|
|
|
|
680
|
|
|
|
—
|
|
Change in fair value of warrant liabilities
|
|
|
277
|
|
|
|
(1,204
|
)
|
|
|
465
|
|
|
|
(1,326
|
)
|
Total other income (expenses)
|
|
|
864
|
|
|
|
(1,083
|
)
|
|
|
955
|
|
|
|
(1,033
|
)
|
Net loss
|
|
$
|
(398
|
)
|
|
$
|
(1,860
|
)
|
|
$
|
(1,884
|
)
|
|
$
|
(2,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
8,535,550
|
|
|
|
4,958,159
|
|
|
|
7,565,772
|
|
|
|
4,951,083
|
|
See accompanying notes to condensed consolidated
financial statements
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders’ Equity
($ in thousands except per share amounts)
(Unaudited)
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Accumulated
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31, 2017
|
|
|
6,234,898
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
149,425
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(145,055
|
)
|
|
$
|
4,106
|
|
Issuance common stock in equity raise, net of offering cost
|
|
|
2,222,222
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,699
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,700
|
|
Stock-based compensation
|
|
|
85,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286
|
|
Cumulative effect of the changes related to adoption of ASC 606
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,884
|
)
|
|
|
(1,884
|
)
|
Balance at June 30, 2018
|
|
|
8,542,530
|
|
|
$
|
1
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,410
|
|
|
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
(143,694
|
)
|
|
$
|
8,453
|
|
See accompanying notes to condensed consolidated
financial statements
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
($ in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,884
|
)
|
|
$
|
(2,779
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
681
|
|
|
|
681
|
|
Change in fair value of investment
|
|
|
(680
|
)
|
|
|
—
|
|
Change in fair value of warrant liabilities
|
|
|
(465
|
)
|
|
|
1,326
|
|
Stock-based compensation
|
|
|
286
|
|
|
|
11
|
|
Depreciation expense
|
|
|
17
|
|
|
|
2
|
|
Realized loss on marketable securities
|
|
|
275
|
|
|
|
129
|
|
Unrealized loss (gain) on marketable securities
|
|
|
17
|
|
|
|
(137
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
4
|
|
|
|
40
|
|
Accounts payable and accrued expenses
|
|
|
150
|
|
|
|
(20
|
)
|
Accrued salaries and benefits
|
|
|
(103
|
)
|
|
|
(364
|
)
|
Deferred revenue
|
|
|
—
|
|
|
|
(618
|
)
|
Accrued lease liabilities
|
|
|
(48
|
)
|
|
|
(87
|
)
|
Net cash used in operating activities
|
|
|
(1,750
|
)
|
|
|
(1,816
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(10,047
|
)
|
|
|
(6,510
|
)
|
Sale of marketable securities
|
|
|
9,119
|
|
|
|
9,624
|
|
Purchase of investment at fair value
|
|
|
(25
|
)
|
|
|
(675
|
)
|
Purchase of property and equipment
|
|
|
(16
|
)
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
|
|
(969
|
)
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash from issuance common stock, net of offering cost
|
|
|
2,700
|
|
|
|
—
|
|
Repurchase of restricted stock units to pay for employee withholding taxes
|
|
|
—
|
|
|
|
(24
|
)
|
Net cash provided by (used in) financing activities
|
|
|
2,700
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(19
|
)
|
|
|
599
|
|
Cash and cash equivalents, beginning of period
|
|
|
197
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
178
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes to condensed consolidated
financial statements
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”)
is an intellectual property company incorporated in the State of Delaware that owns patented and unpatented intellectual property. The
Company was formed in 1967 as a scientific research company and for much of its history pursued drug development including through
Phase III clinical studies which were discontinued. Through the Company’s acquisition of patents and patent applications
developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”) and Harris Corporation from North
South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities.
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.
In addition to our patent monetization
efforts, since the fourth quarter of 2017, we have been transitioning to focus our efforts as a technology development company.
The Company made no investments in new IP during 2017 and started the transition with its investment in Hoth Therapeutics, Inc.
during the third quarter of 2017.
In March 2018, the Company
entered into an agreement and plan of merger, subject to shareholder approval, with DatChat, Inc. (the “DatChat
Merger”), a secure messaging application that utilizes blockchain technology, as amended on May 3, 2018. After further
negotiations, the Company determined not to pursue a merger with DatChat and on August 8, 2018, entered into a Securities
Purchase Agreement with DatChat pursuant to which the Company and DatChat agreed to terminate the DatChat Merger and the
Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of (a) a cash payment of $500,000, (b)
the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation of the Company to pay certain
specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in
the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 3.6% of the issued
and outstanding common stock of DatChat.
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 to support new technologies and help advance innovation. The Company’s working
capital amounted to approximately $3.8 million at June 30, 2018. Absent generation of sufficient revenue from the execution of
the Company’s long-term business plan, the Company will need to obtain additional debt or equity financing, especially if
the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences
significant increases in expense levels resulting from being a publicly-traded company or operations. If the Company
attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the
Company on favorable terms, or at all.
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-party 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.
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.
Use of Estimates
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US
GAAP”). This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue
and expenses during the period. The Company’s significant estimates and assumptions include the recoverability and useful
lives of long-lived assets, stock-based compensation, the valuation of derivative liabilities, the valuation of investments and
the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including
the carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company and
general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s
estimates and could cause actual results to differ from those estimates and assumptions.
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 June 30, 2018 and December
31, 2017, the Company had $0.2 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 three months ended June 30,
2018 and 2017, the Company incurred realized losses of approximately $0.2 million and $36,000, respectively, and unrealized gains
of approximately $41,000 and $66,000, respectively, on its investments in marketable securities, which are included in other income,
net on the consolidated statements of operations. In addition, during the six months ended June 30, 2018 and 2017, the Company
earned dividend income of approximately $44,000 and $47,000, respectively, which is included in other income, net on the consolidated
statement of operations.
During the six months ended June 30, 2018
and 2017, the Company incurred realized losses of approximately $0.3 million and $0.1 million, respectively, and unrealized losses
of approximately $17,000 and unrealized gains of approximately $0.1 million, respectively, on its investments in marketable securities,
which are included in other income, net on the consolidated statements of operations. In addition, during the six months ended
June 30, 2018 and 2017, the Company earned dividend income of approximately $78,000 and $55,000, respectively, which is included
in other income, net on the consolidated statement of operations.
The realized gain or loss, unrealized
gain or loss, and dividend income related to marketable securities for the three and six months ended June 30, 2018 and 2017
are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Realized gain (loss)
|
|
$
|
(177
|
)
|
|
$
|
(36
|
)
|
|
$
|
(275
|
)
|
|
$
|
(129
|
)
|
Unrealized gain (loss)
|
|
|
41
|
|
|
|
66
|
|
|
|
(17
|
)
|
|
|
138
|
|
Dividend income
|
|
|
44
|
|
|
|
47
|
|
|
|
78
|
|
|
|
55
|
|
|
|
$
|
(92
|
)
|
|
$
|
77
|
|
|
$
|
(215
|
)
|
|
$
|
64
|
|
The Company reinvested such dividend income
into its marketable securities during the six months ended June 30, 2018 and 2017. The fair values of such marketable securities
held as of June 30, 2018 and December 31, 2017 were $4.6 million and $4.0 million, respectively.
The marketable securities were classified
as a Level 2 financial instrument at June 30, 2018 (see Note 7).
Digital Currencies Translations and
Remeasurements
The Company accounts for digital currencies,
which it considers to be an asset, at their initial cost and subsequently remeasures the carrying amounts of digital currencies
it owns at each reporting date based on their current fair value. The changes in the fair value of digital currencies are included
as a component of income or loss. The Company currently classifies digital currencies as a current asset.
The Company obtains the equivalency rate
of bitcoins to USD from various exchanges including, Bitstamp, Kraken and Coinbase. Equivalency rate obtained from these sources
represents a generally well recognized quoted price in an active market for bitcoins, which market and related database are accessible
to the Company on an ongoing basis.
Investment
The Company elected the fair value option
for its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”). As of June 30, 2018, the fair value of
this investment was $1,700,000. The Company also elected the fair value option for its investment in TheBit Daily LLC, a Delaware
limited liability company (“TheBit Daily”). As of June 30, 2018, the fair value of this investment was $25,000. These
investments were classified as a Level 3 financial instrument at June 30, 2018 (see Note 4).
While the Company believes its valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The decision to elect the fair value option,
which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The
net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as an unrealized
gain on investment in the Condensed Consolidated Statements of Operations.
Net Loss per Share
Basic loss per share is computed by dividing
the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period.
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.
Securities that could potentially dilute
loss per share in the future that were not included in the computation of diluted loss per share at
Jun
e
30, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
2,926
|
|
Warrants to purchase common stock
|
|
|
1,249,754
|
|
|
|
1,251,709
|
|
Options to purchase common stock
|
|
|
528,490
|
|
|
|
328,716
|
|
Total
|
|
|
1,781,170
|
|
|
|
1,583,351
|
|
Revenue Recognition
The Company recognizes revenue when it
is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of
an arrangement when the services have been provided to the customer, the sales price is fixed or determinable and collectability
is probable. Our material revenue stream is related to revenue generated from its settlement and licensing agreements. the appropriate
recognition of revenue is determined as one performance obligation and revenue is recognized upon delivery of the final performance
obligations, including the license for past and future use and the release.
The Company recognizes revenue under ASC
606,
Revenue from Contracts with Customers
. The core principle of the new revenue standard is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that
core principle:
|
●
|
Step 1: Identify the contract with the customer
|
|
●
|
Step 2: Identify the performance obligations in the contract
|
|
●
|
Step 3: Determine the transaction price
|
|
●
|
Step 4: Allocate the transaction price to the performance
obligations in the contract
|
|
●
|
Step 5: Recognize revenue when the company satisfies
a performance obligation
|
In order to identify the performance obligations
in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised
good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or
service (or bundle of goods or services) if both of the following criteria are met:
|
●
|
The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct).
|
|
●
|
The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
|
If a good or service is not distinct, the
good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of
consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining
the transaction price, an entity must consider the effects of all of the following:
|
●
|
Constraining estimates of variable consideration
|
|
●
|
The existence of a significant financing component in
the contract
|
|
●
|
Consideration payable to a customer
|
Variable consideration is included in the transaction price
only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur
when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation
on a relative standalone selling price basis.
The transaction price allocated to each performance obligation
is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
As of June 30, 2018, there were no contract
assets or liabilities associated with the Company’s settlement and licensing agreements. During the six months ended June
30, 2018, the Company did not generate any revenue.
Recently Issued Accounting Pronouncements
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 July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception
, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments
with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost
and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features
that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses
the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content
in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements
about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact
of adopting ASU 2017-11 on its financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07,
Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 simplifies
several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic
718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees.
ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. The Company is currently assessing the effect this guidance may have on its financial statements.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with
Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition principle in ASU 2014-09
is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced
disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective
approach with practical expedients, or a cumulative effect upon adoption approach. The Company adopted the new standard effective
January 1, 2018, using the modified retrospective approach. The Company has determined that its licenses represent functional intellectual
property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual
property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated
and accumulated deficit as of January 1, 2018 was decreased by approximately $3.2 million so that the Company will not recognize
revenue on earnings statements in the future as to its license.
In January 2016, the FASB issued ASU No.
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 requires equity
investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment
of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates
the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value
that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business
entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial
liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial
statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective
for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company adopted the provisions of ASU 2016-01 on January 1, 2018. The adoption of this update did not impact the Company’s
consolidated financial statements and related disclosures.
In May 2017, the Financial Accounting Standards
Board (the FASB) issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, (ASU
2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the
guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should
be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. The Company adopted ASU 2017-09 on January 1, 2018. The adoption
of this ASU did not have a material impact on the Company’s financial position or results of operations.
Note 4. Investment in Hoth Therapeutics,
Inc.
On June 30, 2017 (the “Closing Date”),
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hoth Therapeutics, Inc., a
Nevada corporation (“Hoth”), for the purchase of an aggregate of 6,800,000 shares of common stock, par value $0.0001
(the “Shares”), of Hoth, for a purchase price of $675,000. The Company adopted the fair value option for this investment
and recorded changes in fair value in the statement of operations (see Note 7).
Note 5. Investment in TheBit Daily LLC
On March 23, 2018, Spherix Incorporated
purchased 8.0% of the issued and outstanding limited liability company membership interests of TheBit Daily LLC, a development
stage media and education platform focused on the blockchain and cryptocurrency space, for a subscription price of $25,000.
The Company adopted the fair value option
for this investment and recorded changes in fair value, if any, in the statement of operations (see Note 7).
Note 6. Intangible Assets
Patent Portfolio and Patent Rights
The Company’s intangible assets
with finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable
intangible assets were subject to amortization. The carrying amounts related to acquired intangible assets as June 30, 2018 are
as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2017, net
|
|
$
|
3,578
|
|
|
|
2.67
|
|
Amortization expenses
|
|
|
(681
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at June 30, 2018, net
|
|
$
|
2,897
|
|
|
|
2.19
|
|
The amortization expenses related to acquired
intangible assets for the six months ended June 30, 2018 and 2017 are as follows ($ in thousands):
|
|
Amortization Expense for the Three Months Ended June 30,
|
|
|
Amortization Expense for the Six Months Ended June 30,
|
|
Date Acquired and Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
35
|
|
|
$
|
35
|
|
9/10/13 - North South patent portfolio
|
|
|
5
|
|
|
|
5
|
|
|
|
11
|
|
|
|
11
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
320
|
|
|
|
320
|
|
|
|
635
|
|
|
|
635
|
|
|
|
$
|
343
|
|
|
$
|
343
|
|
|
$
|
681
|
|
|
$
|
681
|
|
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
Portfolio
Acquired
24-Jul-13
|
|
|
North South Portfolio Acquired 10-Sep-13
|
|
|
Rockstar Portfolio Acquired 31-Dec-13
|
|
|
Total Amortization
|
|
Six Months Ended December 31, 2018
|
|
|
|
36
|
|
|
|
11
|
|
|
|
645
|
|
|
|
692
|
|
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
|
|
|
$
|
253
|
|
|
$
|
80
|
|
|
$
|
2,564
|
|
|
$
|
2,897
|
|
Note 7. 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 June 30, 2018 and December 31, 2017 ($ in thousands):
|
|
Fair value measured at June 30, 2018
|
|
|
|
Total carrying value at June 30,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
4,634
|
|
|
$
|
—
|
|
|
$
|
4,634
|
|
|
$
|
—
|
|
Investments at fair value
|
|
$
|
1,725
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
357
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
357
|
|
|
|
Fair value measured at December 31, 2017
|
|
|
|
Total carrying value at December 31,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
3,998
|
|
|
$
|
—
|
|
|
$
|
3,998
|
|
|
$
|
—
|
|
Investments at fair value
|
|
$
|
1,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
822
|
|
There were no transfers between Level 1, 2 or 3 during the six
months ended June 30, 2018.
Level 2 Valuation Techniques
The fair values of Level 2 marketable securities
are determined using one or more quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of
the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires
significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are
analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A significant decrease in the volatility
or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the
Company’s consolidated statements of operations.
The Series A and Series B warrants have
been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value
at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual
terms, maturity, risk free rates, as well as volatility. The warrants require, at the option of the holder, a net-cash settlement
following certain fundamental transactions at the Company or require the issuance of registered shares upon exercise, do not expressly
preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities.
A summary of quantitative information with
respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that
are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2018 and December 31, 2017
is as follows:
Date of valuation
|
|
June 30, 2018
|
|
December 31, 2017
|
Risk-free interest rate
|
|
2.52%
|
|
1.98%
|
Expected volatility
|
|
89.88% - 109.61%
|
|
100.00% - 132.21%
|
Expected life (in years)
|
|
2.44-2.56
|
|
2.94 - 3.06
|
Expected dividend yield
|
|
—
|
|
—
|
The risk-free interest rate was based on
rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based
on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement
feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s
underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date
of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its
common stock, and does not expect to pay dividends on its common stock in the future.
The following table sets forth a summary
of the changes in the fair value of the Company’s Level 3 financial liabilities for the six months ended June 30, 2018 and
2017 that are measured at fair value on a recurring basis ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Beginning balance
|
|
$
|
822
|
|
|
$
|
702
|
|
Fair value adjustment of warrant liabilities
|
|
|
(465
|
)
|
|
|
1,326
|
|
Ending balance
|
|
$
|
357
|
|
|
$
|
2,028
|
|
The Company owns approximately 33% of common
shares in Hoth as of June 30, 2018. The value of the Company’s investment in Hoth increased by approximately $0.7 million
during the six months ended June 30, 2018.
The following table sets forth a summary
of the changes in the fair value of the Company’s Level 3 financial assets for the six months ended June 30, 2018 and 2017
that are measured at fair value on a recurring basis:
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Beginning balance
|
|
$
|
1,020
|
|
|
$
|
—
|
|
Purchase of investment in TheBit Daily LLC at fair value
|
|
|
25
|
|
|
|
—
|
|
Fair value of Hoth upon issuance
|
|
|
—
|
|
|
|
675
|
|
Change in fair value of Hoth
|
|
|
680
|
|
|
|
—
|
|
Ending balance
|
|
$
|
1,725
|
|
|
$
|
675
|
|
While the Company believes its valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The decision to elect the fair value option,
which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The
net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as change in fair
value of investment in the Consolidated Statements of Operations.
A summary of quantitative information with
respect to the valuation methodology and significant unobservable inputs used for the Company’s valuation in Hoth that are
categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2018 and December 31, 2017 is
as follows:
Date of valuation
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
2.24
|
%
|
|
|
1.39
|
%
|
Expected volatility
|
|
|
75.00
|
%
|
|
|
75.00
|
%
|
Expected life (in years)
|
|
|
1.00
|
|
|
|
1.00
|
|
The investment in Hoth Therapeutics was valued using a hybrid
probability weighted expected return method, with scenarios including (1) Hoth continuing to operate as a private company through
an estimated potential exit date, and (2) Hoth undergoing an IPO in the near future. The private-company scenario utilizes a reverse
option pricing method (backsolve) based on the recent Series A transaction. Key inputs to the backsolve, in addition to the Series
A price, include volatility (75.00%) and expected maturity (1.0 years). The IPO scenario is based on initial value indications
proposed by investment bankers. The primary inputs, in addition to the pre-money value indications, include the estimated time
to IPO (end of November) and a discount rate of 15%. The valuation conclusion is sensitive to the probability weightings assigned
to each scenario. The weightings (1/3 IPO scenario, 2/3 private company scenario), were determined according to management expectations
regarding exit opportunities, based on what was known or knowable as of June 30, 2018.
Note 8. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Series D Convertible Preferred Stock
On April 2, 2013, the Company designated
1,488,152 shares of preferred stock as Series D 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 June 30, 2018 and December 31, 2017,
4,725 shares of Series D Preferred Stock remained issued and outstanding.
Series D-1 Convertible Preferred Stock
On November 20, 2013, the Company designated
1,379,685 shares of preferred stock as Series D-1 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 June 30, 2018 and December 31, 2017,
834 shares of Series D-1 Preferred Stock remained issued and outstanding.
Common Stock
On March 19, 2018, the Company closed a
public offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of the
Company’s registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement
(the “Agreement”) between the Company and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts
basis with respect to the offering (the “Placement Agent”), that was entered into on March 14, 2018. The Company sold
2,222,222 shares of its common stock in the offering at a purchase price of $1.35 per share.
Warrants
A summary of warrant activity for the six
months ended June 30, 2018 is presented below:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.92
|
|
Outstanding as of June 30, 2018
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
2.42
|
|
Exercisable as of June 30, 2018
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.42
|
|
Stock Options
On February 16, 2018, pursuant to and subject
to the available number of shares reserved under the 2014 Plan, the Company issued an aggregate of 150,000 options to purchase
common stock of the Company to three of its directors. The aggregate grant date fair value of these options was approximately $0.2
million. These stock options vest over six months.
On May 3, 2018, a new director was granted
options to purchase 50,000 shares of the Company’s common stock, at an exercise price of $1.04 per share, which options vested
50% at May 3, 2018 with the remaining 50% vesting at May 3, 2019. The aggregate grant date fair value of these options was approximately
$46,000. These stock options vest over twelve months.
A summary of option activity under the Company’s employee
stock option plan for the six months ended June 30, 2018 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
325,597
|
|
|
$
|
78.20
|
|
|
$
|
5,999
|
|
|
|
3.2
|
|
Employee options granted
|
|
|
200,000
|
|
|
|
1.39
|
|
|
|
—
|
|
|
|
9.7
|
|
Outstanding as of June 30, 2018
|
|
|
525,597
|
|
|
$
|
48.97
|
|
|
$
|
1,632
|
|
|
|
5.4
|
|
Options vested and expected to vest
|
|
|
525,597
|
|
|
$
|
48.97
|
|
|
$
|
1,632
|
|
|
|
5.4
|
|
Options vested and exercisable
|
|
|
425,597
|
|
|
$
|
60.15
|
|
|
$
|
1,132
|
|
|
|
4.3
|
|
A summary of option activity under the
Company’s non-employee stock option plan for the six months ended June 30, 2018 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.4
|
|
Outstanding as of June 30, 2018
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.9
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.9
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
2.9
|
|
Stock-based compensation associated with
the amortization of stock option expense was approximately $71,000 and $8,000 for the three months ended June 30, 2018 and 2017,
and was approximately $0.2 million and $11,000 for the six months ended June 30, 2018 and 2017, respectively.
Restricted Stock Awards
On February 16, 2018, the Company granted
each of its three directors 20,000 shares of restricted common stock. The grant date fair value of each restricted stock award
was approximately $27,000. These restricted stock awards vested immediately.
On April 26, 2018, the Company issued 25,410
shares of its common stock to an employee for services pursuant to employment agreement. The grant date fair value of this restricted
stock award was approximately $27,000 (based upon the closing price of the Company’s common stock on April 26, 2018). This
restricted stock award vested immediately.
Stock-based Compensation
Stock-based compensation for the six months
ended June 30, 2018 and 2017 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employee restricted stock awards
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
—
|
|
Employee stock option awards
|
|
|
71
|
|
|
|
8
|
|
|
|
179
|
|
|
|
11
|
|
Total compensation expense
|
|
$
|
98
|
|
|
$
|
8
|
|
|
$
|
286
|
|
|
$
|
11
|
|
Unamortized stock-based compensation expense
was approximately $42,000 at June 30, 2018.
Note 9. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of patented technology.
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of business. There were no pending material claims or legal matters as of the date of this report other than the following matters:
International License Exchange of America,
LLC Litigations
Under our Monetization Agreement with Equitable,
ILEA filed the patent infringement litigation below.
|
●
|
On May 15, 2017, litigation against ADTRAN, Inc. case number 1:17-cv-00562-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. 5,959,990; 6.970,461; 7,478,167; 7,274,704; and 7,277,533. On January 22, 2018, ILEA filed a notice of voluntary dismissal and the court terminated the case.
|
Optic153 LLC Litigations
Under our Monetization Agreement with Equitable,
Optic 153 LLC, an Equitable subsidiary, has filed the following litigations relating to patents acquired under the terms of settlement
of one of our prior litigations:
|
●
|
On March 15, 2018, litigation against Lumentum Operations LLC, Case No. 1:18-cv-00406-VAC-CJB, in the in the U.S. District Court for the District of Delaware, related to alleged infringement of U.S. Patent No. 6,587,261. Lumentum’s Answer is currently due on September 6, 2018.
|
Counterclaims
In the ordinary course of business, we,
or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed
on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated
by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can
provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results
from operations.
Note 10. DatChat, Inc.
The Merger
On March 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Spherix, Spherix Merger Subisdiary Inc.,
a Nevada corporation and a wholly-owned Subsidiary of Spherix (“Merger Sub”), DatChat, Inc., a Nevada corporation (“DatChat”),
and Darin Myman in the capacity as the representative from and after the effective time of the Merger (the “Effective Time”)
for the stockholders of DatChat as of immediately prior to the Effective Time (the “Stockholder Representative”).
Pursuant to the Merger Agreement,
subject to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Merger
Agreement (the “Closing”), Merger Sub would merge with and into DatChat (the “Merger”), with DatChat
continuing as the surviving corporation in the Merger. Subject to the terms and conditions set forth in the Merger Agreement,
at the Effective Time: (i) all shares of capital stock of DatChat (the “DatChat Stock”) issued and outstanding
immediately prior to the Effective Time will be converted into the right to receive 46,153,846 shares of Spherix
common stock (the “Stockholder Merger Consideration”).
On May 3, 2018, Spherix, Merger Sub, DatChat
and the Stockholder Representative entered into that certain First Amendment to Agreement and Plan of Merger (the “Amendment”),
pursuant to which the Merger Agreement was amended to reduce the Stockholder Merger Consideration from 46,153,846 shares of Spherix
common stock to 34,615,385 shares of Spherix common stock.
After further negotiations, the Company
determined not to pursue a merger with DatChat and on August 8, 2018, entered into a securities purchase agreement (the “Securities
Purchase Agreement”) with DatChat pursuant to which the Company and DatChat agreed to terminate the DatChat Merger and each
of the parties to the Merger Agreement agreed to release and discharge and hold harmless each of the other parties with respect
to the transaction contemplated by the Merger Agreement.
In addition to the termination, under
the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of
(a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation
of the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed
a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is
equal to 3.6% of the issued and outstanding common stock of DatChat.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements
You should read this discussion together
with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. The following
discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties.
These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All
references to “we,” “us,” “our” and the “Company” refer to Spherix Incorporated,
a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise.
Overview
We are an intellectual property company
that owns patented and unpatented intellectual property. Spherix Incorporated was formed in 1967 as a scientific research company
and for much of our history pursued drug development including through Phase III clinical studies which were largely discontinued
in 2012. In 2012 and 2013, we shifted our focus to being a firm that owns, develops, acquires and monetizes intellectual property
assets. Through our acquisitions of 108 patents and patent applications from Rockstar Consortium US, LP and acquisition of several
hundred patents issued to Harris Corporation as a result of our acquisition of North South, we have expanded our activities in
wireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality and cellular.
Our activities generally include the acquisition
and development of patents through internal or external research and development. In addition, we seek to acquire existing rights
to intellectual property through the acquisition of already issued patents and pending patent applications, both in the United
States and abroad. We may alone, or in conjunction with others, develop products and processes associated with our intellectual
property and license our intellectual property to others seeking to develop products or processes or whose products or processes
infringe our intellectual property rights through legal processes. Using our patented technologies, we employ strategies seeking
to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We will continue to
seek to obtain patents from inventors and patent owners to monetize patent portfolios.
In addition to our patent monetization
efforts, since the fourth quarter of 2017, we have been transitioning to focus our efforts as a technology development company.
The Company made no investments in new IP during 2017 and started the transition with its investment in Hoth Therapeutics, Inc.
during the third quarter of 2017.
In March 2018, the Company entered into
an agreement and plan of merger, subject to shareholder approval, with DatChat, Inc. (the “DatChat Merger”), a secure
messaging application that utilizes blockchain technology, as amended on May 3, 2018. After further negotiations, the Company determined
not to pursue a merger with DatChat and on August 8, 2018, entered into a securities purchase agreement (the “Securities
Purchase Agreement”) with DatChat pursuant to which the Company and DatChat agreed to terminate the DatChat Merger and each
of the parties to the Merger Agreement agreed to release and discharge and hold harmless each of the other parties with respect
to the transaction contemplated by the Merger Agreement.
In addition to the termination,
under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat which
consisted of (a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c)
an obligation of the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c)
not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common
stock which is equal to 3.6% of the issued and outstanding common stock of DatChat.
DatChat agreed to certain
covenants, including the covenant in the event that DatChat completes (i) a public offering of its securities pursuant to an
effective registration statement or (ii) a merger, consolidation, transfer or share exchange transaction pursuant to which
DatChat becomes subject to the reporting requirements of the Securities Exchange Act of 1934, (each, a “Going Public Event”), and until the time that the Company holds no shares
of DatChat, DatChat agreed to certain covenants, including the covenant to timely file (or obtain extensions in respect
thereof and file within the applicable grace period) all reports required to be filed by DatChat pursuant to the Exchange Act
of 1934, as amended the “Exchange Act”), provided that, if after becoming subject to the Exchange Act, DatChat is thereafter
no longer required to file reports pursuant to the Exchange Act, DatChat will, for as long as the Company owns shares of
DatChat, prepare and furnish to the Company and make publicly available in accordance with Rule 144(c) such information as is
required for the Company to sell such shares, including without limitation, under Rule 144. Under the Securities Purchase
Agreement, DatChat further covenants that it will take such further action as the Company may reasonably request, to the
extent required from time to time to enable the Company to sell its DatChat shares without registration under the Securities
Act of 1933, as amended, including, without limitation, within the requirements of the exemption provided by Rule 144.
DatChat also agreed
that, from and after a Going Public Event, and subject to certain exceptions, neither DatChat nor any other person acting on its
behalf will provide the Company with any information that constitutes, or that DatChat reasonably believes constitutes, material
non-public information, unless prior thereto, the Company shall have consented to the receipt of such information and agreed with
DatChat to keep such information confidential.
Results of Operations
Three months ended June 30, 2018 compared
to three months ended June 30, 2017
During the three months ended June 30,
2018 and 2017, revenue was approximately $0 and $311,000, respectively. $311,000 in 2017 represented the amortization of deferred
revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23, 2015
and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional
intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to
use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to
its licenses was eliminated through a debit adjustment in the amount of approximately $3.2 million through the accumulated deficit
at the beginning of 2018. The Company will not recognize revenue from the RPX license in the future.
During the three months ended June 30,
2018 and 2017, we incurred a loss from operations of approximately $1.3 million and $0.8 million, respectively. The increase in
net loss was primarily attributed to $0.1 million increase in professional fees, $66,000 increase in acquisition costs related
to the DatChat Merger and $48,000 increase in compensation and related expenses, and was partially offset by $94,000 decrease in
other selling, general and administrative expenses.
During the three months ended June 30,
2018, other income was approximately $0.9 million as compared to other expenses of approximately $1.1 million for the comparable
prior period. The increase in other income was primarily attributed to $0.7 million increase in fair value of our investment
in Hoth, and $1.5 million increase in change in fair value of warrant liabilities.
Net loss was $0.4 million in the three
months ended June 30, 2018 compared to net loss of $1.9 million in the three months ended June 30, 2017.
Six months ended June 30, 2018 compared
to six months ended June 30, 2017
During the six months ended June 30, 2018
and 2017, revenue was approximately $0 and $638,000, respectively. $638,000 represents the amortization of deferred revenue related
to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23, 2015 and May 22,
2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional intellectual
property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual
property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated
through a debit in the amount of approximately $3.2 million through the accumulated deficit at the beginning of 2018. The Company
will not recognize revenue from the RPX license in the future.
During the six months ended June 30, 2018
and 2017, we incurred a loss from operations of approximately $2.8 million and $1.7 million, respectively. The increase in net
loss was primarily attributed to $0.5 million increase in professional fees and $0.2 million increase in acquisition costs related
to the DatChat Merger, and was partially offset by $0.2 million decrease in compensation and related expenses.
During the six months ended June 30, 2018,
other income was approximately $1.0 million as compared to other expenses of approximately $1.0 million for the comparable prior
period. The increase in other income was primarily attributed to $0.7 million increase in fair value of our investment
in Hoth, and $1.8 million increase in change in fair value of warrant liabilities.
Net loss was $1.9 million in the six months
ended June 30, 2018 compared to net loss of $2.8 million in the six months ended June 30, 2017.
Liquidity and Capital Resources
We continue to incur ongoing administrative
and other expenses, including public company expenses, in excess of corresponding revenue.
We intend to finance our activities through:
|
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managing current cash and cash equivalents on hand from our past equity offerings,
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seeking additional funds raised through the sale of additional securities in the future,
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seeking additional liquidity through credit facilities or other debt arrangements, and
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increasing revenue from the monetization of its patent portfolios, license fees and new business ventures.
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Cash Flows from Operating Activities
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For the six months ended June 30, 2018 and 2017, net cash used in operations was approximately $1.7 million and $1.8 million,
respectively. The cash used in operating activities for the six months ended June 30, 2018 primarily resulted from a net loss of
$0.4 million, $0.7 million change in fair value of our investment in Hoth and $0.5 million change in fair value of warrant liabilities,
and partially offset by amortization expenses of $0.3 million. The cash used in operating activities for the six months ended June
30, 2017 primarily resulted from $1.3 million of change in fair value of warrant liabilities and amortization expenses of $0.7
million, partially offset by $1.0 million of changes in assets and liabilities.
Cash Flows from Investing Activities
- For the six months ended June 30, 2018 and 2017, net cash used in investing activities was approximately $1.0 million and net
cash provided by investing activities was approximately $2.4 million, respectively. The cash used in investing activities primarily
resulted from our purchase of marketable securities for the six months ended June 30, 2018 of $10.0 million, partially offset by
our sale of marketable securities of $9.1 million. The cash provided by investing activities primarily resulted from our sale of
marketable securities for the six months ended June 30, 2017 of $9.6 million, partially offset by our purchase of marketable securities
of $6.5 million.
Cash Flows from Financing Activities
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Cash provided by financing activities for the six months ended June 30, 2018 was approximately $2.7 million, which related
to issuance of 2,222,222 shares of its common stock. Cash used in financing activities for the six months ended June 30, 2016 was
approximately $24,000, which related to repurchase of restricted stock units to pay for employee withholding taxes.
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
$3.8 million at June 30, 2018. Absent generation of sufficient revenue from the execution of the Company’s long-term business
plan, the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns
in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense
levels resulting from being a publicly-traded company or operations. If the Company attempts to obtain additional debt
or equity financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at
all.
We have filed a shelf registration statement
on Form S-3 with the SEC. The registration statement, which has been declared effective, was filed in reliance on Instruction I.B.6
of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement
during any twelve-month period. At the time we sell securities pursuant to the registration statement, the amount of securities
to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6 may not
exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60
days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration
statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and
the availability and terms of alternative sources of capital.
On March 19, 2018, we closed on a public
offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of our registration
statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement between us and Laidlaw &
Company (UK) Ltd., the sole placement agent, on a best-efforts basis with respect to the offering (“Laidlaw”),
that was entered into on March 14, 2018. We sold 2,222,222 shares of our common stock in the offering at a purchase price of $1.35
per share.
Disputes regarding the assertion of patents
and other intellectual property rights are highly complex and technical. We may be forced to litigate against others to enforce
or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The
defendants or other third parties involved in the lawsuits in which we are involved may allege defenses and/or file counterclaims
or initiate inter parties reviews in an effort to avoid or limit liability and damages for patent infringement. If such efforts
are successful, they may have an impact on the value of the patents and preclude us 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.
Should we be unsuccessful in our efforts
to execute our business plan, it could become necessary for us to reduce expenses, curtail operations or explore various alternative
business opportunities or possibly suspend or discontinue our business activities.
Rockstar will be entitled to receive a
contingent recovery percentage of future profits (“Participation Payments”) from licensing, settlements and judgments
against defendants with respect to patents purchased under the First Patent Purchase Agreement; however, no payment is required
unless the Company receives a recovery. The Participation Payments under the First Patent Purchase Agreement are equal to zero
percent until the Company recovers with respect to patents purchased under the First Patent Purchase Agreement at least (a) $8.0
million or (b) if we recover less than $17.0 million, an amount equal to $5.0 million plus $3.0 million times a fraction equal
to total recoveries minus $10.0 million, divided by $7.0 million (clause (a) or (b), as applicable, being the “Initial Return”),
in each case net of certain expenses. Once we obtain recoveries in excess of the Initial Return, we are required to
make a payment to Rockstar of $13.0 million, payable only from the proceeds of such recovery, within six months after such recovery.
In addition, no later than 30 days after the end of each quarter in which we make such a recovery, we are required to pay to Rockstar
a percentage of such recovery, net of certain expenses, scaling from 30% if such cumulative recoveries net of certain expenses
are less than or equal to $50.0 million, to 70% to the extent cumulative recoveries net of certain expenses are in excess of $1.0
billion.
Rockstar will also be entitled to receive
Participation Payments from licensing, settlements and judgments against defendants with respect to patents purchased under the
Second Patent Purchase Agreement; however, no payment is required unless we receive a recovery. The Participation Payments under
the Second Patent Purchase Agreement are equal to zero percent until we recover with respect to patents purchased under the Second
Patent Purchase Agreement at least $120.0 million, net of certain expenses. Once we obtain recoveries in excess of that
amount, we are required to pay to Rockstar 50% of our recovery in excess of that amount, no later than 30 days after the end of
each quarter in which we make such a recovery.
Our ability to fund these Participation
Payments or the $13.0 million contingent payment will depend on the liquidity of our assets, recoveries, alternative demands for
cash resources and access to capital at the time. Furthermore, our obligation to fund Participation Payments could adversely
impact our liquidity and financial position. As of the date of this report, we have not made any such Participation Payments.
Off-balance sheet arrangements.
None.