PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
SEPTEMBER 5, 2019
Your proxy is solicited by the Board of
Directors for our Special Meeting of Stockholders (the “Special Meeting”), to be held on Thursday, September 5, 2019,
at 12:00 p.m. Eastern Time. Our Special Meeting will be a “virtual meeting” of stockholders, which will be conducted
exclusively online via live audio webcast. The Company’s principal executive office is located at One Rockefeller Plaza,
11th Fl., New York, NY 10020, and the telephone number is 212-745-1374.
At the Special Meeting, you will be asked
to consider and vote upon the following matters:
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(1)
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To authorize, for purposes of complying with Nasdaq Listing
Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock,
issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between Spherix Incorporated
(the “Company”) and CBM BioPharma, Inc. (“CBM”), as amended by Amendment No. 1 to the Asset Purchase Agreement,
dated May 30, 2019 (as amended, the “Asset Agreement”), in an amount equal to or in excess of 20% of our common stock
outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution
provisions contained in such Series L Preferred Stock);
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(2)
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To
amend Spherix’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”),
to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000; and
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(3)
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To
transact other business that may properly come before the meeting and any postponement(s) or adjournment(s) thereof.
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The Board of Directors has fixed the close of business on July 22, 2019 as the record date (the “Record
Date”) for determining stockholders entitled to notice of and to vote at the Special Meeting and any adjournment thereof.
The notice of the Special Meeting (the “Notice”), this Proxy Statement and the proxy card will be first sent or made
available to stockholders on or around July 30, 2019.
You will be able to attend the Special
Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19SM on
Thursday, September 5, 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the 16-digit
Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you receive
materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely log on,
vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and participate
in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.
IMPORTANT NOTICE REGARDING THE AVAILABILITY
OF PROXY MATERIALS FOR THE SPECIAL MEETING TO BE HELD ON SEPTEMBER 5, 2019: THE NOTICE, PROXY STATEMENT AND PROXY CARD ARE AVAILABLE
AT WWW.PROXYVOTE.COM.
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION
AND THE MEETING
The following questions and answers
are intended to address briefly some commonly asked questions regarding the acquisition and the stockholder meeting. These questions
and answers may not address all of the questions that may be important to you as a Spherix stockholder. To better understand these
matters, and for a description of the legal terms governing the acquisition, you should carefully read this entire proxy statement,
including the annexes. See “Where You Can Find More Information” beginning on page 69. All references in this proxy
statement to “Spherix” refer to Spherix Incorporated, a Delaware corporation, and its subsidiaries; unless otherwise
indicated or as the context requires, all references in this proxy statement to “we” refer to Spherix; all references
to the “Asset Agreement” refer to the Asset Purchase Agreement, dated as of May 15, 2019, by and among Spherix and
CBM BioPharma, Inc. (“CBM”), as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, a copy
of which is attached as Annex A to this proxy statement.
Q: Why am I receiving this proxy statement?
A:
Spherix and CBM have entered
into an Asset Agreement, pursuant to which Spherix will purchase substantially all of the assets of CBM. A copy of the Asset Agreement
is included as Annex A to this proxy statement.
We have included in this proxy statement
important information about the acquisition, the Asset Agreement and the Spherix Special Meeting. You should read this information
carefully and in its entirety. The enclosed voting materials allow you to vote your shares without attending the stockholder meeting.
Your vote is very important and we encourage you to submit your proxy as soon as possible.
Q: What proposals are Spherix stockholders being asked to
consider?
A:
Spherix stockholders are being asked to:
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authorize,
for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our
common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of the Asset Agreement, in an amount equal
to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock
(including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock);
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amend
Spherix’s Certificate of Incorporation to decrease the number of authorized shares of Spherix common stock from 100,000,000
to 99,000,000; and
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approve
the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes
at the time of the Special Meeting to approve the proposals described above.
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Q: What are the recommendations of the Spherix board of directors?
A:
The board of directors has approved the Asset
Agreement and the other transactions contemplated thereby and determined that the Asset Agreement and the acquisition are
advisable and in the best interests of the Spherix stockholders.
THE SPHERIX BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT SPHERIX STOCKHOLDERS VOTE “
FOR
” THE PROPOSAL TO APPROVE THE ISSUANCE OF SPHERIX COMMON STOCK
TO COMPLY WITH NASDAQ LISTING RULE 5635(A), VOTE “
FOR
” THE PROPOSAL TO AMEND SPHERIX’S CERTIFICATE OF
INCORPORATION TO DECREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK, AND VOTE “
FOR
” THE PROPOSAL TO ADJOURN
THE SPECIAL MEETING FOR ANY PURPOSE, INCLUDING TO SOLICIT ADDITIONAL PROXIES IF THERE ARE INSUFFICIENT VOTES AT THE TIME OF THE
MEETING TO APPROVE THE PROPOSALS MENTIONED ABOVE .
See “The Acquisition—Spherix Board of Directors’ Recommendation”
beginning on page 28.
Q: When and where will the Special Meeting be held?
A:
You will be able to attend the
Special Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19SM on
Thursday, September 5, 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the 16-digit
Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you receive
materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely log on,
vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and participate
in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.
Q: Who is entitled to vote at the Special
Meeting?
A:
Pursuant to its amended and
restated bylaws, the board of directors has fixed the close of business on July 22, 2019 as the “record date”
for determination of stockholders entitled to notice and to vote at the Special Meeting and any adjournment or postponements thereof.
Holders of Spherix common stock, Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock (collectively,
the “Voting Capital”) are entitled to vote at the Special Meeting. As of the record date there were 2,354,421
shares of Spherix common stock outstanding, 4,725 shares of Series D Preferred Stock outstanding and 834 shares of Series D-1
Preferred Stock outstanding.
Each share of Spherix
common stock is entitled to one vote on each matter properly brought before the Special Meeting. The outstanding Series D Preferred
Stock and Series D-1 Preferred Stock are entitled to the following number of votes subject to the beneficial ownership limitations
described below:
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Series
D Preferred Stock – 0.1238 votes per preferred share; and
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Series
D-1 Preferred Stock – 0.1238 votes per preferred share.
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Beneficial ownership limitations on Spherix
preferred stock prevents the conversion or voting of such preferred stock if the number of shares of common stock to be issued
pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of common stock or other voting
stock owned by such holder at such time, the number of shares of common stock which would result in such holder beneficially owning
(as determined in accordance with Section 13(d) of the Securities Exchange Act, as amended, and the rules thereunder) more than:
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4.99%
of all the common stock outstanding at such time, in the case of Series D Preferred Stock; and
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9.99%
of all the common stock outstanding at such time, in the case of Series D-1 Preferred Stock.
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As of the record date, no stockholder’s
ownership of our preferred stock had violated the ownership limitations set forth above and, as a result, no reductions of voting
rights have been made.
A list of stockholders of record entitled
to vote at the special meeting will be available for inspection at our principal executive offices located at One Rockefeller Plaza,
11th Floor, New York, NY 10020 for a period of at least 10 days prior to the special meeting and during the meeting. The stock
transfer books will not be closed between the record date and the date of the Special Meeting.
Q: What constitutes a quorum for the Special Meeting?
A:
To carry on business at the Special
Meeting, we must have a quorum. A quorum is present when a majority of the shares entitled to vote, as of the Record
Date, are represented in person or by proxy. Thus, holders of the Voting Capital representing at least 1,177,556
votes must be represented in person or by proxy to have a quorum. Your shares will be counted towards the quorum only
if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person
at the Special Meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. Shares
owned by us are not considered outstanding or considered to be present at the Special Meeting. If there is not a quorum
at the Special Meeting, our stockholders may adjourn the meeting.
Q: What vote of Spherix stockholders is required to approve
the Spherix proposals?
A:
Proposal
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Vote Required
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Broker
Discretionary
Vote Allowed
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Authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock)
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A majority of the votes cast
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No
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Approval of the amendment to Spherix’s certificate of incorporation to decrease the authorized common stock from 100,000,000 shares to 99,000,000 shares
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A majority of the shares entitled to vote
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Yes
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Adjournment of the Special Meeting
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A majority of the votes cast
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Yes
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Q: How do Spherix stockholders vote?
A:
Spherix stockholders have three
voting options. You may vote using one of the following methods:
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Internet
.
You can vote over the Internet by accessing the website at
www.proxyvote.com
, and following the instructions on the website.
Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card.
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Telephone
.
If you hold shares directly in your own name and are the holder of record, you can vote by telephone by calling the toll-free
number 1-800-690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the
control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a
day. If, however, you hold the shares through a broker (“street name”) and not in your own name, then follow the specific
instructions included in your proxy materials, including the specific phone number to use to vote your shares by phone.
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Mail
.
You can vote by mail by simply completing, signing, dating and mailing your proxy card in the postage-paid envelope included with
this proxy statement.
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Q: Who will be the directors of Spherix if the acquisition
is consummated?
A:
There will be no changes to the board of directors
of Spherix Incorporated after the consummation of the acquisition.
Q: If my shares are held in “street name” by
a broker or other nominee, will my broker or nominee vote my shares for me?
A:
If you are a Spherix stockholder,
your broker or other nominee does not have authority to vote on non-routine matters. The proposal to approve the issuance of Spherix’s
common stock pursuant to Nasdaq Listing Rule 5635(a) (the “share issuance proposal”) is considered a non-routine matter,
and your broker or other nominee will vote your shares held by it in “street name” with respect to this proposal only
if you provide instructions to it on how to vote. You should follow the directions your broker or other nominee provides.
The proposal to amend the Company’s
certificate of incorporation to decrease the Company’s authorized common stock and the adjournment proposal are routine matters
on which brokers or other nominees have the authority to vote.
Q: What if I do not vote on the matters relating to the acquisition?
A:
If you are a Spherix stockholder
and you abstain or fail to respond with a vote or fail to instruct your broker or other nominee how to vote on the approval of
the proposed charter amendment to decrease the authorized common stock of Spherix, this will have the effect of voting against
the proposal; provided, that if your shares are held in street name, your broker or nominee may vote on your behalf. If you are
a Spherix stockholder and you abstain or fail to respond with a vote or fail to instruct your broker or other nominee how to vote
on the share issuance proposal or the adjournment proposal, it will have no effect on such proposal. Abstentions and broker non-votes
will be counted as present for the purpose of determining a quorum.
Q: May I change my vote after I have delivered my proxy or
voting instruction card?
A:
Yes. You may change your vote
at any time before your proxy is voted at your Special Meeting. You may do this in one of three ways:
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by
sending a notice of revocation to the corporate secretary of Spherix, dated as of a later date than the date of the proxy and
received prior to the Special Meeting;
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by
sending a completed proxy card bearing a later date than your original proxy card and mailing it so that it is received prior
to the Special Meeting, as applicable; or
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by
logging on to the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically
or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so and following the instructions
on the proxy card.
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Your attendance alone will not revoke any
proxy.
If your shares are held in an account at
a broker or other nominee, you should contact your broker or other nominee to change your vote.
Q: Do I have appraisal/dissenters’ rights?
A:
Spherix stockholders do not have appraisal rights
in connection with the acquisition.
Q: Should I send in my stock certificates now?
A:
No. Please do not send your stock
certificates with your proxy card.
You will keep your existing stock certificates,
which will continue to represent the number of shares of Spherix common stock equal to the number of Spherix shares you now hold.
Q: Whom should I call if I have questions about the proxy
materials or voting procedures?
A:
If you have questions about the
acquisition, or if you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement
or the enclosed proxy card, you should contact the proxy solicitation agent for the company in which you hold shares. You should
contact Mackenzie Partners, the proxy solicitation agent for Spherix, by mail at 1407 Broadway, New York, NY 10018, by telephone
toll free at 1-212-929-550. If your shares are held in a stock brokerage account or by a bank or other nominee, you should contact
your broker, bank, or other nominee for additional information.
Q: What do I need to do now?
A:
After carefully reading and
considering the information contained in this proxy statement, including the annexes, please vote your shares as soon as possible
so that your shares will be represented at the Special Meeting. Please follow the instructions set forth on the proxy card or
on the voting instruction form provided by the record holder if your shares are held in the name of your broker or other nominee.
SUMMARY
This summary highlights
selected information contained in this proxy statement and may not contain all the information that is important to you. Spherix
and CBM urge you to read carefully this proxy statement in its entirety, as well as the annexes.
Summary Term Sheet
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Spherix
will purchase and acquire from CBM, CBM’s rights, title and interests in and to all of its assets, properties, contracts
and rights, other than certain excluded assets (the “Purchased Assets”), including, among other things, a license
agreement relating to certain technologies in the areas of acute myeloid leukemia (“AML”), acute lymphoblastic leukemia
(“ALL”) and pancreatic cancer and contracts with a chief scientist and an advisory board.
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Spherix
will 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 date that the Acquisition closes (the “Closing Date”)
(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 Spherix to 9.9% of Spherix’s issued
and outstanding common stock, and (B) such number of shares of nonvoting Series L Preferred Stock (as defined herein) 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”).
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The
Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by Spherix
of the first sale by Spherix of common stock, Series L convertible preferred stock or any other equity or equity-linked financing
of Spherix to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000
(a “Qualified Financing”) after the Closing Date. Upon consummation of a Qualified Financing by Spherix, Spherix 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 Spherix in excess of $2,000,000 as well as the gross proceeds of any
subsequent equity financings by Spherix until the Cash Consideration Amount is satisfied in full.
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Spherix,
CBM, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow Agreement 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 in the future 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. Such Escrow Shares shall
be held in the Escrow Account for a period of six months following closing of the Acquisition (the “Closing”) and
shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and
any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification
claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.
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The obligations of Spherix and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of Spherix and CBM, (b) the absence of any law being enacted, issued, promulgated, enforced or entered, or any order by any federal or national, state or provincial, municipal or local government, governmental authority, regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality, political subdivision, court, tribunal, official arbitrator or arbitral body in each case whether domestic or foreign (each a “Governmental Authority”) which makes the transaction illegal, and (c) no pending action being brought by a third-party non-affiliate to enjoin or restrict the transaction; (d) the Company holding a special meeting of its stockholders to approve, among other things, the issuance of the Stock Consideration, and (e) 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 Asset Agreement, and no Material Adverse Effect having occurred with respect to either Spherix or CBM since the date of the Asset Agreement. “Material Adverse Effect” means, with respect to CBM, any event, fact, condition, change, circumstance, occurrence or effect, which, either individually or in the aggregate with all other events, facts, conditions, changes, circumstances, occurrences or effects, (a) has had, or would reasonably be expected to have, a material adverse effect on the business, operations, properties, prospects, assets, liabilities, value, condition (financial or otherwise), licenses or results of operations of CBM’s business or the Purchased Assets or the Assumed Liabilities or (b) does or would reasonably be expected to materially impair or delay the ability of CBM to perform its obligations under the Asset Agreement and the ancillary documents or to consummate the transactions contemplated hereby and thereby;
provided
,
however
, that a Material Adverse Effect will not include any adverse effect or change resulting from any change, circumstance or effect relating to (A) the economy in general, (B) securities markets, regulatory or political conditions in the United States (including terrorism or the escalation of any war, whether declared or undeclared or other hostilities), (C) changes in applicable laws or generally accepted accounting principles or the application or interpretation thereof or (D) a natural disaster (provided, that in the cases of clauses (A) through (D), CBM’s business is not disproportionately affected by such event as compared to other similar companies and businesses in similar industries and geographic regions as CBM’s business).
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The Asset Agreement may be terminated (i) by mutual written consent of Spherix and CBM, (ii) by written
notice by Spherix or CBM if any of the conditions to Closing are not satisfied or waived by December 31, 2019 (unless
a condition to Closing is due to breach or violation of Spherix or CBM of any representation, warranty, covenant or obligation
under the Asset Agreement), (iii) by written notice by Spherix or CBM if a Governmental Authority has issued an order or taken
action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing
is due to breach or violation of Spherix or CBM of any representation, warrant, covenant or obligation under the Asset Agreement),
(iv) by written notice of Spherix 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 has been an incurable material breach by Spherix of any of its
representations, warranties, covenants or obligations, (vi) by written notice by Spherix if there shall have been a Material Adverse
Effect on Spherix following the date of the Asset Agreement, or (vii) by written notice by the Company or CBM in the event that
Spherix’s stockholders did not approve the issuance of the Stock Consideration at a special meeting of Spherix. In the event
that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by Spherix
of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within
20 days after written notice by CBM to Spherix, or (ii) by either Spherix or CBM in the event that Spherix’s stockholders
did not approve the issuance of the Stock Consideration at a duly held special meeting of Spherix, Spherix will issue to CBM or
CBM’s designee an aggregate of 250,000 shares of Spherix’s common stock (the “Buyer Termination Fee”) within
two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more
than one occasion.
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In
connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into that certain Leak-Out Agreement (the “Leak-Out
Agreement”), in the form attached as Annex D to this proxy statement, whereby CBM will agree that for a period of 21 months
following the Closing Date (such period, the “Restricted Period”), neither CBM nor any affiliate of CBM, collectively,
shall sell, dispose or otherwise transfer, directly or indirectly, during any calendar month during the Restricted Period, shares
acquired pursuant to the Asset Agreement in an amount more than 5% of the issued and outstanding shares of Spherix common stock
as of the end of each month immediately preceding any such disposition following the Closing Date. Such restriction shall be subject
to certain exceptions, including but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally,
so long as the bid price of Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell
shares: (a) at a bona-fide sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date
(excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as
reported by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally,
CBM agrees that in the event that, during the Restricted Period, Spherix engages the services of an investment bank to undertake
a registered offering of Spherix’s equity securities, if required by the lead investment bank, CBM shall enter into a reasonable
and customary lock-up with such investment bank for a period of at least 30 days but no more than 90 days upon closing of the
transaction, provided, that such lock-up shall in no event extend beyond the Restricted Period.
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The Companies
Spherix Incorporated
One Rockefeller Plaza, 11
th
Floor
New York, NY 10020
(212) 745-1372
Spherix Incorporated is a technology
development company committed to the fostering of innovative ideas. 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. Such monetization included, but was 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, commercializing the IP, 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 our patent monetization efforts, since the fourth quarter of
2017, we have been transitioning to a technology development company. The Company made no investments in new IP during 2017 and
2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the third quarter of 2017, with its proposed
merger agreement with DatChat, Inc. in March 2018 and with its agreement with CBM BioPharma, Inc. in October 2018. On May 15, 2019,
the Company restructured the terms of its proposed merger with CBM and entered into the Asset Agreement to purchase substantially
all of the assets of CBM.
CBM BioPharma, Inc.
6427 Lake Washington Boulevard Northeast
Kirkland, WA 98053
973-738-0967
CBM is a privately held pharmaceutical
company with exclusive drug development rights from partners including Wake Forest University and the University of Texas at Austin.
CBM is dedicated to translating fundamental biological insights into new drugs and treatments that address unmet medical needs.
CBM currently has two drug candidates focused on the treatment of acute myeloid leukemia (“AML”), acute lymphoblastic
(ALL) and pancreatic cancer. CBM was formed as a corporation in December 2017 under the laws of the State of Delaware.
The Acquisition
Structure of the Acquisition
Spherix and CBM have entered
into an Asset Agreement pursuant to which Spherix will purchase certain assets of CBM, including, among other things:
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a License Agreement with Wake Forest University Health Sciences relating to certain technologies in the
areas of acute myeloid leukemia (AML), and acute lymphoblastic leukemia (ALL), which such License Agreement includes the following
patent rights:
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o
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U.S. Patent 6,670,341, titled “Compositions and methods for double-targeting
virus infections and targeting cancer cells” issued December 30, 2003
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o
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U.S. Patent 7,026,469, titled “Compositions and methods for double-targeting
virus infections and targeting cancer cells” issued April 11, 2006
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o
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U.S. Patent 7,309,696, titled “Novel phospholipid conjugates double-targeting
HIV” issued December 18, 2007
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o
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U.S. Patent 7,638,528, titled “Compositions and methods for targeting
cancer cells” issued December 29, 2009
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o
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U.S. Patent 8,138,200, titled “Compositions and methods for double-targeting
virus infections and targeting cancer cells” issued March 20, 2012
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a Patent License Agreement with the University of Texas at Austin on behalf of the Board of Regents of
the University of Texas System, dated as of April 12, 2018, relating to certain technologies in the area of pancreatic cancer treatment,
which such License Agreement includes the following patent rights:
|
|
o
|
US Patent 61/933,035, titled “Nucleobase Analogue Derivatives and their
applications” filed January 29, 2014
|
|
o
|
PCT/US2015/013454, titled “Nucleobase analogue derivatives and their applications”
filed January 29, 2015
|
|
o
|
US App 15/115,393, titled “Nucleobase analogue derivatives and their applications”
filed January 29, 2015
|
|
●
|
consulting contract with CBM’s Chief Scientific Officer, entered into on July 23, 2018, pursuant to which the consultant is paid $50,000 annually
|
|
●
|
contracts with five Scientific Advisory Board members, pursuant to which each member is paid $20,000 annually.
|
Consideration to be Received
in the Acquisition by CBM
At the time of completion of
the acquisition, Spherix will acquire substantially all of the assets of CBM and CBM will receive (i) seven million dollars ($7,000,000)
of Spherix’s securities consisting of (a) an aggregate number of shares of Spherix common stock equal to 9.9% of the issued
and outstanding shares of Spherix common stock as of the date of the Closing valued at $3.61 per share, and (b) a number of shares
of Series L Preferred Stock convertible into shares of common stock at $3.61 per share with a stated value equal to the balance
of the Stock Consideration; and (ii) cash consideration in the amount of One Million Dollars ($1,000,000), which amount will be
held back at the closing until certain equity financing milestones are met.
Interests of CBM Directors
and Executive Officers in the Acquisition
In considering the recommendation
of CBM’s board of directors with respect to the Asset Agreement, Spherix stockholders should be aware that CBM’s executive
officers and directors have financial interests in the acquisition.
Additionally, as of the date
of this proxy statement, Spherix owns 50,000 shares of CBM common stock, or 20% of the issued and outstanding shares of CBM common
stock.
Interests of Spherix Directors
and Executive Officers in the Acquisition
In considering the recommendation
of Spherix’s board of directors with respect to the Asset Agreement, Spherix stockholders should be aware that Spherix’s
sole executive officer and some of its directors have financial interests in the acquisition that are different from, or in addition
to, those of Spherix’s stockholders generally. As of the date of this preliminary proxy statement, Anthony Hayes, the sole
executive officer of Spherix, owns 12,280 shares of Spherix common stock and options to purchase 12,389 shares of Spherix common
stock. The non-executive members of the board of directors of Spherix, Robert J. Vander Zanden, Tim S. Ledwick, Eric Weisblum and
Gregory James Blattner own 4,944, 7,059, 4,706 and 0 shares of Spherix common stock, respectively, and have options to purchase
17,961, 14,555, 13,626 and 11,766 shares of Spherix common stock, respectively. The Spherix board of directors was aware of these
interests and considered them, among other matters, in negotiating and approving the Asset Agreement and making its recommendation
that the Spherix stockholders approve and adopt the Asset Agreement and the transactions contemplated thereby.
For further discussion of the
implications of the acquisition on Spherix’s compensation arrangements with its named executive officers, see “The
Acquisition—Interests of Spherix Directors and Executive Officers in the Acquisition” beginning on page 29, and “Potential
Payment Upon Termination or Change in Control” beginning on page 60.
Anticipated Accounting Treatment
It is anticipated that the
transaction will be accounted for by Spherix as an asset acquisition of CBM rather than as a business combination under ASC 805,
Business Combinations.
Regulatory Matters
The acquisition does not meet
the thresholds for furnishing notification and other information to the Antitrust Division of the U.S. Department of Justice and
the U.S. Federal Trade Commission (the “FTC”) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the
parties are not aware of any other regulatory filings or approvals that are required in connection with the acquisition.
For a more complete discussion
of regulatory matters relating to the acquisition, see “The Acquisition—Regulatory Approvals Required for the Acquisition”
beginning on page 29.
Conditions to Completion
of the Acquisition
The obligations of the parties
to consummate the acquisition are subject to various conditions, including the following mutual conditions of the parties unless
waived: (i) the approval of the Asset Agreement and the transactions contemplated thereby and related matters by the requisite
vote of CBM’s stockholders; (ii) the approval by Spherix stockholders of the issuance of the Stock Consideration to CBM;
(iii) receipt of requisite governmental and third party approvals; (iv) no law or order preventing or prohibiting the acquisition
or the other transactions contemplated by the Asset Agreement; and (v) no pending litigation to enjoin or restrict the consummation
of the Closing.
In addition, unless waived
by CBM, the obligations of CBM to consummate the acquisition are subject to the satisfaction of the following Closing conditions,
in addition to customary certificates and other closing deliveries:
|
●
|
The
representations and warranties of Spherix being true and correct as of the date of the Asset Agreement and as of the Closing (subject
to Material Adverse Effect);
|
|
●
|
Spherix
having performed in all material respects its obligations and complied in all material respects with its covenants and agreements
under the Asset Agreement required to be performed or complied with on or prior the date of the Closing; and
|
|
●
|
Absence
of any Material Adverse Effect with respect to Spherix since the date of the Asset Agreement.
|
Unless waived by Spherix, the
obligations of Spherix to consummate the Acquisition are subject to the satisfaction of the following Closing conditions, in addition
to customary certificates and other closing deliveries:
|
●
|
The
representations and warranties of CBM being true and correct as of the date of the Asset Agreement and as of the Closing (subject
to Material Adverse Effect);
|
|
●
|
CBM
having performed in all material respects its obligations and complied in all material respects with its covenants and agreements
under the Asset Agreement required to be performed or complied with on or prior to the Closing Date; and
|
|
●
|
Absence
of any Material Adverse Effect with respect to CBM since the date of the Asset Agreement.
|
Timing of the Acquisition
The acquisition is expected
to be completed in the third calendar quarter of 2019, subject to the receipt of any necessary regulatory approvals and the satisfaction
or waiver of other closing conditions, and in no event later than December 31, 2019.
Termination of the Asset Agreement
The Asset Agreement may be
terminated prior to the closing date as follows:
|
●
|
by mutual written consent of Spherix and CBM;
|
|
|
|
|
●
|
by written notice by either Spherix or CBM if the closing has not occurred on or prior to December 31, 2019;
|
|
|
|
|
●
|
by written notice by either Spherix or CBM if a governmental authority of competent jurisdiction shall have issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Asset Agreement, and such order or other action has become final and non-appealable;
|
|
|
|
|
●
|
by written notice by either party of the other party’s material breach of a representation, warranty, covenant or agreement, or if the other party’s representations or warrants becomes inaccurate and such breach or inaccuracy is incurable or is not cured within the earlier of 20 days after written notice of the breach or inaccuracy is provided or December 31, 2019;
|
|
|
|
|
●
|
by written notice by Spherix if there has been a Material Adverse Effect on CBM since the date of the Asset Agreement which is continuing and uncured; or
|
|
|
|
|
●
|
by written notice by Spherix or CBM if Spherix holds a Special Meeting of its stockholders and it does not receive the requisite stockholder approval to.
|
In the event that the Asset Agreement
is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by the Company of any of its representations,
warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice
by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration
to be paid to CBM by the Company pursuant to the Asset Agreement is not approved by the Company’s stockholders at a duly
held special meeting of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two
business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than
one occasion.
Selected Historical Consolidated
Financial Data of Spherix
You should read the following
selected historical consolidated financial data in conjunction with the consolidated financial statements of Spherix as of December
31, 2018 and 2017 and for each of the years in the two year period ended December 31, 2018 and the condensed consolidated financial
statements of Spherix as of March 31, 2019 and for the three months ended March 31, 2019 and 2018, which are furnished with this
proxy statement. See “Index to Financial Statements” beginning on page F-1. The selected historical consolidated statements
of operations data for the two-year period ended December 31, 2018 and the selected historical consolidated balance sheet
data as of December 31, 2018 and 2017 have been derived from the audited consolidated financial statements of Spherix. The
selected historical consolidated statement of operations data for the three months ended March 31, 2019 and 2018 and the selected
historical consolidated balance sheet data as of March 31, 2019 have been derived from the unaudited condensed consolidated financial
statements of Spherix. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, which Spherix considers
necessary for a fair presentation of the information set forth therein. Operating results for the three months ended March 31,
2019 are not necessarily indicative of the results that may be expected for the entire year ended December 31, 2019.
|
|
Three Months Ended
March 31,
|
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28
|
|
|
$
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
$
|
-
|
|
|
$
|
338
|
|
|
|
1,405
|
|
|
|
1,373
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
181
|
|
|
|
355
|
|
|
|
1,012
|
|
|
|
2,059
|
|
Professional fees
|
|
|
399
|
|
|
|
597
|
|
|
|
1,569
|
|
|
|
1,038
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
2,173
|
|
|
|
-
|
|
Acquisition costs
|
|
|
11
|
|
|
|
145
|
|
|
|
230
|
|
|
|
-
|
|
Other selling, general and administrative
|
|
|
122
|
|
|
|
142
|
|
|
|
513
|
|
|
|
588
|
|
Total operating expenses
|
|
|
713
|
|
|
|
1,577
|
|
|
|
6,902
|
|
|
|
5,058
|
|
Loss from operations
|
|
|
(713
|
)
|
|
|
(1,577
|
)
|
|
|
(6,874
|
)
|
|
|
(3,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
92
|
|
|
|
(97
|
)
|
|
|
(333
|
)
|
|
|
291
|
|
Change in fair value of investment
|
|
|
(475
|
)
|
|
|
-
|
|
|
|
8,194
|
|
|
|
345
|
|
Change in fair value of warrant liabilities
|
|
|
(53
|
)
|
|
|
188
|
|
|
|
740
|
|
|
|
(120
|
)
|
Total other (expenses) income
|
|
|
(436
|
)
|
|
|
91
|
|
|
|
8,601
|
|
|
|
516
|
|
Net loss
|
|
$
|
(1,149
|
)
|
|
$
|
(1,486
|
)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.57
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
Diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,010,025
|
|
|
|
1,549,481
|
|
|
|
1,896,057
|
|
|
|
1,303,209
|
|
Diluted
|
|
|
2,010,025
|
|
|
|
1,549,481
|
|
|
|
1,896,745
|
|
|
|
1,303,209
|
|
|
|
March 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance Sheet Data (in thousands):
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
1,702
|
|
|
$
|
2,723
|
|
|
$
|
4,195
|
|
Working capital
|
|
|
885
|
|
|
|
1,752
|
|
|
|
1,768
|
|
Total assets
|
|
|
11,937
|
|
|
|
13,251
|
|
|
|
8,972
|
|
Total liabilities
|
|
|
982
|
|
|
|
1,153
|
|
|
|
4,866
|
|
Accumulated deficit
|
|
|
(141,232
|
)
|
|
|
(140,083
|
)
|
|
|
(145,055
|
)
|
Total stockholders’ equity
|
|
|
10,955
|
|
|
|
12,098
|
|
|
|
4,106
|
|
Total liabilities and stockholders’ equity
|
|
|
11,937
|
|
|
|
13,251
|
|
|
|
8,972
|
|
Market Price and Comparative
Dividend Information
Spherix’s common stock
is listed on Nasdaq under the symbol “SPEX.”
The closing market price of
Spherix common stock on May 14, 2019, the trading day prior to the announcement of the Asset Agreement, was $3.37. The market price
of Spherix common stock will fluctuate between the date of this proxy statement and the completion of the acquisition. No assurance
can be given concerning the market prices of Spherix common stock before the completion of the acquisition or Spherix common stock
after the completion of the acquisition. The market value of the Spherix common stock that CBM’s stockholders will receive
in connection with the acquisition may vary significantly from the prices shown in the table above. Spherix and CBM urge Spherix
stockholders and CBM to obtain current market quotations for shares of Spherix common stock before making any decision regarding
the approval and adoption of the Asset Agreement and the approval of the issuance of Spherix common stock to CBM or the approval
and adoption of the Asset Agreement by CBM.
Dividends and Other Distributions
No dividends were declared
or paid by Spherix with respect to its common stock since inception and Spherix does not anticipate paying any cash dividends on
its capital stock in the foreseeable future.
No dividends were declared
or paid by CBM with respect to its common stock since inception and CBM does not anticipate paying any cash dividends on its capital
stock in the foreseeable future.
RISK FACTORS
You should carefully consider the following
risk factors, together with all of the other information included in this proxy statement and the annex hereto, before you decide
whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement. The risks and uncertainties
described below are not the only risks and uncertainties facing Spherix or CBM in the future. Additional risks and uncertainties
not presently known or that are currently considered to be immaterial may also materially and adversely affect the business operations
or the business operations or stock price of Spherix following the transactions described in this proxy statement. If any of the
following risks or uncertainties occurs, the business, financial condition or operating results of Spherix or CBM could materially
suffer. In that event, the trading price of your securities could decline.
Risk Factors Relating to Spherix
Spherix’s business is, and following
the completion of the acquisition, Spherix’s business will continue to be, subject to the risks described below. If any of
the risks described below actually materializes, the business, financial results, financial condition, or stock price of Spherix
could be materially adversely affected. For this section, Spherix is also referred to as “we,” “us,” or
“our.”
Risks Related to Spherix’s Business
Because we have a limited operating
history to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered by an early-stage company.
Since we have a limited operating history
in our current business of technology development, it will make it difficult for investors and securities analysts to evaluate
our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties we face
as an early stage company with a limited operating history. Investors should evaluate an investment in our securities
in light of the uncertainties encountered by early stage companies in an intensely competitive industry. The technology
development industry is intensely competitive and there can be no assurance that our efforts to identify and target development
stage technology companies with intellectual property we can acquire or license will be successful or that we will be able to become
profitable.
We continue to incur operating losses and may not achieve
profitability.
Our loss from operations for three months
ended March 31, 2019 and 2018, for the years ended December 31, 2018 and 2017 was $0.7 million, $1.6 million, $6.9 million and
$3.8 million, respectively. Our net loss for the three months ended March 31, 2019 and 2018 was $1.1 million and $1.5 million,
respectively, net income for the year ended December 31, 2018 was $1.7 million and net loss for the year ended December 31, 2017
was $3.3 million. Our accumulated deficit was $141.2 million and $140.1 million at March 31, 2019 and December 31, 2018, respectively.
We recognized $0 in revenue for three months ended March 31, 2019 and 2018, $28,000 and $1.2 million in revenue in December 31,
2018 and 2017, respectively. Our ability to become profitable depends upon our ability to generate revenue from the monetization
of intellectual property. We do not know when, or if, we will generate any revenue from such monetization. Even though our revenue
may increase, we expect to incur significant additional losses while we grow and expand our business. We cannot predict if and
when we will achieve profitability. Our failure to achieve and sustain profitability could negatively impact the market price of
our common stock.
We expect to need additional capital
to fund our growing operations and if we are unable to obtain sufficient capital, we may be forced to limit the scope of our operations.
We expect that for our business to grow
we will need additional working capital. If adequate additional debt and/or equity financing is not available on reasonable
terms or at all, we may not be able to continue to expand our business or pay our outstanding obligations, and we will have to
modify our business plans accordingly. These factors would have a material adverse effect on our future operating results
and our financial condition.
If we reach a point where we are unable
to raise needed additional funds to continue as a going concern, we will be forced to cease our activities and dissolve the Company. In
such an event, we will need to satisfy various creditors and other claimants, severance, lease termination and other dissolution-related
obligations and we may not have sufficient funds to pay to our stockholders.
If we fail to maintain an effective
system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent
fraud and our business may be harmed and our stock price may be adversely impacted.
Effective internal controls over financial
reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide
reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management
to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply
with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies,
procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we
could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our
financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley
Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully
comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.
Our assessment, testing and evaluation
of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as
of December 31, 2018, our internal control over financial reporting was not effective, due to our lack of segregation of duties,
and lack of controls in place to ensure that all material transactions and developments impacting the financial statements are
reflected. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control
over financial reporting in the future.
Our independent auditors have expressed
substantial doubt about our ability to continue as a going concern.
Due to our net losses, negative cash flow
and negative working capital, in their report on our audited financial statements for the year ended December 31, 2018, our independent
auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.
We may seek to internally develop
additional new inventions and intellectual property, which would take time and be costly. Moreover, the failure to obtain
or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.
Part of our business may include the internal
development of new inventions or intellectual property that we will seek to monetize. For example, as a result of our acquisition
of certain shares of common stock of Hoth Therapeutics, Inc. (“Hoth”) in June 2017, we have indirectly acquired certain
sublicensing rights for BioLexa products developed by Chelexa Biosciences, Inc., for the treatment of eczema. Hoth is developing
BioLexa’s applications in the aesthetic dermatology field to help treat and reduce post-procedure infections, accelerate
healing and improve clinical outcomes for patients undergoing procedures and also intends to implement FDA testing procedures for
BioLexa. Should we choose to assist in the development of BioLexa’s applications and/or internally develop any other inventions
or intellectual property, such aspect of our business will require significant capital and will take time to achieve. Such
activities may also distract our management team from its present business initiatives, which could have a material and adverse
effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions
or technology, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally
develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain,
and we would heavily rely upon, a proprietary position with respect to such inventions and intellectual property. However,
there are significant risks associated with any such intellectual property we may develop principally, including the following:
|
●
|
patent
applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;
|
|
●
|
we
may be subject to interference proceedings;
|
|
●
|
we
may be subject to opposition proceedings in the U.S. or foreign countries;
|
|
●
|
any
patents that are issued to us may not provide meaningful protection;
|
|
●
|
we
may not be able to develop additional proprietary technologies that are patentable;
|
|
●
|
other
companies may challenge patents issued to us;
|
|
●
|
other
companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or
alternative technologies, or duplicate our technologies;
|
|
●
|
other
companies may design around technologies we have developed; and
|
|
●
|
enforcement
of our patents could be complex, uncertain and very expensive.
|
We cannot be certain that patents will
be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection
from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable,
or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications
covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from
commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to
enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on
maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure
to obtain or maintain intellectual property rights for our inventions would lead to the loss our business.
Moreover, patent application delays could
cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents
before other competing technologies are developed or introduced into the market.
Our ability to raise additional capital
may be adversely affected by certain of our agreements.
Our ability to raise additional capital
for use in our operating activities may be adversely impacted by the terms of a securities purchase agreement, dated as of July
15, 2015 (the “Securities Purchase Agreement”), between us and the investors who purchased securities in our July 2015
offering of our common stock and warrants for the purchase of our common stock. The Securities Purchase Agreement provides that,
until the warrants issued thereunder are no longer outstanding, we will not effect or enter into a variable rate transaction, which
includes issuances of securities whose prices or conversion prices may vary with the trading prices of or quotations for the shares
of our common stock at any time after the initial issuance of such securities, as well as the entry into agreements where our stock
would be issued at a future-determined price. These warrants may remain outstanding as late as January 22, 2021, when the warrants
expire in accordance with their terms. These restrictions may have an adverse impact on our ability to raise additional capital,
or to use our cash to make certain payments that we are contractually obligated to make.
We are exploring and evaluating strategic
alternatives and there can be no assurance that we will be successful in identifying, or completing any strategic alternative or
that any such strategic alternative will yield additional value for shareholders.
Our management and Board of Directors has
commenced a review of strategic alternatives which could result in, among other things, a sale, a merger, consolidation or business
combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in
one or more transactions, or continuing to operate with our current business plan and strategy. For example, on May 15, 2019, we
entered into an Asset Agreement with CBM, pursuant to which we will purchase substantially all of CBMs assets. CBM is a privately
pharmaceutical company focused on the development of cancer treatments. There can be no assurance that the exploration of strategic
alternatives will result in the identification or consummation of any transaction, and there can be no assurance that the transaction
with CBM will close. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic
alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and
if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely
affected. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and
consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction
would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions,
industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable
terms.
We may be unsuccessful at integrating
future acquisitions.
If we find appropriate opportunities in
the future, we may acquire businesses to strategically increase the number of patents in our portfolio and pursue monetization.
For example, on June 30, 2017, we acquired a stake in Hoth Therapeutics, Inc. (“Hoth”), a development stage biopharmaceutical
company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as
eczema. Hoth has a sublicense from Chelexa Biosciences, Inc. to use Chelexa’s BioLexa products for the treatment of eczema
and such sublicense includes the right to further sublicense to third parties to make, use, have made, import, offer for sale and
sell BioLexa products. There can be no guarantee that Hoth will be successful in its efforts to monetize its sublicense agreement
with Chelexa. In addition, on March 12, 2018, we entered into an agreement and plan of acquisition with DatChat, pursuant to which
we were going to acquire 100% ownership of DatChat, which is a privately held personal privacy platform focused on encrypted communication,
internet security and digital rights management, which we subsequently terminated on August 8, 2018. Most recently, on May 15,
2019, we entered into an Asset Agreement with CBM, pursuant to which we will purchase substantially all of CBMs assets. There can
be no guarantee that we will be successful in closing the transaction contemplated by the Asset Agreement with CBM or that we will
be successful in managing the operations of CBM, which is in the early stages of development of cancer treatments.
As we acquire businesses or substantial
stakes in certain businesses, the process of integration may produce unforeseen operating difficulties and expenditures, fail to
result in expected synergies or other benefits and absorb significant attention of our management that would otherwise be available
for the ongoing development of our business. In addition, in the event of any future acquisitions, we may record a portion of the
assets we acquire as goodwill, other indefinite-lived intangible assets or finite-lived intangible assets. We do not amortize goodwill
and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or whenever events or changes
in circumstances indicate that their carrying value may not be recoverable. The recoverability of goodwill and indefinite-lived
intangible assets is dependent on our ability to generate sufficient future earnings and cash flows. Changes in estimates, circumstances
or conditions, resulting from both internal and external factors, could have a significant impact on our fair valuation determination,
which could then have a material adverse effect on our business, financial condition and results of operations. We cannot guarantee
that we will be able to identify suitable acquisition opportunities, consummate any pending or future acquisitions or that we will
realize any anticipated benefits from any such acquisitions.
Our acquisitions of patent assets
may be time consuming, complex and costly, which could adversely affect our operating results.
Identifying and targeting development stage
technology companies and acquiring their patents or other intellectual property assets, which are critical to our business plan,
are often time consuming, complex and costly to consummate. We may elect to not pursue any additional patents while
we focus our efforts on monetizing our existing assets. We may utilize many different transaction structures in our
acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur
significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is
ultimately not consummated, or if we determine to acquire additional patents or other assets. Even if we are able to
identify a particular target, there is no guarantee that we will generate sufficient revenue related to such target’s underlying
intellectual property assets to offset the acquisition costs, and we may be required to pay significant amounts of deferred purchase
price if we monetize those patents above certain thresholds. While we will seek to conduct confirmatory due diligence
on the patent assets we are considering for acquisition, we may acquire patent assets from a seller who does not have complete
analysis of infringements or claims, have valid or sole title or ownership to those assets, or otherwise provides us with flawed
ownership rights, including invalid or unenforceable assets. In those cases, we may be required to spend significant
resources to defend our interest in the patent assets and, if we are not successful, our acquisition may be worthless, in which
case we could lose part or all of our investment in the assets.
We may also identify targets with patent
or other intellectual property assets that cost more than we are prepared to spend with our own capital resources. We
may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition
of any patent assets or, if consummated, proves to be unprofitable for us. Acquisitions involving issuance of our securities
could be dilutive to existing stockholders and could be at prices lower than those prices reflected in the trading markets. These
higher costs could adversely affect our operating results and, if we incur losses, the value of our securities will decline.
The integration of acquired assets may place a significant burden on management and our internal resources. The diversion
of management attention and any difficulties encountered in the integration process could harm our business.
As we are targeting technology companies
in the development stage, their patents and technologies are in the early stages of adoption. Demand for some of these
technologies will likely be untested and may be subject to fluctuation based upon the rate at which our licensees or others adopt
our patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies
we acquire or develop will have value that can be realized through licensing or other activities.
Any failure to maintain or protect
our patent assets or other intellectual property rights could significantly impair our return on investment from such assets and
harm our brand, our business and our operating results.
Our ability to operate our new line of
business and compete in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired
patent assets and other intellectual property. To protect our proprietary rights, we will rely on a combination of patent,
trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual
provisions. No assurances can be given that any of the measures we undertake to protect and maintain our assets will
have any measure of success.
We are required to spend significant time
and resources to maintain the effectiveness of our assets by paying maintenance fees and making filings with the USPTO. We
may acquire patent assets, including patent applications, which require us to spend resources to prosecute the applications with
the USPTO prior to issuance of patents. Further, there is a material risk that patent related claims (such as, for example,
infringement claims (and/or claims for indemnification resulting therefrom), unenforceability claims, or invalidity claims) will
be asserted or prosecuted against us, and such assertions or prosecutions could materially and adversely affect our business. For
instance, in connection with
inter partes
review in our now-settled litigations with VTech and Uniden, the Patent Trial
and Appeals Board has found that certain portions of the claims relating to certain of our patents are invalid. Regardless of whether
any such claims are valid or can be successfully asserted, defending such claims could cause us to incur significant costs and
could divert resources away from our other activities.
Despite our efforts to protect our intellectual
property rights, any of the following or similar occurrences may reduce the value of our intellectual property:
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our
applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
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issued
trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing
other properties;
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our
efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or
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our
efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior
to those we acquire and/or prosecute.
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Moreover, we may not be able to effectively
protect our intellectual property rights in certain foreign countries where we may do business or enforce our patents against infringers
in foreign countries. If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would
be reduced or eliminated, and our business would be harmed.
We may be unable to issue securities
under our shelf registration statement, which may have an adverse effect on our liquidity.
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 availability of our existing S-3 under the 1/3 limitation
calculations set forth in Instruction I.B.6 of Form S-3, the market conditions at that time, our cash position at that time and
the availability and terms of alternative sources of capital. Furthermore, Instruction I.B.6. of Form S-3 requires that the
issuer have at least one class of common equity securities listed and registered on a national securities exchange. If we are not
able to maintain compliance with applicable NASDAQ rules, we will no longer be able to rely upon that Instruction. If we cannot
sell securities under our shelf registration, we may be required to utilize more costly and time-consuming means of accessing the
capital markets, which could materially adversely affect our liquidity and cash position.
Risks Related to Ownership of Our Common Stock
We face evolving regulation of corporate
governance and public disclosure that may result in additional expenses and continuing uncertainty.
As a public company, we incur significant
legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, or SOX, the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate
governance practices. Our management and other personnel devote a substantial amount of time towards maintaining compliance
with these requirements. These rules, regulations and standards are subject to varying interpretations, and, as a result, their
application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could
result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure
and governance practices. We intend to invest the resources necessary to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed
laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may
initiate legal proceedings against us, which could be costly and time-consuming, and our reputation and business may be harmed.
Our common stock may be delisted
from The NASDAQ Capital Market if we fail to comply with continued listing standards.
Our common stock is currently traded on
The NASDAQ Capital Market under the symbol “SPEX.” If we fail to meet any of the continued listing standards
of The NASDAQ Capital Market, our common stock could be delisted from The NASDAQ Capital Market. These continued listing
standards include specifically enumerated criteria, such as:
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a
$1.00 minimum closing bid price;
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stockholders’
equity of $2.5 million;
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500,000
shares of publicly-held common stock with a market value of at least $1 million;
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300
round-lot stockholders; and
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compliance
with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in
the exercise of NASDAQ’s discretionary authority.
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On November 27, 2018, we received a deficiency
notice from The Nasdaq Stock Market (“Nasdaq”) informing the Company that its common stock, par value $0.0001 per share,
failed to comply with the $1.00 minimum bid price required for continued listing on The Nasdaq Capital Market under Nasdaq Listing
Rule 5550(a)(2). Nasdaq’s letter advised the Company that, based upon the closing bid price during the period from October
15, 2018 to November 26, 2018, the Company no longer meets this test.
Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A),
the Company has been provided an initial compliance period of 180 calendar days, or until May 28, 2019, to regain compliance with
the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or
exceed $1.00 per share for a minimum of 10 consecutive business days prior to May 28, 2019. On May 9, 2019, we effected a 4.25-for-one
reverse split of our common stock to regain compliance with this requirement. On May 24, 2019, the Company received a notice of
compliance from Nasdaq.
In addition, on January 11, 2019, the Company
received written notice (the “Notice”) from the Listing Qualifications Department (the “Staff”) of Nasdaq
indicating that, based upon the Company’s non-compliance with Nasdaq Listing Rule 5620(a), which requires an issuer to hold
an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end (the “Annual
Meeting Rule”), the Company would be required to submit a plan to regain compliance with the Annual Meeting Rule for the
Staff’s consideration by no later than February 25, 2019. The Notice has no immediate impact on the Company’s listing
or trading in the Company’s securities on Nasdaq.
The Company was provided an extension of
up to 180 calendar days from the Company’s fiscal year end, through July 1, 2019, to evidence compliance with the Annual
Meeting Rule. As announced to the Company’s stockholders on a Current Report on
Form 8-K
filed on April 16, 2019, the Company
conducted its annual meeting of stockholders on April 15, 2019. On April 18, 2019, the Company received a notice of compliance
with the Annual Meeting Rule from Nasdaq.
There can be no assurance that we will
be able to remain in compliance in the future. In particular, our share price may continue to decline for a number of reasons,
including many that are beyond our control. See “
Our share price may be volatile and there may not be an active trading
market for our common stock
.”
If we fail to comply with NASDAQ’s
continued listing standards, we may be delisted and our common stock will trade, if at all, only on the over-the-counter market,
such as the OTC Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply with
quotation requirements. In addition, delisting of our common stock could depress our stock price, substantially limit
liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all.
Further, delisting of our common stock would likely result in our common stock becoming a “penny stock” under the Exchange
Act.
Our share price may be volatile and
there may not be an active trading market for our common stock.
There can be no assurance that the market
price of our common stock will not decline below its present market price or that there will be an active trading market for our
common stock. The market prices of technology or technology related companies have been and are likely to continue to be highly
volatile. Fluctuations in our operating results and general market conditions for technology or technology related stocks
could have a significant impact on the volatility of our common stock price. We have experienced significant volatility in
the price of our common stock. From January 1, 2017 through December 31, 2018, the share price of our common stock (on
a split-adjusted basis) ranged from a high of $3.92 to a low of $0.57. The reason for the volatility in our stock is not well understood
and may continue. Factors that may have contributed to such volatility include, but are not limited to:
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introduction
of new technologies by us or our competitors;
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government
regulations and laws;
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public
sentiment relating to our industry;
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developments
in patent or other proprietary rights;
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the
number of shares issued and outstanding;
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the
number of shares trading on an average trading day;
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performance
of companies in the non-performing entity space generally;
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announcements
regarding other participants in the technology and technology related industries, including our competitors;
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block
sales of our shares by stockholders to whom we have sold stock in private placements, or the cessation of transfer restrictions
with respect to those shares; and
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market
speculation regarding any of the foregoing.
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We could fail in future financing
efforts or be delisted from The NASDAQ Capital Market if we fail to receive stockholder approval when needed.
We are required under the NASDAQ rules
to obtain stockholder approval for any issuance of additional equity securities that would comprise more than 20% of the total
shares of our common stock outstanding before the issuance of such securities sold at a discount to the greater of book or market
value in an offering that is not deemed to be a “public offering” by NASDAQ. Funding of our operations and acquisitions
of assets may require issuance of additional equity securities that would comprise more than 20% of the total shares of our common
stock outstanding, but we might not be successful in obtaining the required stockholder approval for such an issuance. If we are
unable to obtain financing due to stockholder approval difficulties, such failure may have a material adverse effect on our ability
to continue operations.
Our shares of common stock are thinly
traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise
money or otherwise desire to liquidate their shares.
Our common stock has been “thinly-traded”
meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively
small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that
is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we
become more seasoned and viable. Our trading volumes are further adversely affected by the 1-for-19 reverse stock split that was
effective as of March 4, 2016 as well as the 1-for-4.25 reverse stock split that was effective as of May 10, 2019. In addition,
we believe that due to the limited number of shares of our common stock outstanding, an options market has not been established
for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies available
for larger companies with broader shareholder bases which prevents institutions and others from acquiring or trading in our securities.
Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared
to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without
an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading levels will be sustained.
Because of the Rights Agreement and
“anti-takeover” provisions in our Certificate of Incorporation and Bylaws, a third party may be discouraged from making
a takeover offer that could be beneficial to our stockholders.
Effective as of January 24, 2013, we adopted
a shareholder rights plan which was amended and restated as of June 9, 2017. The effect of this rights plan and of certain provisions
of our Certificate of Incorporation, ByLaws, and the anti-takeover provisions of the Delaware General Corporation Law, could delay
or prevent a third party from acquiring us or replacing members of our Board of Directors, or make more costly any attempt to acquire
control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These factors could
also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price
being lower than it would be without these provisions.
Dividends on our common stock are
not likely.
During the last five years, we have not
paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable
future. Investors must look solely to the potential for appreciation in the market price of the shares of our common
stock to obtain a return on their investment.
If we fail to retain our key personnel, we may not be
able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability
to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to
replace. In particular, Anthony Hayes, our Chief Executive Officer, is important to the management of our business and operations
and the development of our strategic direction. The loss of the services of any such individual and the process to replace any
key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business
objectives.
Risk Factors Relating to CBM BioPharma, Inc.
Risks
Relating to Clinical Development and Commercialization of Our Product Candidates
If we are
unable to generate revenues from our drug candidates, our ability to create stockholder value will be limited.
Our two lead product
candidates, which include (1) our KPC34 drug candidate, which technology we licensed from Wake Forest University and (2) our DHA-dFdC
drug candidate, which technology we licensed from the University of Texas at Austin, are both in the pre-clinical stage. We may
not be successful in obtaining acceptance from the regulatory authorities to start our clinical trials. If we do not obtain such
acceptance, the time in which we expect to commence clinical programs for any product candidate will be extended and such extension
will increase our expenses and increase our need for additional capital. Moreover, there is no guarantee that our clinical trials
will be successful or that we will continue clinical development in support of an approval from the regulatory authorities for
any indication. We note that most drug candidates never reach the clinical development stage and even those that do commence clinical
development have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore,
our business currently depends entirely on the successful development, regulatory approval and commercialization of our product
candidates, which may never occur.
If we fail
to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully commercialize our product
candidates, our business would be harmed and the value of our securities would decline.
We must be evaluated
in light of the uncertainties and complexities affecting a pre-commercial biopharmaceutical company. We have not completed clinical
development for any of our product candidates. We cannot assure you that our planned clinical development for our product candidates
will be completed in a timely manner, or at all, or that we, or any future partner, will be able to obtain approval for our product
candidates from the FDA or any foreign regulatory authority.
Regulatory agencies,
including the FDA must approve our product candidates before they can be marketed or sold. The approval process is lengthy, requires
significant capital expenditures, and is uncertain as to outcome. Our ability to obtain regulatory approval of any product candidate
depends on, among other things, completion of additional clinical trials, whether our clinical trials demonstrate statistically
significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product candidates, and
whether the regulatory agencies agree that the data from our future clinical trials are sufficient to support approval for any
of our product candidates. The final results of our current and future clinical trials may not meet FDA or other regulatory agencies’
requirements to approve a product candidate for marketing, and the regulatory agencies may otherwise determine that our manufacturing
processes or facilities are insufficient to support approval. We, and our current and potential future collaborators, may need
to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other regulatory agency approval, we
or our collaborators may not be successful in commercializing approved product candidates. If any of these events occur, our business
could be materially harmed and the value of our securities would decline.
We, or our
collaborators, may face delays in completing our clinical trials, and may not be able to complete them at all.
Clinical trials
necessary to support an application for approval to market any of our product candidates have not been completed. Our, or our collaborators’,
current and future clinical trials may be delayed, unsuccessful, or terminated as a result of many factors, including, but not
limited to:
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delays
in reaching agreement on trial design and clinical study protocol with investigators and regulatory authorities in various countries
where our clinical trials are being conducted;
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governmental
or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy or guidelines;
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adding
new clinical trial sites;
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reaching
agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of
which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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the
actual performance of CROs and clinical trial sites in ensuring the proper and timely conduct of our clinical trials;
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adverse
effects experienced by subjects in clinical trials;
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manufacturing
sufficient quantities of product candidates for use in clinical trials;
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delay
or failure in achieving study efficacy endpoints and completing data analysis for a trial;
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regulators
or institutional review boards, or IRBs, may not authorize us to commence a clinical trial;
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regulators
or IRBs may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or
concerns about patient safety;
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we
may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health
risks;
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patients
may not complete clinical trials due to safety issues, side effects, such as injection site discomfort, a belief that they are
receiving placebo instead of our product candidates, or other reasons;
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patients
with serious diseases included in our clinical trials may die or suffer other adverse medical events for reasons that may not
be related to our product candidates;
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in
those trials where our product candidate is being tested in combination with one or more other therapies, deaths may occur that
may be attributable to the other therapies;
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we
may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our
study protocol;
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product
candidates may demonstrate a lack of efficacy during clinical trials;
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personnel
conducting clinical trials may fail to properly administer our product candidates; and
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our
collaborators may decide not to pursue further clinical trials.
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In addition, we
may rely on academic institutions, medical institutions, physician practices and CROs to conduct, supervise or monitor some or
all aspects of clinical trials involving our product candidates. We have less control over the timing and other aspects of these
clinical trials than if we conducted the monitoring and supervision entirely on our own. Third parties may not perform their responsibilities
for our clinical trials on our anticipated schedule or consistent with a clinical trial protocol or applicable regulations. We
also may rely on CROs to perform our data management and analysis. They may not provide these services as required or in a timely
or compliant manner, and we may be held legally responsible for any or all of their performance failures or inadequacies.
If we or our collaborators
experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects
of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will
be delayed or eliminated. In addition, any delays in completing our clinical trials will increase our costs, slow our product candidate
development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences
may harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the
commencement or completion of clinical trials may also lead to the denial of regulatory approval of our product candidates.
If we encounter
difficulties enrolling patients in our clinical trials, our clinical trials could be delayed or otherwise adversely affected.
Clinical trials
for our product candidates will require us to identify and enroll a large number of patients with the disease under investigation.
We may not be able to enroll a sufficient number of patients with required or desired characteristics to conduct our clinical trials
in a timely manner, if at all. Patient enrollment is affected by factors including, but not limited to:
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severity
of the disease under investigation;
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design
of the trial protocol;
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the
size and nature of the patient population;
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eligibility
criteria for the study in question;
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lack
of a sufficient number of patients who meet the enrollment criteria for our clinical trials;
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delays
in characterizing a patient’s infection to allow us to select a product candidate, which may lead patients to seek to enroll in
other clinical trials or seek alternative treatments;
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perceived
risks and benefits of the product candidate under study;
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availability
of competing therapies and clinical trials;
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efforts
to facilitate timely enrollment in clinical trials;
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scheduling
conflicts with participating clinicians;
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patient
referral practices of physicians;
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the
ability to monitor patients adequately during and after treatment; and
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proximity
and availability of clinical trial sites for prospective patients.
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We may be
required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements,
the results are negative or inconclusive, or the trials are not well designed.
Clinical trials
must be conducted in accordance with FDA regulations governing clinical studies, or other applicable foreign government guidelines,
and are subject to oversight by the FDA, other foreign governmental agencies and IRBs/Ethic Committees at the medical institutions
where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under
current Good Manufacturing Practices, or cGMP, and may require large numbers of test subjects. Clinical trials may be suspended
by the FDA, other foreign governmental agencies or us for various reasons, including, but not limited to:
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deficiencies
in the conduct of the clinical trials, including failure to conduct the clinical trial in accordance with regulatory requirements
or clinical protocols;
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deficiencies
in the clinical trial operations or trial sites;
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the
product candidate may have unforeseen adverse side effects;
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the
time required to determine whether the product candidate is effective may be longer than expected;
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deaths
or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments;
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the
product candidate may not appear to be more effective than current therapies;
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the
quality or stability of the product candidate may fall below acceptable standards; and
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insufficient
quantities of the product candidate might be available to complete the trials.
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In addition, changes
in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments
may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful
completion of a clinical trial. Due to these and other factors, our product candidates could take longer to gain regulatory approval
than we expect or we may never gain approval for any product candidates, which could reduce or eliminate our revenue by delaying
or terminating the commercialization of our product candidates.
We may not
be able to obtain orphan drug marketing exclusivity for our product candidates in the United States and/or the European Union.
Under the Orphan
Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition (with a
population of less than 200,000), which is defined as one occurring in a patient population of fewer than 200,000 in the United
States, or a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing
the drug or biologic will be recovered from sales in the United States. In the EU, following the opinion of the EMA’s Committee
for Orphan Medicinal Products, the European Commission grants orphan drug designation to a product if (1) it is intended for
the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such
condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product, without
the incentives derived from orphan medicinal product status, would not generate sufficient return in the EU to justify investment;
and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing
in the EU, or if such a method exists, the product will be of significant benefit to those affected by the condition.
Generally, if
a drug with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such
designation, the drug is entitled to a period of marketing exclusivity, which precludes the FDA or the European Commission and
the competent authorities in the EU Member States from approving another marketing application for the same drug (or similar medicinal
product in the European Union) for that time period, except in limited circumstances. The applicable period is seven years in the
U.S. and 10 years in the EU. The EU exclusivity period can be reduced to six years if a drug no longer meets the criteria
for orphan drug designation or if the drug is sufficiently profitable that market exclusivity is no longer justified. Orphan drug
exclusivity may be lost if the FDA determines that the request for designation was materially defective or if the manufacturer
is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Although we may
apply for orphan drug designation for our product candidates we may develop in both the U.S. and EU, applicable regulatory authorities
may not grant us this designation. In addition, even if such status is obtained for any product candidate that we may develop,
that exclusivity may not effectively protect the candidate from competition because other drugs, such as those with different active
ingredients or molecular structures, can be approved for the same condition. Furthermore, even after an orphan drug is approved,
the FDA can subsequently approve another drug for the same condition if the FDA concludes that the later drug is clinically superior,
in that it is shown to be safer, more effective or makes a major contribution to patient care. In the EU, a marketing authorization
may be granted to a similar product during the 10-year period of market exclusivity for the same therapeutic indication at any
time if:
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The
second applicant can establish in its application that its product, although similar to the orphan medicinal product already authorized,
is safer, more effective or otherwise clinically superior;
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The
holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product
application; or
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The
holder of the marketing authorization for the original orphan medicinal product cannot supply enough orphan medicinal product.
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Any inability
to secure orphan drug designation or to maintain the exclusivity benefits of this designation could have an adverse impact on our
ability to develop and commercialize our product candidates, depending on the extent to which we would be protected by other patents
and regulatory exclusivities, and may adversely affect our business, prospects, financial condition and results of operations.
Any product
candidate for which we, or our collaborators, obtain marketing approval could be subject to restrictions or withdrawal from the
market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated
problems with our products, when and if any of them are approved.
Any product candidate
that we, or our collaborators, obtain marketing approval for, along with the manufacturing processes, post-approval clinical data,
labeling, advertising and promotional activities for such product, will be subject to continuing requirements of the FDA and other
regulatory authorities. These requirements include submissions of safety and other post-marketing information, reports, facility
registration and product listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding
maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even
if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which
the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance
to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs
to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling.
The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use. If we market our products outside
of their approved indications, we will be subject to enforcement action for off-label marketing.
In addition, later
discovery of previously unknown problems with these products, manufacturers or manufacturing processes, or failure to comply with
regulatory requirements, may yield various results, including, but not limited to:
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restrictions
on such products, manufacturers or manufacturing processes;
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restrictions
on the labeling or marketing of a product;
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restrictions
on product distribution or use;
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requirements
to conduct post-marketing clinical trials;
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warning
or untitled letters;
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withdrawal
of the products from the market;
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refusal
to approve pending applications or supplements to approved applications that we submit;
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recall
of products, fines, restitution or disgorgement of profits or revenue;
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suspension
or withdrawal of marketing approvals;
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refusal
to permit the import or export of our products;
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injunctions
or the imposition of civil or criminal penalties.
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The FDA’s policies
may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product
candidates. If we, or our collaborators, are slow or unable to adapt to changes in existing requirements or the adoption of new
requirements or policies, or if we, or our collaborators, are not able to maintain regulatory compliance, any marketing approval
that was obtained could be lost, which would adversely affect our business, prospects and ability to achieve or sustain profitability.
Our product
candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit
the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
Undesirable side
effects caused by our product candidates could cause us, our collaborators, or regulatory authorities to interrupt, delay or halt
clinical trials and could result in a more restrictive label, the delay or denial of regulatory approval by the FDA or other comparable
foreign regulatory authorities, or litigation by injured patients, if any.
As a result of
any side effects, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities
could order us to cease further development, or deny approval, of our product candidates for any or all targeted indications. The
drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result
in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.
Additionally,
if one or more of our product candidates receives marketing approval, and we, our collaborators, or others later identify undesirable
side effects caused by such products, a number of potentially significant negative consequences could result, including, but not
limited to:
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regulatory
authorities may withdraw approvals of such product;
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regulatory
authorities may require additional warnings on the label;
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we
may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
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we
may be sued and held liable for harm caused to patients; and
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our
reputation may suffer.
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Any of these events
could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly
harm our business, results of operations and prospects.
If we cannot
conduct the non-clinical testing required by regulatory authorities to demonstrate an acceptable toxicity profile for our product
candidates in non-clinical studies, we will not be able to initiate or continue clinical trials or obtain approval for our product
candidates.
In order to move
a product candidate into human clinical trials, we must first demonstrate an acceptable toxicity profile in preclinical testing.
Furthermore, in order to obtain approval, we must also demonstrate safety in various non-clinical tests. We may not have conducted
or may not conduct the types of non-clinical testing required by regulatory authorities, or future non-clinical tests may indicate
that our product candidates are not safe for use. Preclinical and non-clinical testing is expensive, time-consuming and has an
uncertain outcome. In addition, success in initial non-clinical testing does not ensure that later non-clinical testing will be
successful. We may experience numerous unforeseen events during, or as a result of, the non-clinical testing process, which could
delay or prevent our ability to develop or commercialize our product candidates, including, but not limited to:
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our
preclinical and non-clinical testing may produce inconclusive or negative safety results, which may require us to conduct additional
non-clinical testing or to abandon product candidates;
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our
product candidates may have unfavorable pharmacology or toxicity characteristics;
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our
product candidates may cause undesirable side effects such as negative immune responses that lead to complications;
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our
enrolled patients may have allergies that lead to complications after treatment; and
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the
FDA or other regulatory authorities may determine that additional safety testing is required.
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Any such events
would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely
impact our business, financial condition and results of operations.
To be commercially successful, physicians
must be persuaded that using our products are effective alternatives to existing therapies and treatments.
We believe that physicians will not widely
adopt our products unless they determine, based on experience, clinical data, and published peer-reviewed journal articles, that
the use of our products provides an effective alternative to other means of treatment. Patient studies or clinical experience may
indicate that treatment with our products does not provide patients with sufficient benefits in quality of life. We believe that
recommendations and support for the use of our products from influential physicians will be essential for widespread market acceptance.
Our products are still in the pre-clinical development stage and it is premature to attempt to gain support from physicians at
this time. We can provide no assurance that such support will ever be obtained. If our products do not receive such support from
these physicians and from long-term data, physicians may not use or continue to use, and hospitals may not purchase or continue
to purchase, our products.
If we are
unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product
candidates, we may not be successful in commercializing our product candidates if and when they are approved.
We do not have
a sales and marketing infrastructure. We may seek additional third-party collaborators for the commercialization of our product
candidates. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote some of
our product candidates if and when they are approved, which would be expensive and time-consuming. Alternatively, we may elect
to outsource these functions to third parties. Either approach carries significant risks. For example, recruiting and training
a sales force is expensive and time-consuming and, if done improperly, could delay a product launch and result in limited sales.
If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed
or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may
be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel. Outsourcing sales
and marketing capabilities will depend on our ability to enter into and maintain agreements with other companies having sales,
marketing and distribution capabilities, the ability of such companies to successfully market and sell our product candidates,
and our ability to enter into such agreements on terms favorable to us.
Factors that may
inhibit our efforts to commercialize our products on our own include, but are not limited to:
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our
inability to recruit, manage and retain adequate numbers of effective sales and marketing personnel;
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the
inability of marketing personnel to develop effective marketing materials;
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the
inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;
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the
lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies
with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales and marketing organization.
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Entry into agreements
with third parties to sell and market our product candidates will subject us to a number of risks, including, but not limited to,
the following:
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we
may be required to relinquish important rights to our products or product candidates;
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we
may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization
of our product candidates;
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distributors
or collaborators may experience financial difficulties;
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our
distributors or collaborators may not devote sufficient time to the marketing and sales of our products; and
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business
combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or
ability to complete its obligations under any arrangement.
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The availability
and amount of reimbursement for our product candidates, if approved, and the manner in which government and private payors may
reimburse for any potential products, are uncertain.
Obtaining coverage
and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that
could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor.
There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more
limited than the purposes for which the product is approved by the FDA or similar regulatory authorities outside of the United
States. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at
a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses.
Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on
reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net
prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors
and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower
prices than in the United States.
There is significant
uncertainty related to the insurance coverage and reimbursement of newly approved products. Third-party payors often rely upon
Medicare coverage policy and payment limitations in setting their own reimbursement policies, but also have their own methods and
approval process Asset Agreement from Medicare coverage and reimbursement determinations. It is difficult to predict at this time
what third party payors will decide with respect to the coverage and reimbursement for our product candidates. Our inability to
promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products
that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize
products and our overall financial condition.
Reimbursement
may impact the demand for, and/or the price of, any product for which we obtain marketing approval. Assuming we obtain coverage
for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments
that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their
prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications.
Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover all or a significant
portion of the cost of our products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Coverage
decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic
alternatives are already available or subsequently become available.
The U.S. government,
state legislatures and foreign governmental entities have shown significant interest in implementing cost containment programs
to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and coverage and
requirements for substitution of generic products for branded prescription drugs.
Adoption of government
controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude
or limit our products from coverage and limit payments for pharmaceuticals.
In addition, we
expect that the increased emphasis on managed care and cost containment measures in the U.S. by third-party payors and government
authorities to continue and will place pressure on pharmaceutical pricing and coverage. Coverage policies and third-party reimbursement
rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more drug products for
which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Our revenue stream will depend upon
third-party reimbursement.
The commercial success of our products
in both domestic and international markets will be substantially dependent on whether third-party coverage and reimbursement is
available for patients that use our products. However, the availability of insurance coverage and reimbursement for newly approved
eczema therapies is uncertain, and therefore, third-party coverage may be particularly difficult to obtain even if our products
are approved by the FDA as safe and efficacious. Patients using existing approved therapies are generally reimbursed all or part
of the product cost by Medicare or other third-party payors. Medicare, Medicaid, health maintenance organizations and other third-party
payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new
drugs, and, as a result, they may not cover or provide adequate payment for these products. Submission of applications for reimbursement
approval generally does not occur prior to the filing of an NDA for that product and may not be granted for as long as many months
after NDA approval. In order to obtain reimbursement arrangements for these products, we or our commercialization partners may
have to agree to a net sales price lower than the net sales price we might charge in other sales channels. The continuing efforts
of government and third-party payors to contain or reduce the costs of healthcare may limit our revenue. Initial dependence on
the commercial success of our products may make our revenues particularly susceptible to any cost containment or reduction efforts.
Risks
Relating to Our Financial Position and Need for Additional Capital
We expect
to continue to incur increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.
We are a pre-clinical-stage
biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative
because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail
to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have
no products approved for commercial sale and have not generated any revenue from product sales to date, and we expect to continue
to incur significant research and development and other expenses related to our ongoing operations.
To become and
remain profitable, we or our partners must succeed in developing our product candidates, obtaining regulatory approval for them,
and manufacturing, marketing and selling those products for which we or our partners may obtain regulatory approval. We or they
may not succeed in these activities, and we may never generate revenue from product sales that is significant enough to achieve
profitability. Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization,
we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain
profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue.
We have financed our operations primarily through the sale of equity securities, upfront payments pursuant to collaboration agreements,
government grants and capital lease and equipment financing. The size of our future net losses will depend, in part, on the rate
of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Our ability to achieve profitability
is dependent on our ability, alone or with others, to complete the development of our products successfully, obtain the required
regulatory approvals, manufacture and market our proposed products successfully or have such products manufactured and marketed
by others, and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.
We will
require substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or
cease operations.
Developing pharmaceutical
products, including conducting preclinical studies and clinical trials, is expensive. Development of our product candidates will
require substantial additional funds to conduct research, development and clinical trials necessary to bring such product candidates
to market and to establish manufacturing, marketing and distribution capabilities. We expect our development expenses to substantially
increase in connection with our ongoing activities, particularly as we advance our clinical programs. Our future capital requirements
will depend on many factors, including, among others:
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the
scope, rate of progress, results and costs of our preclinical and non-clinical studies, clinical trials and other research and
development activities;
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the
scope, rate of progress and costs of our manufacturing development and commercial manufacturing activities;
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the
cost, timing and outcomes of regulatory proceedings, including FDA review of any Biologics License Application, or BLA, or New
Drug Application, or NDA, that we file;
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payments
required with respect to development milestones we achieve under our in-licensing agreements;
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the
costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
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the
costs associated with commercializing our product candidates, if they receive regulatory approval;
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the
cost and timing of establishing sales and marketing capabilities;
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competing
technological efforts and market developments;
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changes
in our existing research relationships;
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our
ability to establish collaborative arrangements to the extent necessary;
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revenues
received from any future products;
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the
ability to achieve and receive milestone payments for products licensed to collaborators; and
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payments
received under any future strategic collaborations.
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We anticipate
that we will continue to generate significant losses for the next several years as we incur expenses to complete our clinical trial
programs for our product candidates, build commercial capabilities, develop our pipeline and expand our corporate infrastructure.
We may never be
able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to seek additional funding
through public or private equity or debt financings, collaborative relationships, capital lease transactions or other available
financing transactions. However, there can be no assurance that additional financing will be available on acceptable terms, if
at all, and such financings could be dilutive to existing security holders. Moreover, in the event that additional funds are obtained
through arrangements with collaborators, such arrangements may require us to relinquish rights to certain of our technologies,
product candidates or products that we would otherwise seek to develop or commercialize ourselves.
If adequate funds
are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs.
Our failure to obtain adequate financing when needed and on acceptable terms would have a material adverse effect on our business,
financial condition and results of operations.
Even if
we can raise additional funding, we may be required to do so on terms that are dilutive to you.
The capital markets
have been unpredictable in the recent past for unprofitable companies such as ours. In addition, it is generally difficult for
development stage companies to raise capital under current market conditions. The amount of capital that a company such as ours
is able to raise often depends on variables that are beyond our control. As a result, we may not be able to secure financing on
terms attractive to us, or at all. If we are able to consummate a financing arrangement, the amount raised may not be sufficient
to meet our future needs. If adequate funds are not available on acceptable terms, or at all, our business, including our results
of operations, financial condition and our continued viability will be materially adversely affected.
Risks
Relating to Competitive Factors
We compete
in an industry characterized by extensive research and development efforts and rapid technological progress. New discoveries or
commercial developments by our competitors could render our potential products obsolete or non-competitive.
New developments
occur and are expected to continue to occur at a rapid pace in our industry, and there can be no assurance that discoveries or
commercial developments by our competitors will not render some or all of our potential products obsolete or non-competitive, which
could have a material adverse effect on our business, financial condition and results of operations. New data from commercial and
clinical-stage products continue to emerge and it is possible that these data may alter current standards of care, completely precluding
us from further developing our product candidates or preventing us from getting them approved by regulatory agencies. Further,
it is possible that we may initiate a clinical trial or trials for our product candidates, only to find that data from competing
products make it impossible for us to complete enrollment in these trials, resulting in our inability to file for marketing approval
with regulatory agencies. Even if these products are approved for marketing in a particular indication or indications, they may
have limited sales due to particularly intense competition in these markets.
We expect to compete
with fully integrated and well-established pharmaceutical and biotechnology companies in the near- and long-term. Most of these
companies have substantially greater financial, research and development, manufacturing and marketing experience and resources
than we do and represent substantial long-term competition for us. Such companies may succeed in discovering and developing pharmaceutical
products more rapidly than we do or pharmaceutical products that are safer, more effective or less costly than any that we may
develop. Such companies also may be more successful than we are in manufacturing, sales and marketing. Smaller companies may also
prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established
biotechnology companies. Academic institutions, governmental agencies and other public and private research organizations also
conduct clinical trials, seek patent protection and establish collaborative arrangements for the development of product candidates.
We expect competition
among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply,
marketing and sales capabilities, reimbursement coverage, price and patent position. There can be no assurance that our competitors
will not develop safer and more effective products, commercialize products earlier than we do, or obtain patent protection or intellectual
property rights that limit our ability to commercialize our products.
There can be no
assurance that our issued patents or pending patent applications, if issued, will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide us with proprietary protection or a competitive advantage.
Our competitors
may develop and market products that are less expensive, more effective, safer or reach the market sooner than our product candidates,
which may diminish or eliminate the commercial success of any products we may commercialize.
The biopharmaceutical
industry is highly competitive. There are many public and private biopharmaceutical companies, public and private universities
and research organizations actively engaged in the discovery and research and development of products similar to our product candidates.
Many
of our competitors, either alone or with their strategic collaborators, have substantially greater financial, technical and human
resources than we do and significantly greater experience in the discovery and development of drugs, obtaining FDA and other regulatory
approvals, and the commercialization of those products. Accordingly, our competitors may be more successful in obtaining approval
for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed
and sold, than any drug we may commercialize and may render our product candidates obsolete or non-competitive before we can recover
the significant expenses of developing and commercializing any of our product candidates. We anticipate that we will face intense
and increasing competition as new drugs enter the market and advanced technologies become available.
We
also compete with other pre-clinical and clinical-stage companies and institutions for clinical trial participants, which could
reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely
affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result
in breakthroughs that render our product candidates obsolete even before they begin to generate any revenue.
In
addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which
may impact future sales of any of our product candidates that receive marketing approval. If the FDA approves the commercial sale
of any of our product candidates, we will also be competing with respect to marketing capabilities and manufacturing efficiency,
areas in which we have limited or no experience. We expect competition among products will be based on product efficacy and safety,
the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, product price, reimbursement
coverage by government and private third-party payors, and patent position. Our profitability and financial position will suffer
if our products receive regulatory approval, but cannot compete effectively in the marketplace.
Our
product candidates may not be accepted in the marketplace; therefore, we may not be able to generate significant revenue, if any.
Even
if our product candidates are approved for sale, physicians and the medical community may not ultimately use them or may use them
only in applications more restricted than we expect. Our product candidates, if successfully developed, will compete with a number
of traditional products, including antibiotics, and immunotherapies manufactured and marketed by major pharmaceutical and other
biotechnology companies. Our product candidates will also compete with new products currently under development by such companies
and others. Physicians will prescribe a product only if they determine, based on experience, clinical data, side effect profiles,
reimbursement for their patients and other factors, that it is beneficial as compared to other products currently in use. Furthermore,
physicians have been prescribing traditional antibiotics for decades and may be resistant to switching to new, less established
therapies. Many other factors influence the adoption of new products, including marketing and distribution restrictions, course
of treatment, adverse publicity, product pricing, the views of thought leaders in the medical community and reimbursement by government
and private third-party payors.
Risks
Relating to our Reliance on Third Parties
We
may rely on third parties to conduct our preclinical studies and our clinical trials and to store and distribute our products
for the clinical trials we conduct. If these third parties do not perform as contractually required or expected, we may not be
able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.
We
may rely on third parties, such as CROs, medical institutions, academic institutions, clinical investigators and contract laboratories,
to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted
in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational
plan and protocol. The FDA requires us to comply with Good Laboratory Practice for conducting and recording the results of our
preclinical studies and Good Clinical Practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical
trials, to ensure that data and reported results are accurate and that the clinical trial participants are adequately protected.
Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials
do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with GCP, do not adhere
to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements
with alternative third parties and our clinical trials may be more costly than expected or budgeted, extended, delayed or terminated
or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being
tested in such trials.
Our
CROs will not be our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and
resources to our clinical and preclinical programs. These CROs may also have relationships with other commercial entities, including
our competitors, for whom they may also be conducting clinical trials or other product development activities that could harm
our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected
deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical
protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and
we may not be able to obtain regulatory approval for, or successfully commercialize, our therapeutic candidates. If any such event
were to occur, our financial results and the commercial prospects for our therapeutic candidates would be harmed, our costs could
increase, and our ability to generate revenues could be delayed.
If
any of our relationships with these potential third-party CROs terminate, we may not be able to enter into arrangements with alternative
CROs or to do so on commercially reasonable terms. Further, switching or adding additional CROs involves additional costs and
requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result,
delays occur, which could materially impact our ability to meet our desired clinical development timelines. Though we carefully
manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future
or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.
In
addition, our future clinical trials will require a sufficient number of test subjects to evaluate the safety and effectiveness
of our therapeutic candidates. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient
number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.
We
also rely on other third parties to store and distribute our products for the clinical trials that we conduct. Any performance
failure on the part of our distributors could delay clinical development or marketing approval of our therapeutic candidates or
commercialization of our products, if approved, producing additional losses and depriving us of potential product revenue.
We
may explore new strategic collaborations that may never materialize or may fail.
We
may, in the future, periodically explore a variety of new strategic collaborations in an effort to gain access to additional product
candidates or resources. At the current time, we cannot predict what form such a strategic collaboration might take. We are likely
to face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be complicated
and time-consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or
at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous
risks and uncertainties associated with establishing strategic collaborations.
Risk
Factors Relating to the Acquisition
The
Company may not be able to successfully integrate the business of CBM and realize the anticipated benefits of the asset acquisition.
Realization
of the anticipated benefits of the CBM asset acquisition will depend on our ability to successfully integrate our businesses and
operations with CBM. We will be required to devote significant management attention and resources to integrating its business
practices, operations, and support functions. The process of integrating CBM’s operations could cause an interruption of,
or loss of momentum in, our business and financial performance, and in CBM’s business and financial performance as well.
The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the
integration of the two companies’ operations could have an adverse effect on the business, financial results.
Our
stockholders will have a reduced ownership and voting interest after the acquisition and will exercise less influence over our
management and policies than they did prior to the acquisition of CBM’s assets.
Our
stockholders currently have the right to vote in the election of our board of directors on other matters affecting us. When and
if the acquisition occurs, because of the issuance of shares of common stock to CBM as part of the purchase consideration, our
current stockholders will hold a percentage ownership of the post-acquisition company that is much smaller than the stockholder’s
current percentage ownership of ours. Because of this, our current stockholders will have less influence over the management and
policies of the Company than they now have after the consummation of the acquisition.
The
acquisition of substantially all of the assets of CBM is subject to certain conditions to closing that could result in the acquisition
not being completed or being delayed, either of which could negatively impact its stock price and future business and results
of operations.
Completion
of the acquisition is subject to a number of customary conditions, including, but not limited to, the approval of the issuance
of Spherix common stock pursuant to the Asset Agreement by our stockholders. In addition, if any governmental authority shall
have enacted, issued, promulgated or enforced any law or order which has the effect of making the transactions or agreements contemplated
by the Asset Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by the Asset
Agreement, CBM may elect not to consummate the acquisition contemplated by the Asset Agreement. There is no assurance that we
will satisfy the conditions necessary for completion of the acquisition. If any of the conditions to the acquisition are not satisfied
or, where waiver is permissible, waived, the acquisition will not be consummated. Failure to complete the acquisition would prevent
us from realizing the anticipated benefits of the acquisition. We have already and expect to continue to incur significant costs
associated with transaction fees, professional services, taxes and other costs related to the acquisition. In the event that the
acquisition is not completed, we will remain liable for these costs and expenses. In addition, the current market price of our
common stock may reflect a market assumption that the acquisition will occur, and a failure to complete the acquisition could
result in a negative perception by the market of ours generally and a resulting decline in the market price of our common stock.
The market price may also decline if the market disapproves of the acquisition contemplated by the Asset Agreement. Any delay
in the consummation of the acquisition or any uncertainty about the consummation of the acquisition could also negatively impact
our stock price and future business and results of operations. The acquisition may not be consummated, there may be a delay in
the consummation of the acquisition or the acquisition may not be consummated on the terms contemplated by the Asset Agreement.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
proxy statement includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995 that are subject to risks, uncertainties and other factors, including the risk that the acquisition will not be consummated,
as the acquisition is subject to certain closing conditions. All statements other than statements of historical fact are statements
that could be deemed forward-looking statements, including statements regarding the expected timing of the completion of the acquisition;
the ability to obtain approval for listing on the Nasdaq of the shares of common stock of Spherix issuable in connection with
the acquisition; the ability to obtain approvals from the stockholders of Spherix and CBM and to complete the acquisition considering
the various closing conditions; any statements of the plans, strategies and objectives of management for future operations; any
statements regarding product development, product extensions, product integration or product marketing; continued compliance with
government regulations, changing legislation or regulatory environments; any statements of expectation or belief and any statements
of assumptions underlying any of the foregoing. In addition, if and when the acquisition is consummated, there will be risks and
uncertainties related to successfully integrating the products and employees of the Spherix and CBM, as well as the ability to
ensure continued regulatory compliance, performance and/or market growth. These risks, uncertainties and other factors, and the
general risks associated with the businesses of Spherix and CBM described herein and in the reports and other documents filed
with the SEC, could cause actual results to differ materially from those referred to in the forward-looking statements. You are
cautioned not to rely on these forward-looking statements. All forward-looking statements are based on information currently available
to Spherix and CBM and are qualified in their entirety by this cautionary statement. Spherix and CBM anticipate that subsequent
events and developments will cause their views to change. The information contained in this proxy statement speaks as of the date
hereof and Spherix and CBM have or undertake no obligation to update or revise these forward-looking statements, whether as a
result of new information, future events or otherwise.
THE
ACQUISITION
The
following is a discussion of the acquisition and the material terms of the Asset Agreement between Spherix and CBM. You are urged
to read carefully the Asset Agreement in its entirety, a copy of which is attached as Annex A to this proxy statement and incorporated
by reference herein.
On
October 10, 2018, the Company entered into an Agreement and Plan of Merger (the “CBM Merger Agreement”), subject to
shareholder approval, with CBM, a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all
shares of capital stock of CBM will be converted into the right to receive an aggregate of 3,529,411 shares of the Company’s
common stock with CBM continuing as the surviving corporation in the merger.
On
May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in the CBM Merger Agreement
,
and entered into the Asset Agreement with CBM, whereby the Company purchased CBM’s Purchased Assets, including, among
other things:
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a
License Agreement with Wake Forest University Health Sciences, dated as of April 17, 2018 relating to certain technologies
in the areas of acute myeloid leukemia (AML), and acute lymphoblastic leukemia (ALL), which License Agreement includes the
following patent rights:
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U.S.
Patent 6,670,341, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued December 30, 2003
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U.S.
Patent 7,026,469, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued April 11, 2006
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U.S.
Patent 7,309,696, titled “Novel phospholipid conjugates double-targeting HIV” issued December 18, 2007
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U.S.
Patent 7,638,528, titled “Compositions and methods for targeting cancer cells” issued December 29, 2009
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U.S.
Patent 8,138,200, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued March 20, 2012
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a
Patent License Agreement with the University of Texas at Austin on behalf of the Board of Regents of the University of Texas
System, dated as of April 12, 2018, relating to certain technologies in the area of pancreatic cancer treatment, which Patent
License Agreement includes the following patent rights:
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US
Patent 61/933,035, titled “Nucleobase Analogue Derivatives and their applications” filed January 29, 2014
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PCT/US2015/013454,
titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
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US
App 15/115,393, titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
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consulting
contract with CBM’s Chief Scientific Officer, entered into on July 23, 2018, pursuant to which the consultant is paid
$50,000 annually
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contracts
with five Scientific Advisory Board members, pursuant to which each member is paid $20,000 annually.
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As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to
CBM consisting of (i) the Stock Consideration comprised of (A) 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 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)
the Cash Consideration Amount. 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 sale by Spherix of common stock, Series L convertible preferred stock or
any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate
gross proceeds of greater than $2,000,000 (a “Qualified Financing”) 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.
Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate
the
CBM
Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby,
and waived that certain termination fee due to CBM pursuant to the
CBM
Merger Agreement.
Additionally,
at or prior to the Closing, the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement, pursuant to which the
Company shall deposit with the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed by the Escrow Agent.
Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security
for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof
under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six
month escrow period expires shall be released from the Escrow Account and disbursed to CBM.
The obligations of the Company and CBM
to consummate the transaction are subject to: (a) all necessary consents and approvals being obtained by any Governmental Authority
or any third parties, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced
or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority which makes the transaction illegal,
and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the
Asset Agreement) to enjoin or restrict the transaction; (d) the Company holding a special meeting of its stockholders to approve,
among other things, the issuance of the Stock Consideration; and (e) 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 Asset Agreement, and no Material Adverse Effect having occurred with respect to either the
Company or CBM since the date of the Asset Agreement.
The Asset Agreement 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 are not satisfied or waived by December 31, 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 Asset Agreement), (iii) by written notice by the Company
or CBM if a Governmental Authority has issued an order or taken action restraining, enjoining or prohibiting the transactions
contemplated by the Asset Agreement (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 Asset Agreement), (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 has been an incurable material breach by the Company of any of its representations, warranties, covenants
or obligations, (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect on the Company following
the date of the Asset Agreement. In the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM
as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset
Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company
or CBM by the Company’s stockholders did not approve the issuance of the Stock Consideration at a duly held special meeting
of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination,
it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.
In
connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into the Leak-Out Agreement, whereby CBM will agree
that during the Restricted Period, neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer,
directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement
in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately
preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including
but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of
Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide
sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant
to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for
such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event
that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s
equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such
investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such
lock-up shall in no event extend beyond the Restricted Period.
Background
of the Acquisition
In
the middle of July 2018, CBM and the Company commenced preliminary discussions regarding CBM’s technology and a possible
transaction between the companies. On approximately July 24, 2018, the Company began a general technology overview of CBM’s
assets and the Company began conducting due diligence on CBM.
From
the end of July through October 2018, the Company received and reviewed scientific literature from CBM, including, but not limited
to, presentations on acute myeloid leukemia (“AML”) and pancreatic cancer as well as papers published by Wake Forest
University in the field of oncology related to CBM’s assets. During this same time period, representatives of CBM and the
Company had discussions regarding CBM’s assets, CBM’s patents and possible deal terms. The dates of these calls included,
but were not limited to, July 25, July 27, August 3, August 10, August 17, August 21, September 4, September 12, September 14,
September 19, September 25, October 1, October 8, October 9, October 10 and October 11, 2018. In the middle of September 2018,
the Company conducted due diligence calls with representatives from Wake Forest University with whom CBM has a licensing agreement,
to discuss and review CBM’s technology as well as specific topics such as the chemical structure of KPC34, CBM’s AML
drug candidate, patent coverage of the chemical structure, yearly patient costs of KPC34, Wake Forest University’s proposal
for a Phase 1 study, development timelines and costs, and FDA exclusivity, including orphan drug status.
On
July 24, 2018, Spherix’s management and members of its board of directors met with Dr. Tom Wilkie, CBM’s Chief Scientific
Officer, to review and discuss CBM’s technology, including a presentation on CBM’s intellectual property assets.
On
September 21, 2018, members of the Company’s board of voted to proceed with the merger and authorized management to finalize
terms.
On
October 16, 2018, the Company filed a Current Report on
Form
8-K
to announce its proposed merger with CBM. The consummation of such merger was conditioned upon, among other things, receipt
of requisite approval by the Company’s stockholders and CBM’s stockholders.
After
the October 16, 2018 announcement, the Company continued to conduct pre-closing due diligence which included a pre-clinical analysis
of KPC34 to review KPC34 mechanisms to identify other types of cancers that might respond well to KPC34. Specifically, the Company
analyzed cancers with target gene expressions indicative of high levels of PLC and PKC mRNA. This analysis revealed that uveal
melanoma, low grade glioma, AML and adrenocortical carcinoma have gene profiles which KPC34 could potentially respond to as an
effective treatment. In addition, the Company and CBM worked together to produce a short video presentation demonstrating, in
simple terms, KPC34 mechanisms, one of the two main compounds that form the cornerstone of the CBM merger.
On
January 9, February 14, March 4, March 19, March 27, April 10, April 12, 2019, April 15 and April 19, 2019, various telephonic
discussions were conducted with Scott Wilfong, Chief Executive Officer of CBM, to address the terms of the merger and the preference
of CBM shareholders to be passive shareholders of Spherix rather than control persons after the completion of the merger.
As a result of those discussions, it was agreed that the CBM shareholders would receive convertible preferred stock instead of
common stock, which preferred stock has all of the characteristics of common stock but limits each holders’ beneficial interest
of Spherix common stock to less than 3% on an individual basis, 19.9% on an aggregate basis. Additionally, upon completion
of further due diligence since the time that the initial agreement was signed, it was decided that Spherix would purchase substantially
all of CBM’s assets at a lower purchase price instead of proceeding with a merger in recognition of CBM having a lower valuation.
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
closed on May 28, 2019.
On
May 16, 2019, the Company filed a Current Report on
Form 8-K
to announce its proposed restructuring of the CBM merger as an asset
acquisition. The consummation of such transaction is conditioned upon, among other things, receipt of requisite approval by the
Company’s stockholders and CBM’s stockholders.
Spherix
Board of Directors’ Recommendation
The
board of directors of Spherix has unanimously determined that the issuance of common stock of Spherix pursuant to the Asset Agreement
with CBM are advisable, fair to, and in the best interests of the Spherix stockholders. In approving and authorizing the issuance
and the Asset Agreement itself, the board of directors considered a number of factors, including, among others, the facts discussed
in the following paragraphs. Although the foregoing discussion sets forth the material factors considered by the Spherix board
of directors in reaching its conclusion, it may not include all the factors considered by the Spherix board of directors. In light
of the number and wide variety of factors considered in connection with its evaluation of the acquisition, the Spherix board of
directors did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered
in reaching its determination. The Spherix board of directors viewed its position and determinations as being based on all of
the information available and the factors presented to it and considered by it. In addition, individual directors may have given
different weight to different factors.
In
reaching its decision, the Spherix board of directors consulted with its senior management, financial advisor and outside legal
counsel. These consultations included discussions regarding strategic and operational matters, the historical and future price
for Spherix common stock, past and current business operations and financial condition and performance.
The
decision of the Spherix board of directors to enter into the Asset Agreement was the result of careful consideration by the Spherix
board of directors of numerous factors, including that the Company will realize synergistic benefits upon the acquisition of substantially
all of the assets of CBM.
The
Spherix board of directors also identified and considered negative factors, including the following:
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It
is possible that the closing conditions relating to the consummation of the acquisition will not be met.
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The
Asset Agreement substantially limits any outside opportunities Spherix might otherwise have with other potential business combination
opportunities.
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It
should be noted that this explanation of the reasoning of the board of directors of Spherix and certain information presented
in this section is forward-looking in nature and, therefore, that information should be read in light of the factors discussed
in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” in this proxy statement.
Interests
of Spherix Directors and Executive Officers in the Acquisition
When
you consider the recommendation of Spherix’s board of directors in favor of approval of the acquisition, you should keep
in mind that Spherix’s directors and officers have interests in the acquisition that are different from, or in addition
to, your interests as a stockholder. These interests include, among other things:
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Those
executive officers who will receive compensatory benefits as a result of the acquisition have an interest in the consummation
of the acquisition that may be influenced by the benefits that inure to themselves and not to the stockholders in general.
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The
Spherix board of directors was aware of these interests and considered them, among other matters, in negotiating and approving
the Asset Agreement and making its recommendation that the Spherix stockholders approve and adopt the Asset Agreement and the
transactions contemplated thereby. The board of directors undertook such measures as, for example, reliance on third-party advisors,
full mutual disclosure of the directors’ and officers’ interests and relationships to minimize or eliminate the risks
inherent in such disparities in interest. Notwithstanding, it cannot be stated to a certainty that the Spherix board of directors’
measures to assure that the potential influence from the foregoing disparities in interests of the directors and executive officers
from the interests of the other stockholders of Spherix have been eliminated from the deliberations and decisions of the Spherix
board of directors.
Regulatory
Approvals Required for the Acquisition
The
acquisition does not meet the thresholds for furnishing pre-acquisition notification and other information to the Antitrust Division
of the U.S. Department of Justice and the FTC under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the parties
are not aware of any other regulatory filings or approvals that are required in connection with the acquisition.
Anticipated
Accounting Treatment
It
is anticipated that the transaction will be accounted for by Spherix as an asset acquisition of CBM rather than as a business
combination under ASC 805, Business Combinations.
THE
ASSET PURCHASE AGREEMENT
The
following discussion summarizes material provisions of the Asset Agreement, a copy of which is attached as Annex A to this proxy
statement and is incorporated by reference into this proxy statement. The rights and obligations of the parties are governed by
the express terms and conditions of the Asset Agreement and not by this summary or any other information contained in this proxy
statement. This summary is qualified in its entirety by reference to the Asset Agreement, which we urge you to read carefully
and in its entirety, as well as this proxy statement, before making any decisions regarding the acquisition.
The
Asset Agreement has been included to provide information regarding the terms of the acquisition. In your review of the representations
and warranties contained in the Asset Agreement and described in this summary, it is important to bear in mind that the representations
and warranties were negotiated with the principal purposes of establishing the circumstances under which a party to the Asset
Agreement may have the right to not close the acquisition if the representations and warranties of another party prove to be untrue
due to a change in circumstance or otherwise, and allocate risk between the parties to the Asset Agreement, rather than establishing
matters of fact.
The
Asset Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date
of the Asset Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were
made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed
to by the parties in connection with negotiating the Asset Agreement. Moreover, information concerning the subject matter of the
representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since
the date of the Asset Agreement and subsequent developments or new information qualifying a representation or warranty to the
extent material to an investment decision have been included in this proxy statement. The representations, warranties and covenants
in the Asset Agreement are also modified in important part by the underlying disclosure schedules which are not filed publicly
and which are subject to a contractual standard of materiality different from that generally applicable to stockholders and were
used for the purpose of allocating risk among the parties rather than establishing factual matters. Spherix and CBM do not believe
that these disclosure letters contain information that is material to an investment decision.
Any
subsequent developments or new information material to an investment decision have been included in this proxy statement. The
representations and warranties and other provisions of the Asset Agreement should not be read alone, but instead should be read
only in conjunction with the information provided elsewhere in this proxy statement and the annex. The representations, warranties,
pre-closing covenants and pre-closing obligations contained in the Asset Agreement do not survive the effective time of the acquisition.
On
May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an Agreement and Plan of Merger,
dated October 10, 2018 (the “CBM Merger Agreement”) and entered into the Asset Agreement with CBM, whereby the Company
purchased CBM’s Purchased Assets, including, among other things:
|
●
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a
License Agreement with Wake Forest University Health Sciences, dated as of April 17, 2018, relating to certain technologies
in the areas of acute myeloid leukemia (AML), and acute lymphoblastic leukemia (ALL), which License Agreement includes the
following patent rights:
|
|
○
|
U.S.
Patent 6,670,341, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued December 30, 2003
|
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○
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U.S.
Patent 7,026,469, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued April 11, 2006
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○
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U.S.
Patent 7,309,696, titled “Novel phospholipid conjugates double-targeting HIV” issued December 18, 2007
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○
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U.S.
Patent 7,638,528, titled “Compositions and methods for targeting cancer cells” issued December 29, 2009
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○
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U.S.
Patent 8,138,200, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued March 20, 2012
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●
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a
Patent License Agreement with the University of Texas at Austin on behalf of the Board of Regents of the University of Texas
System, dated as of April 12, 2018, relating to certain technologies in the area of pancreatic cancer treatment, which Patent
License Agreement includes the following patent rights:
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|
○
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US
Patent 61/933,035, titled “Nucleobase Analogue Derivatives and their applications” filed January 29, 2014
|
|
○
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PCT/US2015/013454,
titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
|
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○
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US
App 15/115,393, titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
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●
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Consulting
contract with CBM’s Chief Scientific Officer, entered into on July 23, 2018, pursuant to which the consultant is paid
$50,000 annually
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●
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contracts
with five Scientific Advisory Board members, pursuant to which each member is paid $20,000 annually.
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As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to
CBM consisting of (i) the Stock Consideration comprised of (A) 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 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)
the Cash Consideration Amount. 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 sale by Spherix of common stock, Series L convertible preferred stock or
any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate
gross proceeds of greater than $2,000,000 (a “Qualified Financing”) 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.
Upon the execution of the Asset Agreement,
the Company and CBM agreed to terminate the CBM Merger Agreement, including all schedules and exhibits thereto, and all ancillary
agreements contemplated thereby, and waived that certain termination fee due to CBM pursuant to the CBM Merger Agreement.
Additionally,
at or prior to the Closing, the Company, CBM, and the Escrow Agent, shall enter into an Escrow Agreement, pursuant to which the
Company shall deposit with the Escrow Agent 10% of the Stock Consideration (including any equity securities paid in the future
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 the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow
Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s
obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares
remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released
from the Escrow Account and disbursed to CBM.
In
connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into the Leak-Out Agreement, whereby CBM will agree
that during the Restricted Period, neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer,
directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement
in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately
preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including
but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of
Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide
sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant
to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for
such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event
that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s
equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such
investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such
lock-up shall in no event extend beyond the Restricted Period.
The obligations of the Company and CBM
to consummate the transaction are subject to: (a) all necessary consents and approvals being obtained by relevant governmental
authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any law being enacted, issued, promulgated,
enforced or entered, or any order by a Governmental Authority which makes the transaction illegal, and (c) no pending action being
brought by a third-party non-affiliate to enjoin or restrict the transaction; (d) the Company holding a special meeting of its
stockholders to approve, among other things, the issuance of the Stock Consideration, and (e) 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 Asset Agreement, and no Material Adverse Effect having
occurred with respect to either the Company or CBM since the date of the Asset Agreement.
The Asset Agreement 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 are not satisfied or waived by December 31, 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 Asset Agreement), (iii) by written notice by the Company
or CBM if a Governmental Authority has issued an order or taken action restraining, enjoining or prohibiting the transactions
contemplated by the Asset Agreement (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 Asset Agreement), (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 has been an incurable material breach by the Company of any of its representations, warranties, covenants
or obligations, (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect on the Company following
the date of the Asset Agreement, or (vii) by written notice by the Company or CBM in the event that the Company’s stockholders
did not approve the issuance of the Stock Consideration at a special meeting of the Company.
On
May 30, 2019 the Asset Agreement was amended by Amendment No. 1 to the Asset Purchase Agreement to include a termination fee in
the Asset Agreement whereby, in the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as
a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset
Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company
or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to
the Asset Agreement is not approved by the Company’s stockholders at a duly held special meeting of the Company, the Company
will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination, it being understood
that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.
INFORMATION
ABOUT SPHERIX AND CBM
Spherix
Incorporated
One
Rockefeller Plaza
New
York, NY 10020
(212)
745-1374
General
Spherix
Incorporated is a technology development company committed to the fostering of innovative ideas. 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. Such monetization included, but was 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, commercializing
the IP, 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 our patent monetization efforts,
since the fourth quarter of 2017, we have been transitioning to a technology development company. The Company made no investments
in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter
of 2017, with its agreement with DatChat, Inc. in March 2018 and with its agreement with CBM BioPharma, Inc. in October 2018.
CBM
BioPharma, Inc. Transaction
In
October 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with CBM BioPharma, Inc.
(“CBM”), a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of
capital stock of CBM will be converted into the right to receive an aggregate of 15,000,000 shares of the Company’s common
stock with CBM continuing as the surviving corporation in the acquisition. On May 15, 2019, the Company restructured the terms
of its proposed merger with CBM as agreed to in an agreement and plan of merger and entered into the Asset Agreement with CBM,
whereby the Company purchased substantially all of CBM’s assets, including, among other things, a license agreement relating
to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL) and pancreatic cancer,
and contracts with a chief scientist and an advisory board.
DatChat
Securities Purchase Agreement and Share Purchase Agreement
In
March 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”), 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 4.37% of the issued and outstanding common stock of DatChat. In the event that DatChat completes a public offering
of its securities pursuant to an effective registration statement or a merger, consolidations, transfer or share exchange transaction
to pursuant to which DatChat becomes subject to the reporting requirements of the Securities Exchange Act of 1934, DatChat agreed
to certain covenants in connection with certain reporting and information disclosure requirements.
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 twenty percent (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.
Patent
Monetization Activities
In
July 2013, we acquired 7 patents in the field of mobile communications from Rockstar Consortium US LP (“Rockstar”),
which was launched in 2011 by Apple, Inc., Microsoft Corporation, Sony Corporation, Blackberry Limited and LM Ericsson Telephone
Company as an intellectual property licensing company to manage a patent portfolio related to the pre-bankruptcy technology and
businesses of Nortel Networks (“Nortel”).
In
September 2013, we acquired North South Holdings, Inc. (“North South”) and its 222 patents in the fields of wireless
communications, satellite, solar, and radio frequency and 2 patents in the field of pharmaceutical distribution. The 222 patents
were originally developed by Harris Corporation, a leader in defense communications and electronics.
In
December 2013, we acquired an additional 101 patents and patent applications covering, among other things, internet access and
video and data transmission, from Rockstar in consideration for approximately $60 million of our securities consisting of common
stock and preferred stock.
We
have not generated any significant revenues from our intellectual property monetization platform. We have incurred losses
from operations for the years ended December 31, 2018 and 2017 of $6.9 million and $3.8 million, respectively. Our
accumulated deficit was $140.1 million at December 31, 2018. In 2018, the Company took a $1,405,000 amortization expense
on its patent portfolio and patent rights and an impairment loss of $2,173,000. Therefore, at December 31, 2018, the value of
the Company’s patent portfolio and patent rights was zero.
Acquisition
of shares of Hoth Therapeutics, Inc.
On
June 30, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hoth Therapeutics,
Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of 1,700,000 shares of common stock, par value
$0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. As of December 31, 2018, Hoth had approximately
5 million shares of common stock issued and outstanding, which has been retroactively restated to reflect the 1-for-4 reverse
stock split effected by Hoth on December 6, 2018. Hoth is a development stage biopharmaceutical company focused on unique targeted
therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. Hoth’s primary asset
is a sublicense agreement with Chelexa Biosciences, Inc. (“Chelexa”) pursuant to which Chelexa has granted Hoth an
exclusive sublicense to use its BioLexa Platform, a proprietary, patented, drug compound platform developed at the University
of Cincinnati. Hoth intends to develop BioLexa’s applications in the aesthetic dermatology field to help treat and reduce
post-procedure infections, accelerate healing and improve clinical outcomes for patients undergoing procedures. Hoth will be implementing
FDA testing procedures for BioLexa. In addition to the Purchase Agreement, the Company and Hoth entered into a Registration Rights
Agreement, pursuant to which Hoth is obligated to register for resale on a registration statement on
Form S-1
under the Securities
Act, all of the shares. Further, the Company, Hoth and Hoth’s existing shareholders have entered into a Shareholders Agreement,
pursuant to which Spherix shall have a right to appoint one director to the board of directors of Hoth for so long as the Company
holds at least 10% of the issued and outstanding common stock of Hoth.
On
February 14, 2019, the Company purchased an aggregate of 35,714 shares of the common stock of Hoth in connection with Hoth’s
initial public offering, which was consummated on February 20, 2019, at a purchase price of $5.60 per share, for an aggregate
purchase price of $200,000. Hoth’s common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under
the ticker symbol “HOTH”. The Company entered into a lock-up agreement with Hoth pursuant to which the Company
has agreed not to sell any shares of Hoth common stock or common stock equivalents until February 20, 2022, which is the 36 month
anniversary of the consummation of Hoth’s initial public offering, (the “Spherix Securities”) until February
20, 2022, which is the 36 month anniversary of the consummation of Hoth’s initial public offering, provided, however (i)
Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose
of, directly or indirectly, up to an aggregate of 10% of the initially issued Spherix Securities, provided further that the recipients
of the Spherix Securities shall not be permitted to resell such Spherix Securities until six months after the date of the Initial
Public Offering, (ii) beginning 12 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract
to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to
an additional 10% of the initially issued Spherix Securities, (iii) beginning 24 months after the date of Hoth’s initial
public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or
otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities and (iv) beginning
36 months after the date of the Hoth initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge,
dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, the Spherix Securities without any
restrictions.
Mellow
Scooters Investment
On
November 23, 2018, the Company entered into a Security Purchase Agreement with Mellow Scooters, LLC (“Mellow Scooters”),
a leading-edge company that enables anyone to own and operate a personal fleet of electric scooters and dockless bicycles to generate
revenue. Mellow Scooters agreed to sell 250 Units to the Company, representing 25% of its issued and outstanding limited liability
company membership interests for a subscription price of $106,000. The $106,000 consisted of (a) a cash payment of $30,000, (b)
the forgiveness of prior advances made to Mellow Scooters by the Company, and (c) an obligation of the Company to pay certain
specific future expenses of Mellow Scooters (amounts in clauses (b) and (c) not to exceed a maximum of $76,000 in the aggregate).
As of December 31, 2018, the Company has applied a total of approximately $74,000 prior advances towards its investment in Mellow
Scooters, including $71,000 compensation related cost and $3,500 professional fees. The Company also recorded $2,000 payable for
professional fees of Mellow Scooter in addition to the $74,000 advances to reach the $76,000 maximum. Mellow Scooters recently
launched its operations, focused on the scooter rental market in the Washington, D.C. area via its website www.borrowmellow.com.
March
2018 Shelf Takedown
On
March 19, 2018, we closed 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 (the “Place Agency Agreement”) between us and Laidlaw, the sole placement agent, on a best-efforts
basis with respect to the offering that was entered into on March 14, 2018. We sold 522,876 shares of its common stock in the
offering at a purchase price of $1.35 per share. The material terms of the offering are described in a prospectus supplement which
was filed by us with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act on March 16, 2018.
TheBit
Daily LLC Investment
On
March 23, 2018, the Company 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.
Our
principal executive offices are located at One Rockefeller Plaza, New York, NY 10020, our telephone number is (212) 745-1374,
and our Internet website address www.spherix.com.
Our
common stock trades on the NASDAQ Capital Market under the symbol SPEX.
Available
Information
Our
principal Internet address is www.spherix.com. We make available free of charge on www.spherix.com our annual, quarterly
and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Competition
We
encounter significant competition from others seeking to target development stage technology companies in order to acquire interests
in intellectual property assets and monetize such assets. This includes an increase in the number of competitors seeking to acquire
the same or similar patents and technologies that we may seek to acquire. Most of our competitors have much longer
operating histories, and significantly greater financial and human resources, than we do.
We
also compete with venture capital firms, strategic corporate buyers and various industry leaders for identifying and targeting
technology acquisitions and licensing opportunities. Many of these competitors may have more financial and human resources
than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities,
which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
Other
companies may develop competing technologies that offer better or less expensive alternatives to the patented technologies that
we may acquire and/or out-license. Many potential competitors may have significantly greater resources than we do. Technological
advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies
owned or controlled by our operating subsidiaries obsolete and/or uneconomical.
Intellectual
Property and Patent Rights
Our
intellectual property is primarily comprised of trade secrets, patented know-how, issued and pending patents, copyrights and technological
innovation relating to our past business of patent monetization through litigation activities.
The
portfolio we were working with Equitable to monetize pursuant to the Monetization Agreement is comprised of over 290 patents and
patent applications (the “Portfolio”). The Portfolio includes both U.S. and foreign patents and pending patent applications
in the wireless communications and telecommunication sectors including data, optical and voice technology, antenna technology,
Wi-Fi, base station functionality, and cellular.
Most
of the patents in the Portfolio are publicly accessible on the Internet website of the U.S. Patent and Trademark Office at www.uspto.gov.
The
lives of the patent rights in the Portfolio have a wide duration ranging from 2019 to 2026.
Employees
As
of June 30, 2019, Spherix has three full-time employees, none of which are represented by a labor union or covered by a collective
bargaining agreement.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
CBM
BioPharma, Inc.
6427
Lake Washington Boulevard Northeast
Kirkland,
Washington 98053
973-738-0967
CBM
BioPharma, Inc. (“CBM”) is a privately held pharmaceutical company with exclusive drug development rights from partners
including Wake Forest University and the University of Texas at Austin. CBM is dedicated to translating fundamental biological
insights into new drugs and treatments that address unmet medical needs. CBM currently has two drug candidates focused on the
treatment of two cancers, acute myeloid leukemia (“AML”) and pancreatic cancer.
CBM
was formed as a corporation in December 2017 under the laws of the State of Delaware. Its principal offices are at 6427 Lake Washington
Boulevard Northeast, Kirkland, Washington 98053.
KPC34
Developed
at the Wake Forest School of Medicine, CBM’s AML drug candidate (“KPC34”) is designed to bypass the resistant
mechanisms in AML cancer cells. In preclinical studies in mice, KPC34 has shown to be a superior treatment to gemcitabine, the
current state of the art treatment for AML and has served to double the mean survival time of mice versus the current standard
of care treatments. KPC34 has also been shown to be more effective in AML relapse cases in mice, notably increasing the lifespan
of mice treated with the drug.
KPC34
is able to be orally administered, which may be critical for patients that are unable to tolerate repeated cycles of chemotherapy.
Because of the low AML patient population, FDA orphan drug status will be sought for KPC34.
License
Agreement with Wake Forest University
On
April 17, 2018, CBM entered into a license agreement (the “WF Agreement”) with Wake Forest University Health Sciences
(“WF”). The WF Agreement granted to CBM an exclusive, royalty-bearing license to WF’s and The University of
North Carolina at Chapel Hill’s patents relating to the KPC34 drug candidate (the “WF Patent Rights”). The WF
Agreement also granted to CBM the right to sublicense.
CBM
paid WF an upfront license fee of $10,000 and will owe an additional $10,000 per year to WF beginning on the third anniversary
of the WF Agreement. In addition, CBM is obligated to pay to WF a single-digit royalty fee and certain other milestone and other
payments upon sales milestones. The aggregate milestone payments under the WF Agreement are up to $1,400,000. In addition, as
consideration for entering into the WF Agreement, CBM issued WF 5,000 shares of common stock to WF, which equaled 2% of CBM’s
issued and outstanding capital stock at the effective date of the WF Agreement.
The
term of the WF Agreement continues until the expiration of the last of the WF Patent Rights to expire or the expiration of market
exclusivity via orphan drug status or new chemical entity status (or their non-U.S. equivalents), or until the WF Agreement is
earlier terminated. CBM may terminate the WF Agreement upon 90 days’ prior written notice. Either party may terminate
the WF Agreement upon a breach of the WF Agreement that has not been cured in 90 days. Additionally, the WF Agreement will
automatically terminate in the event CBM becomes insolvent, makes an assignment for the benefit of creditors, or if a petition
for bankruptcy is filed.
DHA-dFdC
Developed
at the University of Texas at Austin, CBM’s pancreatic cancer drug candidate (“DHA-dFdC”) has shown positive
results in preclinical studies, inhibiting pancreatic tumor growth in clinically relevant transgenic mouse models. Pancreatic
cancer is a deadly disease that affects millions of people around the world.
DHA-dFdC
has been shown to be well tolerated in preclinical toxicity tests, has demonstrated activities against other cancers (e.g. leukemia,
lung, melanoma) and may stimulate immunogenic cell death to activate host antitumor immunity.
Patent
License Agreement with the University of Texas at Austin
On
April 12, 2018, CBM entered into a patent license agreement (the “UT Agreement”) with the University of Texas at Austin
on behalf of the Board of Regents of the University of Texas System (“UT”). The UT Agreement granted to CBM an exclusive,
royalty-bearing license to certain patent applications related to nucleobase analogue derivatives and their applications, and
specifically to the DHA-dFdC drug candidate (the “UT Patent Rights”). The UT Agreement also granted to CBM the right
to sublicense.
CBM
paid UT an upfront license fee of $5,000 and CBM is obligated to pay UT a tiered license fee annually up to $35,000, in addition
to certain other milestone and other payments. The aggregate milestone payments under the UT Agreement are up to $1,350,000.
The
term of the UT Agreement continues until the expiration of the UT Patent Rights, or until the UT Agreement is earlier terminated.
CBM may terminate the UT Agreement upon 90 days’ prior written notice. UT may terminate the agreement upon any of the
following events:
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●
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CBM
fails to make a payment within 30 days written notice of default;
|
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●
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A
breach of the UT Agreement occurs that has not been cured in 60 days;
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●
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CBM
breaches the agreement three or more times in any 12-month period; and
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CBM
initiates any proceeding or action to challenge the validity, enforceability, or scope of the UT Patent Rights.
|
Additionally,
the UT Agreement will automatically terminate upon any of the following events:
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●
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CBM
becomes insolvent, makes an assignment for the benefit of creditors, or if a petition for bankruptcy is filed; and
|
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●
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CBM
is dissolved or liquidated.
|
CBM’s
Development Plan
CBM’s drug candidates are both in the preclinical stage. CBM anticipates making an IND filing for
KPC34 by the end of 2019 and to potentially start a Phase 1 trial by the end of 2020. CBM is in the process of drafting and finalizing
requests for Orphan Drug Designation to the FDA for KPC34 for each of the AML and ALL indications. CBM also anticipates starting
a GLP toxicity study as well as a Phase 1 trial for DHA-dFdC by the end of 2020, following required prior pre-clinical trials.
We may be subject to delays in our clinical trials and we cannot assure you that our planned clinical development for our product
candidates will be completed in a timely manner, or at all.
Intellectual
Property
CBM’s
success depends, in part, on its ability to obtain, maintain, and enforce patents and other proprietary protections of our commercially
important technologies and product candidates, to operate without infringing the proprietary rights of others, and to maintain
trade secrets or other proprietary know-how, both in the U.S. and other countries. CBM has licenses with Wake Forest University
Health Sciences (“Wake Forest”) and The University of Texas at Austin (“UTA”) that include rights to eight
patents and patent applications as follows:
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a License Agreement with Wake Forest relating to all fields of use, expressly including human therapeutic
and diagnostic uses, of the inventions claimed in five licensed patents, which are listed below. The patents cover many novel
compounds showing promise in the treatment of several cancer types, including acute myeloid leukemia (AML) and acute lymphoblastic
leukemia (ALL), and several types of viral infections, including human immunodeficiency virus (HIV), hepatitis viruses and herpes
viruses. The lead compound CBM is currently pursuing is KPC34, which has been shown to be effective against AML and ALL.
The licensed patents include patent claims covering the compound KPC34. CBM is in the process of drafting and finalizing
requests for Orphan Drug Designation to the FDA for KPC34 for each of the AML and ALL indications. The following patent rights
are included under CBM’s license agreement with Wake Forest:
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U.S.
Patent 6,670,341 titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued December 30, 2003
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U.S.
Patent 7,026,469 titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued April 11, 2006
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U.S.
Patent 7,309,696 titled “Novel phospholipid conjugates double-targeting HIV” issued December 18, 2007
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U.S.
Patent 7,638,528 titled “Compositions and methods for targeting cancer cells” issued December 29, 2009
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U.S.
Patent 8,138,200 titled “Compositions and methods for double-targeting virus infections and targeting cancer cells”
issued March 20, 2012
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a Patent License Agreement with UTA relating to relating to all fields of use of the inventions disclosed
in the three patent applications listed below. CBM’s lead compound, which has been designated as Gem-DHA, a.k.a., DHA-dFdC,
has been shown to be effective against pancreatic cancer in mice. Specifically, the data show that the drug halts tumor growth
and significantly increases in life expectancy. Surprisingly, the data show that Gem-DHA preferentially concentrates itself
in the pancreas relative to other organs. The Patent Office recently issued a Notice of Allowance and Issue Fee due in pending
U.S. Application Serial No. 15/115,393 and the allowed claims include claims that specifically cover the lead compound Gem-DHA.
The following patent rights are included under CBM’s license agreement with UTA:
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US
Patent 61/933,035 titled “Nucleobase Analogue Derivatives and their applications” filed January 29, 2014
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PCT/US2015/013454
titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
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US
App 15/115,393 titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015
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Competition
The
biopharmaceutical industry is characterized by rapidly advancing technologies, strong emphasis on proprietary products and significant
competition. CBM faces potential competition from many sources, including major pharmaceutical, specialty pharmaceutical and biotechnology
companies, academic institutions and government agencies and public and private research institutions. Any product candidates
that CBM successfully develops and commercializes will compete with any existing therapies and new therapies that may become available
in the future.
Government
Regulation
CBM
operates in a highly regulated industry that is subject to significant federal, state, local and foreign regulation. CBM’s
present and future business has been, and will continue to be, subject to a variety of laws including, the Federal Food, Drug,
and Cosmetic Act, or FDC Act, and the Public Health Service Act, among others.
The
FDC Act and other federal and state statutes and regulations govern the testing, manufacture, safety, effectiveness, labeling,
storage, record keeping, approval, advertising and promotion of potential products. As a result of these laws and regulations,
product development and product approval processes are very expensive and time-consuming.
FDA
Approval Process
In
the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDC Act and other federal and state
statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping,
approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export
of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative
or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, or biologic license applications,
or BLAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, civil penalties, and criminal prosecution.
Pharmaceutical
product development in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA
of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials
to establish the safety and effectiveness of the drug or biologic for each indication for which FDA approval is sought. Satisfaction
of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon
the type, complexity and novelty of the product or disease.
Preclinical
tests include laboratory evaluation as well as animal trials to assess the characteristics and potential pharmacology and toxicity
of the product. The conduct of the preclinical tests must comply with federal regulations and requirements including good laboratory
practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including
information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical
tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A
30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If
the FDA has not objected to the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical
trials involve the administration of the investigational drug to healthy volunteers or patients under the supervision of a qualified
investigator. Clinical trials must be conducted in compliance with federal regulations and good clinical practices, or GCP, as
well as under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness
criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted
to the FDA as part of the IND.
The
FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes
that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical
trial patients. The clinical trial protocol and informed consent information for patients in clinical trials must also be submitted
to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either
temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical
trials to support NDAs or BLAs, which are applications for marketing approval, are typically conducted in three sequential Phases,
but the Phases may overlap. In Phase 1, the initial introduction of the investigational drug candidate into healthy human
subjects or patients, the investigational drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side
effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials
in a limited patient population, to determine the effectiveness of the investigational drug for a particular indication or indications,
dosage tolerance and optimum dosage, and identify common adverse effects and safety risks. In the case of product candidates for
severe or life-threatening diseases such as pneumonia, the initial human testing is often conducted in patients rather than in
healthy volunteers.
If
an investigational drug demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3
clinical trials are undertaken to obtain additional information about clinical efficacy and safety in a larger number of patients,
typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship
of the investigational drug and to provide adequate information for its labeling.
After
completion of the required clinical testing, an NDA or, in the case of a biologic, a BLA, is prepared and submitted to the FDA.
FDA approval of the marketing application is required before marketing of the product may begin in the United States. The marketing
application must include the results of all preclinical, clinical and other testing and a compilation of data relating to the
product’s pharmacology, chemistry, manufacture, and controls.
The
FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based
on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission
is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of marketing
applications. Most such applications for non-priority drug products are reviewed within ten months. The review process may be
extended by the FDA for three additional months to consider new information submitted during the review or clarification regarding
information already provided in the submission. The FDA may also refer applications for novel drug products or drug products that
present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other
experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by
the recommendation of an advisory committee, but it generally follows such recommendations. Before approving a marketing application,
the FDA will typically inspect one or more clinical sites to assure compliance with GCP.
Additionally,
the FDA will inspect the facility or the facilities at which the drug product is manufactured. The FDA will not approve the NDA
or, in the case of a biologic, the BLA unless compliance with cGMPs is satisfactory and the marketing application contains data
that provide substantial evidence that the product is safe and effective in the indication studied. Manufacturers of biologics
also must comply with FDA’s general biological product standards.
After
the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues an approval letter or a complete response letter.
A complete response letter outlines the deficiencies in the submission and may require substantial additional testing or information
in order for the FDA to reconsider the application. If and when those deficiencies have been addressed in a resubmission of the
marketing application, the FDA will re-initiate review. If the FDA is satisfied that the deficiencies have been addressed, the
agency will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on
the type of information included. It is not unusual for the FDA to issue a complete response letter because it believes that the
drug product is not safe enough or effective enough or because it does not believe that the data submitted are reliable or conclusive.
An
approval letter authorizes commercial marketing of the drug product with specific prescribing information for specific indications.
As a condition of approval of the marketing application, the FDA may require substantial post-approval testing and surveillance
to monitor the drug product’s safety or efficacy and may impose other conditions, including labeling restrictions, which
can materially affect the product’s potential market and profitability. Once granted, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Orphan
Drug Act in the United States
The
Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer
than 200,000 persons in the U.S. at the time of application for orphan drug designation. Orphan drug designation must be requested
before submitting a BLA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory
review and approval process. If a product that has orphan drug designation subsequently receives the first FDA approval for the
disease for which it has such designation, the holder of the approval is entitled to a seven-year exclusive marketing period in
the U.S. for that product except in very limited circumstances. For example, a drug that the FDA considers to be clinically superior
to, or different from, another approved orphan drug, even though for the same indication, may also obtain approval in the U.S.
during the seven-year exclusive marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure
the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in
the withdrawal of marketing exclusivity for the drug.
Orphan
Designation and Exclusivity in the European Union
Products
authorized as “orphan medicinal products” in the EU are entitled to certain exclusivity benefits. In accordance with
Article 3 of Regulation (EC) No. 141/2000 of the European Parliament and of the Council of 16 December 1999 on
orphan medicinal products, a medicinal product may be designated as an orphan medicinal product if: (1) it is intended for
the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such
condition affects no more than five in 10,000 persons in the European Union when the application is made, or (b) the product,
without the incentives derived from orphan medicinal product status, would not generate sufficient return in the European Union
to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition
authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those affected by
the condition.
An
application for orphan drug designation must be submitted before the application for marketing authorization. Orphan drug designation
does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
Products
authorized in the EU as orphan medicinal products are entitled to 10 years of market exclusivity. The 10-year market exclusivity
may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria
for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity.
Additionally, marketing authorization may be granted to a similar product during the 10-year period of market exclusivity for
the same therapeutic indication at any time if:
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The
second applicant can establish in its application that its product, although similar to the orphan medicinal product already authorized,
is safer, more effective or otherwise clinically superior;
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The
holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product
application; or
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The
holder of the marketing authorization for the original orphan medicinal product cannot supply enough orphan medicinal product.
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Other
Regulatory Requirements
Once
a NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates
the post-approval marketing and promotion of therapeutic products, including standards and regulations for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving
the internet.
Biologics
may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some
of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes
or facilities, require submission and FDA approval of a new BLA or BLA supplement, before the change can be implemented. A BLA
supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses
the same procedures and actions in reviewing BLA supplements as it does in reviewing BLAs. We cannot be certain that the FDA or
any other regulatory agency will grant approval for our product candidates for any other indications or any other product candidate
for any indication on a timely basis, if at all.
Adverse
event reporting and submission of periodic reports is required following FDA approval of a BLA. The FDA also may require post-marketing
testing, known as Phase 4 testing, risk evaluation and mitigation strategies, and surveillance to monitor the effects of
an approved product or place conditions on an approval that could restrict the distribution or use of the product. In addition,
quality control as well as product manufacturing, packaging, and labeling procedures must continue to conform to cGMPs after approval.
Manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by the FDA during which the agency inspects manufacturing facilities
to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production
and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product
recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously
unrecognized problems are subsequently discovered.
Healthcare
Reform in the United States
In
the United States, there have been, and continue to be, a number of legislative and regulatory changes and proposed changes to
the healthcare system that could affect the future results of pharmaceutical manufactures’ operations. In particular, there
have been and continue to be a number of initiatives at the federal and state levels that seek to reduce healthcare costs. Most
recently, the Patient Protection and Affordable Care Act, or PPACA, was enacted in March 2010, which includes measures to significantly
change the way healthcare is financed by both governmental and private insurers. Among the provisions of the PPACA of greatest
importance to the pharmaceutical and biotechnology industry are the following:
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an
annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned
among these entities according to their market share in certain government healthcare programs;
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implementation
of the federal physician payment transparency requirements, sometimes referred to as the “Physician Payments Sunshine Act”;
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a
licensure framework for follow-on biologic products;
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a
new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research;
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establishment
of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services, or CMS, to test innovative payment
and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending;
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an
increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of
the average manufacturer price for most branded and generic drugs, respectively and capped the total rebate amount for innovator
drugs at 100% of the Average Manufacturer Price, or AMP;
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a
new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs
and biologics, including our product candidates, that are inhaled, infused, instilled, implanted or injected;
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extension
of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed
care organizations;
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expansion
of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional
individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty
level, thereby potentially increasing manufacturers’ Medicaid rebate liability;
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a
new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70% commencing January
1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage
gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; and
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expansion
of the entities eligible for discounts under the Public Health program.
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Some
of the provisions of the PPACA have yet to be implemented, and there have been legal and political challenges to certain aspects
of the PPACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent,
or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal
and replace all or part of the PPACA. While Congress has not passed repeal legislation, two bills affecting the implementation
of certain taxes under the PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision repealing,
effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail
to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.”
Additionally, on January 22, 2018, Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the
implementation of certain PPACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored
insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise
tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the PPACA,
effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut
hole”. More recently, in July 2018, CMS published a final rule permitting further collections and payments to and from certain
PPACA qualified health plans and health insurance issuers under the PPACA risk adjustment program in response to the outcome of
federal district court litigation regarding the method CMS uses to determine this risk adjustment. Congress may consider other
legislation to repeal or replace elements of the PPACA.
Many
of the details regarding the implementation of the PPACA are yet to be determined, and at this time, the full effect that the
PPACA would have on a pharmaceutical manufacturer remains unclear. In particular, there is uncertainty surrounding the applicability
of the biosimilars provisions under the PPACA. The FDA has issued several guidance documents, and withdrew others, but no implementing
regulations on biosimilars have been adopted. A number of biosimilar applications have been approved over the past few years.
The regulations that are ultimately promulgated and their implementation are likely to have considerable impact on the way pharmaceutical
manufacturers conduct their business and may require changes to current strategies. A biosimilar is a biological product that
is highly similar to an approved drug notwithstanding minor differences in clinically inactive components, and for which there
are no clinically meaningful differences between the biological product and the approved drug in terms of the safety, purity,
and potency of the product.
Additionally,
there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising
cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and
enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for
products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price
control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example,
measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to
negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump
administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional
proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize
manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers.
HHS has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing
others under its existing authority. Although a number of these, and other potential, proposals will require authorization through
additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to
seek new legislative and or administrative measures to control drug costs. At the state level, legislatures have become increasingly
aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure
and transparency measures, and to encourage importation from other countries and bulk purchasing. Legally mandated price controls
on payment amounts by third-party payors or other restrictions could harm a pharmaceutical manufacturer’s business, results
of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly
using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription
drug and other healthcare programs. This could reduce ultimate demand for certain products or put pressure product pricing, which
could negatively affect a pharmaceutical manufacturer’s business, results of operations, financial condition and prospects.
Further,
on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (“Right
to Try Act”) was signed into law. The law, among other things, provides a federal framework for certain patients to access
certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation
for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without
obtaining FDA permission under an FDA expanded access program.
In
addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and
state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and biologics and the reform
of the Medicare and Medicaid programs. While no one cannot predict the full outcome of any such legislation, it may result in
decreased reimbursement for drugs and biologics, which may further exacerbate industry-wide pressure to reduce prescription drug
prices. This could harm a pharmaceutical manufacturer’s ability to generate revenue. Increases in importation or re-importation
of pharmaceutical products from foreign countries into the United States could put competitive pressure on a pharmaceutical manufacturer’s
ability to profitably price products, which, in turn, could adversely affect business, results of operations, financial condition
and prospects. A pharmaceutical manufacturer might elect not to seek approval for or market products in foreign jurisdictions
in order to minimize the risk of re-importation, which could also reduce the revenue generated from product sales. It is also
possible that other legislative proposals having similar effects will be adopted.
Furthermore,
regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time
and can be affected by many factors, such as the emergence of new information, including on other products, changing policies
and agency funding, staffing and leadership. No one can be sure whether future changes to the regulatory environment will be favorable
or unfavorable to business prospects. For example, average review times at the FDA for marketing approval applications can be
affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.
Regulation
in the European Union
The
EU, for example, there is a centralized approval procedure that authorizes marketing of a product in all countries of the EU,
which includes most major countries in Europe. If this procedure is not used, approval in one country of the European Union can
be used to obtain approval in another country of the EU under two simplified application processes, the mutual recognition procedure
or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval
through any of the European registration procedures, pricing and reimbursement approvals are also required in most countries.
Other
Regulations
We
are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances and biological
materials. We may incur significant costs to comply with such laws and regulations now or in the future.
Reimbursement
Obtaining
coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly
process that can require the provision of supporting scientific, clinical and cost effectiveness data for the use of drug or biologic
products to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products,
and coverage may be more limited than the purposes for which the product is approved by the FDA or similar regulatory authorities
outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid
for in all cases or at a rate that covers operating costs, including research, development, intellectual property, manufacture,
sale and distribution expenses. Reimbursement rates may vary according to the use of the product and the clinical setting in which
it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments
for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and by any future relaxation of laws that presently restrict imports of product from countries where
they may be sold at lower prices than in the U.S.
There
is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Third-party payors
often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, but also have their
own methods and approval process from Medicare coverage and reimbursement determinations. It is difficult to predict what third
party payors will decide with respect to coverage and reimbursement for new drug and biologic product candidates. An inability
to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products
could have a material adverse effect on a pharmaceutical manufacturer’s operating results, ability to raise capital needed
to commercialize products and overall financial condition.
Reimbursement
may impact the demand for, and/or the price of, any product which obtains marketing approval. Even if coverage is obtained for
a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments
that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their
prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications.
Patients are unlikely to use products unless coverage is provided and reimbursement is adequate to cover all or a significant
portion of the cost of the products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Coverage
decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost
therapeutic alternatives are already available or subsequently become available.
The
U.S. government, state legislatures and foreign governmental entities have shown significant interest in implementing cost containment
programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and
coverage and requirements for substitution of generic products for branded prescription drugs. Adoption of government controls
and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit
our products from coverage and limit payments for pharmaceuticals.
In
addition, it is expected that the increased emphasis on managed care and cost containment measures in the United States by third-party
payors and government authorities will continue and place further pressure on pharmaceutical pricing and coverage. Coverage policies
and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for
one or more drug products that gain regulatory approval, less favorable coverage policies and reimbursement rates may be implemented
in the future.
Employees
As
of June 30, 2019, CBM has zero employees and three consultants.
CBM’s
corporate headquarters are located in Kirkland, Washington.
Legal
Proceedings
CBM
is not currently a party to any legal proceedings. From time to time, CBM may be involved in legal proceedings or subject to claims
incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact
on CBM because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that
favorable outcomes will be obtained.
Dividends
CBM
has never paid or declared any cash dividends on its common stock, and CBM does not anticipate paying any cash dividends on its
common stock prior to the acquisition.
SPHERIX
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included
elsewhere in this proxy statement. The following discussion includes certain forward-looking statements. For a discussion of important
factors which could cause actual results to differ materially from the results referred to in the forward-looking statements,
see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.
Overview
We
are a technology development company committed to the fostering of innovative ideas. 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. Such monetization included, but was 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, commercializing the IP,
or through the settlement and litigation of patents.
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 technology development and monetizing related intellectual property.
Since
March 1, 2013, the Company has received limited funds from its IP monetization. In addition to our patent monetization efforts,
since the fourth quarter of 2017, we have been transitioning to a technology development company. The Company made no investments
in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter
of 2017, and with its agreement with DatChat, Inc. (“DatChat”) in March 2018 (which was subsequently terminated in
August 2018).
Pursuant
to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of CBM BioPharma, Inc.
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.
In
October 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with CBM BioPharma, Inc.
(“CBM”), a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of
capital stock of CBM will be converted into the right to receive an aggregate of 3,529,411 shares of the Company’s common
stock with CBM continuing as the surviving corporation in the merger.
On
February 15, 2019, Hoth announced the pricing of 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 addition,
Hoth granted the underwriters a 30-day option to purchase up to an additional 187,500 shares of common stock at the initial public
offering price, less the underwriting discount, to cover over-allotments, if any.
Hoth’s
common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”.
The IPO closed on February 20, 2019. As of the date of this report, the Company and its affiliates own approximately 19% of Hoth.
On
May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an Agreement and Plan of Merger
dated October 10, 2018 (the “CBM Merger Agreement”) and entered into the Asset Agreement with CBM, whereby the Company
purchased CBM’s Purchased Assets, including, among other things, a license agreement relating to certain technologies in
the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL) and pancreatic cancer, and contracts with a chief
scientist and an advisory board (the “Purchase” or “Asset Acquisition”).
As consideration for the Purchase, the
Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A)
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 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) the Cash Consideration Amount. 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
sale by Spherix of common stock, Series L convertible preferred stock or any other equity or equity-linked financing of Spherix
to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000 (a “Qualified
Financing”) 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.
Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate the CBM Merger Agreement,
including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived that certain termination
fee due to CBM pursuant to the CBM Merger Agreement.
Additionally, at or prior to the Closing,
the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement, pursuant to which the Company shall deposit with
the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall
be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment
for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement.
Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires
shall be released from the Escrow Account and disbursed to CBM.
The obligations of the Company and CBM
to consummate the transaction are subject to: (a) all necessary consents and approvals being obtained by any Governmental Authority
or any third parties, (b) the absence of any law being enacted, issued, promulgated, enforced or entered, or any order by a Governmental
Authority which makes the transaction illegal, (c) no pending action being brought by a third-party non-affiliate to enjoin or
restrict the transaction; and (d) the Company holding a special meeting of its stockholders to approve, among other things, the
issuance of the Stock Consideration, and (e) 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 Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM
since the date of the Asset Agreement.
The Asset Agreement 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
are not satisfied or waived by December 31, 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 Asset Agreement), (iii) by written notice by the Company
or CBM if a Governmental Authority has issued an order or taken action restraining, enjoining or prohibiting the transactions contemplated
by the Asset Agreement (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 Asset Agreement), (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 has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, (vi)
by written notice by the Buyer if there shall have been a Material Adverse Effect on the Company following the date of the Asset
Agreement, or (vii) by written notice by the Company or CBM in the event that the Company’s stockholders did not approve
the issuance of the Stock Consideration at a special meeting of the Company.
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 our common stock, including prices per share of our common stock, reflect the Reverse Stock Split.
Results
of Operations
Three
months ended March 31, 2019 compared to three months ended March 31, 2018
During
the three months ended March 31, 2019 and 2018, we incurred a loss from operations of approximately $0.7 million and $1.6 million,
respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.3 decrease in amortization of patent
portfolio, $0.2 million decrease in professional fees, $0.1 million decrease in acquisition costs and $0.2 million decrease in
compensation and related expenses.
During
the three months ended March 31, 2019, other expenses was approximately $0.4 million as compared to approximately $91,000 of other
income for the comparable prior period. The increase of other expenses was primarily attributed to a $0.5 million decrease
in change in fair value of warrant liabilities and investments recorded at fair value.
Fiscal
Year Ended December 31, 2018 Compared to Fiscal Year Ended December 31, 2017
For
the year ended December 31, 2018 and 2017, revenue was approximately $28,000 and $1.2 million, respectively. The $28,000 for the
year ended December 31, 2018 is a settlement from monetization pursuant to agreement with Equitable. The $1.2 million for the
year ended December 31, 2017 primarily 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 or the other patents in its portfolio in the future.
For
the year ended December 31, 2018 and 2017, we incurred a loss from operations of $6.9 million and $3.8 million, respectively.
The increase in net loss was primarily attributed to $2.2 million increase in impairment of intangible assets, $1.2 million decrease
in revenue, $0.5 million increase in professional fees and $0.1 million increase in acquisition costs related to the DatChat Merger,
and was partially offset by $1.0 million decrease in compensation and related expenses.
For
the year ended December 31, 2018 and 2017, other income was approximately $8.6 million and $0.5 million, respectively. The increase
in other income was primarily attributed to $7.8 million increase in fair value of our investment in Hoth and $0.9 million increase
in change in fair value of warrant liabilities, and was partially offset by $0.6 million decrease in other income.
Liquidity
and Capital Resources
We
continue to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing
related) revenue. While we continue to implement our business strategy, we intend to finance our activities through:
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managing
current cash and cash equivalents on hand from our past debt and 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 its patent portfolios, license fees and new business ventures.
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Our
ultimate success is dependent on our ability to obtain additional financing and generate sufficient cash flow to meet our obligations
on a timely basis. Our 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. Our working
capital amounted to approximately $0.9 million at March 31, 2019 and approximately $1.8 million at December 31, 2018. Absent generation
of sufficient revenue from the execution of our long-term business plan, we will need to obtain additional debt or equity financing,
especially if we experience downturns in our business that are more severe or longer than anticipated, or if we experience significant
increases in expense levels resulting from being a publicly-traded company or operations. If we attempt to obtain additional
debt or equity financing, we 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
our ability to continue as a going concern within one year from the date of this filing. The consolidated financial statements
have been prepared assuming that we 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.
Cash
Flows from Operating Activities
For
the three months ended March 31, 2019 and 2018, net cash used in operations was approximately $0.9 million and $1.1 million, respectively.
The cash used in operating activities for the three months ended March 31, 2019 primarily resulted from a net loss of $1.1 million,
and partially offset by change in fair value of investment of $0.5 million. The cash used in operating activities for the three
months ended March 31, 2018 primarily resulted from a net loss of $1.5 million, and partially offset by amortization expenses
of $0.3 million.
For
the year ended December 31, 2018 and 2017, net cash used in operations was $2.7 million and $3.3 million, respectively. The
cash used in operating activities for the year ended December 31, 2018 primarily resulted from $8.2 million change in fair value
of our investment in Hoth and $0.7 million change in fair value of warrant liabilities, and partially offset by a net income of
$1.7 million, impairment of goodwill and intangible assets of $2.2 million and amortization of patent portfolio expenses of $1.4
million. The cash used in operating activities for the year ended December 31, 2017 primarily resulted from a net loss of $3.3
million.
Cash
Flows from Investing Activities
For
the three months ended March 31, 2019 and 2018, net cash provided by investing activities was approximately $1.3 million and net
cash used in investing activities was approximately $1.8 million, respectively. The cash provided by investing activities primarily
resulted from our sale of marketable securities for the three months ended March 31, 2019 of $4.4 million, partially offset by
our purchase of marketable securities of $2.8 million. The cash used in investing activities primarily resulted from our purchase
of marketable securities for the three months ended March 31, 2018 of $5.3 million, partially offset by our sale of marketable
securities of $3.6 million.
For
the year ended December 31, 2018, net cash used in investing activities was approximately $0.2 million. The cash used in investing
activities primarily resulted from our purchase of marketable securities for the year ended December 31, 2018 of $14.3 million,
purchase of investment at fair value of $0.9 million, and was partially offset by our sale of marketable securities of $15.1 million.
For the year ended December 31, 2017, net cash provided by investing activities was approximately $1.3 million. The cash provided
by investing activities primarily resulted from our sale of marketable securities for the year ended December 31, 2017 of $14.2
million, partially offset by our investment in Hoth for $0.7 million and by our purchase of marketable securities of $12.3 million.
Cash
Flows from Financing Activities
Cash
provided by financing activities for the three months ended March 31, 2019 was $0. Cash provided by financing activities for the
three months ended March 31, 2018 was approximately $2.7 million, which related to issuance of common stock.
Net
cash provided by financing activities for the year ended December 31, 2018 was approximately $2.7 million, which related to issuance
of 522,876 shares of its common stock. Net cash flows provided by financing activities during the year ended December 31, 2017
was $2.1 million, which related to the net proceeds from an underwritten public offering of 294,118 shares of our common stock.
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 $1.8 million at December 31, 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.
In
connection with the consummation of the initial public offering of Hoth, the Company entered into a lock-up agreement with
Hoth pursuant to which the Company has agreed not to sell any shares of Hoth common stock or common stock equivalents beneficially
owned or acquired by Spherix (the “Spherix Securities”) until February 20, 2022, which is the 36 month anniversary
of the consummation of Hoth’s initial public offering, provided, however (i) Spherix may offer, sell, contract to sell,
hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an aggregate
of 10% of the initially issued Spherix Securities, provided further that the recipients of the Spherix Securities shall not be
permitted to resell such Spherix Securities until six months after the date of the Initial Public Offering, (ii) beginning 12
months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge,
dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially
issued Spherix Securities, (iii) beginning 24 months after the date of Hoth’s initial public offering, Spherix may offer,
sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly,
up to an additional 10% of the initially issued Spherix Securities and (iv) beginning 36 months after the date of the Hoth initial
public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or
otherwise dispose of, directly or indirectly, the Spherix Securities without any restrictions.
Contractual
Obligations
None.
THE
SPHERIX SPECIAL MEETING
Date,
Time and Place
These
proxy materials are delivered in connection with the solicitation by Spherix’s board of directors of proxies to be voted
at the Spherix Special Meeting, which is to be held on Thursday, September 5, 2019, beginning at 12:00 p.m., Eastern time, via
live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19SM.
Purpose
of the Spherix Special Meeting
At
the Spherix Special Meeting, Spherix stockholders will be asked to consider and vote on proposals to:
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authorize,
for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our
common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement,
dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement,
dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common
stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred
Stock);
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amend
Spherix’s Certificate of Incorporation to decrease the number of authorized shares of Spherix common stock from 100,000,000
to 99,000,000; and
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approve
the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes
at the time of the Special Meeting to approve the proposals described above.
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Spherix
Record Date; Stock Entitled to Vote
Pursuant
to its amended and restated bylaws, the board of directors has fixed the close of business on July 22, 2019 as the “record
date” for determination of stockholders entitled to notice and to vote at the Special Meeting and any adjournment or postponements
thereof. Holders of Spherix common stock, Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock are
entitled to vote at the Special Meeting. As of the record date there were 2,354,421 shares of Spherix common stock outstanding,
4,725 shares of Series D Convertible Preferred Stock outstanding and shares of 834 Series D-1 Convertible Preferred Stock outstanding.
Each
share of Spherix common stock is entitled to one vote on each matter properly brought before the Special Meeting. The outstanding
Series D Preferred Stock and Series D-1 Preferred Stock are entitled to the following number of votes subject to the beneficial
ownership limitations described below:
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Series
D Preferred Stock – 0.1238 votes per preferred share; and
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Series
D-1 Preferred Stock – 01238 votes per preferred share.
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Beneficial
ownership limitations on Spherix preferred stock prevents the conversion or voting of such preferred stock if the number of shares
of common stock to be issued pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of
common stock or other voting stock owned by such holder at such time, the number of shares of common stock which would result
in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act, as amended,
and the rules thereunder) more than:
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4.99%
of all the common stock outstanding at such time, in the case of Series D Preferred Stock; and
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9.99%
of all the common stock outstanding at such time, in the case of Series D-1 Preferred Stock.
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The
list of all stockholders of record on the record date will be available at the Special Meeting and at Spherix’s executive
offices at One Rockefeller Plaza, 11
th
Floor, New York, New York 10020, (212) 745-1374, for the ten (10) days
preceding the Special Meeting.
Quorum
At
the Spherix Special Meeting, the presence in person or by proxy of the holders of shares of common stock representing a majority
of the votes which could be cast by the holders of all outstanding shares of common stock and preferred stock entitled to vote
at the meeting constitutes a quorum at such Special Meeting under the Delaware General Corporate Law (the “DGCL”).
Votes
Required for Approval
Proposal
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Vote Required
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Broker
Discretionary
Vote Allowed
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Authorize,
for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of
our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement,
dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase
Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance
of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained
in such Series L Preferred Stock)
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A
majority of the votes cast
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No
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Approval
of the amendment to Spherix’s certificate of incorporation to decrease the authorized common stock from 100,000,000 to 99,000,000
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A
majority of the shares entitled to vote
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Yes
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Adjournment
of the Special Meeting
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A
majority of the votes cast
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Yes
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Voting
by Spherix Directors and Executive Officers
On
the Record Date, directors and executive officers of Spherix and their affiliates owned and were entitled to vote 40,755
shares of Spherix common stock, or approximately 1.73% of the total voting power of the shares of Spherix common stock outstanding
on that date. Spherix currently expects that its directors and executive officers will vote “FOR” the proposal to
authorize the issuance of shares of Spherix common stock, vote “FOR” the proposal to amend the Spherix Certificate
of Incorporation to decrease the number of authorized shares of Spherix common stock, and vote “FOR” the proposal
to approve the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient
votes at the time of the meeting to approve the proposals mentioned above.
Voting
by Holders of Record
If
you own shares of Spherix common stock in your own name, you are an “owner of record.” This means that you may use
the enclosed proxy card to tell the persons named as proxies how to vote your shares of Spherix common stock. If you fail to vote,
the proxies cannot vote your shares of Spherix common stock at the Spherix Special Meeting. If you are an owner of record then
you have three voting options:
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Internet
.
You can vote over the Internet by accessing the website at
www.proxyvote.com
and following the instructions on the
website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card.
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Telephone
.
If you hold shares directly in your own name and are the holder record, you can vote by telephone by calling the toll-free number
1-800-690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the
control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a
day. If, however, you hold the shares through a broker (“street name”) and not in your own name, then follow the specific
instructions included in your proxy materials, including the specific phone number to use to vote your shares by phone.
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Mail
.
You can vote by mail by simply completing, signing, dating and mailing your proxy card in the postage-paid envelope included with
this proxy statement.
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Spherix
requests that Spherix stockholders complete and sign the accompanying proxy and return it to Spherix as soon as possible in the
enclosed postage–paid envelope. When the accompanying proxy is returned properly executed, the shares of Spherix stock represented
by it will be voted at the Spherix Special Meeting in accordance with the instructions contained on the proxy card.
The Internet and telephone proxy procedures
are designed to authenticate stockholders identities, to allow stockholders to give their proxy voting instructions and to confirm
that these instructions have been properly recorded. Votes directed by the Internet or telephone through such a program must be
received by 11:59 p.m., Eastern time, on September 4, 2019.
Your
vote is very important. Whether or not you plan to attend the Special Meeting, please promptly complete and return your proxy
card in the enclosed envelope, or authorize the individuals named on your proxy card to vote your shares by calling the toll–free
telephone number or by using the Internet as described in the instructions included with your proxy card.
Voting of Shares Held in Street Name
If you are a Spherix stockholder, your
broker or other nominee does not have authority to vote on non-routine matters. The proposal to approve the issuance of Spherix’s
common stock pursuant to Nasdaq Listing Rule 5635(a) (the “share issuance proposal”) is considered a non-routine matter,
and your broker or other nominee will vote your shares held by it in “street name” with respect to this proposal only
if you provide instructions to it on how to vote. You should follow the directions your broker or other nominee provides.
The proposal to amend the Company’s
certificate of incorporation to decrease the Company’s authorized common stock and the adjournment proposal are routine matters
on which brokers or other nominees have the authority to vote.
Effects
of Abstentions and Failures to Vote
If you are a Spherix stockholder and you abstain or fail to respond with a vote or fail to instruct your
broker or other nominee how to vote on the approval of the proposed charter amendment to decrease the authorized common stock of
Spherix, this will have the effect of voting against the proposal; provided, that if your shares are held in street name, your
broker or nominee may vote on your behalf. If you are a Spherix stockholder and you abstain or fail to respond with a vote or fail
to instruct your broker or other nominee how to vote on the share issuance proposal and the adjournment proposal, it will have
no effect on such proposal. Abstentions and broker non-votes will be counted as present for the purpose of determining a quorum.
Stockholder’s
Vote
You
may change your vote at any time before your proxy is voted at the Special Meeting. You may do this in one of three ways:
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by
sending a notice of revocation to the corporate secretary, dated as of a later date than the date of the proxy and received prior
to the Special Meeting;
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by
sending a completed proxy card bearing a later date than your original proxy card and mailing it so that it is received prior
to the Special Meeting; or
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by
logging on to the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically
or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so and following the instructions
on the proxy card.
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Your
attendance alone will not revoke any proxy.
Written
notices of revocation and other communications about revoking Spherix proxies should be addressed to:
Spherix
Incorporated
One
Rockefeller Plaza, 11
th
Floor
New
York, NY 10020
Attention:
Corporate Secretary
If
your shares are held in street name, you should follow the instructions of your broker regarding the revocation of proxies.
Once
voting on a particular matter is completed at the Spherix Special Meeting, a Spherix stockholder will not be able to revoke its
proxy or change its vote as to that matter.
All
shares represented by valid proxies that Spherix receives through this solicitation and that are not revoked will be voted in
accordance with the instructions on the proxy card. If you do not indicate how your shares should be voted on a matter, the shares
represented by your proxy will be voted as the Board recommends on each of the enumerated proposals and with regard to any other
matters that may be properly presented at the Special Meeting and all matters incident to the conduct of the meeting.
Solicitation
of Proxies
Spherix
will bear the entire cost of soliciting proxies from its stockholders. In addition to the solicitation of proxies by mail, Spherix
will request that banks, brokers and other record holders send proxies and proxy material to the beneficial owners of Spherix
common stock and secure their voting instructions, if necessary. Spherix will reimburse the record holders for their reasonable
expenses in taking those actions.
Spherix
has also made arrangements with Mackenzie Parnters to assist in soliciting proxies and in communicating with stockholders and
has agreed to pay them a fee of approximately $6,500 plus reasonable expenses for these services. If necessary, Spherix
may also use several of its regular employees, who will not be specially compensated, to solicit proxies from Spherix stockholders,
either personally or by telephone, the Internet, facsimile or letter.
Stockholders
Sharing an Address
Spherix
may send a single set of stockholder documents to any household at which two or more stockholders reside. This process is called
“householding.” This reduces the volume of duplicate information received at your household and helps us to reduce
costs. Your materials may be householded based on your prior express or implied consent. If your materials have been householded
and you wish to receive separate copies of these documents, or if you are receiving duplicate copies of these documents and wish
to have the information householded, you may write or call Spherix at the following address or phone number: One Rockefeller Plaza,
11
th
Floor, New York, NY 10020, (212) 745-1372.
Other
Matters to Come Before the Meeting
The
Spherix board of directors is not aware of any business to be acted upon at the Special Meeting other than the proposal discussed
herein. Pursuant to the DGCL and the Spherix amended and restated bylaws, only the business described in the notice of the Special
Meeting of the stockholders will be conducted at such meeting.
Part
I. Financial Information
Item
1. Financial Statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
($
in thousands except share and per share amounts)
(Unaudited)
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
446
|
|
|
$
|
22
|
|
Marketable securities
|
|
|
1,256
|
|
|
|
2,700
|
|
Prepaid expenses and other assets
|
|
|
165
|
|
|
|
183
|
|
Total current assets
|
|
|
1,867
|
|
|
|
2,905
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
1
|
|
Investments
|
|
|
10,070
|
|
|
|
10,345
|
|
Total assets
|
|
$
|
11,937
|
|
|
$
|
13,251
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
122
|
|
|
$
|
132
|
|
Accrued salaries and benefits
|
|
|
648
|
|
|
|
732
|
|
Warrant liabilities
|
|
|
135
|
|
|
|
82
|
|
Payable to DatChat
|
|
|
77
|
|
|
|
207
|
|
Total current liabilities
|
|
|
982
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
982
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series D: 4,725 shares issued and outstanding at March 31, 2019 and December 31, 2018; liquidation value of 0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Series D-1: 834 shares issued and outstanding at March 31, 2019 and December 31, 2018; liquidation value of 0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Common stock, 0.0001 par value, 100,000,000 shares authorized; 2,010,028 shares issued at March 31, 2019 and December 31, 2018; 2,010,025 shares outstanding at March 31, 2019 and December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
152,451
|
|
|
|
152,445
|
|
Treasury stock, at cost, 3 shares at March 31, 2019 and December 31, 2018
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Accumulated deficit
|
|
|
(141,232
|
)
|
|
|
(140,083
|
)
|
Total stockholders’ equity
|
|
|
10,955
|
|
|
|
12,098
|
|
Total liabilities and stockholders’ equity
|
|
$
|
11,937
|
|
|
$
|
13,251
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
($
in thousands except share and per share amounts)
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating costs and expenses
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
$
|
—
|
|
|
$
|
338
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
181
|
|
|
|
355
|
|
Professional fees
|
|
|
399
|
|
|
|
597
|
|
Acquisition costs
|
|
|
11
|
|
|
|
145
|
|
Other selling, general and administrative
|
|
|
122
|
|
|
|
142
|
|
Total operating expenses
|
|
|
713
|
|
|
|
1,577
|
|
Loss from operations
|
|
|
(713
|
)
|
|
|
(1,577
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
Other income (expenses) , net
|
|
|
92
|
|
|
|
(97
|
)
|
Change in fair value of investment
|
|
|
(475
|
)
|
|
|
—
|
|
Change in fair value of warrant liabilities
|
|
|
(53
|
)
|
|
|
188
|
|
Total other (expenses) income
|
|
|
(436
|
)
|
|
|
91
|
|
Net loss
|
|
$
|
(1,149
|
)
|
|
$
|
(1,486
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
2,010,025
|
|
|
|
1,549,481
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
($
in thousands except share and per share amounts)
(Unaudited)
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-in
|
|
|
Treasury
Stock
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31,
2018
|
|
|
2,010,025
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,445
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(140,083
|
)
|
|
$
|
12,098
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,149
|
)
|
|
|
(1,149
|
)
|
Balance
at March 31, 2019
|
|
|
2,010,025
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,451
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(141,232
|
)
|
|
$
|
10,955
|
|
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-in
|
|
|
Treasury
Stock
|
|
|
Accumulated
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31,
2017
|
|
|
1,467,052
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
149,425
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(145,055
|
)
|
|
$
|
4,106
|
|
Issuance common
stock in equity raise, net of offering cost
|
|
|
522,876
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,700
|
|
Stock-based
compensation
|
|
|
14,118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
188
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
188
|
|
Cumulative
effect of the changes related to adoption of ASC 606
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,486
|
)
|
|
|
(1,486
|
)
|
Balance
at March 31, 2018
|
|
|
2,004,046
|
|
|
$
|
—
|
|
|
|
5,559
|
|
|
$
|
—
|
|
|
$
|
152,313
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(143,296
|
)
|
|
$
|
8,753
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
($
in thousands)
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,149
|
)
|
|
$
|
(1,486
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
—
|
|
|
|
338
|
|
Change in fair value of investment
|
|
|
475
|
|
|
|
—
|
|
Change in fair value of warrant liabilities
|
|
|
53
|
|
|
|
(188
|
)
|
Stock-based compensation
|
|
|
6
|
|
|
|
188
|
|
Depreciation expense
|
|
|
—
|
|
|
|
1
|
|
Realized loss on marketable securities
|
|
|
73
|
|
|
|
99
|
|
Unrealized loss (gain) on marketable securities
|
|
|
(148
|
)
|
|
|
58
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
18
|
|
|
|
(78
|
)
|
Accounts payable and accrued expenses
|
|
|
(10
|
)
|
|
|
110
|
|
Accrued salaries and benefits
|
|
|
(84
|
)
|
|
|
(70
|
)
|
Payable to DatChat
|
|
|
(130
|
)
|
|
|
—
|
|
Accrued lease liabilities
|
|
|
—
|
|
|
|
(48
|
)
|
Net cash used in operating activities
|
|
|
(896
|
)
|
|
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(2,845
|
)
|
|
|
(5,340
|
)
|
Sale of marketable securities
|
|
|
4,365
|
|
|
|
3,607
|
|
Purchase of investments at fair value
|
|
|
(200
|
)
|
|
|
—
|
|
Purchase of property and equipment
|
|
|
—
|
|
|
|
(25
|
)
|
Net cash provided by (used in) investing activities
|
|
|
1,320
|
|
|
|
(1,758
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash from issuance common stock, net of offering cost
|
|
|
—
|
|
|
|
2,700
|
|
Net cash provided by financing activities
|
|
|
—
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
424
|
|
|
|
(134
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
22
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
446
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
See
accompanying notes to condensed consolidated financial statements
SPHERIX
INCORPORATED AND SUBSIDIARIES
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,
would enter into an escrow agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the
parties, 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),
to be held in a segregated 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 $5.15 reported on The Nasdaq Capital Market as of March 31, 2019.
Note
6. Fair Value of Financial Assets and Liabilities
Financial
instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management
believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial
assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when
measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
The
following table presents the Company’s assets and liabilities that are measured at fair value at March 31, 2019 and December
31, 2018 ($ 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 the Asset Agreement with CBM,
whereby the Company agreed to purchase CBM’s Purchased Assets (as defined in the Asset Agreement), 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”).
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) the Stock Consideration comprised of (A) 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 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) the Cash Consideration Amount. 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 Asset Agreement) after the date of the closing of the Asset Acquisition. 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.
Upon the execution of the Asset Agreement,
the Company and CBM agreed to terminate the CBM Merger Agreement, including all schedules and exhibits thereto, and all ancillary
agreements contemplated thereby, and waived that certain termination fee due to CBM pursuant to the CBM Merger Agreement.
Additionally, at or prior to the closing
of the Asset Acquisition (the “Closing”), the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement,
pursuant to which the Company shall deposit with the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed
by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall
serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor
or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims
after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.
The obligations of the Company and CBM
to consummate the transaction are subject to: (i) (a) all necessary consents and approvals being obtained by relevant governmental
authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any law being enacted, issued, promulgated,
enforced or entered, or any order by a any federal or national, state or provincial, municipal or local government, governmental
authority, regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality,
political subdivision, court, tribunal, official arbitrator or arbitral body in each case whether domestic or foreign (each a “Governmental
Authority”) which makes the transaction illegal, and (c) no pending action being brought by a third-party non-affiliate to
enjoin or restrict the transaction, (d) the Company holding a special meeting of its stockholders to approve, among other things,
the issuance of the Stock Consideration, and (e) 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 Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM
since the date of the Asset Agreement. “Material Adverse Effect” means, with respect to CBM, any event, fact, condition,
change, circumstance, occurrence or effect, which, either individually or in the aggregate with all other events, facts, conditions,
changes, circumstances, occurrences or effects, (a) has had, or would reasonably be expected to have, a material adverse effect
on the business, operations, properties, prospects, assets, liabilities, value, condition (financial or otherwise), licenses or
results of operations of CBM’s business or the Purchased Assets or the Assumed Liabilities or (b) does or would reasonably
be expected to materially impair or delay the ability of CBM to perform its obligations under the Asset Agreement and the ancillary
documents or to consummate the transactions contemplated hereby and thereby;
provided
,
however
, that a
Material Adverse Effect will not include any adverse effect or change resulting from any change, circumstance or effect relating
to (A) the economy in general, (B) securities markets, regulatory or political conditions in the United States (including terrorism
or the escalation of any war, whether declared or undeclared or other hostilities), (C) changes in applicable laws or generally
accepted accounting principles or the application or interpretation thereof or (D) a natural disaster (provided, that in the cases
of clauses (A) through (D), CBM’s business is not disproportionately affected by such event as compared to other similar
companies and businesses in similar industries and geographic regions as CBM’s business).
The Asset Agreement 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
are not satisfied or waived by December 31, 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 Asset Agreement), (iii) by written notice by the Company
or CBM if a Governmental Authority (as defined in the Asset Agreement) has issued an Order (as defined in the Asset Agreement)
or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (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
Asset Agreement), (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, (vi) by written notice by the Buyer
if there shall have been a Material Adverse Effect on the Company following the date of the Asset Agreement, or (vii) by written
notice by the Company or CBM in the event that the Company’s stockholders did not approve the issuance of the Stock Consideration
at a special meeting of the Company.
Spherix
Incorporated
Index
to Financial Statements Page
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of
Spherix
Incorporated
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Spherix Incorporated and Subsidiaries (the “Company”)
as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ equity and
cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United
States of America.
Explanatory
Paragraph – Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully
described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise
additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit
s
. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
Marcum
llp
Marcum
llp
We
have served as the Company’s auditor since 2013
.
New
York, NY
March
11, 2019
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Balance Sheets
($
in thousands except per share amounts)
|
|
December 31
2018
|
|
|
December 31
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
|
$
|
197
|
|
Marketable securities
|
|
|
2,700
|
|
|
|
3,998
|
|
Prepaid expenses and other assets
|
|
|
188
|
|
|
|
150
|
|
Total current assets
|
|
|
2,905
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1
|
|
|
|
3
|
|
Patent portfolios and patent rights, net
|
|
|
—
|
|
|
|
3,578
|
|
Investments
|
|
|
10,345
|
|
|
|
1,020
|
|
Deposit
|
|
|
—
|
|
|
|
26
|
|
Total assets
|
|
$
|
13,251
|
|
|
$
|
8,972
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
132
|
|
|
$
|
56
|
|
Accrued salaries and benefits
|
|
|
732
|
|
|
|
695
|
|
Warrant liabilities
|
|
|
82
|
|
|
|
822
|
|
Payable to DatChat
|
|
|
207
|
|
|
|
—
|
|
Short-term deferred revenue
|
|
|
—
|
|
|
|
957
|
|
Short-term lease liabilities
|
|
|
—
|
|
|
|
48
|
|
Total current liabilities
|
|
|
1,153
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
—
|
|
|
|
2,288
|
|
Total liabilities
|
|
|
1,153
|
|
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series D: 4,725 shares issued and outstanding at December 31, 2018 and 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Series D-1: 834 shares issued and outstanding at December 31, 2018 and 2017; liquidation value of $0.0001 per share
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 100,000,000 shares authorized; 1,467,055 and 2,010,028 shares issued at December 31, 2018 and 2017, respectively; 1,467,052 and 2,010,025 shares outstanding at December 31, 2018 and 2017, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
152,445
|
|
|
|
149,425
|
|
Treasury stock, at cost, 12 shares at December 31, 2018 and 2017
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Accumulated deficit
|
|
|
(140,083
|
)
|
|
|
(145,055
|
)
|
Total stockholders’ equity
|
|
|
12,098
|
|
|
|
4,106
|
|
Total liabilities and stockholders’ equity
|
|
$
|
13,251
|
|
|
$
|
8,972
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Operations
($
in thousands)
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
28
|
|
|
$
|
1,236
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
1,405
|
|
|
|
1,373
|
|
Compensation and related expenses (including stock-based compensation)
|
|
|
1,012
|
|
|
|
2,059
|
|
Professional fees
|
|
|
1,569
|
|
|
|
1,038
|
|
Impairment of intangible assets
|
|
|
2,173
|
|
|
|
—
|
|
Rent
|
|
|
81
|
|
|
|
92
|
|
Depreciation expense
|
|
|
38
|
|
|
|
3
|
|
Acquisition costs
|
|
|
230
|
|
|
|
—
|
|
Other selling, general and administrative
|
|
|
394
|
|
|
|
493
|
|
Total operating expenses
|
|
|
6,902
|
|
|
|
5,058
|
|
Loss from operations
|
|
|
(6,874
|
)
|
|
|
(3,822
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
Other (expenses) income, net
|
|
|
(333
|
)
|
|
|
291
|
|
Change in fair value of investment
|
|
|
8,194
|
|
|
|
345
|
|
Change in fair value of warrant liabilities
|
|
|
740
|
|
|
|
(120
|
)
|
Total other income
|
|
|
8,601
|
|
|
|
516
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
Diluted
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,896,057
|
|
|
|
1,303,209
|
|
Diluted
|
|
|
1,896,982
|
|
|
|
1,303,209
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at January 1, 2017
|
|
|
1,163,293
|
|
|
$
|
-
|
|
|
|
5,559
|
|
|
$
|
-
|
|
|
$
|
147,331
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(141,749
|
)
|
|
$
|
5,318
|
|
Repurchase of restricted stock units to pay for employee withholding taxes
|
|
|
8,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24
|
)
|
Issuance common stock in equity raise, net of offering cost
|
|
|
294,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,095
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,095
|
|
Stock-based compensation
|
|
|
1,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,306
|
)
|
|
|
(3,306
|
)
|
Balance at December 31, 2017
|
|
|
1,467,052
|
|
|
$
|
-
|
|
|
|
5,559
|
|
|
$
|
-
|
|
|
$
|
149,425
|
|
|
|
3
|
|
|
$
|
(264
|
)
|
|
$
|
(145,055
|
)
|
|
$
|
4,106
|
|
Issuance common stock in equity raise, net of offering cost
|
|
|
522,876
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,700
|
|
Stock-based compensation
|
|
|
20,097
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
320
|
|
Cumulative effect of the changes related to adoption of ASC 606
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,727
|
|
|
|
1,727
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
($
in thousands)
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patent portfolio
|
|
|
1,405
|
|
|
|
1,373
|
|
Change in fair value of investment
|
|
|
(8,194
|
)
|
|
|
(345
|
)
|
Change in fair value of warrant liabilities
|
|
|
(740
|
)
|
|
|
120
|
|
Stock-based compensation
|
|
|
320
|
|
|
|
23
|
|
Depreciation expense
|
|
|
38
|
|
|
|
3
|
|
Realized loss on marketable securities
|
|
|
400
|
|
|
|
328
|
|
Unrealized loss (gain) on marketable securities
|
|
|
117
|
|
|
|
(240
|
)
|
Impairment of intangible assets
|
|
|
2,173
|
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(38
|
)
|
|
|
(15
|
)
|
Deposit
|
|
|
—
|
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
74
|
|
|
|
(67
|
)
|
Accrued salaries and benefits
|
|
|
37
|
|
|
|
249
|
|
Deferred revenue
|
|
|
—
|
|
|
|
(1,216
|
)
|
Accrued lease liabilities
|
|
|
(48
|
)
|
|
|
(179
|
)
|
Net cash used in operating activities
|
|
|
(2,729
|
)
|
|
|
(3,272
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(14,280
|
)
|
|
|
(12,274
|
)
|
Sale of marketable securities
|
|
|
15,061
|
|
|
|
14,213
|
|
Purchase of investments
|
|
|
(922
|
)
|
|
|
(675
|
)
|
Release of deposit
|
|
|
26
|
|
|
|
—
|
|
Purchase of property and equipment
|
|
|
(36
|
)
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
|
|
(151
|
)
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash from issuance common stock, net of offering cost
|
|
|
2,700
|
|
|
|
2,095
|
|
Repurchase of restricted stock units to pay for employee withholding taxes
|
|
|
—
|
|
|
|
(24
|
)
|
Net cash provided by financing activities
|
|
|
2,700
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(180
|
)
|
|
|
63
|
|
Cash and cash equivalents, beginning of period
|
|
|
197
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
17
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
—
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Investment in DatChat
|
|
$
|
207
|
|
|
$
|
—
|
|
Investment in Mellow Scooters
|
|
$
|
2
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Note
1. Organization and Description of Business
Organization
and Description of Business
Spherix
Incorporated (the “Company”) is technology development 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. Such monetization included, but was 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,
commercializing the IP, or through the settlement and litigation of patents.
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 our patent monetization efforts,
since the fourth quarter of 2017, we have been transitioning to focus our 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 acquisition with CBM BioPharma, Inc. (“CBM”). The
Company made no investments in new IP during 2017 and 2018.
Hoth
Therapeutics is a development stage biopharmaceutical company focused on proprietary therapeutics for patients suffering from
indications such as atopic dermatitis, also known as eczema. To treat indications impacting more than 32 million Americans, Hoth
is working to develop and commercialize the BioLexa Platform, a proprietary, patented, drug compound platform developed at the
University of Cincinnati. The BioLexa Platform has achieved positive results at preclinical studies conducted at the University
of Miami.
In
addition to Hoth, the Company is proposing a merger with CBM. In October 2018, the Company entered into an agreement and plan
of merger, subject to shareholder approval, with CBM, a pharmaceutical company focusing on the development of cancer treatments,
pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 3,529,412 shares
of the Company’s common stock with CBM continuing as the surviving corporation in the merger.
In
the field of blockchain research, the Company previously 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.
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. Pursuant to the Securities Purchase Agreement, the Company applied a total of approximately
$293,000 prior advances towards its investment in DatChat (“Prior Incurred Amount”), including $272,000 of compensation
related costs and $21,000 professional fees. The Company also recorded approximately $207,000 compensation expenses payable to
DatChat (“Payable to DatChat”) in addition to the $293,000 advances to reach the $500,000 maximum.
The
breakdown of investment at Datchat as December 31, 2018 are as follows ($ in thousands):
|
|
DatChat
Investment as of
December 31, 2018
|
|
Cash Payment
|
|
$
|
500
|
|
Prior Incurred Amount Made to DatChat
|
|
|
293
|
|
Payable to DatChat
|
|
|
207
|
|
Total
|
|
|
1,000
|
|
On
November 23, 2018, the Company entered into a Security Purchase Agreement with Mellow Scooters, LLC (“Mellow Scooters”),
a leading-edge company that enables anyone to own and operate a personal fleet of electric scooters and dockless bicycles to generate
revenue. Mellow Scooters agreed to sell 250 Units to the Company, representing 25% of its issued and outstanding limited liability
company membership interests for a subscription price of $106,000. The $106,000 consisted of (a) a cash payment of $30,000, (b)
the forgiveness of prior advances made to Mellow Scooters by the Company, and (c) an obligation of the Company to pay certain
specific future expenses of Mellow Scooters (amounts in clauses (b) and (c) not to exceed a maximum of $76,000 in the aggregate).
As of December 31, 2018, the Company has applied a total of approximately $74,000 prior advances towards its investment in Mellow
Scooters, including $71,000 compensation related cost and $3,500 professional fees. The Company also recorded $2,000 payable for
professional fees of Mellow Scooter in addition to the $74,000 advances to reach the $76,000 maximum.
The
breakdown of investment at Mellow Scooters as December 31, 2018 are as follows ($ in thousands):
|
|
Mellow Scooters
Investment as of
December 31, 2018
|
|
Cash Payment
|
|
$
|
30
|
|
Prior Incurred Amount Made to Mellow Scooters
|
|
|
74
|
|
Payable to Mellow Scooters
|
|
|
2
|
|
Total
|
|
|
106
|
|
CBM
Acquisition
On
October 10, 2018, the Company entered into an Agreement and Plan of Acquisition (the “Acquisition Agreement”), by
and among the Company, Spherix Delaware Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Spherix
(“Acquisition Sub”), CBM, and Scott Wilfong in the Acquisition Agreement as the representative from and after the
effective time of the Acquisition (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 Acquisition Agreement and subject to the terms and conditions set forth therein, at the closing of the transactions contemplated
by the Acquisition Agreement, Acquisition Sub will merge with and into CBM (the “Acquisition”), with CBM continuing
as the surviving corporation in the Acquisition. Subject to the terms and conditions set forth in the Acquisition Agreement, at
the Effective Time: (i) all shares of capital stock of CBM (the “CBM Stock”) issued and outstanding immediately prior
to the Effective Time will be converted into the right to receive the Stockholder Acquisition Consideration (as defined below).
As
consideration for the Acquisition, the Company shall deliver to the stockholders of CBM an aggregate of 3,529,412 shares
of Company common stock (the “Stockholder Acquisition Consideration”), with each share of Company common stock valued
at $1.10 per share. At or prior to the Closing, the Company, the Stockholder Representative, and a mutually agreeable escrow agent,
shall enter into an Escrow Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the
parties, pursuant to which the Company shall deposit with the escrow agent 352,942 shares from the Stockholder Acquisition
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), to be held in a segregated escrow account and disbursed by the escrow agent. Each stockholder of CBM Stockholder at
the Effective Time (each, a “CBM Stockholder”) shall receive its pro rata share of the Stockholder Acquisition 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 shall serve as a security
for, and a source of payment of, the indemnity rights of the Company indemnified parties.
In the event that this Agreement is terminated
by the Company pursuant to certain sections of the Agreement, then the Company may be 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.
Note
2. Going Concern 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 $1.8 million at December 31, 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.
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 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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology
Corp. (“Nuta”), Spherix Portfolio Acquisition II, Inc. (“SPAII”), Guidance IP, LLC (“Guidance”),
Directional IP, LLC (“Directional”), Spherix Management Services, LLC (“SMS”), Spherix Delaware Acquisition
Sub Inc. (“Acquisition Sub”), Spherix Acquisition Subsidiary, Inc (“SMSI”) 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.
Segments
The
Company operates in one operating segment and, accordingly, no segment disclosures have been presented herein.
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers
all highly liquid investments with original maturities of three months or less when purchased to be cash 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.
Fair
Value of Financial Instruments
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
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
Property
and Equipment
Property
and equipment are stated at cost and include office furniture and equipment and computer hardware and software. The Company computes
depreciation and amortization under the straight-line method and typically over the following estimated useful lives of the related
assets:
|
●
|
Office
furniture and equipment
|
3
to 10 years
|
|
|
|
|
|
●
|
Computer
hardware and software
|
3
to 5 years
|
Impairment
of Long-lived Assets (Including Patent Assets)
The
Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets
whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance
occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will
determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows.
If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing
the fair value of the asset or asset group to its carrying value. The Company performed impairment tests for intangible assets
at December 31, 2018 and 2017. An impairment charge of approximately $2.2 million and nil was taken during the year ended December
31, 2018 and 2017, respectively.
Convertible
Preferred Stock
The
Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement
of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured
at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either
within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s
control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
The
Company accounts for convertible preferred stock with detachable warrants in accordance with ASC 470:
Debt
and allocated
proceeds received to the convertible preferred stock and detachable warrants based on relative fair values. The Company evaluated
the classification of its convertible preferred stock and warrants and determined that such instruments meet the criteria for
equity classification. The Company recorded the related issuance costs and value ascribed to the warrants as a reduction of the
convertible preferred stock.
The
Company has also evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815,
Derivatives
and Hedging
, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred
stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued
with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option
has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized
the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon
conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per
share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock (see Note
8). As the convertible preferred stock may be converted immediately, the Company recognized the BCF as a deemed dividend in the
consolidated statements of operations.
Treasury
Stock
The
Company accounts for the treasury stock using the cost method, which treats it as a reduction in stockholders’ equity.
Revenue
Recognition
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 Asset Agreement 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:
|
●
|
Variable
consideration
|
|
|
|
|
●
|
Constraining
estimates of variable consideration
|
|
|
|
|
●
|
The
existence of a significant financing component in the contract
|
|
|
|
|
●
|
Noncash
consideration
|
|
|
|
|
●
|
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 December 31, 2018, there were no contract assets or liabilities associated with the Company’s settlement and licensing
agreements. During the year ended December 31, 2018, the Company only generated $28 thousand of revenue.
Inventor
Royalties
Inventor
royalties are expensed in the period that the related revenues are recognized. In certain instances, pursuant to the terms of
the underlying inventor agreements, costs paid by the Company to acquire patents are recoverable from future net revenues. Patent
acquisition costs that are recoverable from future net revenues are amortized over the estimated economic useful life of the related
patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization
expense.
Accounting
for Warrants
The
Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance
with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts
that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance
of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative
liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The
Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that such
instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at
their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement
at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change
in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of the warrants has
been estimated using a Black-Scholes valuation model (see Note 8).
Stock-based
Compensation
The
Company accounts for share-based payment awards exchanged for employee services at the estimated grant date fair value of the
award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no
less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant.
These options generally vest over a one- to five-year period.
The
fair value of stock options granted was determined on the grant date using assumptions for risk free interest rate, the expected
term, expected volatility, and expected dividend yield. The risk-free interest rate is based on U.S. Treasury zero-coupon yield
curve over the expected term of the option. The expected term assumption is determined using the weighted average midpoint between
vest and expiration for all individuals within the grant. The expected volatility assumption is computed based on the standard
deviation of the Company’s underlying stock price’s daily logarithmic returns.
The
Company’s model includes a zero dividend yield assumption, as the Company has not historically paid nor does it anticipate
paying dividends on its common stock. The Company’s model does not include a discount for post-vesting restrictions, as
the Company has not issued awards with such restrictions.
The
periodic expense is then determined based on the valuation of the options, and at that time an estimated forfeiture rate is used
to reduce the expense recorded. In addition to the assumptions used in the Black-Scholes option-pricing model, the amount
of stock option expense the Company recognizes in the consolidated statements of operations includes an estimate of stock option
forfeitures. Under ASC 718, the Company is required to estimate the level of forfeitures expected to occur and record compensation
expense only for those awards that ultimately expect will vest. The Company recognizes the effect of forfeitures in compensation
expense when the forfeitures occur.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes”
(“ASC 740”). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable
for the current year and (ii) deferred tax consequences of temporary difference resulting from matters that have been recognized
in the Company’s financial statement or tax returns. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities measured at the enacted tax rates in effect for the year
in which these items are expected to reverse. Deferred tax assets are reduced by valuation allowances if, based on the consideration
of all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Net income (loss) attributable to common stockholders includes the effect of the deemed
capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial
conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of
the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes
the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation
of net loss per share if their effect would be anti-dilutive.
The
following table summarizes the earnings (loss) per share calculation (in thousands, except per share amount):
|
|
For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic earnings per share
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Net income (loss) available
to common stockholders
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
1,896,057
|
|
|
|
1,303,209
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
0.91
|
|
|
|
(2.54
|
)
|
Net income (loss) available
to common stockholders
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
Net income (loss) available
to common stockholders
|
|
$
|
1,727
|
|
|
$
|
(3,306
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding,
|
|
|
1,896,057
|
|
|
|
1,303,209
|
|
Weighted average effect of dilutive securities
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
688
|
|
|
|
-
|
|
Weighted average diluted shares outstanding
|
|
|
1,896,745
|
|
|
|
1,303,209
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
0.91
|
|
|
$
|
(2.54
|
)
|
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share
at December 31, 2018 and 2017 are as follows:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible preferred stock
|
|
|
688
|
|
|
|
688
|
|
Warrants to purchase common stock
|
|
|
294,072
|
|
|
|
294,072
|
|
Options to purchase common stock
|
|
|
124,381
|
|
|
|
77,332
|
|
Total
|
|
|
419,141
|
|
|
|
372,092
|
|
Recently
Issued Accounting Standards
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 adopted ASU 2017-11 on January 1, 2019 and the adoption did not have an impact on the Company’s 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
consolidated financial statements
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification,
amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the
amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must
be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending
balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on
November 5, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements. The Company
anticipates its first presentation of changes in stockholders’ equity will be included in its Form 10-Q for the quarter
ended March 31, 2019.
In
August 2018, the FASB issued 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 consolidated Financial Statements.
Recently
Adopted Accounting Standards
In
May 2014, the FASB issued 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. Absent the adoption of ASC 606, the Company would have recorded approximately $1.0
million of deferred revenue for the year ended December 31, 2018.
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. Investments in Marketable Securities
The
realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the year ended December
31, 2018 and 2017, which are recorded as a component of other(expenses) income on the consolidated statements of operations, are
as follows ($ in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Realized gain (loss)
|
|
$
|
(400
|
)
|
|
$
|
(328
|
)
|
Unrealized gain (loss)
|
|
|
(117
|
)
|
|
|
240
|
|
Dividend income
|
|
|
158
|
|
|
|
111
|
|
|
|
$
|
(359
|
)
|
|
$
|
23
|
|
Note
5. 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
1,700,000 shares of common stock (which has been retroactively restated to reflect the 1-for-4 reverse stock split effected by
Hoth on December 6, 2018), par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. Hoth is a
development stage biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such
as atopic dermatitis, also known as eczema. Hoth’s primary asset is a sublicense agreement with Chelexa Biosciences, Inc.
(“Chelexa”) pursuant to which Chelexa has granted Hoth an exclusive sublicense to use its BioLexa products for the
treatment of eczema.
On
February 15, 2019, Hoth announced the pricing of 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.
Hoth’s
common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”.
The IPO closed on February 20, 2019.
The
Company records this investment at fair value and records any change in fair value in the statements of operations (see Note
8).
Note
6. Investment in DatChat, Inc.
On
August 8, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
DatChat. Under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat. See
Note 1 for further explanation.
As
described in Note 3 to these consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 concerning
recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made
an accounting policy election to adopt an adjusted cost method measurement alternative for its investment in DatChat.
Note
7. Intangible Assets
Patent
Portfolio
The
Company’s intangible assets with finite lives consist of its patents and patent rights. For all periods presented, all of
the Company’s identifiable intangible assets were subject to amortization. The net carrying amounts related to acquired
intangible assets are as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2016, net
|
|
$
|
4,951
|
|
|
|
3.65
|
|
Amortization expenses
|
|
|
(1,373
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2017, net
|
|
$
|
3,578
|
|
|
|
2.67
|
|
Amortization expenses
|
|
|
(1,405
|
)
|
|
|
|
|
Impairment loss
|
|
|
(2,173
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at December 31, 2018, net
|
|
$
|
—
|
|
|
|
—
|
|
The
Company reviews its patent portfolio for impairment as a single asset group whenever events or changes in circumstances indicate
that the carrying value may not be recoverable.
The
Company reviews its patent portfolio for impairment as a single asset group whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. During the year ended 2018, the Company determined that certain events occurred
that were indicators of a potential impairment. In accordance with ASC 360-10, the Company first estimated the future undiscounted
cash flows anticipated to be generated by the patent portfolio based on the Company’s current usage and future plans for
the patent portfolio over its remaining weighted average useful life. Given the short-term nature of the patents the undiscounted
cash flows approximate discounted cash flows. The analysis concluded that the carrying amount of the patent portfolio was not
recoverable. The Company recorded a $2.2 million impairment charge against its patent portfolio to write off the entire remaining
balance of the intangible assets during the year ended December 31, 2018.
There
was no impairment charges recorded during the year ended December 31, 2017.
Note
8. Fair Value of Financial Assets and Liabilities
Financial
instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management
believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial
assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when
measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
following table presents the Company’s assets and liabilities that are measured at fair value at December 31, 2018 and 2017
($ in thousands):
|
|
Fair value measured at December 31, 2018
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Total at December 31,
|
|
|
active markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - exchange traded funds
|
|
$
|
2,700
|
|
|
$
|
2,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments at Hoth
|
|
$
|
9,214
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
|
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
|
|
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
3,998
|
|
|
$
|
976
|
|
|
$
|
3,022
|
|
|
$
|
—
|
|
Investments at Hoth
|
|
$
|
1,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
822
|
|
There
were no transfers between Level 1, 2 or 3 for the years ended December 31, 2018 and 2017.
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 Valuation Techniques – Assets
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets that are
measured at fair value on a recurring basis:
|
|
Fair Value of Level 3 investment
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
1,020
|
|
|
$
|
—
|
|
Fair value of Hoth upon issuance
|
|
|
—
|
|
|
|
675
|
|
Change in fair value of Hoth
|
|
|
8,194
|
|
|
|
345
|
|
Ending balance
|
|
$
|
9,214
|
|
|
$
|
1,020
|
|
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 December 31, 2018 and 2017 is as follows:
Date of valuation
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.83
|
%
|
Expected volatility
|
|
|
75.00
|
%
|
|
|
75.00
|
%
|
Contractual life (in years)
|
|
|
0.17
|
|
|
|
1.50
|
|
The
investment in Hoth Therapeutics as of December 31, 2018 was valued using the PWERM (Probability Weighted Expected Return Method).
Under this method, an analysis of future values of a company is performed for several likely scenarios. These scenarios included
both a high and low range of values that were provided to Hoth Therapeutics by their investment bankers. The price per share was
$6.50 and $5.50, respectively. The value is then discounted to the present using a risk-adjusted discount rate of 15%. The present
values of the common stock under each scenario are then weighted based on the probability of each scenario occurring to determine
the value of the investment. A 10% probability was placed on the high end and a 90% probability was placed on the low end.
The
investment in Hoth Therapeutics as of December 31, 2017 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 December 31, 2017.
Intangible
Assets Measured at Fair Value on a Non-Recurring Basis using Level 3 Inputs
The
following tables presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis
(in thousands):
|
|
Net Carrying
|
|
|
Impairment Charges -
|
|
|
|
Value at
|
|
|
Year Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
Patent Portfolios, Net
|
|
$
|
—
|
|
|
$
|
2,173
|
|
|
|
Net Carrying
|
|
|
Impairment Charges -
|
|
|
|
Value at
|
|
|
Year Ended
|
|
|
|
December 31,
2017
|
|
|
December
31,
2017
|
|
Assets
|
|
|
|
|
|
|
Patent Portfolios, Net
|
|
$
|
3,578
|
|
|
$
|
—
|
|
The
Company’s intangible assets are measured at fair value on a non-recurring basis using Level 3 inputs. See Note 7 for valuation
techniques for patents.
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.
A
summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the
Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and
as of December 31, 2018 and December 31, 2017 is as follows:
Date of valuation
|
|
December 31,
2018
|
|
December 31,
2017
|
Risk-free interest rate
|
|
2.48%
|
|
1.98%
|
Expected volatility
|
|
72.03% - 103.13%
|
|
100.00% - 132.21%
|
Contractual life (in years)
|
|
1.94 - 2.06
|
|
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 that
are measured at fair value on a recurring basis for the year ended December 31, 2018 and 2017 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
822
|
|
|
$
|
702
|
|
Fair value adjustment of warrant liabilities
|
|
|
(740
|
)
|
|
|
120
|
|
Ending balance
|
|
$
|
82
|
|
|
$
|
822
|
|
Note
9. RPX License Agreement
Under
an agreement between the Company and RPX Corporation (“RPX”), the Company granted RPX the ability to grant to VTech
Telecommunications Ltd. (“VTech”) a sublicense for a fully paid portfolio license in exchange for an additional $20,000
in cash consideration during the year ended December 31, 2017.
The
license granted under the terms of the RPX License described herein does not extend to entities/companies that are not clients
of RPX and provide chipsets or other hardware to current RPX clients.
During
the year ended December 31, 2018 and 2017, the Company recorded approximately $0 and $957,000, respectively, in revenue related
to the amortization of the license. 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.
Note
10. Stockholders’ Equity and Convertible Preferred Stock
Common
Stock
2017
activity
On
July 18, 2017, the Company entered into an underwriting agreement with Laidlaw & Company (UK) Ltd. with respect to the issuance
and sale of an aggregate of 294,118 shares of the Company’s common stock, par value $0.0001 per share, in a firm commitment
underwritten public offering which closed on July 24, 2017. Each share was sold for a price of $8.50 for aggregate gross proceeds
of $2.5 million, with net proceeds of approximately $2.1 million, after deducting the underwriting discounts and commissions (equivalent
to 8% of gross proceeds) and estimated offering expenses.
2018
activity
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 522,876 shares of its common stock in the offering at a purchase price of $5.74 per share.
The
Company had designated separate series of its capital stock as of December 31, 2018 and December 31, 2017 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Conversion
|
|
|
2018
|
|
|
2017
|
|
|
Par Value
|
|
|
Ratio
|
Series “A”
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.0001
|
|
|
N/A
|
Series “C”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.01:1
|
Series “D”
|
|
|
4,725
|
|
|
|
4,725
|
|
|
|
0.0001
|
|
|
0.12:1
|
Series “D-1”
|
|
|
834
|
|
|
|
834
|
|
|
|
0.0001
|
|
|
0.12:1
|
Series “F-1”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.01:1
|
Series “H”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.12:1
|
Series “I”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.25:1
|
Series “J”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.01:1
|
Series “K”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
61.92:1
|
Series
D Convertible Preferred Stock
In connection with the acquisition of
North South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred
Stock (“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock
has a stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of common stock. Upon the liquidation,
dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled to receive,
for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or
(ii) the amount the holder would receive as a holder of common stock on an “as converted” basis. Each holder
of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled to such
number of votes equal to the number of shares of common stock such shares of Series D Preferred Stock are convertible into at
such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and
the conversion limitations described below. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the
event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.
As
of December 31, 2018 and 2017, 4,725 shares of Series D Preferred Stock remained issued and outstanding.
Series
D-1 Convertible Preferred Stock
The Company’s Series D-1 Convertible
Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1
Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share of common stock. Upon
the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be
entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of
(i) the stated value or (ii) the amount the holder would receive as a holder of common stock on an “as converted”
basis. Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders
and shall be entitled to such number of votes equal to the number of shares of common stock such shares of Series D-1 Preferred
Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate
of Designation. 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 Acquisition could exchange such shares for shares of the Company’s Series D-1 Preferred
Stock on a one-for-one basis.
As
of December 31, 2018 and 2017, 834 shares of Series D-1 Preferred Stock remained issued and outstanding.
Warrants
A
summary of warrant activity for year ended December 31, 2018 and 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
Total
|
|
|
Remaining
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
|
(in
years)
|
|
Outstanding as of December 31, 2017
|
|
|
294,072
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2.92
|
|
Outstanding as of December 31, 2018
|
|
|
294,072
|
|
|
$
|
38.15
|
|
|
|
|
|
|
|
1.92
|
|
Stock
Options
2012
Plan
At
December 31, 2018, there were 123 shares available for grant under the 2012 Equity Incentive Plan.
2013
Plan
At
December 31, 2018, there were 24,840 fully vested options outstanding and 9,835 shares available for grant under the Spherix Incorporated
2013 Equity Incentive Plan.
2014
Plan and Option Grants
At
December 31, 2018, there were 99,541 options outstanding and 2,627 shares available for grant under the Spherix Incorporated 2014
Equity Incentive Plan.
The
fair value of options granted in 2018 and 2017 was estimated using the following assumptions:
|
|
For the Years Ended
December 31,
|
|
|
2018
|
|
2017
|
|
Exercise price
|
|
$4.42-$6.38
|
|
$
|
4.34
|
|
Expected stock price volatility
|
|
131.8%-132.2%
|
|
|
134.5
|
%
|
Risk-free rate of interest
|
|
2.65%-2.80%
|
|
|
1.4
|
%
|
Term (years)
|
|
9.13-9.34
|
|
|
4.42
|
|
A
summary of option activity under the Company’s employee stock option plan for year ended December 31, 2018 and 2017 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
Total
|
|
|
Remaining Contractual
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
76,650
|
|
|
$
|
332.31
|
|
|
$
|
6,008
|
|
|
|
3.2
|
|
Employee options granted
|
|
|
47,064
|
|
|
|
5.89
|
|
|
|
-
|
|
|
|
9.2
|
|
Outstanding as of December 31, 2018
|
|
|
123,714
|
|
|
$
|
208.07
|
|
|
$
|
-
|
|
|
|
4.9
|
|
Options vested and expected to vest
|
|
|
123,699
|
|
|
$
|
208.07
|
|
|
$
|
-
|
|
|
|
4.9
|
|
Options vested and exercisable
|
|
|
117,816
|
|
|
$
|
218.24
|
|
|
$
|
-
|
|
|
|
4.6
|
|
A
summary of options that the Company granted to non-employees for the year ended December 31, 2018 and 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
Total
|
|
|
Remaining Contractual
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
682
|
|
|
$
|
416.82
|
|
|
$
|
-
|
|
|
|
3.4
|
|
Outstanding as of December 31, 2018
|
|
|
682
|
|
|
$
|
416.82
|
|
|
$
|
-
|
|
|
|
2.4
|
|
Options vested and expected to vest
|
|
|
682
|
|
|
$
|
416.82
|
|
|
$
|
-
|
|
|
|
2.4
|
|
Options vested and exercisable
|
|
|
682
|
|
|
$
|
416.82
|
|
|
$
|
-
|
|
|
|
2.4
|
|
Stock-based
compensation associated with the amortization of stock option expense was $213,000 and $14,000 for the years ended December 31,
2018 and 2017, respectively.
Estimated
future stock-based compensation expense relating to unvested stock options is approximately $8,000. The weighted average remaining
contractual term of exercisable options is approximately 4.8 years at December 31, 2018.
Restricted
Stock Awards
2017
activity
On
October 11, 2017, the Company granted a consultant 1,177 shares of restricted common stock for consulting services. The restricted
stock award vested immediately. The grant date fair value of restricted stock award was $8,400.
2018
activity
During
2018 approximately 20,097 shares with a fair value of approximately $106,000 was granted. These restricted stock awards vested
immediately.
Restricted
Stock Units
On
March 14, 2017, 8,464 restricted stock units (“RSUs”) were delivered to Anthony Hayes. 5,479 shares of common stock
were withheld (at the closing price of the Company’s common stock on the NASDAQ Capital Market on March 14, 2017) to satisfy
the tax obligation relating to the vesting of the RSUs.
As
of December 31, 2018, the Company did not have unrecognized stock-based compensation expense related to restricted stock unit
awards.
Stock-based
Compensation Expense
Stock-based
compensation expense for the year ended December 31, 2018 and 2017 was comprised of the following ($ in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Employee restricted stock awards
|
|
$
|
107
|
|
|
$
|
—
|
|
Non-employee restricted stock awards
|
|
|
—
|
|
|
|
9
|
|
Employee stock option awards
|
|
|
213
|
|
|
|
14
|
|
Total compensation expense
|
|
$
|
320
|
|
|
$
|
23
|
|
Note
11. Commitments and Contingencies
Financing
of Directors’ and Officers’ Insurance
The
Company financed its Directors’ and Officers’ insurance policy for approximately $0.2 million. Payments are due monthly
and the policy is for 12 months. Finance charges for the 12-month period are nominal. As of December 31, 2018, the Company owed
approximately $0.1 million and such amounts were recorded in accrued expenses. The Company has made regular payments in accordance
with this insurance policy.
Legal
Proceedings
In
the ordinary course of business, the Company actively pursues legal remedies to enforce its intellectual property rights and to
stop unauthorized use of use technology. From time to time, the Company may be involved in various claims and counterclaims and
legal actions arising in the ordinary course of business. There were no pending material claims or legal matters as of the date
of this report other than the following matters:
International
License Exchange of America, LLC Litigations
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. Such case settled in November
of 2018 and the Company received its pro rata portion of the aggregate settlement amount of $200,000. A Notice of Voluntary
Dismissal was filed on November 15, 2018 and the Court closed the case.
|
Counterclaims
In
the ordinary course of business, we, or with our wholly-owned subsidiaries or monetization partners, will initiate litigation
against parties whom we believe have infringed on our intellectual property rights and technologies. The initiation of such litigation
exposes us to potential counterclaims initiated by the defendants. Currently, there are no counterclaims pending against us. In
the event such counterclaims are filed, we can provide no assurance that the outcome of these claims will not have a material
adverse effect on our financial position and results from operations.
Note
12. Income Taxes
The
income tax provision consists of the following ($ in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
(517
|
)
|
|
|
14,376
|
|
Decrease in valuation allowance
|
|
|
517
|
|
|
|
(14,376
|
)
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
(92
|
)
|
|
|
(1,416
|
)
|
(Decrease) Increase in valuation allowance
|
|
|
92
|
|
|
|
1,416
|
|
Change in valuation Allowance
|
|
|
610
|
|
|
|
(12,960
|
)
|
Income Tax Provision (Benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the years ended December
31, 2018 and 2017:
|
|
For the years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. Statutory Federal Rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Federal tax rate change
|
|
|
—
|
%
|
|
|
(456.08
|
)%
|
State Taxes, Net of Federal Tax Benefit
|
|
|
3.91
|
%
|
|
|
2.28
|
%
|
Other Permanent Differences
|
|
|
1.76
|
%
|
|
|
3.12
|
%
|
State rate change in effect
|
|
|
—
|
%
|
|
|
—
|
%
|
Fair Value of Warrants
|
|
|
8.99
|
%
|
|
|
(1.23
|
)%
|
Increase due to true up of State NOL
|
|
|
—
|
|
|
|
26.00
|
|
Decrease due to change in Federal NOL and other true ups
|
|
|
(0.36
|
)%
|
|
|
(0.12
|
)%
|
Change in Valuation Allowance
|
|
|
(35.30
|
)%
|
|
|
392.03
|
%
|
Income Tax Provision (Benefit)
|
|
|
0.0
|
|
|
|
0.0
|
|
At
December 31, 2018 and 2017, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences
attributable to the following ($ in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net-operating loss carryforward
|
|
$
|
12,163
|
|
|
$
|
9,608
|
|
Stock based compensation
|
|
|
5,444
|
|
|
|
5,368
|
|
Patent portfolio and other
|
|
|
11,201
|
|
|
|
11,317
|
|
Total Deferred Tax assets
|
|
|
28,808
|
|
|
|
26,293
|
|
Valuation allowance
|
|
|
(26,831
|
)
|
|
|
(26,220
|
)
|
Deferred Tax Asset, Net of valuation allowance
|
|
$
|
1,977
|
|
|
$
|
73
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Fair value adjustment of investment
|
|
|
(1,977
|
)
|
|
|
(73
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
On
December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among
other items, H.R.1 reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1,
2018. As a result, the Company revalued its net deferred tax asset at the new lower tax rate and has reduced the value of the
deferred tax asset before valuation allowance by $15.08 million.
Upon
completion of our 2018 U.S. income tax return in 2019 we may identify additional re-measurement adjustments to our recorded deferred
tax liabilities. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently
anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period
guidance outlined in Staff Accounting Bulletin No. 118
After
the enactment of the Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In our financial statements
for the period ended December 31, 2017, we calculated an estimate of the impact of the Act related to the remeasurement of our
net U.S. deferred tax asset due to the change in U.S. federal corporate income tax rate. The provisional amount recorded was deferred
tax expense of $12.960 million, but which was fully and equally offset by a deferred tax benefit related to a corresponding reduction
in our valuation allowance. The Company had previously recorded a valuation allowance against the deferred tax asset so this adjustment
had no impact on the financial statements for the period ended December 31, 2017. During the quarter ended December 31, 2018,
the completed the accounting for the income tax effects of the Act, which resulted in an in an immaterial change in the net deferred
tax asset, before valuation allowance, as of the enactment date.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The Company
has determined that, based on objective evidence currently available, it is more likely than not that, with the exception of an
Alternative Minimum Tax (AMT) carryforward, the deferred tax assets will not be realized in future periods. Accordingly, the Company
has provided a partial-valuation allowance for the deferred tax assets with the exception of the AMT credit carryforward at December
31, 2018. As of December 31, 2018, the change in valuation allowance is approximately $610 thousand.
Under
the Tax cuts and Jobs Act corporations are no longer subject to the Alternative Minimum Tax (AMT), effective for taxable years
beginning after Dec. 31, 2017. However, where a corporation has an AMT credit from a prior taxable year, the corporation will
continue to carry the credit forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017
but before 2022. Generally, 50 percent of the corporation’s AMT Credit carried forward to one of these years will be claimable
and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The
Company has an AMT credit carryforward of $40,842 as of December, 31, 2018. The Company will request the following refunds for
the tax years ended December 31, 2019 through December 31, 2021:
Tax Year Ended:
|
|
AMT Credit Refund Request
|
|
|
|
|
|
December 31, 2019
|
|
$
|
20,421
|
|
December 31, 2020
|
|
|
10,211
|
|
December 31, 2021
|
|
|
10,210
|
|
|
|
$
|
40,842
|
|
As
of December 31, 2018, the Company had federal and state net operating loss carryovers (“NOLs”) of approximately $52.53
million, which expire from 2019 through 2038. The NOL carryover may be subject to limitation under Internal Revenue Code
section 382, should there be a greater than 50% ownership change as determined under the regulations.
As
required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining
that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting
the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences
between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the
interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of
tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified
as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2018 and 2017,
no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years
ended December 31, 2018 and 2017. The Company does not expect any significant changes in its unrecognized tax benefits in the
next year. The Company files U.S. federal and state income tax returns. As of December 31, 2018, the Company’s U.S. and
state tax returns (California, Delaware, Maryland, New York, New York City, Virginia, Pennsylvania and Texas) remain subject to
examination by tax authorities beginning with the tax return filed for the year ended December 31, 2015, however, there were no
audits pending in any of the above-mentioned jurisdictions during 2018. The Company believes that its income tax positions would
be sustained upon an audit and does not anticipate any adjustments that would result in material changes to its consolidated financial
position.
Note
13. Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the consolidated financial statements are
issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the consolidated financial statements other than disclosed.
Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard
On
January 11, 2019, the Company received written notice (the “Notice”) from the Listing Qualifications Department (the
“Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that, based upon the Company’s non-compliance
with Nasdaq Listing Rule 5620(a), which requires an issuer to hold an annual meeting of shareholders no later than one year after
the end of the Company’s fiscal year-end (the “Annual Meeting Rule”), the Company would be required to submit
a plan to regain compliance with the Annual Meeting Rule for the Staff’s consideration by no later than February 25, 2019.
The Notice has no immediate impact on the Company’s listing or trading in the Company’s securities on Nasdaq.
The
Company has been provided an extension of up to 180 calendar days from the Company’s fiscal year end, through July 1, 2019,
to evidence compliance with the Annual Meeting Rule. As announced to the Company’s stockholders on a Current Report on
Form 8-K
filed on February 6, 2019, the Company has established April 15, 2019 as the date of the Company’s 2019 annual meeting
of stockholders.
ANNEX A
ASSET
PURCHASE AGREEMENT
by
and between
CBM
BIOPHARMA, INC.
as Seller
and
SPHERIX
INCORPORATED
as Buyer
Dated
as of May 15, 2019
ASSET
PURCHASE AGREEMENT
This
ASSET PURCHASE AGREEMENT
(this “
Agreement
”) is made and entered into as of May 15, 2019, by and
between
CBM BIOPHARMA, INC.
, a Delaware corporation (“
Seller
”), and
SPHERIX INCORPORATED
,
a Delaware corporation (“
Buyer
”).
RECITALS
WHEREAS
,
Seller is engaged in the business of licensing certain inventions, including, but not limited to, patents and other intellectual
property related to pioneering drug compounds that were developed at the University of Wake Forest and the University of Texas
at Austin, in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic
cancer (the “
Business
”);
WHEREAS
,
Seller desires to sell and cause to be transferred to Buyer, and Buyer desires to purchase and accept the transfer from Seller,
substantially all of Seller’s assets, properties and rights, subject to the terms and conditions set forth herein; and
WHEREAS
,
certain capitalized terms used herein are defined in
Annex I
.
NOW,
THEREFORE
, in consideration of the premises and the respective representations, warranties, covenants and agreements herein
contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
ARTICLE
I
PURCHASE AND SALE OF PURCHASED ASSETS
1.1.
Purchase and Sale of Purchased Assets.
Upon the terms and subject to the conditions set forth herein, and in reliance upon
the representations and warranties contained herein, at the Closing, Seller will sell, convey, assign, transfer and deliver to
Buyer, and Buyer will purchase and acquire from Seller, free and clear of any and all Liens, all of Seller’s rights, title
and interests in and to all of the assets, properties, contracts and rights of Seller (other than the Excluded Assets) (collectively,
the “
Purchased Assets
”), including the following to the extent they exist:
(a)
all rights of Seller in, to and under any Contract of any kind or character to which Seller is a party, or by which Seller or
any of the Purchased Assets may be bound or affected (other than the Excluded Contracts) (each, a “
Purchased Contract
”);
(b)
all “general intangibles” (as defined in the Uniform Commercial Code);
(c)
all rights, if any, to any Intellectual Property, including all Patents, Copyrights, Trade Secrets, inventions and processes,
Trademarks, trademarks, service marks, logos, brand names, assumed names, domain names, URLs, websites, software, technology rights
and licenses, and all registrations and applications therefor, together with the goodwill symbolized thereby;
(d)
all of the following which pertain to the Purchased Assets, Assumed Liabilities or the Business: books, records, manuals and other
materials, files, originals and copies of all Purchased Contracts, purchase orders, invoices, items of payment, tax receipts,
computer tapes, disks, other storage media and records, advertising matter, catalogues, price lists, correspondence, memoranda,
forecast, price lists, sales records, customer and client lists, customer relationship management data, vendor and supplier lists,
financial records, mailing lists, lists of customers and suppliers, distribution lists, photographs, sales and promotional materials
and records, purchasing materials and records, personnel records, credit records, quality control records and procedures, research
and development files, records, data, trademark files and disclosures, media materials and plates, sales order files and litigation
files (other than litigation files exclusively relating to Excluded Assets or Retained Liabilities);
(e)
all rights to indemnification, warranties, guarantees, claims, causes of action, choses in action, rights of recovery, rights
of setoff, rights of recoupment and other rights of any kind against suppliers, manufacturers, contractors or other third parties
relating to the Purchased Assets or the Assumed Liabilities; and
(f)
all goodwill associated with the Business or the Purchased Assets.
1.2.
Excluded Assets.
Notwithstanding anything to the contrary contained in
Section 1.1
, Seller shall retain all of its
right, title and interest in and to, and shall not sell, transfer, assign, convey or deliver to Buyer at the Closing, and the
Purchased Assets shall not include, the following (collectively, the “
Excluded Assets
”):
(a)
any cash or cash equivalents, including any marketable securities, of Seller;
(b)
any bank or brokerage accounts of Seller (the “
Retained Bank Account
”);
(c)
the Organizational Documents, qualification to conduct business as a foreign corporation, arrangements with registered agents
relating to foreign qualifications, taxpayer and other identification numbers, minute books, equity interests transfer books,
books and records relating to Taxes, and any other documents relating to the organization, maintenance and existence of Seller
as a corporation;
(d)
any rights of Seller under this Agreement or any Ancillary Document to which Seller is a party or any other agreement between
Seller and Buyer;
(e)
all rights of Seller under any Contract that is listed on
Schedule 1.2(e)
(collectively, the “
Excluded Contracts
”);
(f)
all Tax assets (including duty and Tax refunds and prepayments and Tax losses of Seller incurred prior to the Closing Date) of
Seller or any of its Affiliates;
(g)
all rights to any action, suit or claim of any nature available to or being pursued by Seller, whether arising by way of counterclaim
or otherwise that are unrelated to the Purchased Assets; and
(h)
any other assets, properties and rights used by Seller in its businesses other than the Business.
1.3.
Assumption of Assumed Liabilities.
On the terms and subject to the conditions contained in this Agreement, effective at the
Closing, Buyer will assume and thereafter pay, perform or otherwise discharge only the following Liabilities of Seller (collectively,
the “
Assumed Liabilities
”):
(a)
all obligations of Seller to be performed under the Purchased Contracts (excluding, for the avoidance of doubt, Excluded Contracts)
for periods after the Closing, but excluding any Liability, whether incurred or arising prior to, on or after the Closing Date,
in connection with any actual or alleged breach, default or other failure to perform under any Purchased Contract or violation
of Law, in any case, occurring or alleged to have occurred at or prior to the Closing;
(b)
all Liabilities and obligations to the extent arising from or related to the operation of the Business after the Closing (other
than in connection with the Purchased Contracts), but excluding any Liability, whether incurred or arising prior to, on or after
the Closing Date, in connection with any actual or alleged breach, default or other failure to perform under any Purchased Contract
or violation of Law occurring or alleged to have occurred at or prior to the Closing;
(c)
all liabilities and obligations of Buyer or its Affiliates relating to employee benefits, compensation or other arrangements with
respect to any Transferred Employee arising on or after the Closing but not including any bonus payments payable thereunder as
a result of the transactions contemplated hereunder (ie. change of control);
(d)
all liabilities and obligations for (i) Taxes relating to the Business, the Purchased Assets or the Assumed Liabilities for any
taxable period ending after the Closing Date and (ii) Taxes for which Buyer is liable pursuant to this Agreement;
(e)
all other liabilities and obligations arising out of or relating to Buyer's ownership or operation of the Business and the Purchased
Assets on or after the Closing;
(f)
all liabilities and obligations of Seller set forth on Section 1.3(f) of the Disclosure Schedules.
1.4.
Retained Liabilities.
Except for the Assumed Liabilities as provided in
Section 1.3
, Buyer shall not assume and shall
not be responsible for, any Liabilities of Seller (or any Affiliate or predecessor thereof), all of which Liabilities shall be
and remain the sole responsibility of Seller (or its Affiliate) (the “
Retained Liabilities
”), including
all of the following Liabilities:
(a)
any trade payables and other current liabilities and any Liabilities under any Purchased Contract for any period at or prior to
the Closing (regardless of any contrary provisions in any instrument of assumption or conveyance), including for such purposes
any Liabilities that arise as a result of the transactions contemplated hereunder, including bonus payments for a change of control;
(b)
any Liability, whether incurred or arising prior to, on or after the Closing Date, in connection with any actual or alleged breach,
default or other failure to perform under any Purchased Contract or violation of Law occurring or alleged to have occurred at
or prior to the Closing;
(c)
all Liabilities in respect of Actions of or involving third parties against Seller arising out of incidents or events occurring
at or prior to the Closing, including all workers compensation, general liability and other insurance claims with an incident
date on or prior to the Closing Date;
(d)
any Liability for any Indebtedness;
(e)
any labor or employment related Liabilities (including accrued vacation pay, and severance and other payments payable to Employees
in connection with termination of such employment and all bonuses or other payments payable to such Employees as a result of the
transactions contemplated hereunder), Action, judgments, damages, costs, expenses (including any Action for severance pay, accrued
vacation pay or wrongful discharge), grievances, unfair labor practices and violations of any applicable Law or Order by reason
of any act, omission or matter occurring at or prior to the Closing relating to any Employees or their respective Representatives;
(f)
any Liability with respect to Employees that do not become Transferred Employees at the Closing in accordance with
Section
6.7
;
(g)
any Liability with respect to self-insured retention, retrospective premiums and/or deductibles, if applicable, for claims arising
from or relating to the period at or prior to the Closing;
(h)
all Taxes now or hereafter owed by Seller, or attributable to the Business or the ownership, operation or use of the Purchased
Assets relating to any period up to and including the Closing Date, including liabilities and obligations for Transfer Taxes resulting
from the transactions contemplated by this Agreement;
(i)
any Liability imposed upon or incurred by Buyer or its Affiliates by operation of any applicable Law or Order which Liability,
if not for the operation of such Law or Order, would have been a Retained Liability;
(j)
any Liabilities of Seller under this Agreement or any Ancillary Document to which Seller is a party or any other agreement between
Seller and Buyer;
(k)
any Liability to the extent related to an Excluded Asset (including Excluded Contracts); and
(l)
any Liability relating to or arising from the Business for periods at or prior to the Closing.
1.5.
Consents Not Obtained.
In the event that Seller fails to obtain prior to the Closing (or otherwise fails to have in full force
and effect at the Closing) any consent (including any consent to an assignment of a Contract), Permit, waiver, authorization,
order or other approval required to consummate the transactions contemplated by this Agreement without breaching a Purchased Contract
or otherwise adversely affecting the ability of Buyer to operate the Business after the Closing or the rights of Buyer with respect
to the Purchased Assets, the Assumed Liabilities or otherwise under this Agreement (any of the foregoing, a “
Necessary
Consent
”), this Agreement shall not constitute an agreement to sell, convey, assign, transfer or deliver any interest
in any such instrument, Contract, Permit or other Purchased Asset for which a Necessary Consent is not obtained and in effect
as of the Closing, and Seller and Buyer shall, from and after the Closing, continue to use its commercially reasonable efforts
to obtain any such Necessary Consent for the benefit of Buyer under the terms and conditions substantially the same as those existing
under the applicable Purchased Asset as of the Closing. Once a Necessary Consent is obtained, the applicable Purchased Asset will
be deemed to have been automatically assigned and transferred to Buyer on the terms set forth in this Agreement, effective as
of the date of assignment. If any Necessary Consent is not obtained and in full force and effect as of the Closing and as a result
thereof, the assignment or transfer of a Purchased Asset is ineffective or the rights or obligations of Buyer with respect to
a Purchased Asset or Assumed Liability or Buyer’s ability to operate the Business after the Closing are otherwise adversely
affected, at Buyer’s request, Seller will enter into a mutually agreeable and reasonable arrangement with Buyer under which
(i) Buyer will obtain the benefits and assume, perform and/or promptly reimburse Seller for the obligations thereunder (to the
extent otherwise constituting Assumed Liabilities) in accordance with this Agreement, including subcontracting, sublicensing or
subleasing to Buyer, or (ii) Seller will enforce for the benefit, and at the direction, of Buyer any and all rights of Seller
thereunder, with Buyer assuming Seller’s obligations thereunder (to the extent otherwise constituting Assumed Liabilities).
ARTICLE
II
PURCHASE PRICE
2.1.
Purchase Price.
Subject to the Closing, in consideration of the sale, assignment, transfer and delivery to Buyer of the Purchased
Assets in accordance with and subject to the terms and conditions of this Agreement, at the Closing, Buyer shall:
(a)
assume the Assumed Liabilities in accordance with and subject to the terms and conditions of this Agreement;
(b)
pay to Seller an amount equal to Eight Million U.S. Dollars ($8,000,000) (the “
Purchase Price
”) consisting
of (i) an aggregate number of shares of common stock, par value $0.0001 per share, of Buyer (the “
Buyer Common Stock
”)
as shall be equal to Seven Million U.S. Dollars ($7,000,000) (the “
Stock Consideration
”) consisting
of (A) an aggregate number of shares of Buyer Common Stock equal to 9.9% of the issued and outstanding shares of Buyer Common
Stock (“
Common Stock
”) as of the Closing Date (the “
Common Stock Consideration
”),
and (B) such number of shares of Buyer Preferred Stock (the “
Preferred Stock Consideration
”) as shall
be equal to the Stock Consideration less the value of the shares of Buyer Common Stock comprising the Common Stock Consideration,
with each share constituting the Stock Consideration valued at Buyer Common Stock Price, and (ii) cash consideration in the amount
of One Million U.S. Dollars ($1,000,000) (the “
Cash Consideration Amount
”, and together with the Stock
Consideration, the “
Purchase Consideration
”);
(c)
hold back and retain the Cash Consideration Amount from the Purchase Consideration. The Cash Consideration Amount shall become
payable to Seller upon the consummation by Buyer of the first Qualified Financing after the Closing Date. Upon consummation of
a Qualified Financing by Buyer, Buyer shall retain the first Two Million Dollars ($2,000,000) of gross proceeds received in connection
with such Qualified Financing and Seller shall receive 100% of the gross proceeds of such Qualified Financing received by Buyer
in excess of Two Million Dollars ($2,000,000) as well as the gross proceeds of any subsequent equity financings by Buyer until
the Cash Consideration Amount is satisfied in full. The Cash Consideration Amount shall be paid by wire transfer of immediately
available funds to such account or accounts as designated by Buyer, within five (5) Business days of the closing of the applicable
Qualified Financing and/or equity financing; and
(d)
deposit with the Escrow Agent such number of shares of Buyer Preferred Stock as shall equal ten percent (10%) of the Stock Consideration
deliverable to Seller (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 hold in escrow in a segregated
escrow account (the “
Escrow Account
”) in accordance with the terms of the Escrow Agreement and this
Agreement.
2.2.
[RESERVED]
2.3.
Escrow.
(a)
At the Closing, Buyer and Seller shall enter into an Escrow Agreement in the form attached as
Exhibit A
hereto (the “
Escrow
Agreement
”) with a mutually agreeable escrow agent (together with any successor escrow agent, the “
Escrow
Agent
”), pursuant to which Buyer shall, at the Closing, deliver, or cause to be delivered, the Escrow Shares to
the Escrow Agent, to be held by the Escrow Agent in the Escrow Account, together with any interest and earnings thereon, and disbursed
therefrom in accordance with the terms and conditions of this Agreement and the Escrow Agreement. The Escrow Shares shall serve
as a source of security for Seller’s obligations after the Closing under this Agreement, including its indemnification obligations
under
ARTICLE VII
.
(b)
The Escrow Shares shall no longer be subject to any claim that is first made after the date which is six (6) months after the
Closing Date (the “
Expiration Date
”);
provided
,
however
, with respect to any claims made
in accordance with this Agreement on or prior to the Expiration Date (including those that are revised or adjusted in accordance
with
ARTICLE VII
after the Expiration Date) that remain unresolved as of the end of the Expiration Date (“
Pending
Claims
”), all or a portion of the Escrow Shares reasonably necessary to satisfy such Pending Claims (as determined
with respect to any indemnification claims based on the amount of the indemnification claim included in the Claim Notice provided
by a Buyer Indemnitee under
ARTICLE VII
, as it may be revised or adjusted in accordance with
ARTICLE VII
) shall
remain in the Escrow Account until such time as such Pending Claim shall have been finally resolved pursuant to the provisions
of this Agreement. After the Expiration Date, any Escrow Shares remaining in the Escrow Account that are not subject to (i) Pending
Claims or (ii) resolved but unpaid claims in favor of Buyer or other Buyer Indemnitees, shall be disbursed by the Escrow Agent
to Seller, after receipt by the Escrow Agent of joint written instructions by Buyer and Seller. Promptly after the final resolution
of all Pending Claims and the payment of all obligations in connection therewith, the Escrow Agent shall disburse any Escrow Shares
remaining in the Escrow Account to Seller upon receipt of joint written instruction by Buyer and Seller to the Escrow Agent.
ARTICLE
III
CLOSING
3.1.
Closing.
The closing of the transactions contemplated by this Agreement (the “
Closing
”) will take
place at the offices of Ellenoff, Grossman & Schole LLP, 1345 Avenue of the Americas, New York, NY 10105, on a date and at
a time to be agreed upon by Seller and Buyer, which date shall be no later than the second (2nd) Business Day after all the Closing
conditions to this Agreement have been satisfied or waived. By mutual agreement of the parties, the Closing may take place by
conference call and facsimile (or other electronic transmission of signature pages) with exchange of original signatures by mail
if requested. The date on which the Closing actually occurs will be referred to as the “
Closing Date
”.
The parties agree that to the extent permitted by applicable Law and GAAP, the Closing will be deemed effective as of 11:59 p.m.
(New York City time) on the Closing Date.
3.2.
Closing Deliveries by Seller
. At or prior to the Closing, Seller will deliver or cause to be delivered to Buyer the following,
each in form and substance reasonably acceptable to Buyer:
(a)
the Bill of Sale and Assignment and Assumption Agreement between Buyer and Seller in the form attached as
Exhibit B
hereto
(the “
Bill of Sale
”), duly executed by Seller, and any other instruments of transfer reasonably requested
by Buyer to evidence the transfer of the Purchased Assets to Buyer (including assignments with respect to any Intellectual Property
registered, recorded or filed with any Governmental Authority, in form suitable for registration, recordation or filing with such
Governmental Authority), in each case duly executed by Seller;
(b)
the Escrow Agreement between Buyer, Seller and Escrow Agent, duly executed by Seller and the Escrow Agent;
(c)
the required notices, consents, Permits, waivers authorizations, orders and other approvals, if any, and all such notices, consents,
Permits, waivers, authorizations, orders and other approvals will be in full force and effect and not be subject to the satisfaction
of any condition that has not been satisfied or waived;
(d)
a certificate from Seller’s secretary certifying to (i) the resolutions of Seller’s board of directors (or similar
governing board or Person) and stockholders authorizing the execution, delivery and performance of this Agreement and each of
the Ancillary Documents to which it is a party or by which it is bound, and the consummation of each of the transactions contemplated
hereby and thereby, and (ii) the incumbency of officers authorized to execute this Agreement or any Ancillary Document to which
Seller is a party or by which it is bound;
(e)
a certificate from Seller’s chief executive officer certifying as to the amount of the Purchased Receivables as of the Closing,
along with reasonable documentation therefor; and
(f)
a leak-out agreement of Seller in form of
Exhibit E
attached hereto; and
(g)
such other documents and instruments as may be required by any other provision of this Agreement or as may reasonably be required
to consummate the transactions contemplated by this Agreement and the Ancillary Documents.
3.3.
Closing Deliveries by Buyer.
At or prior to the Closing, Buyer will deliver or cause to be delivered to Seller the following,
each in form and substance reasonably acceptable to Seller:
(a)
Certificates evidencing the Common Stock Consideration and the Preferred Stock Consideration in the amounts required by
Section
2.1
to be delivered by Buyer at the Closing;
(b)
the Bill of Sale duly executed by Buyer, and any other instruments of transfer reasonably requested by Seller to evidence the
assumption of the Assumed Liabilities by Buyer, in each case duly executed by Buyer;
(c)
a copy of the Certificate of Designation evidencing the Preferred Stock Consideration certified as of a date no later than the
Closing Date from the proper state official of its jurisdiction of organization;
(d)
each of the following documents, duly executed by Buyer: (i) the Escrow Agreement; and (ii) the Employee Agreements with the Transferred
Employees; and
(e)
a certificate from Buyer’s secretary certifying to (i) the resolutions of Buyer’s board of directors authorizing the
execution, delivery and performance of this Agreement and each of the Ancillary Documents to which it is a party or by which it
is bound, and the consummation of each of the transactions contemplated hereby and thereby, and (ii) the incumbency of officers
authorized to execute this Agreement or any Ancillary Document to which Buyer is a party or by which it is bound.
ARTICLE
IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller
represents and warrants to Buyer that the statements contained in this
ARTICLE IV
, and the information in the Disclosure
Schedules referenced therein, are true and correct as of the date hereof and the Closing, except to the extent that a representation
and warranty contained in this
ARTICLE IV
expressly states that such representation and warranty is current as of an earlier
date and then such statements contained in this
ARTICLE IV
are true and correct as of such earlier date or time:
4.1.
Organization and Qualification.
Seller is a corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has full corporate power and authority to own the assets owned by it and conduct its business as
and where it is being conducted by it. Seller is duly licensed or qualified to do business, and is in good standing as a foreign
entity, in all jurisdictions in which its assets or business makes such licensing or qualification necessary.
4.2.
Authorization.
Seller has full corporate power and authority to enter into this Agreement and the Ancillary Documents to which
it is a party and to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Ancillary Documents and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Seller, including requisite
approval by Seller’s board of directors (or similar governing board or Person) and stockholders. This Agreement and each
Ancillary Document to which Seller is a party has been duly executed and delivered by Seller and constitutes a legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’
rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or
in equity).
4.3.
Subsidiaries.
Seller does not have any Subsidiaries or have any ownership interest in any other Person; provided, that, notwithstanding
anything to the contrary contained in this Agreement, in the event of the breach of the foregoing representation and warranty,
without limiting any rights or remedies available under this Agreement or applicable Law, any reference in this Agreement to the
Business or the assets, properties, contracts, rights, Liabilities, business, operations, condition or employees of Seller will
include those of its Subsidiaries to the extent reasonably applicable.
4.4.
Non-Contravention.
Neither the execution, delivery and performance of this Agreement or any Ancillary Documents by Seller,
nor the consummation of the transactions contemplated hereby or thereby, will (a) violate or conflict with, any provision of the
Organizational Documents of Seller, (b) violate or conflict with any Law or Order to which Seller, the Business or the Purchased
Assets are bound or subject, (c) with or without giving notice or the lapse of time or both, breach or conflict with, constitute
or create a default under, or give rise to any right of termination, cancellation or acceleration of any obligation or result
in a loss of a material benefit under, or give rise to any obligation of Seller (or Buyer as the assignee thereof) to make any
payment under, or to the increased, additional, accelerated or guaranteed rights or entitlements of any Person under, any of the
terms, conditions or provisions of any Contract, agreement, or other commitment to which Seller is a party or by which Seller,
the Business or the Purchased Assets are bound, (d) result in the imposition of a Lien on any Purchased Asset or (e) require any
filing with, or Permit, consent or approval of, or the giving of any notice to, any Governmental Authority or other Person.
4.5.
Absence of Changes.
Since December 31, 2018, (a) Seller has conducted its business only in the Ordinary Course and (b) there
has not been any change or development which, individually or in the aggregate, has had, and would reasonably be expected to have
a Material Adverse Effect. Without limiting the previous sentence, since December 31, 2018, Seller has not approved, taken or
otherwise effected any of the following transactions or actions: (i) sold, transferred, leased or otherwise disposed of any material
assets that would constitute Purchased Assets if owned by Seller on the Closing Date; (ii) permitted any of the Purchased Assets
to be subject to any Lien (other than the Permitted Liens) other than in the Ordinary Course; (iii) cancelled or compromised any
debt or claim or waived or released any material right of Seller in connection with the Business; (iii) changed or modified in
any material respects the credit, collection or payment policies, procedures or practices of the Business, including accelerating
collections of receivables of the Business; (iv) failed to pay any creditor, customer or subcontractor of Seller in connection
with the Business when due, unless such amount was being contested in good faith by Seller (and which contest has otherwise been
disclosed to Buyer); or (v) changed Seller’s accounting principles applicable to the Business, except insofar as may have
been required by a change in GAAP.
4.6.
Title to and Sufficiency of Assets.
Seller has good and marketable title to, or other legal rights to possess and use, all
of the Purchased Assets, free and clear of all Liens except for Permitted Liens. Upon delivery of the Purchased Assets to Buyer
at the Closing in accordance with this Agreement, good and marketable title to all of the Purchased Assets owned by Seller and
a legal right to possess and use all of the Purchased Assets leased or licensed by Seller, free and clear of all Liens (other
than Liens incurred or imposed by Buyer), will pass to Buyer. Except for the Excluded Assets, the Purchased Assets constitute
all of the assets, rights and properties that are used in or are necessary for the operation of the Business as it is currently
conducted.
4.7.
Properties.
There is no tangible personal property (including furniture, fixtures, equipment, facsimile machines, printers,
copiers and related software and supplies, together with all deposits and prepaid assets associated therewith) owned by Seller
for use in connection with the Business. Seller does not own and has never owned any real property or any interest in real property.
4.8.
Intellectual Property.
Schedule 4.8
sets forth: (i) all U.S. and foreign registrations of Intellectual Property (and
applications therefor) owned or licensed by Seller or otherwise used or held for use by Seller in which Seller is the owner, applicant,
licensee or assignee (“
Registered IP
”); (ii) all material unregistered Intellectual Property owned or
purported to be owned by Seller; and (iii) all licenses, sublicenses and other agreements or permissions (“
IP Licenses
”)
(other than shrink wrap licenses or other similar licenses for commercial off-the-shelf software with an annual license fee of
Five Thousand U.S. Dollars ($5,000) or less (which are not required to be listed, but are “IP Licenses” as that term
is used herein)), under which Seller is a licensee or otherwise is authorized to use any Intellectual Property. All Registered
IP is valid and in force and owned exclusively by Seller without obligation to pay royalties, licensing fees or other fees, or
otherwise account to any other Person with respect to such Registered IP. Seller owns, free and clear of all royalties or other
Liens (other than Permitted Liens), has valid and enforceable rights in, and has the unrestricted right to use, sell, license,
transfer or assign, all Intellectual Property currently used, licensed or held for use by Seller, and previously used or licensed
by Seller (except for the Intellectual Property that is the subject of the IP Licenses) (“
Seller IP
”),
and there are no agreements which restrict or limit the use of Seller IP by Seller (or Buyer as its assignee). Seller IP is valid
and enforceable, and to the Knowledge of Seller, Seller IP does not violate any Trade Secret agreement and does not infringe on
any Intellectual Property or proprietary rights of any Person in any country. Seller has not licensed or sublicensed out any of
its owned or licensed Intellectual Property. Seller has a valid and enforceable license to use all Intellectual Property that
is the subject of the IP Licenses. Seller has performed all obligations imposed on it in the IP Licenses, has made all payments
required to date, and is not, nor, to the Knowledge of Seller, is any other party thereto, in breach or default thereunder, nor
has any event occurred that with notice or lapse of time or both would constitute a default thereunder. All commercially reasonable
and desirable action to maintain and protect Seller IP has been taken by Seller, and all maintenance fees, Taxes, annuities and
renewal fees have been paid and all other necessary actions to maintain Seller IP have been taken through the Closing. Seller
has not interfered with, infringed upon or misappropriated any Intellectual Property rights of third parties in connection with
the ownership of the Purchased Assets or the operation of the Business, and Seller has not received any notice of claim that any
of Seller IP has expired, is not valid or enforceable in any country or that it or the operation of the Business infringes upon,
conflicts with or misappropriates any Intellectual Property of any third party, and no such claims or controversies currently
exist. Seller has not given any notice of infringement to any third party with respect to any Seller IP nor become aware of facts
or circumstances evidencing the infringement by any third party of any Seller IP. To the Knowledge of Seller, (i) there has been
no misappropriation of any Trade Secrets or other confidential Seller IP by any current or former employee, independent contractor,
consultant or agent of Seller, or by any other Person, (ii) no current or former employee, independent contractor, consultant
or agent of Seller has misappropriated any Trade Secrets of any other Person in the course of his, her or its performance as an
employee, independent contractor, consultant or agent of Seller, (iii) no current or former employee, independent contractor,
consultant or agent of Seller is in default or breach of any term of any employment agreement, non-disclosure agreement, non-compete
obligation, assignment of invention agreement or similar agreement or contract with Seller relating in any way to the protection,
ownership, development, use or transfer of Seller IP and (iv) each employee, consultant and independent contractor of Seller has
assigned to Seller all Intellectual Property arising from the services performed for Seller by such Person. Seller is not a party
to any Contract that requires Seller to assign to any Person any of its rights in any Intellectual Property developed by Seller
under such Contract. No Person has obtained unauthorized access to third party information and data in Seller’s possession,
nor has there been any other compromise of the security, confidentiality or integrity of such information or data. No computer
and information technology hardware or equipment, including any servers, computers, monitors, computer accessories, tablets and
mobile phones is currently being used by Seller in connection with the Business.
4.9.
Contracts.
Schedule 4.9
contains a complete, current and correct list of all Contracts to which Seller is a party or
by which any of its properties or assets are bound. True and correct copies of all such Contracts have been provided to Buyer
(along with any amendments thereto), including written summaries of oral Contracts. Each such Contract is a valid, binding and
enforceable obligation of Seller and, to Seller’s Knowledge, of the other party or parties thereto, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of
creditors’ rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding
at law or in equity), and each such Contract is in full force and effect. Neither Seller nor, to Seller’s Knowledge, any
other party thereto is in material breach of or default under any term of any such Contract or has repudiated any term of any
such Contract. During the three (3) year period prior to the date of this Agreement, Seller has not received any written or, to
Seller’s Knowledge, oral notice of termination, cancellation or non-renewal, or request to materially amend or modify the
terms thereof, that is currently in effect with respect to any such Contract. To Seller’s Knowledge, no event has occurred
which either entitles, or would, with notice or lapse of time or both, entitle any party to any such Contract to declare a material
breach or default under any such Contract or to accelerate, or which does accelerate, the maturity of any obligation of Seller
(or its assignee) under any such Contract. To the Knowledge of Seller, there is no reason to believe that any such Contract with
a customer will not remain in effect after the Closing or continue to generate substantially the same or more revenue after the
Closing through the remainder of its term as it currently generates. No such Contract contains any covenant (i) limiting in any
respect the right of Seller or its Affiliates (or Buyer as assignee thereof) to engage in any line of business, to make use of
any of its Intellectual Property or compete with any Person in any line of business or in any geographic region, (ii) imposing
non-solicitation restrictions on Seller or its Affiliates (or Buyer as the assignee thereof), (iii) granting to the other party
any exclusivity or similar provisions or rights or any other restriction on future contracting, or (iv) providing “most
favored customers” or other preferential pricing terms for the services of Seller or its Affiliates (or Buyer as the assignee
thereof).
4.10.
Litigation.
There is no (a) Action of any nature pending or, to the Knowledge of Seller, threatened, nor to the Knowledge
of Seller is there any reasonable basis for any Action to be made, or (b) Order now pending or previously rendered, since incorporation,
in either case of (a) or (b), by or against Seller or any of its Affiliates or any of their respective properties or assets or,
to Seller’s Knowledge, any of their respective current or former managers, officers or equity holders which, if adversely
determined, would reasonably be expected to affect any of the Business, the Purchased Assets or the Assumed Liabilities.
4.11.
Compliance with Laws; Permits.
Seller is in compliance with, and has complied since incorporation, in all material respects
with all Laws and Orders in respect of the operation, activities, conduct and transactions of the Business and the ownership,
operation, use or possession of the Purchased Assets. None of the operation, activity, conduct and transactions of the Business
or the ownership, operation, use or possession of the Purchased Assets conflicts with the rights of any other Person or violates,
or with or without the giving of notice or passage of time, or both, will violate, conflict with or result in a default, right
to accelerate or loss of rights under, any terms or provisions of any Lien, Contract or any Law or Order to which Seller is a
party or by which Seller, the Business or any of the Purchased Assets may be bound or affected. Seller has not received any written
or, to the Knowledge of Seller, oral notice of any actual or alleged violation or non-compliance with applicable Laws. Seller
owns or possesses all right, title and interest in all Permits required to own the Purchased Assets and conduct the Business as
now being conducted.
4.12.
Employees; Consultants; Labor Matters.
(a)
Schedule 4.12(a)
contains a complete and correct list of all employees of Seller whose employment relates to the Business
(collectively, the “
Employees
”), (i) showing for each Employee the Employee’s name, job title
or description, salary level (including any non-discretionary bonus or deferred compensation arrangements), accrued vacation and
sick pay, and (ii) also showing any bonus, commission or other remuneration other than salary paid during the calendar year ending
December 31, 2018 or during the calendar year 2019. No Employee is a party to a written employment agreement or contract with
Seller and each Employee is employed “at will.” Each Employee has entered into Seller’s standard form of employee
non-disclosure agreement with Seller, a copy of which has been previously delivered to Buyer.
(b)
Schedule 4.12(b)
contains a list of all consultants and independent contractors currently engaged by Seller in connection
with the Business, along with the position, date of retention and rate of remuneration, most recent increase (or decrease) in
remuneration and amount thereof, for each such Person. All of such consultants and independent contractors are a party to a written
Contract with Seller, which have been provided to Buyer (along with any amendments thereto). Each such independent contractor
has entered into customary covenants regarding confidentiality with Seller, a copy of which has been previously delivered to Buyer.
4.13.
Tax Matters.
Seller has timely filed all Tax Returns required to have been filed by it, all such Tax Returns are accurate
and complete in all material respects and Seller has paid all Taxes owed by it which were due and payable (whether or not shown
on any Tax Return). Seller has complied with all applicable Laws relating to Tax. There is no current Action against or affecting
Seller, the Business or the Purchased Assets by a Governmental Authority in a jurisdiction where Seller does not file Tax Returns
that Seller is or may be subject to taxation by that jurisdiction, and there are no pending or ongoing audits or assessments of
Seller’s Tax Returns by a Governmental Authority. There are no Liens for Taxes upon the Purchased Assets, except for Permitted
Liens. Seller is not a real property holding company within the meaning of Section 897 of the Code.
4.14.
Environmental Matters
. In connection with Seller’s ownership of the Purchased Assets and the operation of the Business
on or prior to the Closing Date: (i) Seller has complied in all respects with all applicable Environmental Laws; (ii) Seller has
not received notice of any Actions pending or threatened against Seller or the Purchased Assets relating to any Environmental
Conditions or any applicable Environmental Laws or related Permits; and (iii) to Seller’s Knowledge, Seller does not have
any environmental audits, environmental assessments, reports, sampling results, correspondence with Governmental Authorities or
other environmental documents relating to Seller’s past or current properties, facilities or operation. Except for de minimis
quantities of Hazardous Materials used, stored, disposed, or present in compliance with Environmental Laws on or about premises
owned or leased by Seller, to Seller’s Knowledge, there are no Hazardous Materials that are being stored or are otherwise
present on, under or about premises owned or leased by Seller. Seller has not operated any above-ground or underground tanks,
drum storage areas, disposal sites, or landfills, or created any Environmental Conditions at premises owned or leased by Seller.
To the Knowledge of Seller, Seller has not released any Hazardous Materials on, under or about any real property constituting
or connected with premises owned or leased by Seller, that requires investigation or remediation pursuant to Environmental Law
or that otherwise is in violation of any requirement of any Environmental Law.
4.15.
Insurance.
Seller has maintained, since incorporation, insurance in amounts sufficient for the Business and the Purchased
Assets and in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning
similar properties in the same general areas in the Business operates.
4.16.
Transactions with Related Persons.
No Affiliate of Seller, nor any officer, manager, director, employee, trustee or beneficiary
of Seller or its Affiliate, nor any immediate family member of any of the foregoing (whether directly or indirectly through an
Affiliate of such Person) (each of the foregoing, a “
Related Person
”) is presently, or in the past three
(3) years has been, a party to any transaction or has an outstanding Contract or other arrangement or commitment with Seller that
relates to the Business or the Purchased Assets, and no Related Person owns any property or right (including Intellectual Property)
which is used in the Business. The Purchased Assets do not include any receivable or other obligation from a Related Person, and
the Assumed Liabilities do not include any payable or other obligation or commitment to any Related Person.
4.17.
Solvency.
Seller is not entering into this Agreement with the intent to hinder, delay or defraud any Person to which Seller
is, or may become, indebted. After the Closing and after giving effect to this Agreement and the other transactions contemplated
hereby, Seller expects and believes in good faith that it will not be insolvent (either because its financial condition will be
such that the sum of its debts is greater than the fair value of its assets or because the present fair salable value of its assets
would be less than the amount required to pay its probable liability on debts as they become absolute and matured).
4.18.
No Brokers.
Neither Seller nor any of its Representatives on its behalf has employed any broker, finder or investment banker
or incurred any liability for any brokerage fees, commissions, finders’ fees or similar fees in connection with the transactions
contemplated by this Agreement.
4.19.
Disclosure.
No representations or warranties by Seller in this Agreement contains any untrue statement of material fact or
omits or will omit to state, when read in conjunction with all of the information contained in this Agreement, any fact necessary
in order to make the statements or facts herein not materially misleading.
4.20.
Own Account
. Seller understands that the securities constituting the Stock Consideration are “restricted securities”
and have not been registered under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder
(“
Securities Act
”) or any applicable state securities law and is acquiring the Stock Consideration as
principal for its own account and not with a view to or for distributing or reselling such Stock Consideration or any part thereof
in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of the
Stock Consideration in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement
or understandings with any other persons to distribute or regarding the distribution of such Stock Consideration in violation
of the Securities Act or any applicable state securities law.
4.21.
Seller Status
. Seller is an “accredited investor” as defined in Rule 501 under the Securities Act.
4.22.
Experience of Seller
. Seller, either alone or together with its representatives, has such knowledge, sophistication and experience
in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the
Stock Consideration, and has so evaluated the merits and risks of such investment. Seller is able to bear the economic risk of
an investment in the Stock Consideration and, at the present time, is able to afford a complete loss of such investment.
4.23.
General Solicitation
. Seller is not purchasing the Stock Consideration as a result of any advertisement, article, notice or
other communication regarding the Stock Consideration published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or, to the knowledge of Seller, any other general solicitation or general advertisement.
4.24.
Access to Information
. Seller acknowledges that it has had the opportunity to review the this Agreement and the Ancillary
Documents (including all exhibits and schedules thereto) and the SEC Reports (as defined in Section 5.7) and has been afforded
(i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of Buyer
concerning the terms and conditions of the offering of the Stock Consideration and the merits and risks of investing in the Stock
Consideration; (ii) access to information about Buyer and its financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional
information that Buyer possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment.
4.25.
No Other Representations and Warranties.
Except for the representations and
warranties contained in this ARTICLE IV (including the related portions of the Disclosure Schedules), neither Seller nor any other
Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller,
including any representation or warranty as to the accuracy or completeness of any information regarding the Business and the
Purchased Assets furnished or made available to Buyer (including any information, documents or material made available in connection
with the transactions contemplated hereby) or as to the future revenue, profitability or success of the Business, or any representation
or warranty arising from statute or otherwise in law.
ARTICLE
V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer
represents and warrants to Seller that the statements contained in this
ARTICLE V
, and the information in the Disclosure
Schedules, if any, referenced therein, except as set forth in the SEC Reports (as defined below), are true and correct as of the
date hereof and as of the Closing, except to the extent that a representation and warranty contained in this
ARTICLE V
expressly states that such representation and warranty is current as of an earlier date and then such statements contained in
this
ARTICLE V
are true and correct as of such earlier date or time:
5.1.
Organization and Qualification.
Buyer is a corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Buyer is duly qualified or licensed to do business as a foreign entity and is in good standing in each
jurisdiction where such qualification or license is required, except where the failure to be so qualified or be so licensed would
not have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by, and discharge its obligations
under, this Agreement and the Ancillary Documents to which Buyer is a party (a “
Buyer Material Adverse Effect
”).
5.2.
Authorization.
Buyer has full corporate power and authority to enter into this Agreement and the Ancillary Documents to which
it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Documents to which Buyer is a party and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement and each Ancillary Document to
which Buyer is a party has been duly executed and delivered by Buyer and constitutes a legal, valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and
general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity).
5.3.
Non-Contravention.
Neither the execution and delivery of this Agreement or any Ancillary Document by Buyer, nor the consummation
of the transactions contemplated hereby or thereby, will violate or conflict with (a) any provision of Buyer’s Organizational
Documents, (b) any Law or Order to which Buyer or any of its business or assets are bound or subject or (c) any Contract or Permit
to which Buyer is a party or by which it or any of its properties may be bound or affected, other than, in the cases of clauses
(a) through (c), such violations and conflicts which would not reasonably be expected to have a Buyer Material Adverse Effect.
5.4.
Filings, Consents and Approvals
. Buyer is not required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or
other Person in connection with the execution, delivery and performance by Buyer of the this Agreement or any Ancillary Document
by Buyer, other than: (i) the filings required pursuant to applicable securities laws, including the filings with the Securities
and Exchange Commission (“
Commission
”), (ii) the notice and/or application(s) to each applicable Trading
Market for the issuance and sale of the Securities and the listing of the Underlying Shares for trading thereon in the time and
manner required thereby, (iii) the filing of Form D with the Commission and such filings as are required to be made under applicable
state securities laws and (iv) Required Buyer Stockholder Approval (as defined in Section 8.1(e) and collectively with clauses
(i) through (iii), the “
Required Approvals
”).
5.5.
Issuance of the Stock Consideration
. The Stock Consideration is duly authorized and, at the Closing, will be duly and validly
issued, fully paid and nonassessable, free and clear of all Liens imposed by Buyer other than restrictions on transfer provided
for in this Agreement. The Underlying Shares, when issued in accordance with the terms of this Agreement or any Ancillary Document
by Buyer, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by Buyer other than restrictions
on transfer provided for in the this Agreement or any Ancillary Document by Buyer. Buyer has reserved from its duly authorized
capital stock a number of shares of Common Stock for issuance of the Underlying Shares in full.
5.6.
Capitalization
. The capitalization of Buyer as of the date hereof is as set forth in the SEC Reports. Buyer has not issued
any capital stock since its most recently filed periodic report under the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (“
Exchange Act
”), other than pursuant to the exercise of
employee stock options under Buyer’s stock option plans, the issuance of shares of Common Stock to employees pursuant to
Buyer’s employee stock purchase plans and pursuant to the conversion and/or exercise of securities convertible or exercisable
into Common Stock (“
Common Stock Equivalents
”) outstanding as of the date of the most recently filed
periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or
any similar right to participate in the transactions contemplated by the this Agreement or any Ancillary Document by Buyer. Except
as a result of the purchase and sale of the Stock Consideration, there are no outstanding options, warrants, scrip rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable
or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock or the capital stock
of any Subsidiary of Buyer, or contracts, commitments, understandings or arrangements by which Buyer or any Subsidiary is or may
become bound to issue additional shares of Common Stock or Common Stock Equivalents or capital stock of any Subsidiary. The issuance
and sale of the Stock Consideration will not obligate Buyer to issue shares of Common Stock or other securities to any Person
(other than Buyer). There are no outstanding securities or instruments of Buyer with any provision that adjusts the exercise,
conversion, exchange or reset price of such security or instrument upon an issuance of securities by Buyer. There are no outstanding
securities or instruments of Buyer that contain any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which Buyer is or may become bound to redeem a security of Buyer. Buyer does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All of the outstanding
shares of capital stock of Buyer are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights
or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board
of Directors of Buyer or others is required for the issuance and sale of the Stock Consideration. There are no stockholders agreements,
voting agreements or other similar agreements with respect to Buyer’s capital stock to which Buyer is a party or, to the
knowledge of Buyer, between or among any of Buyer’s stockholders.
5.7.
SEC Reports; Financial Statements
. Buyer has filed all reports, schedules, forms, statements and other documents required
to be filed by Buyer under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as Buyer was required by law or regulation to file such material)
(the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred
to herein as the “
SEC Reports
”) on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and
none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they
were made, not misleading. The financial statements of Buyer included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time
of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“
GAAP
”), except as may be otherwise
specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the financial position of Buyer and its consolidated Subsidiaries
as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case
of unaudited statements, to normal, immaterial, year-end audit adjustments.
5.8.
Material Changes; Undisclosed Events, Liabilities or Developments
. Since the date of the latest audited financial statements
included within the SEC Reports, except as set forth in the SEC Reports, (i) there has been no event, occurrence or development
that has had or that could reasonably be expected to result in a Buyer Material Adverse Effect, (ii) Buyer has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected in Buyer’s financial statements pursuant
to GAAP or disclosed in filings made with the Commission, (iii) Buyer has not altered its method of accounting, (iv) Buyer has
not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made
any agreements to purchase or redeem any shares of its capital stock and (v) Buyer has not issued any equity securities to any
officer, director or Affiliate, except pursuant to existing Buyer stock option plans. Buyer does not have pending before the Commission
any request for confidential treatment of information.
5.9.
Litigation.
There is no Action pending or, to the Knowledge of Buyer, threatened, nor any Order of any Governmental Authority
rendered, against or involving Buyer or any of its officers, managers, shareholders, properties, assets or businesses, whether
at law or in equity, before or by any Governmental Authority, which would reasonably be expected to have a Buyer Material Adverse
Effect.
5.10.
No Brokers.
Neither Buyer nor any of its Representatives on its behalf has employed any broker, finder or investment banker
or incurred any liability for any brokerage fees, commissions, finders’ fees or similar fees in connection with the transactions
contemplated by this Agreement.
5.11.
Compliance
. Neither Buyer nor any Subsidiary of Buyer: (i) is in default under or in violation of (and no event has occurred
that has not been waived that, with notice or lapse of time or both, would result in a default by Buyer or any Subsidiary under),
nor has Buyer or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree or order of any
court, arbitrator or other governmental authority or (iii) is or has been in violation of any statute, rule, ordinance or regulation
of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental
protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as
could not have or reasonably be expected to result in a Buyer Material Adverse Effect.
5.12.
Regulatory Permits
. Buyer and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC
Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect
(“
Material Permits
”), and neither Buyer nor any Subsidiary of Buyer has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
5.13.
Insurance
. Buyer and its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in which Buyer and its Subsidiaries are engaged, including,
but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription Amount. Neither Buyer
nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant
increase in cost.
5.14.
Sarbanes-Oxley; Internal Accounting Controls
. Buyer and its Subsidiaries are in compliance with any and all applicable requirements
of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated
by the Commission thereunder that are effective as of the date hereof and as of the Closing Date.
5.15.
Private Placement
. Assuming the accuracy of Buyer’s representations and warranties set forth in ARTICLE IV, no registration
under the Securities Act is required for the issuance of the Stock Consideration by Buyer to Seller as contemplated hereby.
5.16.
Solvency
. Immediately after giving effect to the transactions contemplated hereby, Buyer shall be solvent and shall: (a) be
able to pay its debts as they become due; (b) own property that has a fair saleable value greater than the amounts required to
pay its debts (including a reasonable estimate of the amount of all contingent liabilities); and (c) have adequate capital to
carry on its business. No transfer of property is being made and no obligation is being incurred in connection with the transactions
contemplated hereby with the intent to hinder, delay or defraud either present or future creditors of Buyer or Seller. In connection
with the transactions contemplated hereby, Buyer has not incurred, nor plans to incur, debts beyond its ability to pay as they
become absolute and matured.
5.17.
Independent Investigation
. Buyer has conducted its own independent investigation, review and analysis of the Business and
the Purchased Assets, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises,
books and records, and other documents and data of Seller for such purpose. Buyer acknowledges and agrees that: (a) in making
its decision to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer has relied solely upon
its own investigation and the express representations and warranties of Seller set forth in ARTICLE IV of this Agreement (including
related portions of the Disclosure Schedules); and (b) neither Seller nor any other Person has made any representation or warranty
as to Seller, the Business, the Purchased Assets or this Agreement, except as expressly set forth in ARTICLE IV of this Agreement
(including the related portions of the Disclosure Schedules)
.
5.18.
General Solicitation
. Neither Buyer nor any Person acting on behalf of Buyer has offered or sold any of the Stock Consideration
by any form of general solicitation or general advertising.
5.19.
Acknowledgment Regarding Buyer’s Purchase of Stock Consideration
. Buyer acknowledges and agrees that the Seller is acting
solely in the capacity of an arm’s length purchaser with respect to this Agreement or any Ancillary Document by Buyer and
the transactions contemplated thereby. Buyer further acknowledges that Seller is not acting as a financial advisor or fiduciary
of Buyer (or in any similar capacity) with respect to the this Agreement or any Ancillary Document by Buyer and the transactions
contemplated thereby and any advice given by any Buyer or any of their respective representatives or agents in connection with
the this Agreement or any Ancillary Document by Buyer and the transactions contemplated thereby is merely incidental to Seller’s
acceptance of the Stock Consideration. Buyer further represents to Seller that Buyer’s decision to enter into this Agreement
and the other this Agreement or any Ancillary Document by Buyer has been based solely on the independent evaluation of the transactions
contemplated hereby by Buyer and its representatives
.
5.20.
No Other Representations or Warranties.
Except for the representations and warranties contained in this Agreement (including
the Disclosure Schedules hereto), the Ancillary Documents or in any document, exhibit, annex, statement, certificate or schedule
which is furnished or to be furnished by Buyer pursuant to
Section 3.3
in connection with the Closing, neither Buyer, nor
any of its Representatives, nor any other Person on behalf of Buyer, makes any express or implied representation or warranty to
Seller, at law or in equity, in respect of Buyer, its operations, business, assets, liabilities, capitalization, condition or
prospects or the Ancillary Documents or the transactions contemplated by this Agreement or the Ancillary Documents, and Buyer
hereby disclaims any such representation or warranty.
ARTICLE
VI COVENANTS
6.1.
Further Assurances.
In the event that at any time after the Closing any further action is reasonably necessary to carry out
the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such
further instruments and documents) as the other parties reasonably may request, at the sole cost and expense of the requesting
party (unless otherwise specified herein or unless such requesting party is entitled to indemnification therefor under
ARTICLE
VII
in which case, the costs and expense will be borne by the parties as set forth in
ARTICLE VII
).
6.2.
Publicity.
No party hereto shall, and each party shall cause its Representatives not to, disclose, make or issue, any statement
or announcement concerning this Agreement or the Ancillary Documents or the transactions contemplated hereby or thereby (including
the terms, conditions, status or other facts with respect thereto) to any third parties (other than its Representatives who reasonably
need to know such information in connection with carrying out or facilitating the transactions contemplated hereby) without the
prior written consent of the other parties hereto (such consent not to be unreasonably withheld, delayed or conditioned), except
as required by applicable Law after conferring with the other parties concerning the timing and content of such required disclosure.
6.3.
Confidentiality.
Seller shall, and shall cause its Representatives to: (a) treat and hold in strict confidence any Confidential
Information, and will not use for any purpose (other than in furtherance of its authorized duties on behalf of Buyer or its Affiliates),
nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the
Confidential Information without Buyer’s prior written consent; (b) in the event that Seller becomes legally compelled to
disclose any Confidential Information, to provide Buyer with prompt written notice of such requirement so that Buyer or an Affiliate
thereof may seek a protective order or other remedy or so that Buyer may waive compliance with this
Section 6.3
; (c)
in the event that such protective order or other remedy is not obtained, or Buyer waives compliance with this
Section 6.3
,
to furnish only that portion of such Confidential Information which is legally required to be provided as advised in writing by
outside counsel and to exercise their commercially reasonable efforts to obtain assurances that confidential treatment will be
accorded such Confidential Information; and (d) upon request of Buyer, to promptly furnish to Buyer or destroy (at the election
of Buyer) any and all copies (in whatever form or medium) of all Confidential Information, including any analyses, compilations,
studies or other documents prepared, in whole or in part, on the basis thereof.
6.4.
Litigation Support.
Following the Closing, in the event that and for so long as any party is actively contesting or defending
against any third party or Governmental Authority Action in connection with any fact, situation, circumstance, status, condition,
activity, practice, plan, occurrence, event, incident, action, failure to act or transaction existing on or relating to periods
prior to the Closing and involving the Business, the Purchased Assets or the Assumed Liabilities, the other parties will (i) reasonably
cooperate with the contesting or defending party and its counsel in the contest or defense, (ii) make available its personnel
at reasonable times and upon reasonable notice and (iii) provide (A) such testimony and (B) access to its non-privileged books
and records as may be reasonably requested in connection with the contest or defense, in each case of clauses (i) through (iii),
at the sole cost and expense of the contesting or defending party (unless such contesting or defending party is entitled to indemnification
therefor under
ARTICLE VII
in which case, the costs and expense will be borne by the parties as set forth in
ARTICLE
VII
).
6.5.
Post-Closing Receipts and Possession of Assets.
If after the Closing Date any party or its Affiliate receives any funds properly
belonging to another party in accordance with the terms of this Agreement, the receiving party will promptly advise such other
party, will segregate and hold such funds in trust for the benefit of such other party and will promptly deliver such funds, together
with any interest earned thereon, to an account or accounts designated in writing by such other party. In the event that after
the Closing Date, Buyer or its Affiliates receives or otherwise is in possession of any Excluded Asset, Buyer shall promptly notify
Seller of its receipt or possession of the Excluded Asset and transfer, at Seller’s expense, such Excluded Asset to Seller.
In the event that after the Closing Date, Seller or its Affiliates receives or otherwise is in possession of any Purchased Asset,
Seller shall promptly notify Buyer of its receipt or possession of the Purchased Asset and transfer, at Buyer’s expense
(unless such receipt or possession is a result of a breach of this Agreement by Seller, in which case, at Seller’s expense),
such Purchased Asset to Buyer.
6.6.
Allocation of Purchase Price.
Within one hundred twenty (120) days after the Closing Date, Buyer will provide to Seller copies
of an IRS Form 8594 and any required exhibits thereto, prepared in accordance with Section 1060 of the Code, with Buyer’s
proposed allocation of the Purchase Price, all other capitalizable costs, including the amount of Assumed Liabilities among the
Purchased Assets (the “
Allocation
”). Seller will review the Allocation and, to the extent Seller disagrees
with the content of the Allocation, Seller will, within twenty (20) days after receipt of the Allocation, provide written notice
to Buyer of such disagreement or will be deemed to have indicated its concurrence therewith. Seller and Buyer will attempt in
good faith to resolve any such disagreement. Upon the final agreement or determination of the Allocation or any modification thereof,
Buyer and Seller will report the allocation of the total consideration among the Purchased Assets in a manner consistent with
such Allocation or modification and will act in accordance with such Allocation in the preparation and timely filing of all income
Tax returns (including filing IRS Form 8594 with their respective federal income Tax returns for the taxable year that includes
the Closing Date and any other forms or statements required by the Code or any Taxing Authority). Each of Buyer and Seller agrees
to promptly provide the other party with any additional information and reasonable assistance required to complete IRS Form 8594
or compute Taxes and other taxes arising in connection with (or otherwise affected by) the transactions contemplated by this Agreement.
Buyer and Seller will promptly inform one another in writing of any challenge by any Taxing Authority to any Allocation made pursuant
to this
Section 6.6
and agree to consult with and keep one another informed with respect to the status of, and any discussion,
proposal or submission with respect to, any such challenge.
6.7.
Business Employees
. Seller shall terminate the employment or service of all Employees listed on
Schedule 6.7
as of
the Closing, and will use its commercially reasonable efforts to cause such Employees to make available their employment services
to Buyer after the Closing. Any such Employees who accept any offer that may be made by Buyer for employment and commence employment
immediately after the Closing will be collectively referred to as the “
Transferred Employees
”. Nothing
in this Agreement will impose on Buyer any obligation to make any offer to any Employee (including those listed on
Schedule
6.7
) or to retain any Transferred Employee in its employ after the Closing, or to continue to provide the same compensation
or benefits that were provided by Buyer immediately following the Closing, and except as may be limited by applicable Law or Contracts
with any such Transferred Employee, Buyer shall have the right at any time after the Closing to terminate the employment of, and
alter the terms and conditions of employment (including with respect to compensation and benefits) of, any Transferred Employee.
Except to the extent otherwise expressly agreed in writing by Buyer, Transferred Employees will be at-will employees who are terminable
at-will in the discretion of Buyer. Nothing express or implied in this Agreement will confer upon any Employee any rights or remedies,
including any right to employment, or continued employment for any specified period, of any nature or kind whatsoever under or
by any reason of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, Buyer and its Affiliates
will have no Liability or responsibility with respect to any Employee that does not receive an offer of employment from Buyer
or that does not accept Buyer’s offer of employment, and Seller shall be solely responsible for all Liabilities relating
to any Employees that are not Transferred Employees and the termination of any such Employees by Seller at or prior to the Closing,
including any Liabilities or obligations with respect to COBRA. Buyer has no non-competition or non-solicitation agreements with
any of the Transferred Employees.
6.8.
Employment Related Taxes.
Payroll withholding and Tax reporting by Seller with respect to each Transferred Employee shall
be terminated on the later of the Closing Date or such Person’s date of hire by Buyer. Seller represents and covenants to
Buyer that there is no unemployment insurance history and fund balance (including all rights to state unemployment tax accounts
relating to the Transferred Employees).
6.9.
Seller will pay over to appropriate Governmental Authorities, in accordance with all applicable Laws and Orders, all amounts
required to be withheld on or before the Closing Date or such later date. Seller shall issue, by the date prescribed by the applicable
IRS requirements, Forms W-2 for wages paid to such Transferred Employees through the Closing Date or such later date. Buyer shall
be responsible for all payroll withholding and Tax reporting with respect to the Transferred Employees from and after their date
of hire by Buyer. Seller will supply Buyer with such information in their possession regarding the Transferred Employees for the
period between January 1, 2019 and the date of their hire by Buyer as may be reasonably necessary for Buyer to carry out its payroll
tax withholding and reporting responsibilities. In every state in which Seller has reported payroll and/or operative state unemployment
tax accounts, to the extent requested by Buyer, Seller agrees to cooperate with Buyer to facilitate Buyer obtaining successor
state unemployment tax account treatment in all such jurisdictions in a timely and complete manner without reservation, interference
or limitation.
6.10.
Merger Agreement.
The parties hereby agree that that certain Agreement and Plan of Merger, by and between Buyer and Seller,
dated as of October 10, 2018 (the “
Merger Agreement
”), including all schedules and exhibits thereto,
and all ancillary agreements contemplated thereby (collectively, the “
Merger Transaction Documents
”),
are hereby terminated in their entirety effective immediately on the date hereof and, notwithstanding anything to the contrary
in the Merger Transaction Documents, shall be of no further force or effect whatsoever. In addition, in consideration of entering
into of this Agreement, Buyer and Seller hereby waive the Purchaser Termination Fee (as defined in the Merger Agreement) as detailed
in Section 8.2 of the Merger Agreement.
6.11.
Supplement to Disclosure Schedules.
From time to time prior to the Closing,
either party shall have the right (but not the obligation) to supplement or amend the Disclosure Schedules hereto with respect
to any matter hereafter arising or of which it becomes aware after the date hereof (each a "
Schedule Supplement
").
Any disclosure in any such Schedule Supplement shall not be deemed to have cured any inaccuracy in or breach of any representation
or warranty contained in this Agreement, including for purposes of the indemnification or termination rights contained in this
Agreement or of determining whether or not the conditions set forth herein have been satisfied;
provided, however,
that
if such party has the right to, but does not elect to, terminate this Agreement within three (3) Business Days of its receipt
of such Schedule Supplement, then such party r shall be deemed to have irrevocably waived any right to terminate this Agreement
with respect to such matter and, further, shall have irrevocably waived its right to indemnification under ARTICLE VII of this
Agreement with respect to such matter.
6.12.
Transfer Restrictions.
(a)
The Stock Consideration and Underlying Shares may only be disposed of in compliance with state and federal securities laws. In
connection with any transfer of Stock Consideration or the Underlying Shares other than pursuant to an effective registration
statement or Rule 144 under the Securities Act, to Buyer or to an Affiliate of Seller, Buyer may require the transferor thereof
to provide to Buyer an opinion of counsel reasonably acceptable to Buyer, the form and substance of which opinion shall be reasonably
satisfactory to Buyer, to the effect that such transfer does not require registration of such transferred Stock Consideration
and/or Underlying Shares under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be
bound by the terms of this Agreement.
(b)
Seller agrees to the imprinting, so long as is required by this Section 6.11, of a legend on any of the Stock Consideration and
Underlying Shares in the following form:
THIS
SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a)
UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES
ARTICLE
VII
INDEMNIFICATION
7.1.
Survival.
All representations and warranties of Seller and Buyer contained in this Agreement (including all schedules, exhibits
and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement) shall survive
the Closing through and until the 6-month anniversary of the Closing Date;
provided
,
however
, that (i) the representations
and warranties contained in
Sections 4.8
(Intellectual Property),
4.13
(Tax Matters), and
4.14
(Environmental
Matters) shall survive until sixty (60) days after the expiration of the applicable statute of limitations and (ii) the representations
and warranties contained in
Sections 4.1
(Organization and Qualification),
4.2
(Authorization),
4.3
(Subsidiaries),
4.
6 (Title to and Sufficiency of Assets), 4.18 (No Brokers),
5.1
(Organization and Qualification),
5.2
(Authorization),
5.5
(Issuance of Stock Consideration) and 5.10 (No Brokers) will survive indefinitely (the representations and warranties
referenced in subsections (i) and (ii), the “
Special Representations
”) and (iii) claims for fraud will
also survive indefinitely, in each case, the date until each such representation shall survive is herein referred to as the “
Survival
Date
”) (If written notice of a claim for breach of any representation or warranty has been given on or before the
applicable Survival Date for such representation or warranty, then the relevant representations and warranties shall survive as
to such claim, until the claim has been finally resolved. All covenants, obligations and agreements of the parties contained in
this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings
furnished pursuant to this Agreement), including any indemnification obligations, shall survive the Closing and continue until
fully performed in accordance with their terms. For the avoidance of doubt, a claim for indemnification under any subsection of
Section 7.2
or
Section 7.3
other than, in each case, clauses (a) or (b) may be made at any time.
7.2.
Indemnification by Seller.
Except as otherwise limited by this
ARTICLE VII
, Seller shall indemnify, defend and hold
harmless Buyer and its Representatives and any successor or assign thereof (collectively, the “
Buyer Indemnitees
”)
from and against, and pay or reimburse Buyer Indemnitees for, any and all losses, Actions, Orders, Liabilities, damages (including
consequential damages), diminution in value, Taxes, interest, penalties, Liens, amounts paid in settlement and reasonable costs
and expenses (including reasonable expenses of investigation and court costs and reasonable attorneys’ fees and expenses),
(any of the foregoing, a “
Loss
”) suffered or incurred by, or imposed upon, any Buyer Indemnitee arising
in whole or in part out of or resulting directly or indirectly from: (a) any inaccuracy in or breach of any representation or
warranty made by Seller in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents,
instruments and undertakings furnished pursuant to this Agreement to which Seller is a party or made in connection herewith);
(b) any nonfulfillment or breach of any covenant, obligation or agreement made by or on behalf of Seller in this Agreement (including
all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to
this Agreement to which Seller is a party or made in connection herewith and therewith), including Seller’s obligations
with respect to Transfer Taxes under
Section 10.1
; (c) the existence of, or the failure of Seller to pay, perform or discharge
when due, any Retained Liability after the Closing; or (d) enforcing Buyer Indemnitees’ indemnification rights provided
for hereunder.
7.3.
Indemnification by Buyer.
Except as otherwise limited by this
ARTICLE VII
, Buyer shall indemnify, defend and hold harmless
Seller and its Representatives and any successor or permitted assign thereof (collectively, the “
Seller Indemnitees
”)
from and against, and pay or reimburse Seller Indemnitees for, any and all Losses, suffered or incurred by, or imposed upon, any
Seller Indemnitee arising in whole or in part out of or resulting directly or indirectly from: (a) any inaccuracy in or breach
of any representation or warranty made by Buyer in this Agreement (including all schedules, exhibits and annexes hereto and all
certificates, documents, instruments and undertakings furnished pursuant to this Agreement to which Buyer is a party or made in
connection herewith); (b) any nonfulfillment or breach of any covenant, obligation or agreement made by or on behalf of Buyer
in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings
furnished pursuant to this Agreement to which Buyer is a party or made in connection herewith and therewith); (c) the existence
of, or the failure of Buyer to pay, perform or discharge when due, any Assumed Liability after the Closing; or (d) enforcing Seller
Indemnitees’ indemnification rights provided for hereunder.
7.4.
Indemnification Procedures.
(a)
For the purposes of this Agreement, (i) the term “
Indemnitee
” shall refer to the Person or Persons indemnified,
or entitled, or claiming to be entitled, to be indemnified, pursuant to the provisions of
Section 7.2
or
7.3
,
as the case may be, and (ii) the term “
Indemnitor
” shall refer to the Person or Persons having the actual
or alleged obligation to indemnify pursuant to such provisions.
(b)
In order to make a claim for indemnification hereunder, the Indemnitee must provide written notice (a "
Claim Notice
”)
of such claim to the Indemnitor (and with respect to any claim against Seller prior to the Expiration Date, the Escrow Agent),
which Claim Notice shall include (i) a reasonable description of the facts and circumstances which relate to the subject matter
of such indemnification claim to the extent then known and (ii) the amount of Losses suffered by the Indemnitee in connection
with the claim to the extent known or reasonably estimable (provided, that the Indemnitee may thereafter in good faith adjust
the amount of Losses with respect to the claim by providing a revised Claim Notice to the Indemnitor and, if applicable, the Escrow
Agent); provided, that the copy of any Claim Notice provided to the Escrow Agent shall be redacted for any confidential or proprietary
information of the Indemnitor or the Indemnitees described in clause (i) above.
(c)
In the case of any claim for indemnification under this Agreement arising from a claim of a third party (including any Governmental
Authority), an Indemnitee must give a Claim Notice the Indemnitor of such third party claim promptly (and in any event within
thirty (30) days) after the Indemnitee’s receipt of notice of such claim;
provided
, that the failure to timely provide
such notice will not relieve an Indemnitor of its indemnification obligations except to the extent that the Indemnitor is actually
harmed thereby. The Indemnitor will have the right to defend and to direct the defense against any such claim in its name and
at its expense, and with counsel selected by the Indemnitor unless: (i) the Indemnitor fails to acknowledge fully its obligations
to the Indemnitee within fifteen (15) days after receiving notice of such third party claim or contests, in whole or in part,
its indemnification obligations therefor; (ii) if the Indemnitor is Seller, (A) the applicable third party claimant is a Governmental
Authority or a then-current customer of Buyer or any of its Affiliates or (B) an adverse judgment with respect to the claim will
establish a precedent materially adverse to the continuing business interests of Buyer or its Affiliates; (iii) there is a conflict
of interest between the Indemnitor and the Indemnitee in the conduct of such defense such that representation of both Indemnitor
and Indemnitee by the same counsel would violate professional standards of conduct for attorneys in the jurisdiction where the
Indemnitor’s counsel is practicing on behalf of the Indemnitor; (iv) the applicable third party alleges claims of fraud,
willful misconduct or intentional misrepresentation; (v) such claim is criminal in nature, could reasonably be expected to lead
to criminal proceedings, or seeks an injunction or other equitable relief against the Indemnitee; or (vi) the claim seeks or is
reasonably expected to seek damages or other amounts that would result in all or any portion of the Indemnitee’s right to
indemnification for such claim (when combined in the aggregate with the amount of all other pending and finally determined claims
against the Indemnitor) being either (A) if the Indemnitor is Seller, in excess of the then remaining Escrow Shares unless Seller
provides evidence reasonably acceptable to Buyer of Seller’s ability to pay all potential amounts with respect to such claim
and all other pending and finally determined claims against Seller, along with security or an escrow arrangement reasonably acceptable
to Buyer for such amounts, or (B) limited by the Indemnification Cap. If the Indemnitor elects, and is entitled, to compromise
or defend such claim, it will within fifteen (15) days (or sooner, if the nature of the claim so requires) notify the Indemnitee
of its intent to do so, and the Indemnitee will, at the request and expense of the Indemnitor, cooperate in the defense of such
claim. If the Indemnitor elects not to, or is not entitled under this
Section 7.4(c)
to, compromise or defend such claim,
fails to notify the Indemnitee of its election as herein provided or refuses to acknowledge or contests its obligation to indemnify
under this Agreement, the Indemnitee may pay, compromise or defend such claim. Notwithstanding anything to the contrary contained
herein, the Indemnitor will have no indemnification obligations with respect to any such claim which has been or will be settled
by the Indemnitee without the prior written consent of the Indemnitor (which consent will not be unreasonably withheld, delayed
or conditioned);
provided
,
however
, that notwithstanding the foregoing, the Indemnitee will not be required to refrain
from paying any claim which has matured by a court judgment or decree, unless an appeal is duly taken therefrom and exercise thereof
has been stayed, nor will it be required to refrain from paying any claim where the delay in paying such claim would result in
the foreclosure of a Lien upon any of the property or assets then held by the Indemnitee or where any delay in payment would cause
the Indemnitee material economic loss. The Indemnitor’s right to direct the defense will include the right to compromise
or enter into an agreement settling any claim by a third party;
provided
,
further
, that no such compromise or settlement
will obligate the Indemnitee to agree to any settlement that requires the taking or restriction of any action (including the payment
of money and competition restrictions) by the Indemnitee (other than the delivery of a release for such claim and customary confidentiality
obligations), except with the prior written consent of the Indemnitee (such consent not to be unreasonably withheld, conditioned
or delayed). Notwithstanding the Indemnitor’s right to compromise or settle in accordance with the immediately preceding
sentence, the Indemnitor may not settle or compromise any claim over the objection of the Indemnitee;
provided
,
however
,
that consent by the Indemnitee to settlement or compromise will not be unreasonably withheld, delayed or conditioned. The Indemnitee
will have the right to participate in the defense of any claim with counsel selected by it subject to the Indemnitor’s right
to direct the defense. The fees and disbursements of such counsel will be at the expense of the Indemnitee;
provided
,
however
,
that, in the case of any claim which seeks injunctive or other equitable relief against the Indemnitee, the fees and disbursements
of such counsel will be at the expense of the Indemnitor.
(d)
With respect to any direct indemnification claim under this Agreement that does not arise from a third-party claim, the Indemnitor
will have a period of thirty (30) days after receipt of the Claim Notice within which to respond thereto. If the Indemnitor does
not respond within such thirty (30) days, the Indemnitor will be deemed to have accepted responsibility for the Losses set forth
in the Claim Notice and will have no further right to contest the validity of the Claim Notice. If the Indemnitor responds within
such thirty (30) days after the receipt of the Claim Notice and rejects such claim in whole or in part, the Indemnitee will be
free to pursue such remedies as may be available to it under this Agreement, any Ancillary Documents or applicable Law.
7.5.
Limitations on Indemnification.
No Indemnitor shall be liable for an indemnification claim made under clause (a) of
Section
7.2
or
Section 7.3
, as the case may be: (a) for which a claim for indemnification is not asserted hereunder on or before
the applicable Survival Date; (b) unless and until the aggregate amount of Losses incurred by Buyer Indemnitees in the aggregate
under clause (a) of
Section 7.2
or by Seller Indemnitees in the aggregate under clause (a) of
Section 7.3
, as applicable,
exceeds Fifty Thousand U.S. Dollars ($50,000) (the “
Basket
”) in which case the applicable Indemnitor
shall be obligated to the applicable Indemnitee for the amount of all Losses of such Indemnitees from the first dollar of Losses
of the Indemnitees required to reach the Basket; or (c) to the extent Losses incurred by Buyer Indemnitees in the aggregate under
clause (a) of
Section 7.2
or by Seller Indemnitees in the aggregate under clause (a) of
Section 7.3
, as applicable,
exceed an amount equal to the value of the Escrow Shares (the “
Indemnification Cap
”). Notwithstanding
the foregoing: (i) the Indemnification Cap shall not apply to indemnification claims to the extent amounts are actually paid under
insurance maintained by the Indemnitor (or any of its Affiliates); and (ii) the Basket and the Indemnification Cap shall not apply
to indemnification claims that are based in whole or in part upon fraud, willful misconduct or intentional misrepresentation.
The Indemnification Cap and Basket shall apply only to indemnification claims made under clause (a) of
Section 7.2
or
Section
7.3
and shall not affect or apply to any other indemnification claim made pursuant to this Agreement, including those asserted
under any other clause of
Section 7.2
or
Section 7.3
.
7.6.
General Indemnification Provisions.
The amount of any Losses suffered or incurred by any Indemnitee shall be reduced by the
amount of any insurance proceeds or other cash receipts paid to the Indemnitee or any Affiliate thereof as a reimbursement with
respect to such Losses (and no right of subrogation shall accrue to any insurer hereunder, except to the extent that such waiver
of subrogation would prejudice any applicable insurance coverage), including any indemnification received by the Indemnitee or
such Affiliate from an unrelated party with respect to such Losses, net of the costs of collection and any related anticipated
future increases in insurance premiums resulting from such Loss or insurance payment. No investigation or knowledge by a party
of a breach of a representation or warranty of another party hereto shall affect the representations and warranties of the breaching
party or the recourse available to such first party under any provision of this Agreement (including this
ARTICLE VII
)
with respect thereto. For all purposes of this
ARTICLE VII
including for purposes determining whether there has been a
breach giving rise to the indemnification claim and the amount of Losses, all of the representations, warranties and covenants
set forth in this Agreement (including the schedules, exhibits and annexes hereto) that are qualified by materiality, Material
Adverse Effect or words of similar import or effect will be deemed to have been made without any such qualification. Unless otherwise
required by applicable Law, all indemnification payments will constitute adjustments to the Purchase Price for all Tax purposes,
and no party may take a position inconsistent with such characterization. In any claim for indemnification under this Agreement,
no Person shall be required to indemnify any Person for punitive damages or special damages, unless such punitive damages, or
special damages are actually awarded to a third party.
7.7.
Escrow; Timing of Payment; Right to Set-Off
. All claims for indemnification by a Buyer Indemnitee pursuant to this
ARTICLE
VII
shall first be asserted against the Escrow Shares in accordance with this Agreement and the Escrow Agreement. With respect
to any indemnification payment that includes Escrow Shares, the value of each Escrow Share for purposes of determining the indemnification
payment shall be Buyer Common Stock Price on the date hereof . Any indemnification obligation of an Indemnitor under this
ARTICLE
VII
will be paid within five (5) Business Days after the determination of such obligation in accordance with
Section 7.4
(and Buyer and Seller will provide or cause to be provided to the Escrow Agent any written instructions or other information
or documents required by the Escrow Agent to do so). The provisions of this
ARTICLE VII
notwithstanding, at the sole discretion
of Buyer and without limiting any other rights of Buyer Indemnitees under this Agreement or any Ancillary Document or at law or
equity, to the extent that a Buyer Indemnitee is determined in accordance with this Agreement to be entitled to indemnification
hereunder, if Seller fails or refuses to promptly indemnify such Buyer Indemnitee as provided herein then Buyer (or any other
Buyer Indemnitee) may offset the full amount to which such Buyer Indemnitee is entitled, in whole or in part, by reducing the
amount of any payment or other obligation due to Seller pursuant to this Agreement or any Ancillary Document, and any amounts
owed by Buyer pursuant to any outstanding indemnification claim by a Seller Indemnitee.
7.8.
Exclusive Remedies
. Except as otherwise set forth herein, the parties acknowledge and agree that their sole and exclusive
remedy with respect to any and all claims (other than claims arising from intentional fraud on the part of a party hereto in connection
with the transactions contemplated by this Agreement)] for any breach of any representation, warranty, covenant, agreement or
obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification
provisions set forth in this ARTICLE VII. In furtherance of the foregoing, each party hereby waives, to the fullest extent permitted
under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement
or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties
hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant
to the indemnification provisions set forth in this ARTICLE VII. Nothing in this Section 7.8 shall limit any Person's right to
seek and obtain any equitable relief to which any Person shall be entitled pursuant to this Agreement.
7.9.
Non-Compete; Non-Solicit
. For a period of 2 years following the Closing Date, Seller covenants and agrees with Buyer that
Seller (a) will not directly or indirectly own, manage, operate or consult with a business substantially similar to, or competitive
with, the Business and (b) will not solicit for employment any Transferred Employee.
ARTICLE
VIII
CLOSING CONDITIONS
8.1.
Conditions to Each Party’s Obligations
. The obligations of each party to consummate the transactions described herein
shall be subject to the satisfaction or written waiver (where permissible) by Buyer and Seller of the following conditions:
(a)
All Consents required to be obtained from or made with any Governmental Authority in order to consummate the transactions contemplated
by this Agreement, shall have been obtained or made.
(b)
The Consents required to be obtained from or made with any third Person (other than a Governmental Authority) in order to consummate
the transactions contemplated by this Agreement shall have each been obtained or made.
(c)
No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary
or permanent) or Order that is then in effect and which has the effect of making the transactions or agreements contemplated by
this Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by this Agreement.
(d)
There shall not be any pending Action brought by a third-party non-Affiliate to enjoin or otherwise restrict the consummation
of the Closing.
(e)
Buyer shall have held a special meeting of its stockholders (the “
Buyer Special Meetin
g”) in accordance
with the Delaware General Corporation Law (“
DGCL
”), Nasdaq Stock Market Rules and Buyer’s Organization
Documents, and the issuance of the Stock Consideration shall have been submitted to the vote of the stockholders of Buyer at Buyer
Special Meeting in accordance with the a proxy statement filed with the Commission and shall have been approved by the requisite
vote of the stockholders of Buyer at Buyer Special Meeting (the “
Required Buyer Stockholder Approval
”).
8.2.
Conditions to Obligations of Seller
. In addition to the conditions specified in
ARTICLE VIII
, the obligations of Seller
to consummate the transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by Seller) of
the following conditions:
(a)
All of the representations and warranties of Buyer set forth in this Agreement and in any certificate delivered by Buyer pursuant
hereto shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing
Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations
and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect
to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not
had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, Buyer and that do not materially
and adversely affect Buyer’s ability to consummate the transactions contemplated hereby.
(b)
Buyer shall have performed in all material respects all of Buyer’s obligations and complied in all material respects with
all of Buyer’s agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing
Date.
(c)
No Material Adverse Effect shall have occurred with respect to Buyer since the date of this Agreement.
8.3.
Conditions to Obligations of Buyer
. In addition to the conditions specified in
ARTICLE VIII
, the obligations of Buyer
to consummate the transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by Buyer) of
the following conditions:
(a)
All of the representations and warranties of Seller set forth in this Agreement and in any certificate delivered by Seller, shall
be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date,
except for (i) those representations and warranties that address matters only as of a particular date (which representations and
warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect
to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not
had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, Seller and that do not materially
and adversely affect Seller’s and each stockholder of Seller’s ability to consummate the transactions contemplated
hereby.
(b)
Seller shall have performed in all material respects all of its obligations and complied in all material respects with all of
its agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c)
No Material Adverse Effect shall have occurred with respect to Seller since the date of this Agreement.
(d)
Seller’s Stockholder’s shall have held a stockholder meeting or shall have taken action by written consent in lieu
of a meeting in accordance with the DGCL and Seller’s Organization Documents, and the execution and delivery of this Agreement
and each Ancillary Document to which Seller is a party or bound, the performance by Seller of its obligations hereunder and thereunder
and the consummation of the transactions contemplated hereby and thereby, including the transactions contemplated hereunder, shall
have been approved by the requisite vote or consent of the holders of the stockholders of Seller.
8.4.
Frustration of Condition
s. Notwithstanding anything contained herein to the contrary, no party may rely on the failure of
any condition set forth in this
ARTICLE VIII
to be satisfied if such failure was caused by the failure of such party or
its Affiliates (or with respect to Seller, any stockholder of Seller) failure to comply with or perform any of its covenants or
obligations set forth in this Agreement.
ARTICLE
IX
TERMINATION
9.1.
Termination
. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior
to the Closing as follows:
(a)
by mutual written consent of Buyer and Seller;
(b)
by written notice by Buyer or Seller if any of the conditions to the Closing set forth in
ARTICLE VIII
have not been satisfied
or waived by December 31, 2019 (the “
Outside Date
”);
provided
,
however
, the right
to terminate this Agreement under this
Section 9.1(b)
shall not be available to a Party if the breach or violation by such
Party or its Affiliates of any representation, warranty, covenant or obligation under this Agreement was the cause of, or resulted
in, the failure of the Closing to occur on or before the Outside Date;
(c)
by written notice by either Buyer or Seller if a Governmental Authority of competent jurisdiction shall have issued an Order or
taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement,
and such Order or other action has become final and non-appealable;
provided
,
however
, that the right to
terminate this Agreement pursuant to this
Section 9.1(c)
shall not be available to a Party if the failure by such Party
or its Affiliates to comply with any provision of this Agreement has been a substantial cause of, or substantially resulted in,
such action by such Governmental Authority;
(d)
by written notice by Seller, if (i) there has been a material breach by Buyer of any of its representations, warranties, covenants
or agreements contained in this Agreement, or if any representation or warranty of Buyer shall have become materially untrue or
materially inaccurate, in any case, which would result in a failure of a condition set forth in
Section 7.2(a)
or
Section
7.2(b)
to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of
such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20)
days after written notice of such breach or inaccuracy is provided by Seller or (B) the Outside Date;
(e)
by written notice by Buyer, if (i) there has been a breach by Seller of any of its representations, warranties, covenants or agreements
contained in this Agreement, or if any representation or warranty of such Parties shall have become untrue or inaccurate, in any
case, which would result in a failure of a condition set forth in
Section 7.3(a)
or
Section 7.3(b)
to be satisfied
(treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the
breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20) days after written notice
of such breach or inaccuracy is provided by Buyer or (B) the Outside Date;
(f)
by written notice by Buyer if there shall have been a Material Adverse Effect on Seller or its Subsidiaries following the date
of this Agreement which is uncured and continuing; or
(g)
by written notice by either Buyer or Seller, if Buyer Special Meeting has been held (including any adjournment or postponement
thereof), has concluded, Buyer’s stockholders have duly voted, and the Required Buyer Stockholder Approval was not obtained.
9.2.
Effect of Termination
. This Agreement may only be terminated in the circumstances described in
Section 9.1
and pursuant
to a written notice delivered by the applicable party to the other applicable party, which sets forth the basis for such termination,
including the provision of
Section 9.1
under which such termination is made. In the event of the valid termination of this
Agreement pursuant to
Section 9.1
, this Agreement shall forthwith become void, and there shall be no Liability on the part
of any party or any of their respective Representatives, and all rights and obligations of each party shall cease, except: (i)
Sections 6.2
,
6.3
,
ARTICLE X
and this
Section 9.2
shall survive the termination of this Agreement,
and (ii) nothing herein shall relieve any party from Liability for any willful breach of any representation, warranty, covenant
or obligation under this Agreement or any fraud claim against such party, in either case, prior to termination of this Agreement
(in each case of clauses (i) and (ii) above, subject to
ARTICLE VIII
). Without limiting the foregoing, and except as provided
in
Section 10.1
and this Section, but subject to
ARTICLE VIII
, the parties’ sole right prior to the Closing
with respect to any breach of any representation, warranty, covenant or other agreement contained in this Agreement by another
party or with respect to the transactions contemplated by this Agreement shall be the right, if applicable, to terminate this
Agreement pursuant to
Section 9.1
.
ARTICLE
X
GENERAL PROVISIONS
10.1.
Expenses.
Except as otherwise expressly provided in this Agreement, each party will pay all fees and expenses incurred by
it in connection with the negotiation, execution, delivery of, and the performance under, this Agreement and the Ancillary Documents
and the consummation of the transactions contemplated hereby and thereby. Notwithstanding the foregoing, all Taxes imposed in
connection with the transfer of the Purchased Assets and the Assumed Liabilities (“
Transfer Taxes
”),
whether such Taxes are assessed initially against Buyer or any Affiliate of Buyer or Seller or any Affiliate of Seller, shall
be borne and paid by Seller.
10.2.
Notices.
Any notice, request, instruction or other document to be given hereunder by a party hereto shall be in writing and
shall be deemed to have been given, (i) when received if given in person or by courier or a courier service, (ii) on the date
of transmission if sent by facsimile or email (with affirmative confirmation of receipt, and provided, that the party providing
notice shall within two (2) Business Days provide notice by another method under this
Section 10.2
) or (iii) three (3)
Business Days after being deposited in the U.S. mail, certified or registered mail, postage prepaid (or at such other address
for a party as shall be specified by like notice):
If
to Seller, to:
CBM
Biopharma, Inc.
One Rockefeller Plaza, Suite 1039
New
York, NY 10020
Attn: Scott Wilfong, CEO
Telephone No: (425) 223-0234
Email: scott.wilfong@gmail.com
|
|
with
a copy (which will not constitute notice) to:
Sheppard
Mullin
30 Rockefeller Plaza, 39th Floor
New
York, NY 10112
Attn: Richard A. Friedman, Esq.
Facsimile No.: (212) 655-1729
Telephone No.: (212) 634-3031
Email: rafriedman@sheppardmullin.com
|
|
|
|
If
to Buyer, to:
Spherix
Incorporated
One Rockefeller Plaza, 11th Floor
New
York, NY 10020
Attention: Anthony Hayes, CEO
Telephone No.: (212) 745-1372
Email:
ahayes@spherix.com
|
|
with
a copy (which will not constitute notice) to:
Ellenoff
Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attention: Robert F. Charron, Esq.
Facsimile No.: (212) 401-4741
Telephone
No.: (212) 370-1300
Email:
rcharron@egsllp.com
|
10.3.
Interpretation.
The parties acknowledge and agree that: (a) this Agreement and the Ancillary Documents are the result of negotiations
between the parties and will not be deemed or construed as having been drafted by any one party, (b) each party and its counsel
have reviewed and negotiated the terms and provisions of this Agreement (including any schedules, exhibits and annexes attached
hereto) and the Ancillary Documents and have contributed to their revision, (c) the rule of construction to the effect that any
ambiguities are resolved against the drafting party will not be employed in the interpretation of this Agreement or the other
Ancillary Documents, and (d) the terms and provisions of this Agreement and the Ancillary Documents will be construed fairly as
to all parties hereto and not in favor of or against any party, regardless of which party was generally responsible for the preparation
of this Agreement or such Ancillary Document. The table of contents and the headings and subheadings of this Agreement are for
reference and convenience purposes only and in no way modify, interpret or construe the meaning of specific provisions of the
Agreement. In this Agreement, unless the context otherwise requires: (i) whenever required by the context, any pronoun used in
this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and
verbs shall include the plural and vice versa; (ii) reference to any Person includes such Person’s successors and assigns
but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular
capacity excludes such Person in any other capacity; (iii) any accounting term used and not otherwise defined in this Agreement
or any Ancillary Document has the meaning assigned to such term in accordance with GAAP; (iv) “including” (and with
correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding
such term and shall be deemed in each case to be followed by the words “without limitation”; (v) the words “herein,”
“hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case
to refer to this Agreement as a whole and not to any particular Section or other subdivision of this Agreement; (vi) the word
“if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase
“and only if”; (vii) the term “or” means “and/or”; (viii) reference to any statute includes
any rules and regulations promulgated thereunder; (ix) any agreement, instrument, insurance policy, Law or Order defined or referred
to herein or in any agreement or instrument that is referred to herein means such agreement, instrument, insurance policy, Law
or Order as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes, regulations, rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments incorporated therein; and (x) except as otherwise indicated,
all references in this Agreement to the words “Section,” “Schedule”, “Exhibit”, “Annex”
are intended to refer to sections, schedules, exhibits and annexes to this Agreement.
10.4.
Severability.
In case any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable
in any respect, the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired.
Any illegal or unenforceable term will be deemed to be void and of no force and effect only to the minimum extent necessary to
bring such term within the provisions of applicable Law and such term, as so modified, and the balance of this Agreement will
then be fully enforceable. The parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable
provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or
unenforceable provision.
10.5.
Assignment.
This Agreement may not be assigned by any party without the prior written consent of the other parties hereto,
and any attempted assignment in violation of this
Section 10.5
shall be null and void ab initio;
provided
,
however
,
that after the Closing, Buyer may assign its rights and benefits hereunder (i) to any Affiliate of Buyer (provided, that Buyer
shall remain primarily responsible for its obligations hereunder) or (ii) to any Person acquiring all or substantially all of
the Purchased Assets or all or substantially all of the assets of Buyer and its Subsidiaries taken as a whole (provided that the
assignee expressly assumes the obligations of the assignor hereunder). Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of each party hereto.
10.6.
No Third-Party Beneficiaries.
Except for the indemnification rights of Buyer Indemnitees and Seller Indemnitees set forth
herein, this Agreement is for the sole benefit of the parties hereto and their successors and permitted assigns and nothing herein
expressed or implied shall give or be construed to give to any Person, other than the parties hereto and such successors and permitted
assigns, any legal or equitable rights hereunder.
10.7.
Amendment; Waiver.
This Agreement may not be amended or modified except by an instrument in writing signed by each of the
parties hereto. Notwithstanding anything to the contrary contained herein: (a) the failure of any party at any time to require
performance by the other of any provision of this Agreement will not affect such party’s right thereafter to enforce the
same; (b) no waiver by any party of any default by any other party will be valid unless in writing and acknowledged by an authorized
representative of the non-defaulting party, and no such waiver will be taken or held to be a waiver by such party of any other
preceding or subsequent default; and (c) no extension of time granted by any party for the performance of any obligation or act
by any other party will be deemed to be an extension of time for the performance of any other obligation or act hereunder.
10.8.
Remedies.
Except as specifically set forth in this Agreement, any party having any rights under any provision of this Agreement
will have all rights and remedies set forth in this Agreement and all rights and remedies which such party may have been granted
at any time under any other contract or agreement and all of the rights which such party may have under any applicable Law. Except
as specifically set forth in this Agreement, any such party will be entitled to (a) enforce such rights specifically, without
posting a bond or other security or proving that monetary damages would be inadequate (including Buyer’s right to equitable
relief, including injunction and specific enforcement, in the event of any breach of
Section 6.3
hereof), (b) to recover
damages by reason of a breach of any provision of this Agreement and (c) to exercise all other rights granted by applicable Law.
The exercise of any remedy by a party will not preclude the exercise of any other remedy by such party.
10.9.
Dispute Resolution.
Any and all disputes, controversies and claims (other than applications for a temporary restraining order,
preliminary injunction, permanent injunction or other equitable relief or an application for enforcement of a resolution under
this
Section 10.9
) arising out of, related to, or in connection with this Agreement or the transactions contemplated hereby
(a “
Dispute
”) shall be governed by this
Section 10.9
. A party must, in the first instance, provide
written notice of any Disputes to the other parties subject to such Dispute, which notice must provide a reasonably detailed description
of the matters subject to the Dispute. The parties involved in such Dispute shall seek to resolve the Dispute on an amicable basis
within ten (10) Business Days of the notice of such Dispute being received by such other parties subject to such Dispute (the
“
Resolution Period
”);
provided
, that if any Dispute would reasonably be expected to have become
moot or otherwise irrelevant if not decided within sixty (60) days after the occurrence of such Dispute, then there shall be no
Resolution Period with respect to such Dispute. Any Dispute that is not resolved during the Resolution Period may immediately
be referred to and finally resolved by arbitration pursuant to the then-existing Expedited Procedures of the Commercial Arbitration
Rules (the “
AAA Procedures
”) of the American Arbitration Association (the “
AAA
”).
Any party involved in such Dispute may submit the Dispute to the AAA to commence the proceedings after the Resolution Period.
To the extent that the AAA Procedures and this Agreement are in conflict, the terms of this Agreement shall control. The arbitration
shall be conducted by one arbitrator nominated by the AAA promptly (but in any event within five (5) Business Days) after the
submission of the Dispute to the AAA and reasonably acceptable to each party subject to the Dispute, which arbitrator shall be
a commercial lawyer with substantial experience arbitrating disputes under acquisition agreements. The arbitrator shall accept
his or her appointment and begin the arbitration process promptly (but in any event within five (5) Business Days) after his or
her nomination and acceptance by the parties subject to the Dispute. The proceedings shall be streamlined and efficient. The arbitrator
shall decide the Dispute in accordance with the substantive law of the State of New York. Time is of the essence. Each party shall
submit a proposal for resolution of the Dispute to the arbitrator within twenty (20) Business Days after confirmation of the appointment
of the arbitrator. The arbitrator shall have the power to order any party to do, or to refrain from doing, anything consistent
with this Agreement, the Ancillary Documents and applicable Law, including to perform its contractual obligation(s); provided,
that the arbitrator shall be limited to ordering pursuant to the foregoing power (and, for the avoidance of doubt, shall order)
the relevant party (or parties, as applicable) to comply with only one or the other of the proposals. The arbitrator’s award
shall be in writing and shall include a reasonable explanation of the arbitrator’s reason(s) for selecting one or the other
proposal. The seat of arbitration shall be in New York County, State of New York. Judgment on the arbitration award may be entered
in any court having jurisdiction over the subject matter of controversy.
10.10.
Governing Law; Jurisdiction;
Waiver
of Jury Trial
.
This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without giving effect to its choice of law principles). Except
as expressly set forth in this Agreement, including
Section 10.9
hereof, for purposes of any Action arising out of or in
connection with this Agreement or any transaction contemplated hereby, each of the parties hereto (a) irrevocably submits to the
exclusive jurisdiction and venue of any state or federal court located within New York County in the State of New York (or in
any appellate courts thereof), (b) agrees that service of any process, summons, notice or document by U.S. registered mail to
such party’s respective address set forth in
Section 10.2
shall be effective service of process for any Action with
respect to any matters to which it has submitted to jurisdiction in this
Section 10.10
, and (c) waives and covenants not
to assert or plead, by way of motion, as a defense or otherwise, in any such Action, any claim that it is not subject personally
to the jurisdiction of such court, that the Action is brought in an inconvenient forum, that the venue of the Action is improper
or that this Agreement or the subject matter hereof may not be enforced in or by such court, and hereby agrees not to challenge
such jurisdiction or venue by reason of any offsets or counterclaims in any such Action. Each party hereto agrees that a final
judgement in any such Action shall be conclusive and may be enforced in each other jurisdiction by suit on the judgment or in
any other manner provided by law or in equity.
Each party hereto hereby knowingly, voluntarily
and intentionally waives any right such party may have to a trial by jury in respect to any litigation based hereon, or arising
out of, under, or in connection with this Agreement and any agreement contemplated to be executed in connection herewith, or any
course of conduct, course of dealing, statements (whether verbal or written) or actions of any party in connection with such agreements,
in each case, whether now existing or hereafter arising and whether in tort, contract or otherwise. Each party hereto acknowledges
that it has been informed by the other parties hereto that this
Section 10.10
constitutes a material inducement upon which
they are relying and will rely in entering into this Agreement.
10.11.
Entire Agreement.
This Agreement (including the schedules, exhibits and annexes hereto, which are hereby incorporated herein
by reference and deemed part of this Agreement), together with the Ancillary Documents constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and supersede all prior agreements and undertakings, both written and
oral, with respect to the subject matter hereof.
10.12.
Counterparts.
This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one
and the same agreement. A photocopy, faxed, scanned and/or emailed copy of this Agreement or any Ancillary Document or any signature
page to this Agreement or any Ancillary Document, shall have the same validity and enforceability as an originally signed copy.
[Remainder
of Page Intentionally Left Blank; Signatures Appear on Following Page]
IN
WITNESS WHEREOF
, the parties hereto have caused this Asset Purchase Agreement to be duly executed and delivered as of the
date first written above.
|
Seller
:
|
|
|
|
CBM
BIOPHARMA, INC.
, a Delaware corporation
|
|
|
|
|
By:
|
/s/
Scott Wilfong
|
|
Name:
|
Scott Wilfong
|
|
Title:
|
Chief Executive Officer
|
|
|
|
|
Buyer
:
|
|
|
|
SHPERIX
INCORPORATED
, a Delaware corporation
|
|
|
|
|
By:
|
/s/
Anthony Hayes
|
|
Name:
|
Anthony Hayes
|
|
Title:
|
Chief Executive Officer
|
[Signature Page to Asset Purchase Agreement]
Annex
I
Definitions
1.
Certain Defined Terms
.
As used in the Agreement, the following terms shall have the following meanings:
“
Action
”
means any notice of noncompliance or violation, or any claim, demand, charge, action, suit, litigation, audit, settlement, complaint,
stipulation, assessment or arbitration, or any request (including any request for information), inquiry, hearing, proceeding or
investigation, by or before any Governmental Authority.
“
Affiliate
”
means, as applied to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect
common control with, such Person, where “control” (including with correlative meanings, the terms “controlling,”
“controlled by” and “under common control with”), as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
“
Ancillary
Document
” means each agreement, instrument or document attached hereto as an exhibit, including the Bill of Sale,
the Certificate of Designation, the Escrow Agreement, the Employee Agreements, and the other agreements, certificates and instruments
to be executed or delivered by any of the parties hereto in connection with or pursuant to this Agreement.
“
Business
Day
” means any day that is not a Saturday, Sunday or any other day on which banks are required or authorized by
Law to be closed in New York, New York.
“
Buyer
Common Stock Price
” means an amount equal to $3.61 per share; provided, that in the event that any equity securities
are issued or issuable by Buyer (or its successor) after the Closing with respect to shares of Buyer Common Stock (whether by
way of any equity dividend, equity split or reverse equity split or in exchange for or upon conversion of such shares or otherwise
in connection with a combination of shares, recapitalization, merger, consolidation or other corporation reorganization), Buyer
Common Stock Price thereafter will be equitably adjusted for any such events are reasonably determined in good faith by Buyer.
“
Buyer
Preferred Stock
” means the shares of Buyer’s Series L Convertible Preferred Stock issued or issuable hereunder
having the rights, preferences and privileges set forth in the Certificate of Designation.
“
Certificate
of Designation
” means the certificate of designation of preferences, rights and limitations of Buyer Preferred Stock
to be filed prior to the Closing with the Secretary of State of Nevada, in the form of
Exhibit D
attached hereto.
“
Code
”
means the Internal Revenue Code of 1986 and any successor statute thereto, as amended. Reference to a specific section of the
Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation
amending, supplementing or superseding such section.
“
Confidential
Information
” means the terms and provisions of this Agreement and any information concerning the Purchased Assets,
the Assumed Liabilities or the Business or, to the extent disclosed in connection with this Agreement or the Ancillary Documents
or the transactions contemplated hereby or thereby, Buyer or its Affiliates that is not generally available to the public, including
Trade Secrets, customer lists, details of customer or consultant contracts, pricing policies, operational methods and marketing
plans or strategies, and any information disclosed to Seller or Buyer or their respective Affiliates by third parties to the extent
that they have an obligation of confidentiality in connection therewith;
provided
,
however
, that Confidential Information
shall not include any information which, at the time of disclosure, is generally available publicly and was not disclosed in breach
of this Agreement by Seller or its Representatives.
“
Contract
”
means any contract, agreement, binding arrangement, commitment or understanding, bond, note, indenture, mortgage, debt instrument,
license (or any other contract, agreement or binding arrangement concerning Intellectual Property), franchise, lease or other
instrument or obligation of any kind, written or oral (including any amendments or other modifications thereto).
“
Copyrights
”
means all works of authorship, mask works and all copyrights therein, including all renewals and extensions, copyright registrations
and applications for registration and renewal, and non-registered copyrights.
“
Disclosure
Schedules
” means the disclosure schedules to this Agreement dated as of the date hereof and incorporated by reference
into and forming a part of this Agreement.
“
Employee
Agreements
” means the offer letters and agreements of employment between Buyer and each of the Transferred Employees,
in the forms reasonably agreed to by Buyer (the) duly executed by each such Transferred Employee set forth on Exhibit C.
“
Environmental
Condition
” means any contamination or damage to the environment caused by or relating to the use, handling, storage,
treatment, recycling, generation, transportation, release, spilling, leaching, pumping, pouring, emptying, discharging, injection,
escaping, disposal, dumping or threatened release of Hazardous Materials by any Person. With respect to claims by employees or
other third parties, Environmental Condition also includes the exposure of Persons to amounts of Hazardous Materials.
“
Environmental
Laws
” means all Laws relating to pollution or protection of the environment, natural resources and health, safety
and fire prevention, including those relating to emissions, discharges, releases or threatened releases of Hazardous Material
into the environment (including ambient air, surface water, groundwater or land), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of Hazardous Material.
“
ERISA
”
means the Employee Retirement Income Security Act of 1974 and any successor statute thereto, as amended. Reference to a specific
section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
“
GAAP
”
means United States generally accepted accounting principles applied on a consistent basis.
“
Governmental
Authority
” means any federal or national, state or provincial, municipal or local government, governmental authority,
regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality, political
subdivision, court, tribunal, official arbitrator or arbitral body in each case whether domestic or foreign.
“
Hazardous
Material
” means (a) all substances, materials, chemicals, compounds, pollutants, gasses, liquids or wastes regulated
by, under or pursuant to any Environmental Laws, including the Resource Conservation and Recovery Act, 42 U.S.C. §§
6901 et seq., the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. §§ 9601 et
seq., the Clean Water Act, 33 U.S.C. §§1251 et seq., the Clean Air Act, 42 U.S.C. §§ 7401 et seq., the Toxic
Substances Control Act, 15 U.S.C. §§ 2601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, Title
III of Public Law 99-499, the Safe Drinking Water Act, and any and all foreign (whether national, provincial or local), state
or local counterparts thereto or other similar foreign (whether national, provincial or local), state or local laws and orders,
including any and all rules and regulations promulgated thereunder, or any common law theory based on nuisance, negligence, product
liability, trespass, ultrahazardous activity or strict liability; and (b) asbestos, petroleum, any fraction or product of crude
oil or petroleum, radioactive materials, radon, mold, urea formaldehyde insulation and polychlorinated biphenyls.
“
Indebtedness
”
means, without duplication, (a) the outstanding principal of, and accrued and unpaid interest on and other amounts owed with respect
to, all bank or other third party indebtedness for borrowed money of Seller, including indebtedness under any bank credit agreement
and any other related agreements and all obligations of Seller evidenced by notes, debentures, bonds or other similar instruments
for the payment of which Seller is responsible or liable, (b) all obligations of Seller for the reimbursement of any obligor on
any line or letter of credit, banker’s acceptance, guarantee or similar credit transaction, in each case, that has been
drawn or claimed against, (c) all obligations of Seller all obligations for the deferred purchase price of property or services
(other than trade payables incurred in the ordinary course of business), (d) all interest rate and currency swaps, caps, collars
and similar agreements or hedging devices under which payments are obligated to be made by Seller, whether periodically or upon
the happening of a contingency, (e) all obligations of Seller secured by a Lien (other than a Permitted Lien) on any asset of
Seller, whether or not such obligation is assumed by Seller, (f) any premiums, prepayment fees or other penalties, fees, costs
or expenses associated with payment of any Indebtedness and (g) all obligation described in clauses (a) through (f) above of any
other Person which is directly or indirectly guaranteed by Seller or which Seller has agreed (contingently or otherwise) to purchase
or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.
“
Intellectual
Property
” means all of the following, including any applications to register any of the following, as they exist
in any jurisdiction throughout the world: (a) Patents; (b) Trademarks; (c) Copyrights; (d) Trade Secrets; (e) all domain name
and domain name registrations, web sites and web pages and related rights, registrations, items and documentation related thereto;
(f) Software; (g) rights of publicity and privacy, and moral rights, and (h) all licenses, sublicenses, permissions, and other
agreements related to the preceding property.
“
IRS
”
means the U.S. Internal Revenue Service or any successor entity.
“
Knowledge
”
means: (i) with respect to Seller, the knowledge of a particular matter by any of the directors or officers of Seller, after reasonable
inquiry; and (ii) with respect to Buyer, the actual knowledge of a particular matter by any of the officers of Buyer, after reasonable
inquiry.
“
Law
”
means any federal, state, local, municipal, foreign or other law, statute, legislation, principle of common law, ordinance, code,
edict, decree, proclamation, treaty, convention, rule, regulation, directive, requirement, writ, injunction, settlement, Permit
or Order that is or has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into
effect by or under the authority of any Governmental Authority.
“
Liabilities
”
means any and all debts, liabilities and obligations of any nature whatsoever, whether accrued or fixed, absolute or contingent,
mature or unmatured or determined or determinable, including those arising under any Law, Action, Order or Contract.
“
Lien
”
means any interest (including any security interest), pledge, mortgage, lien, encumbrance, charge, claim or other right of third
parties, including any spousal interests (community or otherwise), whether created by law or in equity, including any such restriction
on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.
“
Material
Adverse Effect
” means, with respect to Seller, any event, fact, condition, change, circumstance, occurrence or effect,
which, either individually or in the aggregate with all other events, facts, conditions, changes, circumstances, occurrences or
effects, (a) has had, or would reasonably be expected to have, a material adverse effect on the business, operations, properties,
prospects, assets, Liabilities, value, condition (financial or otherwise), licenses or results of operations of the Business or
the Purchased Assets or the Assumed Liabilities or (b) does or would reasonably be expected to materially impair or delay the
ability of Seller to perform its obligations under this Agreement and the Ancillary Documents or to consummate the transactions
contemplated hereby and thereby;
provided
,
however
, that a Material Adverse Effect will not include any adverse
effect or change resulting from any change, circumstance or effect relating to (A) the economy in general, (B) securities markets,
regulatory or political conditions in the United States (including terrorism or the escalation of any war, whether declared or
undeclared or other hostilities), (C) changes in applicable Laws or GAAP or the application or interpretation thereof or (D) a
natural disaster (provided, that in the cases of clauses (A) through (D), the Business is not disproportionately affected by such
event as compared to other similar companies and businesses in similar industries and geographic regions as the Business).
“
OFAC
”
means the Office of Foreign Assets Control of the U.S. Treasury Department
“
Order
”
means any order, writ, rule, judgment, injunction, decree, stipulation, determination or award made, entered, rendered or otherwise
put into effect by, with or under the authority of any Governmental Authority.
“
Ordinary
Course
” means, with respect to a Person, an action taken by such Person if (a) such action is recurring in nature,
is consistent with the past practices of the Person and is taken in the ordinary course of the normal day-to-day operations of
the Person; and (b) such action is not required to be authorized by the equity holders of such Person, the board of directors
(or equivalent) of such Person or any committee of the board of directors (or equivalent) of such Person and does not require
any other special authorization of any nature. Unless the context or language herein requires otherwise, each reference to Ordinary
Course will be deemed to be a reference to Ordinary Course of Seller.
“
Organizational
Documents
” means a company’s certificate of incorporation, certificate of formation, articles of organization
or other equivalent charter document and bylaws, operating agreement or other equivalent document.
“
Patents
”
means all patents, patent applications and the inventions, designs and improvements described and claimed therein, patentable
inventions, and other patent rights (including any divisionals, continuations, continuations-in-part, substitutions, or reissues
thereof, whether or not patents are issued on any such applications and whether or not any such applications are amended, modified,
withdrawn, or refiled).
“
Permit
”
means any federal, state, local, foreign or other third-party permit, grant, easement, consent, approval, authorization, exemption,
license, franchise, concession, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation,
rating, registration or qualification that is or has been issued, granted, given or otherwise made available by or under the authority
of any Governmental Authority or other Person.
“
Permitted
Liens
” means any (a) statutory Liens of landlords, carriers, warehousemen, mechanics and materialmen and other similar
Liens imposed by Law in the Ordinary Course for sums not yet due and payable; and (b) Liens for current Taxes not yet due and
payable.
“
Person
”
shall include any individual, trust, firm, corporation, limited liability company, partnership, Governmental Authority or other
entity or association, whether acting in an individual, fiduciary or any other capacity.
“
Qualified
Financing
” means, the sale by Buyer of Buyer Common Stock, Series L convertible preferred stock or any other equity
or equity-linked financing of Buyer to investors in one or more transactions after the date hereof for which Buyer receives aggregate
gross proceeds of greater than Two Million U.S. Dollars ($2,000,000).
“
Representative
”
means, as to any Person, such Person’s Affiliates and the managers, directors, officers, employees, independent contractors,
consultants, advisors (including financial advisors, counsel and accountants), agents and other representatives of such Person
and its Affiliates.
“
Software
”
means all computer software, including all source code, object code, and documentation related thereto and all software modules,
assemblers, applets, compilers, flow charts or diagrams, tools and databases.
“
Subsidiary
”
means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association
or other business entity, a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof,
a Person or Persons will be deemed to have a majority ownership interest in a partnership, association or other business entity
if such Person or Persons will be allocated a majority of partnership, association or other business entity gains or losses or
will be or control the managing director, managing member, general partner or other managing Person of such partnership, association
or other business entity.
“
Tax
”
means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation,
environmental, natural resources, customs duties, franchise, withholding, social security (or similar), payroll, unemployment,
disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum,
estimated tax, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or
not, including such item for which Liability arises from the application of Treasury Regulation 1.1502-6, as a transferee or successor-in-interest,
by contract or otherwise, and any Liability assumed or arising as a result of being, having been, or ceasing to be a member of
any Affiliated Group (as defined in Section 1504(a) of the Code) (or being included or required to be included in any Tax Return
relating thereto) or as a result of any Tax indemnity, Tax sharing, Tax allocation or similar Contract.
“
Tax
Return
” means any return, report, information return, schedule, certificate, statement or other document (including
any related or supporting information) filed or required to be filed with a Taxing Authority in connection with any Tax, or, where
none is required to be filed with a Taxing Authority, the statement or other document issued by a Taxing Authority in connection
with any Tax.
“
Taxing
Authority
” means any Governmental Authority responsible for the imposition or collection of any Tax.
“
Trade
Secrets
” means, as they exist in any jurisdiction throughout the world, any trade secrets, confidential business
information, concepts, ideas, designs, research or development information, processes, procedures, techniques, technical information,
specifications, operating and maintenance manuals, engineering drawings, methods, know-how, data, mask works, discoveries, inventions,
modifications, extensions, improvements, and any other information, however documented, that is a trade secret within the meaning
of the applicable trade secret protection Laws, including the Uniform Trade Secrets Act.
“
Trademarks
”
means, as they exist in any jurisdiction throughout the world, any trademarks, service marks, trade dress, trade names, brand
names, Internet domain names, designs, logos, or corporate/company names (including, in each case, the goodwill associated therewith),
whether registered or unregistered, and all registrations and applications for registration and renewal thereof.
“
Transaction
Bonuses
” means the aggregate of all amounts payable as a result of the sale of the Purchased Assets (or all or substantially
all of the assets of Seller) to Buyer or other similar provisions contained in any agreements binding upon Seller, including all
bonuses and severance payments, retention obligations for retention agreements entered into in contemplation of a potential sale
of the Purchased Assets (or other anticipated change of control of Seller), termination payments to consultants or independent
contractors and any settlement of any such bonus or severance payment obligations, obligations related to terminated equity options,
or obligations related to terminated equity appreciation, phantom equity, profit participation and/or similar rights entered into
by Seller at or prior to the Closing, and including Seller’s portion of any withholding Taxes on such amounts.
“
Transaction
Expenses
” means the aggregate of (i) all fees, commissions, costs and expenses incurred by or on behalf of Seller
in connection with the negotiation, execution or performance of this Agreement or the Ancillary Documents or the consummation
of the transactions contemplated hereby or thereby (or incurred in connection with the transactions hereunder or thereunder) including
any of the foregoing payable to legal counsel, accountants, investment bankers, financial advisors, brokers, finders, or consultants,
and (ii) any Transfer Taxes, whether such Taxes are assessed initially against Buyer or Seller or any of their respective Affiliates.
“
Underlying
Shares
” means the shares of Buyer Common Stock issued and issuable upon conversion of Buyer Preferred Stock and
issued and issuable in lieu of the cash payment of dividends on the Preferred Stock in accordance with the terms of the Certificate
of Designation.
EXHIBIT
A
Escrow
Agreement
To
be mutually agreed to between the Buyer and the Seller prior to closing.
EXHIBIT
B
Bill
of Sale
EXHIBIT
C
Employee
Agreements
To
be mutually agreed to by the Buyer and the Seller.
EXHIBIT
D
Certificate
of Designation
EXHIBIT
E
Leak-out
Agreement
AMENDMENT NO. 1 TO ASSET PURCHASE
AGREEMENT
This Amendment No.
1 (this “
Amendment No. 1
”) to the Purchase Agreement (as defined below) is made and entered into as of
May 30, 2019, by and between Spherix Incorporated, a Delaware corporation (“
Buyer
”), and CBM BioPharma,
Inc., a Delaware corporation (“
Seller
”). Capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Purchase Agreement.
WHEREAS
, Buyer
and Seller (collectively, the “
Parties
”) have entered into that certain Asset Purchase Agreement, dated
as of May 15, 2019, in the form attached hereto as
Exhibit A
(the “
Purchase Agreement
”); and
WHEREAS
, the
Parties now desire to amend the Purchase Agreement on the terms and conditions set forth herein.
NOW, THEREFORE
,
in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and in accordance with the terms of the Purchase Agreement, the Parties hereto, intending to be legally bound, do
hereby acknowledge and agree as follows:
1.
Amendments to
Purchase Agreement
. The Parties hereby agree that the Purchase Agreement is hereby amended as follows:
Section 9.2
of the Purchase Agreement is hereby amended and restated in its entirety as follows:
9.2 Effect of Termination
.
(a) This Agreement may only be terminated
in the circumstances described in
Section 9.1
and pursuant to a written notice delivered by the applicable party to the
other applicable party, which sets forth the basis for such termination, including the provision of
Section 9.1
under which
such termination is made. In the event of the valid termination of this Agreement pursuant to
Section 9.1
, this Agreement
shall forthwith become void, and there shall be no Liability on the part of any party or any of their respective Representatives,
and all rights and obligations of each party shall cease, except: (i)
Sections 6.2
,
6.3
,
ARTICLE X
and this
Section 9.2
shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any party from Liability
for any willful breach of any representation, warranty, covenant or obligation under this Agreement or any fraud claim against
such party, in either case, prior to termination of this Agreement (in each case of clauses (i) and (ii) above, subject to
ARTICLE
VIII
). Without limiting the foregoing, and except as provided in
Section 10.1
and this Section, but subject to
ARTICLE
VIII
, the parties’ sole right prior to the Closing with respect to any breach of any representation, warranty, covenant
or other agreement contained in this Agreement by another party or with respect to the transactions contemplated by this Agreement
shall be the right, if applicable, to terminate this Agreement pursuant to
Section 9.1
.
(b) In the event that this Agreement
is terminated by Seller (i) pursuant to
Section 9.1(d)
or
9.1(g)
, then Buyer shall deliver to Seller or Seller’s
designee, a certificate(s) representing an aggregate of 250,000 shares of Buyer Common Stock (the “
Buyer Termination
Fee
”) within two (2) Business Days of termination, it being understood that in no event shall Seller be entitled
to the Buyer Termination Fee referred to in this
Section 9.2(b)
on more than one (1) occasion.
2.
Miscellaneous
.
a) Except as modified
by this Amendment No. 1, all terms and conditions of the Purchase Agreement shall remain in full force and effect and are hereby
in all respects ratified and affirmed. All references in the Purchase Agreement to the “Agreement” shall be deemed
to refer to the Purchase Agreement, as amended by this Amendment No. 1.
b) This Amendment No.
1 may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one
and the same instrument. An executed facsimile or electronic .pdf counterpart of this Amendment No. 1 shall be deemed to be an
original for all purposes.
c) This Amendment No.
1 shall be governed by and interpreted in accordance with the laws of the State of Delaware (without giving effect to its choice
of law principles). For purposes of any Action arising out of or in connection with this Amendment No. 1 or any transaction contemplated
hereby, each of the Parties (a) irrevocably submits to the exclusive jurisdiction and venue of any state or federal court located
within New York County in the State of New York (or in any appellate courts thereof), (b) agrees that service of any process, summons,
notice or document by U.S. registered mail to such party’s respective address shall be effective service of process for any
Action with respect to any matters to which it has submitted to jurisdiction in this
Section 2(c)
, and (c) waives and covenants
not to assert or plead, by way of motion, as a defense or otherwise, in any such Action, any claim that it is not subject personally
to the jurisdiction of such court, that the Action is brought in an inconvenient forum, that the venue of the Action is improper
or that this Amendment No. 1 or the subject matter hereof may not be enforced in or by such court, and hereby agrees not to challenge
such jurisdiction or venue by reason of any offsets or counterclaims in any such Action.
d) Each provision of
this Amendment No. 1 shall be considered severable and if for any reason any provision or provisions herein are determined to be
invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair
the operation of or affect those portions of this Amendment No. 1 which are valid, enforceable and legal.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF
, the Parties have
executed this Amendment No. 1 as of the day and year first written above.
|
SPHERIX INCORPORATED
,
a Delaware corporation
|
|
|
|
|
By:
|
/s/ Anthony Hayes
|
|
|
Name: Anthony Hayes
|
|
|
Title: Chief Executive Officer
|
|
CBM BIOPHARMA, INC.
,
a Delaware corporation
|
|
|
|
|
By:
|
/s/ Scott Wilfong
|
|
|
Name: Scott Wilfong
|
|
|
Title: Chief Executive Officer
|
[Signature Page to Amendment No. 1 to Asset
Purchase Agreement]
ANNEX B
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SPHERIX INCORPORATED
Under Section 242 of the Delaware General
Corporation Law
Pursuant to the provisions
of Section 242 of the Delaware General Corporation Law, the undersigned, being a duly authorized officer of Spherix Incorporated,
a corporation organized and existing under the Delaware General Corporation Law (the “
Corporation
”), does hereby
certify and set forth as follows:
FIRST: The
name of the corporation is Spherix Incorporated. The Corporation was originally incorporated under the name Biospherics Incorporated.
SECOND: The
date of the filing of the Corporation’s original Certificate of Incorporation with the Secretary of State of the State of
Delaware was May 1, 1992. On April 24, 2014, the Corporation filed an Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware. On March 2, 2016, the Corporation filed a Certificate of Amendment to the Amended
and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. On May 9, 2019, the Corporation
filed another Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware.
THIRD: This
Certificate of Amendment was duly adopted in accordance with the General Corporation Law of the State of Delaware by the Board
of Directors and stockholders of the Corporation. Following adoption of a resolution by the Corporation’s Board of Directors
declaring its advisability and calling a meeting of the stockholders entitled to vote in respect thereof, a meeting of the stockholders
of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State
of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. This
Certificate of Amendment was duly adopted at said meeting of the stockholders in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
FOURTH: Effective
as of 12:01 a.m., Eastern time, on [_________, 2019] (the “
Effective Time
”), Article FOURTH of the Corporation’s
Amended and Restated Certificate of Incorporation, as amended, is hereby amended in its entirety such that, as amended, Article
FOURTH shall read in its entirety as follows:
“A. The total number of shares
of stock of all classes that the Corporation shall have authority to issue is One Hundred Forty-Nine Million (149,000,000) shares,
consisting of Ninety-Nine Million (99,000,000) shares of common stock, par value $0.0001 per share (the “
Common Stock
”),
and Fifty Million (50,000,000) shares of preferred stock, par value $0.0001 per share (the “
Preferred Stock
”).
B.
Blank
Check Powers
. The Corporation may issue any class of the Preferred Stock in any series. The Board
of Directors shall have authority to establish and designate series, and to fix the number of shares included in each such
series and the variations in the relative rights, preferences and limitations as between series, provided that, if the stated
dividends and amounts payable on liquidation are not paid in full, the shares of all series of the same class shall share
ratably in the payment of dividends including accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, and in any distribution of assets other than by way of dividends
in accordance with the sums which would be payable on such distribution if all sums payable were discharged in
full. Shares of each such series when issued shall be designated to distinguish the shares of each series from
shares of all other series.
C. On February 1, 2013, the Corporation
filed a Certificate of Designation designating the rights, preferences and terms of its Series A Participating Preferred Stock,
which is attached hereto as
Exhibit A
. On March 4, 2013, the Corporation filed a Certificate of Designation designating
the rights, preferences and terms of its Series C Convertible Preferred Stock, which is attached hereto as
Exhibit B
.
On April 2, 2013, the Corporation filed a Certificate of Designation designating its Series D Convertible Preferred Stock, which
is attached hereto as
Exhibit C.
On November 22, 2013, the Corporation filed Certificates of Designation designating
the rights, preferences and terms of its Series D-1 Convertible Preferred Stock and Series F-1 Convertible Preferred Stock, which
are attached hereto as
Exhibit D
and
Exhibit E
, respectively. On December 31, 2013, the Corporation
filed Certificates of Designation designating the rights, preferences and terms of its Series H Convertible Preferred Stock and
Series I Redeemable Convertible Preferred Stock, which are attached hereto as
Exhibit F
and
Exhibit G
,
respectively. On [_________, 2019], the Corporation filed a Certificate of Designation designating the rights, preferences and
terms of its Series L Convertible Preferred Stock which is attached hereto as
Exhibit H
.”
FIFTH: Effective
as of the Effective Time,
Exhibit H
shall be attached to the Corporation’s Amended and Restated Certificate of Incorporation,
as amended, and shall have the Certificate of Designation designating the rights, preferences and terms of the Corporation’s
Series L Convertible Preferred Stock placed behind such
Exhibit H
.
IN WITNESS WHEREOF,
Spherix Incorporated has caused this certificate to be signed by its Chief Executive Officer as of the ___ day of ___________,
2019.
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By:
|
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Name: Anthony Hayes
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Title: Chief Executive Officer
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ANNEX C
SPHERIX
INCORPORATED
CERTIFICATE
OF DESIGNATION OF PREFERENCES,
RIGHTS
AND LIMITATIONS
OF
SERIES
L CONVERTIBLE PREFERRED STOCK
PURSUANT
TO SECTION 151 OF THE
delaware
GENERAL CORPORATION LAW
The
undersigned, __________ and ____________, do hereby certify that:
1.
They are the President and Secretary, respectively, of Spherix Incorporated, a Delaware corporation (the “
Corporation
”).
2.
The Corporation is authorized to issue ______________ shares of preferred stock, ___________ of which have been issued.
3.
The following resolutions were duly adopted by the board of directors of the Corporation (the “
Board of Directors
”):
WHEREAS
,
the certificate of incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, consisting
of _____________ shares, $0.0001 par value per share, issuable from time to time in one or more series;
WHEREAS
,
the Board of Directors is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms
of redemption and liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting
any series and the designation thereof, of any of them;
WHEREAS
,
it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions
and other matters relating to a series of the preferred stock, which shall consist of up to ___,000 shares of the preferred stock
which the Corporation has the authority to issue; and
NOW,
THEREFORE, BE IT RESOLVED
, that the Board of Directors does hereby provide for the issuance of a series of preferred stock
for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions
and other matters relating to such series of preferred stock as follows:
TERMS
OF PREFERRED STOCK
Section
1
.
Definitions
. For the purposes hereof, the following terms shall have the following meanings:
“
Affiliate
”
means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.
“
Alternate
Consideration
” shall have the meaning set forth in Section 7(e).
“
Business
Day
” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or
any day on which banking institutions in the State of New York are authorized or required by law or other governmental action
to close.
“
Buy-In
”
shall have the meaning set forth in Section 6(c)(iv).
“
Closing
”
means the issuance of the Preferred Stock pursuant to the terms of the Merger Agreement, as amended.
“
Closing
Date
” means the Trading Day on which the Merger Agreement, as amended, has been executed and delivered by the applicable
parties thereto and all conditions precedent to (i) each Holder’s obligations to pay deliver the exchanged Common Stock
and (ii) the Corporation’s obligations to deliver the Preferred Stock has been satisfied or waived.
“
Commission
”
means the United States Securities and Exchange Commission.
“
Common
Stock
” means the Corporation’s common stock, par value $0.01 per share, and stock of any other class of securities
into which such securities may hereafter be reclassified or changed.
“
Common
Stock Equivalents
” means any securities of the Corporation or the Subsidiaries which would entitle the holder thereof
to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
“
Conversion
Date
” shall have the meaning set forth in Section 6(a).
Conversion
Shares
” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in
accordance with the terms hereof.
“
Exchange
Act
” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“
Fundamental
Transaction
” shall have the meaning set forth in Section 7(e).
“
GAAP
”
means United States generally accepted accounting principles.
“
Holder
”
shall have the meaning given such term in Section 2.
“
Liquidation
”
shall have the meaning set forth in Section 5.
“Merger
Agreement
” means, the Agreement and Plan of Merger, dated as of October 10, 2018, by and among the Corporation, Sperix
Delaware Merger Sub Inc., Scott Wilfon and CBM Biopharma, Inc. (as amended by the First Amendment Agreement and Plan of Merger,
dated April __, 2019).
“
New
York Courts
” shall have the meaning set forth in Section 11(d).
“
Notice
of Conversion
” shall have the meaning set forth in Section 6(a).
“
Original
Issue Date
” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers
of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such
Preferred Stock.
“
Person
”
means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“
Preferred
Stock
” shall have the meaning set forth in Section 2.
“
Rule
144
” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
“
Securities
”
means the Preferred Stock and the Underlying Shares.
“
Securities
Act
” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“
Share
Delivery Date
” shall have the meaning set forth in Section 6(c).
“
Subsidiary
”
means any subsidiary of the Corporation.
“
Successor
Entity
” shall have the meaning set forth in Section 7(e).
“
Trading
Day
” means a day on which the principal Trading Market is open for business.
“
Trading
Market
” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market,
the New York Stock Exchange, the OTCQB or the OTCQX (or any successors to any of the foregoing).
“
Transfer
Agent
” means VStock Transfer, LLC, the current transfer agent of the Company, with a mailing address of 18 Lafayette
Place, Woodmere, New York 11598 and a facsimile number of (646) 536-3179, and any successor transfer agent of the Company.
“
Underlying
Shares
” means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock.
“
VWAP
”
means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based
on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a
Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or
OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the
Common Stock are then reported in the “Pink Sheets” published by OTC Markets, Inc. (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in
all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith
by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Corporation, the
fees and expenses of which shall be paid by the Corporation.
Section
2
.
Designation, Amount and Par Value
. The series of preferred stock shall be designated as its Series L Convertible
Preferred Stock (the “
Preferred Stock
”) and the number of shares so designated shall be up to ___ (which shall
not be subject to increase without the written consent of all of the holders of the Preferred Stock (each, a “
Holder
”
and collectively, the “
Holders
”)).
Section
3
.
Dividends
. Except for stock dividends or distributions for which adjustments are to be made pursuant to Section
7, Holders shall be entitled to receive, and the Corporation shall pay, dividends on shares of Preferred Stock equal (on an as-if-converted-to-Common-Stock
basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid
on shares of the Common Stock. No other dividends shall be paid on shares of Preferred Stock.
Section
4
.
Voting Rights
. Except as otherwise provided herein or as otherwise required by law, the Preferred Stock shall
have no voting rights. However, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the
affirmative vote of the Holders of a majority of the then outstanding shares of the Preferred Stock, (a) alter or change adversely
the powers, preferences or rights given to the Preferred Stock or alter or amend this Certificate of Designation, (b) amend its
certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase
the number of authorized shares of Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Section
5
.
Liquidation
. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary
(a “
Liquidation
”), the Holders shall be entitled to receive out of the assets, whether capital or surplus,
of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted (disregarding
for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid
pari
passu
with all holders of Common Stock. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior
to the payment date stated therein, to each Holder.
Section
6
.
Conversion
.
a)
Conversions
at Option of Holder
. Each share of Preferred Stock shall be convertible, at any time and from time to time from and after
the Original Issue Date at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations
set forth in Section 6(d)) equal to the number of shares of Preferred Stock subject to conversion. Holders shall effect conversions
by providing the Corporation with the form of conversion notice attached hereto as
Annex A
(a “
Notice of Conversion
”).
Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred
Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue
and the date on which such conversion is to be effected, which date may not be prior to the date the applicable Holder delivers
by facsimile such Notice of Conversion to the Corporation (such date, the “
Conversion Date
”). If no Conversion
Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation
is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other
type of guarantee or notarization) of any Notice of Conversion form be required. To effect conversions of shares of Preferred
Stock, a Holder shall not be required to surrender the certificate(s) representing the shares of Preferred Stock to the Corporation
unless all of the shares of Preferred Stock represented thereby are so converted, in which case such Holder shall deliver the
certificate representing such shares of Preferred Stock promptly following the Conversion Date at issue. Shares of Preferred Stock
converted into Common Stock or redeemed in accordance with the terms hereof shall be canceled and shall not be reissued.
b)
[INTENTIONALLY
DELETED]
c)
Mechanics of Conversion
i.
Delivery
of Conversion Shares Upon Conversion
. Not later than three (3) Trading Days after each Conversion Date (the “
Share
Delivery Date
”), the Corporation shall deliver, or cause to be delivered, to the converting Holder Conversion Shares,
which shall be free of restrictive legends and trading restrictions, representing a number of Conversion Shares equal to the number
of shares of Preferred Stock subject to conversion. The Corporation shall deliver the Conversion Shares required to be delivered
by the Corporation under this Section 6 electronically through the Depository Trust Company or another established clearing corporation
performing similar functions.
ii.
Obligation
Absolute
. The Corporation’s obligation to issue and deliver the Conversion Shares upon conversion of Preferred Stock
in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by a Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by such
Holder or any other Person of any obligation to the Corporation or any violation or alleged violation of law by such Holder or
any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to
such Holder in connection with the issuance of such Conversion Shares;
provided
,
however
, that such delivery shall
not operate as a waiver by the Corporation of any such action that the Corporation may have against such Holder.
iii.
Reservation
of Shares Issuable Upon Conversion
. The Corporation covenants that it will at all times reserve and keep available out of
its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock as
herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and
the other holders of the Preferred Stock), not less than such aggregate number of shares of the Common Stock as shall be issuable
(taking into account the adjustments and restrictions of Section 7) upon the conversion of the then outstanding shares of Preferred
Stock. The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid and nonassessable.
iv.
Fractional
Shares
. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred
Stock. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation
shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied
by the then prevailing VWAP or round up to the next whole share.
v.
Transfer
Taxes and Expenses
. The issuance of Conversion Shares on conversion of this Preferred Stock shall be made without charge to
any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such Conversion
Shares, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such Conversion Shares upon conversion in a name other than that of the Holders of such shares
of Preferred Stock and the Corporation shall not be required to issue or deliver such Conversion Shares unless or until the Person
or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established
to the satisfaction of the Corporation that such tax has been paid. The Corporation shall pay all Transfer Agent fees required
for same-day processing of any Notice of Conversion and all fees to the Depository Trust Company (or another established clearing
corporation performing similar functions) required for same-day electronic delivery of the Conversion Shares.
d)
Issuance
Limitations
. Notwithstanding anything herein to the contrary, the Corporation shall not effect any conversion of the Preferred
Stock, and a Holder shall not have the right to convert any portion of the Preferred Stock, to the extent that, after giving effect
to the conversion set forth on the applicable Notice of Conversion, the Conversion Shares issuable thereby, when aggregated with
any shares of Common Stock issued in connection with any conversion of Preferred Stock or any other issuance of Common Stock pursuant
to the Merger Agreement, would exceed 19.99% of the number of shares of Common Stock issued and outstanding immediately prior
to the closing of the transactions contemplated by the Merger Agreement (subject to adjustment for forward and reverse stock splits,
recapitalizations and the like) (such number of shares, the “
Issuable Maximum
”). Each Holder shall be entitled
to convert a portion of the Issuable Maximum equal to, but not greater than, the product of the Issuable Maximum multiplied by
the Holder’s Pro Rata Share (as defined in the Merger Agreement). The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of this Section 6(d) to correct this paragraph (or
any portion hereof) which may be defective or inconsistent with the intended Issuable Maximum contained herein or to make changes
or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph
shall apply to a successor holder of Preferred Stock.
Section
7
.
Certain Adjustments
.
a)
Stock
Dividends and Stock Splits
. If the Corporation, at any time while this Preferred Stock is outstanding: (i) pays a stock dividend
or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common
Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon
conversion of, or payment of a dividend on, this Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger
number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock
of the Corporation, then the number of Conversion Shares issuable hereunder shall be proportionally adjusted to account for such
event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date
in the case of a subdivision, combination or re-classification.
b) [INTENTIONALLY
DELETED]
c)
Subsequent
Rights Offerings
. In addition to any adjustments pursuant to Section 7(a) above, if at any time the Corporation grants, issues
or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the “
Purchase Rights
”), then the Holder of will be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired
if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred
Stock (without regard to any limitations on exercise hereof, including without limitation, such Holder’s portion of the
Issuable Maximum) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in
any such Purchase Right would result in the Holder exceeding such Holder’s portion of the Issuable Maximum, then the Holder
shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock
as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder
until such time, if ever, as its right thereto would not result in the Holder exceeding the such Holder’s portion of the
Issuable Maximum).
d)
Pro
Rata Distributions
. During such time as this Preferred Stock is outstanding, if the Corporation declares or makes any dividend
or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of
capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options
by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction)
(a “
Distribution
”), at any time after the issuance of this Preferred Stock, then, in each such case, the Holder
shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the
Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Preferred Stock (without regard
to any limitations on conversion hereof, including without limitation, such Holder’s portion of the Issuable Maximum) immediately
before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the participation in such Distribution (
provided
,
however
,
to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding such Holder’s
portion of the Issuable Maximum, then the Holder shall not be entitled to participate in such Distribution to such extent (or
in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of
such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would
not result in the Holder exceeding such Holder’s portion of the Issuable Maximum).
e)
Fundamental
Transaction
. If, at any time while this Preferred Stock is outstanding, (i) the Corporation, directly or indirectly, in one
or more related transactions effects any merger or consolidation of the Corporation with or into another Person, (ii) the Corporation,
directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange
offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell,
tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of
the outstanding Common Stock, (iv) the Corporation, directly or indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property, or (v) the Corporation, directly or indirectly,
in one or more related transactions consummates a stock or share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other
Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the
other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such
stock or share purchase agreement or other business combination) (each a “
Fundamental Transaction
”), then,
upon any subsequent conversion of this Preferred Stock, the Holder shall have the right to receive, for each Conversion Share
that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without
regard to any limitation in Section 6(d) on the conversion of this Preferred Stock), the number of shares of Common Stock of the
successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and any additional consideration
(the “
Alternate Consideration
”) receivable as a result of such Fundamental Transaction by a holder of the number
of shares of Common Stock for which this Preferred Stock is convertible immediately prior to such Fundamental Transaction (without
regard to any limitation in Section 6(d) on the conversion of this Preferred Stock). For purposes of any such conversion, the
determination of the Conversion Shares issuable hereunder shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction,
and the Corporation shall apportion the conversion ratio among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following such Fundamental Transaction.
f)
Calculations
.
All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall
be the sum of the number of shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.
g)
Notice
to the Holders
.
i.
Adjustment
to Conversion Ration
. Whenever the conversion ratio is adjusted pursuant to any provision of this Section 7, the Corporation
shall promptly deliver to each Holder a notice setting forth the conversion ratio after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
ii.
Notice
to Allow Conversion by Holder
. If (A) the Corporation shall declare a dividend (or any other distribution in whatever form)
on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock,
(C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall
be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation
is a party, any sale or transfer of all or substantially all of the assets of the Corporation, or any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property or (E) the Corporation shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall
cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to
be delivered to each Holder at its last address as it shall appear upon the stock books of the Corporation, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if
a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such
notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified
in such notice.
Section
8
.
Miscellaneous
.
a)
Notices
.
Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation,
any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service, addressed to the Corporation. Any and all notices or other communications or deliveries to be provided by the
Corporation hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of such Holder appearing on the books of the Corporation,
or if no such facsimile number or address appears on the books of the Corporation, at the principal place of business of such
Holder, as set forth in the Amendment Agreement. Any notice or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after
the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this
Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading
Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given.
b)
Absolute
Obligation
. Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the
obligation of the Corporation, which is absolute and unconditional, to pay liquidated damages and accrued dividends, as applicable,
on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.
c)
Lost
or Mutilated Preferred Stock Certificate
. If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen
or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated
certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of
Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction
of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.
d)
Governing
Law
. All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation
shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard
to the principles of conflict of laws thereof. All legal proceedings concerning the interpretation, enforcement and defense of
the transactions contemplated by the Amendment Agreement (whether brought against a party hereto or its respective Affiliates,
directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City
of New York, Borough of Manhattan (the “
New York Courts
”). The Corporation and each Holder hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such
New York Courts are improper or inconvenient venue for such proceeding. The Corporation and each Holder hereby irrevocably waives
personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any
other manner permitted by applicable law. The Corporation and each Holder hereby irrevocably waives, to the fullest extent permitted
by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of
Designation or the transactions contemplated hereby. If the Corporation or any Holder shall commence an action or proceeding to
enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed
by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution
of such action or proceeding.
e)
Waiver
.
Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as
or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate
of Designation or a waiver by any other Holders. The failure of the Corporation or a Holder to insist upon strict adherence to
any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or
any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of
Designation on any other occasion. Any waiver by the Corporation or a Holder must be in writing.
f)
Severability
.
If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation
shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable
to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates
the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the
maximum rate of interest permitted under applicable law.
g)
Next
Business Day
. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h)
Headings
.
The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall
not be deemed to limit or affect any of the provisions hereof.
i)
Status
of Converted or Redeemed Preferred Stock
. Shares of Preferred Stock may only be issued pursuant to the Amendment Agreement.
If any shares of Preferred Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status
of authorized but unissued shares of preferred stock and shall no longer be designated as Series L Convertible Preferred Stock.
*********************
RESOLVED,
FURTHER, that the Chairman, the president or any vice-president, and the secretary or any assistant secretary, of the Corporation
be and they hereby are authorized and directed to prepare and file this Certificate of Designation of Preferences, Rights and
Limitations in accordance with the foregoing resolution and the provisions of Delaware law.
IN
WITNESS WHEREOF, the undersigned have executed this Certificate this ___ day of February 2019.
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Name:
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Name:
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Title:
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Title:
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ANNEX
A
NOTICE
OF CONVERSION
(To
be Executed by the Registered Holder in order to Convert Shares of Preferred Stock)
The
undersigned hereby elects to convert the number of shares of Series L Convertible Preferred Stock indicated below into shares
of common stock, par value $0.0001 per share (the “
Common Stock
”), of Spherix Incorporated, a Delaware corporation
(the “
Corporation
”), according to the conditions hereof, as of the date written below. If shares of Common
Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions as may be required by the Corporation in accordance
with the Amendment Agreement. No fee will be charged to the Holders for any conversion, except for any such transfer taxes.
Conversion
calculations:
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Date
to Effect Conversion: _____________________________________________
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Number
of shares of Preferred Stock owned prior to Conversion: _______________
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Number
of shares of Preferred Stock to be Converted: ________________________
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Number
of shares of Common Stock to be Issued: ___________________________
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Number
of shares of Preferred Stock subsequent to Conversion: ________________
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Address
for Delivery: ______________________
or
DWAC
Instructions:
Broker
no: _________
Account
no: ___________
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[HOLDER]
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By:
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Name:
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Title:
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ANNEX D
LEAK-OUT AGREEMENT
May ___, 2019
This agreement (the
“
Leak-Out Agreement
”) is being delivered to you in connection with an understanding by and among Spherix Incorporated,
a Delaware corporation (the “
Company
”), and the person or persons named on the signature pages hereto (collectively,
the “
Holder
”).
Reference is hereby
made to the Asset Purchase Agreement, dated May __, 2019, by and among the Company and the certain purchasers signatory thereto
(the “
APA
”), pursuant to which the Holder acquired (i) shares of Common Stock (“
Common Stock
”)
of the Company (the “
Shares
”) and (ii) shares of the Company’s Series L Convertible Preferred Stock (“
Preferred
Stock
”) convertible into Common Stock (the “Conversion Shares” and collectively with the Common Shares, the
“
Shares
”) (the Preferred Stock and the Shares collectively, the “
Securities
”). Capitalized
terms not defined herein shall have the meaning as set forth in the APA.
The Holder agrees solely
with the Company that from the date that from the date hereof (the “
Effective Date
”) and ending on the twenty-one
month anniversary of the Closing Date (such period, the “
Restricted Period
”), neither the Holder, nor any Affiliate
of such Holder (the “
Holder’s Trading Affiliates
”), collectively, shall sell dispose or otherwise transfer,
directly or indirectly, (including, without limitation, any sales, short sales, swaps or any derivative transactions that would
be equivalent to any sales or short positions) during any calendar month during the Restricted Period (any such date, a “
Date
of Determination
”), Shares in an amount more than 5% of the issued and outstanding shares of Common Stock as of the end
of each month immediately preceding any such disposition following the Closing Date (“
Leak-Out Percentage
”).
In determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the
Securities and Exchange Commission, as the case may be, (ii) a more recent public announcement by the Company’s or (iii)
a more recent written notice by the Company’s or the Company’s transfer agent setting forth the number of shares of
Common Stock outstanding. Such restriction shall not be cumulative with any other month (ie. “use it or lose it” as
to any calendar month) and which Leak-Out Percentage shall apply ratably to any partial calendar months during the Restricted Period.
Notwithstanding anything herein to the contrary, the foregoing restrictions shall not apply to any sales by the Holder or any of
the Holder’s Trading Affiliates (a) at a bona-fide sales price greater than $4.25 (as adjusted for stock splits, stock dividends,
stock combinations, recapitalizations or other similar events occurring after the date hereof) provided that sales on the applicable
date (excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Common Stock as reported
by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (as adjusted for stock splits, stock dividends,
stock combinations, recapitalizations or other similar events occurring after the date hereof). Notwithstanding anything herein
to the contrary, the Holder agrees that neither it nor any Trading Affiliates shall sell dispose or otherwise transfer, directly
or indirectly, (including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent
to any sales or short positions) any Shares during any periods that the of the bid price of Common Stock as reported by Bloomberg,
LP is less than $1.00 (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations or other similar events
occurring after the date hereof).
Additionally, the Holder
agrees that in the event that, during the Restricted Period the Company engages the services of an investment bank to undertake
a registered offering of the Company’s equity securities, if required by the lead investment bank, the Holder shall enter
into a reasonable and customary 30-day lock-up, upon closing of the transaction, for a transaction of the type and size contemplated
by the Company and the investment bank;
provided
,
however
, that such lock-up may be increased by up to an additional
sixty (60) days if required by the lead investment bank;
provided
,
further
, that such lock-up shall in no event extend
beyond the Restricted Period.
Notwithstanding anything
herein to the contrary, during the Restricted Period, the Holder may, directly or indirectly, sell or transfer all, or any part,
of the Shares or the Warrant Shares (the “
Restricted Securities
”) to any Person (an “
Assignee
”)
in a transaction which does not need to be reported on the Nasdaq consolidated tape, without complying with (or otherwise limited
by) the restrictions set forth in this Leak-Out Agreement; provided, that as a condition to any such sale or transfer an authorized
signatory of the Company and such Assignee duly execute and deliver a leak-out agreement in the form of this Leak-Out Agreement
(an “
Assignee Agreement
”, and each such transfer a “
Permitted Transfer
”), provided that the
Leak-Out Percentage as to such Assignee and the Leak-Out Percentage of the assignor shall be proportionally adjusted based on the
original leak-Out Percentage of the Holder.
Any notices, consents,
waivers or other communications required or permitted to be given under the terms of this Leak-Out Agreement must be in writing
and shall be given in accordance with the terms of the APA.
This Leak-Out Agreement
constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior negotiations,
letters and understandings relating to the subject matter hereof and are fully binding on the parties hereto.
This Leak-Out Agreement
may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument. This Leak-Out Agreement may be executed and accepted by facsimile or
PDF signature and any such signature shall be of the same force and effect as an original signature.
The terms of this Leak-Out
Agreement shall be binding upon and shall inure to the benefit of each of the parties hereto and their respective successors and
assigns and shall not be for the benefit of, or be enforceable by, any other person or entity.
This Leak-Out Agreement
may not be amended or modified except in writing signed by each of the parties hereto.
All questions concerning
the construction, validity, enforcement and interpretation of this Leak-Out Agreement shall be governed by Sections 10.9 and 10.10
of the APA.
Each party hereto acknowledges
that, in view of the uniqueness of the transactions contemplated by this Leak-Out Agreement, the Company may not have an adequate
remedy at law for money damages in the event that this Leak-Out Agreement has not been performed in accordance with its terms,
and therefore agrees that the Company shall be entitled to seek specific enforcement of the terms hereof in addition to any other
remedy it may seek, at law or in equity.
[The remainder of the page is intentionally
left blank]
[Signature Page to SPEX Leakout]
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Sincerely,
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spherix incorporated
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By:
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Name:
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Title:
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Agreed to and Acknowledged:
“HOLDER”
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CBM BIOPHARMA, INC.
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By:
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Name:
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Title:
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SPHERIX
INCORPORATED
One Rockefeller Plaza, 11th Fl.
New
York, NY 10020
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VOTE
BY INTERNET
Before
The Meeting
- Go to
www.proxyvote.com
Use
the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern
Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow
the instructions to obtain your records and to create an electronic voting instruction form.
During
The Meeting
- Go to
www.virtualshareholdermeeting.com/SPEX19SM
You
may attend the Special Meeting via the internet and vote during the Special Meeting until voting is closed. Have the information
that is printed in the box marked by the arrow available and follow the instructions.
ELECTRONIC
DELIVERY OF FUTURE PROXY MATERIALS
If
you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all
future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic
delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree
to receive or access proxy materials electronically in future years.
VOTE
BY PHONE – 1-800-690-6903
Use
any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time the day before the cut-off
date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
VOTE
BY MAIL
Mark,
sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing,
c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
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TO
VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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E34042-P99160
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KEEP THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
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THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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SPHERIX INCORPORATED
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The Board of Directors recommends
you vote
FOR Proposals
1, 2 and 3:
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For
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Against
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Abstain
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☐
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☐
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☐
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1.
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Authorize, for purposes of complying with Nasdaq Listing Rule
5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock,
issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company
and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal
to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred
Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock).
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2.
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Approve an amendment to the Company’s certificate of incorporation to decrease the number of authorized
shares of common stock from 100,000,000 to 99,000,000.
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For
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Against
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Abstain
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☐
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☐
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☐
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For
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Against
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Abstain
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3.
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To transact such other business as may properly come before the meeting or any postponement(s) or adjournment(s) thereof.
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☐
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☐
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☐
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For
address changes and/or comments, please check this box
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☐
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and
write them on the back where indicated.
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NOTE:
Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
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Signature PLEASE SIGN
WITHIN BOX
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Date
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Signature
(Joint Owners)
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Date
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To
the Stockholders of Spherix Incorporated:
The Special Meeting of Stockholders (“Special
Meeting”) of Spherix Incorporated (the “Company” or “Spherix”) will be held as a virtual meeting
on Thursday, September 5, 2019, at 12:00 p.m. Eastern Time, to vote on the following matters:
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1.
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Authorize,
for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our
common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement,
dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement,
dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common
stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred
Stock);
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2.
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To
amend Spherix’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”)
to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000;
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3.
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To
transact other business that may properly come before the Special Meeting and any postponement(s) or adjournment(s) thereof.
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The
proxy statement contains information regarding the Special Meeting, including information on the matters to be voted on prior
to and during the Special Meeting. If you have chosen to view our proxy statement over the Internet instead of receiving paper
copies in the mail, you can access our proxy statement and vote at www.proxyvote.com.
Your
vote is important.
Whether or not you expect to attend the Special Meeting, we encourage you to promptly vote these shares
by one of the methods listed on the reverse side of this proxy card.
You will be able to attend the Special
Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19SM
on Thursday, September 5, 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the
16-digit Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you
receive materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely
log on, vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and
participate in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.
Sincerely,
Anthony
Hayes, CEO
Important
Notice Regarding the Availability of Proxy Materials for the Special Meeting:
The
Notice and Proxy Statement are available at www.proxyvote.com.
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M97914-P71181
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PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SPHERIX INCORPORATED
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The undersigned hereby appoints Anthony Hayes with power to act without the other and with power of substitution,
as proxies and attorneys-in-fact and hereby authorizes them to represent and vote, as provided on the other side, all the shares
of Spherix Incorporated
common stock
which the undersigned is entitled to vote and, in their discretion, to vote upon such other business as may properly come before
the Special Meeting of Stockholders of the Company to be held Thursday, September 5, 2019 or any adjournment thereof, with all
powers which the undersigned would possess if present at the Meeting.
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THIS
PROXY CARD, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE
BUT THE CARD IS SIGNED, THIS PROXY CARD WILL BE VOTED FOR PROPOSAL 1, FOR PROPOSAL 2, FOR PROPOSAL 3 AND SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
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Address
Changes/Comments:
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(If
you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.)
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(Continued
and to be marked, dated and signed, on the other side)
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