Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix
Incorporated (the “Company”) is technology development company committed to the fostering of innovative ideas. The
Company was incorporated in 1967 in the State of Delaware as a scientific research company, and for much of its history pursued
drug development including through Phase III clinical studies which were discontinued.
The
Company was formerly focused on commercializing and monetizing patents by 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.
Since March 1, 2013, the Company has received
limited funds from its IP monetization. In addition to its patent monetization efforts, since the fourth quarter of 2017, the Company
has been transitioning to focus its efforts as a technology development company. These efforts have focused on biotechnology research
and blockchain technology research. The Company’s biotechnology research development includes investments in Hoth Therapeutics
Inc. and the proposed merger with CBM BioPharma, Inc. (“CBM”).
On May 10, 2019, the
Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the “Reverse
Stock Split”). The Reverse Stock Split, which was approved by the Company’s board of directors under authority granted
by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April 15, 2019, was consummated
pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of
Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective
Date”). Unless the context otherwise requires, all references in this report to shares of the Company’s common
stock, including prices per share of its common stock, reflect the Reverse Stock Split. Fractional shares were not
issued, and the final number of shares were rounded up to the next whole share.
CBM Merger
On October 10, 2018, the Company entered into
an Agreement and Plan of Merger (the “CBM Merger Agreement”), by and among the Company, Spherix Delaware Merger Sub
Inc., a Delaware corporation and a wholly-owned subsidiary of Spherix (“Merger Sub”), CBM, and Scott Wilfong in the
capacity as the representative from and after the effective time of the Merger (as defined below) (the “Effective Time”)
for the stockholders of CBM as of immediately prior to the Effective Time (the “Stockholder Representative”).
Pursuant to the CBM Merger Agreement and subject
to the terms and conditions set forth therein, at the closing of the transactions contemplated by the CBM Merger Agreement, Merger
Sub would merge with and into CBM (the “Merger”), with CBM continuing as the surviving corporation in the Merger. Subject
to the terms and conditions set forth in the CBM Merger Agreement, at the Effective Time, it was contemplated that: (i) all shares
of capital stock of CBM (the “CBM Stock”) issued and outstanding immediately prior to the Effective Time would be converted
into the right to receive the Stockholder Merger Consideration (as defined below).
As consideration for the Merger, it was agreed
that the Company would deliver to the stockholders of CBM an aggregate of 3,529,412 shares of Company common stock (the “Stockholder
Merger Consideration”), with each share of Company common stock valued at $4.68 per share. At or prior to the Closing, the
Company, the Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), would enter into
an Escrow Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the parties (the “Escrow
Agreement”), pursuant to which the Company shall deposit with the Escrow Agent 352,942 shares from the Stockholder Merger
Consideration otherwise deliverable to the stockholders of CBM who own beneficially and of record greater than 10% of the CBM
common stock issued and outstanding immediately prior to the Closing (each a “Significant Company Stockholder”) (including
any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or
converted, the “Escrow Shares”), to be held in a segregated escrow account (the “Escrow Account”) and
disbursed by the Escrow Agent. Each stockholder of CBM Stockholder at the Effective Time (each, a “CBM Stockholder”)
would receive its pro rata share of the Stockholder Merger Consideration (less, in the case of each of the Significant Company
Stockholders, its pro rata portion of the Escrow Shares held in the Escrow Account) based on the number of shares of CBM Stock
owned by such CBM Stockholder as compared to the total number of shares of CBM Stock owned by all CBM Stockholders as of immediately
prior to the Effective Time. The Escrow Shares would serve as a security for, and a source of payment of, the indemnity rights
of the Company indemnified parties.
In the event that the CBM Merger Agreement
was to be terminated by the Company pursuant to certain sections of the agreement, then the Company might have been required to
deliver to CBM certificate(s) representing an aggregate of 94,118 shares of the Company’s Common Stock within two (2) business
days of termination (the “Termination Fee”).
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
As discussed further in Note 9, on May 15,
2019, the Company restructured the proposed terms of the transaction. See Note 9 for additional details.
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.
|
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 $0.9 million at March 31, 2019. 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.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the
Company’s ability to continue as a going concern within one year from the date of this filing. The condensed consolidated
financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Note 3. Summary of Significant Accounting
Policies
Basis of Presentation and Principles
of Consolidation
The accompanying unaudited condensed consolidated
interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions
have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period
presentation.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and
Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company
prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of March 31, 2019, condensed
consolidated statements of operations for the three months ended March 31, 2019 and 2018, condensed consolidated statement of stockholders’
equity for the three months ended March 31, 2019 and 2018, and the condensed consolidated statements of cash flows for the three
months ended March 31, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the
periods presented. The results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected
for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at December 31,
2018 has been derived from audited financial statements; however, it does not include all of the information and notes required
by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included
in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
Use of Estimates
The accompanying condensed consolidated
financial statements have been prepared in conformity with 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 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Significant Accounting Policies
Other
than as described below, there have been no material changes in the Company’s significant accounting policies to those previously
disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
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 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 March 31, 2019 and 2018 are
as follows:
|
|
As of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Convertible preferred stock
|
|
|
688
|
|
|
|
688
|
|
Warrants to purchase common stock
|
|
|
285,273
|
|
|
|
294,072
|
|
Options to purchase common stock
|
|
|
109,387
|
|
|
|
112,630
|
|
Total
|
|
|
395,348
|
|
|
|
407,390
|
|
Recently Issued Accounting Standards
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-13,
Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement,
which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with
the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted
upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed
consolidated financial statements.
Recently Adopted Accounting Standards
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
Company does not have any long-term leases, therefore the adoption of this standard on January 1, 2019 did not have a material
impact on the Company’s condensed consolidated financial position and results of operations.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 adopted ASU 2017-11 on January 1, 2019 and the
adoption did not have an impact on the Company’s condensed consolidated financial statements.
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 adopted ASU 2018-07 on January 1, 2019 and the adoption did not have an impact on
the Company’s condensed consolidated financial statements
Note 4. Investments in Marketable Securities
The realized gain or loss, unrealized gain
or loss, and dividend income related to marketable securities for the three months ended March 31, 2019 and 2018, which are recorded
as a component of other (expenses) income on the consolidated statements of operations, are as follows ($ in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Realized gain (loss)
|
|
$
|
(73
|
)
|
|
$
|
(99
|
)
|
Unrealized gain (loss)
|
|
|
148
|
|
|
|
(58
|
)
|
Dividend income
|
|
|
17
|
|
|
|
33
|
|
|
|
$
|
92
|
|
|
$
|
(124
|
)
|
Note 5. Investment in Hoth Therapeutics, Inc.
On February 20, 2019, Hoth closed its initial
public offering (“IPO) of 1,250,000 shares of its common stock at an initial offering price to the public of $5.60 per share. All
shares of common stock were offered by Hoth.
In February 2019, the Company purchased
35,714 shares of Hoth’s common stock for a total value of $0.2 million.
The Company records this investment at
fair value and records any change in fair value in the statements of operations (see Note 6).
The Company owns 1,735,714 shares of Hoth
common shares as of March 31, 2019. The fair value of Hoth common shares as of March 31, 2019 was $8.9 million based on the closing
price of $5.15 reported on The Nasdaq Capital Market as of March 31, 2019.
Note 6. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and
cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value
due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based
on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The
Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs
that may be used to measure fair value:
Level 1 - quoted prices in active
markets for identical assets or liabilities
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Level 2 - quoted prices for
similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable
(for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s assets and
liabilities that are measured at fair value at March 31, 2019 and December 31, 2018 ($ in thousands):
|
|
Fair
value measured at March 31, 2019
|
|
|
|
|
|
|
Total
at March 31, 2019
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities - mutual and exchange traded funds
|
|
$
|
1,256
|
|
|
$
|
1,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments
in Hoth
|
|
$
|
8,939
|
|
|
$
|
8,939
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of warrant liabilities
|
|
$
|
135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
135
|
|
The table above excludes the Company’s investment in DatChat for $1.0 million and its investment in
Mellow Scooters for $0.1 million as of March 31, 2019. Such investments were recorded on adjusted cost method measurement alternative
in accordance with ASU 2016-01.
|
|
Fair value measured at December 31, 2018
|
|
|
|
|
|
|
Total at December 31, 2018
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant unobservable
inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
2,700
|
|
|
$
|
2,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments in Hoth
|
|
$
|
9,214
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
Due to the Hoth’s IPO in February 2019, the Company’s investment in Hoth was transferred from
Level 3 to Level 1
during the three months
ended March 31, 2019 and there were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2018.
Level 3 Valuation Techniques - Liabilities
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, 2019 and December 31, 2018
is as follows:
Date of valuation
|
|
March 31, 2019
|
|
December 31, 2018
|
Risk-free interest rate
|
|
2.27%
|
|
2.48%
|
Expected volatility
|
|
100.00% - 103.05%
|
|
72.03% - 103.13%
|
Contractual life (in years)
|
|
1.69-1.81
|
|
1.94-2.06
|
The risk-free interest rate was based on
rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based
on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement
feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s
underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date
of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its
common stock and does not expect to pay dividends on its common stock in the future.
The following table sets forth a summary
of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring
basis for the three months ended March 31, 2019 and 2018 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Beginning balance
|
|
$
|
82
|
|
|
$
|
822
|
|
Fair value adjustment of warrant liabilities
|
|
|
53
|
|
|
|
(188
|
)
|
Ending balance
|
|
$
|
135
|
|
|
$
|
634
|
|
Note 7. Stockholders’ Equity and
Convertible Preferred Stock
Warrants
A summary of warrant activity for the three
months ended March 31, 2019 is presented below:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2018
|
|
|
294,072
|
|
|
$
|
38.15
|
|
|
|
1.92
|
|
Expired
|
|
|
(8,799
|
)
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of March 31, 2019
|
|
|
285,273
|
|
|
$
|
24.63
|
|
|
|
1.67
|
|
Stock Options
A summary of option activity under the
Company’s stock option plan for the three months ended March 31, 2019 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
|
|
Total Intrinsic Value
|
|
Outstanding as of December 31, 2018
|
|
|
124,381
|
|
|
$
|
209.22
|
|
|
|
4.8
|
|
|
$
|
—
|
|
Employee options expired
|
|
|
(14,994
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of March 31, 2019
|
|
|
109,387
|
|
|
$
|
173.51
|
|
|
|
5.2
|
|
|
$
|
—
|
|
Options vested and expected to vest
|
|
|
109,387
|
|
|
$
|
173.51
|
|
|
|
5.2
|
|
|
$
|
—
|
|
Options vested and exercisable
|
|
|
103,504
|
|
|
$
|
183.12
|
|
|
|
5.0
|
|
|
$
|
—
|
|
Stock-based compensation associated with
the amortization of stock option expense was approximately $6,000 and $0.1 million for the three months ended March 31, 2019 and
2018, respectively.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Stock-based Compensation
Stock-based compensation for the three
months ended March 31, 2019 and 2018 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Non-employee restricted stock awards
|
|
$
|
—
|
|
|
$
|
80
|
|
Employee stock option awards
|
|
|
6
|
|
|
|
108
|
|
Total compensation expense
|
|
$
|
6
|
|
|
$
|
188
|
|
Note 8. Commitments and Contingencies
Office lease
The Company leases office space in New York,
NY, on a month to month basis, that commenced on August 1, 2018, for approximately $3,500 a month. The Company also leases office
space in Longview, TX that commenced January 1, 2018, for approximately $2,000 a month. During the year 2018, the
Company leased office space in Williamsburg, VA for approximately $500 a month. This lease commenced on May 15, 2018 and was terminated
by the Company on April 30, 2019. Rent expense for the three months ended March 31, 2019 and 2018 was approximately $21,000 and
$22,000, respectively. The initial lease term is 12 months. In according with ASC 842, this lease meets the definition of a short
term lease.
Legal Proceedings
In the past, in the ordinary course of
business, the Company actively pursued legal remedies to enforce its intellectual property rights and to stop unauthorized use
of 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. The Company knows of no pending material claims or legal matters against it as of the date of this
report.
Counterclaims
In the ordinary course of business, the
Company, or with its wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom it believes
have infringed on its intellectual property rights and technologies. The initiation of such litigation exposes the Company to potential
counterclaims initiated by the defendants. Currently, there are no counterclaims pending against the Company. In the event such
counterclaims are filed, the Company can provide no assurance that the outcome of these claims will not have a material adverse
effect on its financial position and results from operations.
Note 9. Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the condensed 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 condensed consolidated financial statements other than disclosed.
On May 10, 2019,
the Company effected the Reverse Stock Split. The Reverse Stock Split, which was approved by the Company’s board of directors
under authority granted by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April
15, 2019, was consummated pursuant to the Certificate of Amendment.
Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i)
50,000 shares of CBM and (ii) certain securities and uncertificated rights of DatChat from an existing shareholder of CBM and DatChat,
for an aggregate purchase price of $350,000. The investment represents a 20% interest in CBM, and the securities and rights
of DatChat that were purchased include: (a) a senior convertible note issued by DatChat with outstanding principal of $300,000,
with an initial conversion rate of $0.20 per share (b) a warrant to purchase 2,250,000 shares of DatChat common stock at an initial
exercise price of $0.20 per share, (c) an option to acquire an additional $300,000 senior convertible note and a warrant to purchase
1,500,000 shares of DatChat common stock, (d) a contingent option to purchase 500,000 shares of DatChat common stock from an existing
DatChat stockholder, and (e) a contingent option to put 200,000 shares of DatChat common stock, subject to certain terms and conditions. The
transaction is expected to close within 10 business days of the execution of the agreement.
On May 15, 2019, the Company restructured
the terms of its proposed merger with CBM and entered into an Asset Purchase Agreement (the “APA”) with CBM, whereby
the Company agreed to purchase CBM’s Purchased Assets (as defined in the APA), including, among other things, a license
agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral
lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the
“Purchase” or “Asset Acquisition”).
In connection with the execution of the APA, the CBM Merger
Agreement was terminated and any and all termination fees thereunder have been waived.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
As consideration for the Purchase, the Company
agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) an aggregate number of shares of Common Stock equal
to $7,000,000 (the “Stock Consideration”) comprised of (A) an aggregate number of shares of Common Stock equal to
9.9% of the issued and outstanding shares of Common Stock as of the Closing Date (as defined in the APA) (the “Common Stock
Consideration”) based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”),
which ultimately limits CBM’s maximum voting control of the Company to 9.9% of the Company’s issued and outstanding
Common Stock, and (B) such number of shares of nonvoting Series L convertible preferred stock as shall be equal to the Stock Consideration
less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock
Consideration valued at the Buyer Common Stock Price, and (ii) cash consideration in the amount of $1,000,000 (the “Cash
Consideration Amount”, and together with the Stock Consideration, the “Purchase Consideration”), less the sum
of (A) the amount of any Affiliate Receivables (as defined in the APA), (B) the amount of the outstanding Indebtedness (as defined
in the APA) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as
defined in the APA) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses
(as defined in the APA), if any, to the recipients thereof. The Cash Consideration Amount from the Purchase Consideration is held
back and becomes payable to CBM upon the consummation by the Company of the first Qualified Financing (as defined in the APA)
after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000
of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such
Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings
by the Company until the Cash Consideration Amount is satisfied in full.
The Company is prohibited from issuing
shares of Common Stock under the APA which, when aggregated with any other shares of Common Stock of the Company, would exceed
19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved.
Upon the execution of the APA, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits
thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.
Additionally, at or prior to the Closing,
the Company, the Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter
into an Escrow Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the parties (the
“Escrow Agreement”), pursuant to which the Company shall deposit with the Escrow Agent 10% of the Stock Consideration
(including any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged
or converted, the “Escrow Shares”), to be held in a segregated escrow account (the “Escrow Account”) and
disbursed by the Escrow Agent. Each stockholder of CBM (each, a “CBM Stockholder”) shall receive its pro rata share
of the Stock Consideration based on their percentage ownership of CBM. The Escrow Shares shall serve as a security for, and a source
of payment of, the indemnity rights of the Company indemnified parties.
The obligations of the Company and CBM to consummate
the transaction are subject to: (i) (a) all necessary approvals being obtained by relevant governmental authorities, third parties,
and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the APA) being enacted, issued, promulgated,
enforced or entered, or any Order (as defined in the APA) by a Governmental Authority which makes the transaction illegal, and
(c) no pending Action (as defined in the APA) being brought by a third-party non-Affiliate (as defined in the APA) to enjoin or
restrict the transaction; and (dii) certain customary closing conditions, including but not limited to the accuracy of certain
representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants
under the APA, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the APA.
The APA may be terminated (i) by mutual written
consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in
the APA) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of the
Company or CBM of any representation, warranty, covenant or obligation under the APA), (iii) by written notice by the Company or
CBM if a Governmental Authority (as defined in the APA) has issued an Order (as defined in the APA) or taken action restraining,
enjoining or prohibiting the transactions contemplated by the APA (unless a condition to Closing is due to breach or violation
of the Company or CBM of any representation, warrant, covenant or obligation under the APA), (iv) by written notice of the Company
if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v)
by written notice of CBM if there is or has been an incurable material breach by the Company of any of its representations, warranties,
covenants or obligations, or (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined
in the APA) on the Company following the date of the APA.