Notes
to Condensed Consolidated Financial Statements
Note
1. Organization and Description of Business
Organization
and Description of Business
Spherix
Incorporated (the “Company”) is an intellectual property company incorporated in the State of Delaware that owns patented
and unpatented intellectual property. The Company was formed in 1967 as a scientific research company and for much of its history
pursued drug development including through Phase III clinical studies which were discontinued. Through the Company’s acquisition
of patents and patent applications developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”)
and Harris Corporation from North South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities.
The
Company is currently a patent commercialization company focused on generating revenues from the monetization of intellectual property,
or IP. Such monetization includes, but is not limited to, acquiring IP from patent holders in order to maximize the value of the
patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents. We intend
to generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies
that we own, that we manage for others, or that others manage on our behalf. To date, we have generated minimal revenues and no
assurance can be provided that our business model will be successful.
The
Company continually works to enhance its portfolio of intellectual property through acquisitions and strategic partnerships. The
Company’s mission is to partner with inventors, or other entities, who own undervalued intellectual property. The Company
then works with the inventors or other entities to commercialize the IP.
In
March 2016, the Company entered into an agreement (which was subsequently amended in April and May 2016) with Equitable IP Corporation
(“Equitable”) to facilitate the monetization of its patents (the “Monetization Agreement”). Pursuant to
the Monetization Agreement, the Company is working together with Equitable to further develop and revise its ongoing litigation
plan. See Note 7 for additional details surrounding the Monetization Agreement.
Note
2. Liquidity and Financial Condition
The
Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding
(non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities
through:
●
|
managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings,
|
●
|
seeking
additional funds raised through the sale of additional securities in the future,
|
●
|
seeking
additional liquidity through credit facilities or other debt arrangements, and
|
●
|
increasing
revenue from its patent portfolios, license fees and new business ventures.
|
Management
believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months.
The
Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flows
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 $2.6 million at September 30, 2017, and net income amounted to approximately $0.5 million and net loss approximately
$2.3 million for the three and nine months ended September 30, 2017. The Company had an approximately $144.1 million of accumulated
deficit as of September 30, 2017. 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. 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 1,250,000 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 $2.00 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.
Disputes
regarding the assertion of patents and other intellectual property rights are highly complex and technical. The Company may be
forced to litigate against others to enforce or defend its intellectual property rights or to determine the validity and scope
of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which the Company
is involved may allege defenses and/or file counterclaims or initiate inter parties reviews in an effort to avoid or limit liability
and damages for patent infringement or cause the Company to incur additional costs as a strategy. If such efforts are successful,
they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents. The patents
could be declared invalid by a court or the United States Patent and Trademark Office, in whole or in part, or the costs of the
Company can increase. Recent rulings also create an increased risk that if the Company is unsuccessful in litigation it could
be responsible to pay the attorneys’ fees and other costs of defendants by lowering the standard for legal fee shifting
sought by defendants in patent cases.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology
Corp. (“Nuta”), Spherix Portfolio Acquisition II, Inc. (“SPXII”), Guidance IP, LLC (“Guidance”),
Directional IP, LLC (“Directional”), Spherix Management Services, LLC (“SMS”) and NNPT, LLC (“NNPT”).
All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant
estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation
of derivative liabilities, the valuation of investments and the valuation allowance related to the Company’s deferred tax
assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be affected by
external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these
external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates
and assumptions.
Marketable
Securities
Marketable
securities are classified as trading and are carried at fair value. The Company’s marketable securities consist of corporate
bonds and highly liquid mutual funds and exchange-traded & closed-end funds which are valued at quoted market prices.
During
the three months ended September 30, 2017 and 2016, the Company incurred realized losses of approximately $174,000 and realized
gains of approximately $56,000, respectively, and unrealized gains of approximately $124,000 and $91,000, respectively, on its
investments in marketable securities, which are included in other income, net on the consolidated statements of operations. In
addition, during the three months ended September 30, 2017 and 2016, the Company earned dividend income of approximately $18,000
and $2,000, respectively, which is included in other income, net on the consolidated statement of operations.
During
the nine months ended September 30, 2017 and 2016, the Company incurred realized losses of approximately $303,000 and $66,000,
respectively, and unrealized gains (losses) of approximately $262,000 and ($62,000), respectively, on its investments in marketable
securities, which are included in other income, net on the consolidated statements of operations. In addition, during the nine
months ended September 30, 2017 and 2016, the Company earned dividend income of approximately $72,000 and $19,000, respectively,
which is included in other income, net on the consolidated statement of operations.
The
Company reinvested such dividend income into its marketable securities during the nine months ended September 30, 2017 and 2016.
The fair values of such marketable securities held as of September 30, 2017 and December 31, 2016 were $4.7 million and $6.0
million, respectively.
Investment
The
Company elected the fair value option for its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”).
As of September 30, 2017, the fair value of this investment was $1,020,000 (see Note 4). The investment was classified as a Level
3 financial instrument at September 30, 2017.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
While
the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date.
The
decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis
and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been
elected, are recognized as an unrealized gain on investment in the Consolidated Statements of Operations.
Accounting
for Warrants
The
Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance
with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts
that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance
of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative
liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The
Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that such
instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at
their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement
at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change
in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of the warrants has
been estimated using a Black-Scholes valuation model (see Note 6).
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.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
following table summarizes the earnings (loss) per share calculation (in thousands, except per share amount):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
459
|
|
|
$
|
(446
|
)
|
|
$
|
(2,320
|
)
|
|
$
|
(2,573
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,480
|
|
Net income (loss) available to common stockholders
|
|
$
|
459
|
|
|
$
|
(446
|
)
|
|
$
|
(2,320
|
)
|
|
$
|
28,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
5,998,920
|
|
|
|
4,163,245
|
|
|
|
5,304,201
|
|
|
|
3,312,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
0.08
|
|
|
|
(0.11
|
)
|
|
|
(0.44
|
)
|
|
|
(0.78
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9.50
|
|
Net income (loss) available to common stockholders
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
8.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
459
|
|
|
$
|
(446
|
)
|
|
$
|
(2,320
|
)
|
|
$
|
(2,573
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,480
|
|
Net income (loss) available to common stockholders
|
|
$
|
459
|
|
|
$
|
(446
|
)
|
|
$
|
(2,320
|
)
|
|
$
|
28,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding,
|
|
|
5,998,920
|
|
|
|
4,163,245
|
|
|
|
5,304,201
|
|
|
|
3,312,969
|
|
Weighted average effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
7,196
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
—
|
|
|
|
—
|
|
|
|
173,418
|
|
Restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,088
|
|
Weighted average diluted shares outstanding
|
|
|
6,009,042
|
|
|
|
4,163,245
|
|
|
|
5,304,201
|
|
|
|
3,503,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.73
|
)
|
Deemed capital contribution on extinguishment of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8.98
|
|
Net income (loss) available to common stockholders
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
8.25
|
|
Securities
that could potentially dilute loss per share in the future as follows:
|
|
As
of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Convertible
preferred stock
|
|
|
2,926
|
|
|
|
2,926
|
|
Warrants to purchase
common stock
|
|
|
1,251,709
|
|
|
|
1,251,709
|
|
Non-vested restricted
stock units
|
|
|
—
|
|
|
|
59,256
|
|
Options
to purchase common stock
|
|
|
328,716
|
|
|
|
289,380
|
|
Total
|
|
|
1,583,351
|
|
|
|
1,603,271
|
|
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new
guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. The FASB has subsequently issued ASU No. 2016-10, Revenue from Contracts with Customer (Topic 606)
Identifying Performance Obligations and Licensing to address issues arising from implementation of the new revenue recognition
standard. ASU 2014-09 and ASU 2016-10 are effective for interim and annual periods beginning January 1, 2018, and may be adopted
earlier, but not before January 1, 2017. The revenue standards are required to be adopted by taking either a full retrospective
or a modified retrospective approach. The Company is currently evaluating the impact that ASU 2014-09 and 2016-10 will have on
the Company’s financial statements and determining the transition method, including the period of adoption, that it will
apply.
In
January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income;
simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost
on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the
total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has
elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate
presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance
sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred
tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. The Company is currently evaluating the impact ASU No. 2016-01 will have on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes FASB ASC Topic 840,
Leases (Topic
840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and
lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will
determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term
of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with
a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted
for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after
December 15, 2018, with early adoption permitted upon issuance. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial position and results of operations.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent
considerations. The amendments in ASU 2016-08 are effective for interim and annual reporting periods beginning after December
15, 2017. The Company is currently assessing the impact of ASU 2016-08 on the consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured
on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13
limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value
exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard
will be effective on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating
the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the impact of this new pronouncement on its consolidated
statements of cash flows.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350):
Simplifying the Accounting
for
Goodwill Impairment
. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical
purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the
first quarter of fiscal year 2021 and is required to be applied prospectively. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this
standard will have on its consolidated financial statements.
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 adoption of
this ASU is not expected to have a material impact on the Company’s financial position or results of operations.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
, (ASU 2017-11). Part I of this update addresses the complexity
of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion
option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because
of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result
of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an
accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related
disclosures.
Recently
Adopted Accounting Pronouncements
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting
(“ASU 2016-09”). Under ASU 2016-09, companies will no longer record excess tax benefits and
certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits
and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition,
ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 2016-09 also
requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing
activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still
qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding
obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair
value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s).
ASU 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory
income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not
specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures
on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected
to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are
effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must
be adopted in the same period. Effective on January 1, 2017, the Company began accounting for forfeitures as they occur. Ultimately,
the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this election under
ASU 2016-09, the Company estimated their forfeiture rate at 0%, or they did not have a significant history of forfeitures.
Note
4. Investment in Hoth Therapeutics, Inc.
On
June 30, 2017 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of
6,800,000 shares of common stock, par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. As
of the Closing Date, Hoth had a total of 17,000,000 shares of common stock issued and outstanding. Hoth is a development stage
biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis,
also known as eczema. Hoth’s primary asset is a sublicense agreement with Chelexa Biosciences, Inc. (“Chelexa”)
pursuant to which Chelexa has granted Hoth an exclusive sublicense to use its BioLexa products for the treatment of eczema.
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Under
the Purchase Agreement, following the occurrence of a Going Public Event (as defined below), Hoth covenants to timely file all
reports required to be filed under the Securities Exchange Act of 1934 (the “Exchange Act”) and to take all necessary
steps to cause the Shares to be approved for listing or quotation on a trading market such as NYSE MKT, the Nasdaq Capital Market,
the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX. A “Going Public
Event” means (i) an initial public offering of Hoth’s securities pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the “Securities Act”), or (ii) Hoth’s entry into a merger, consolidation,
transfer or share exchange transaction pursuant to which Hoth becomes subject to the reporting requirements of the Exchange Act.
The
Company adopted the fair value option for this investment and will record any change in fair value in the statement of operations (see
Note 6).
Note
5. Intangible Assets
Patent
Portfolio and Patent Rights
The
Company’s intangible assets with finite lives consist of its patents and patent rights. For all periods presented, all of
the Company’s identifiable intangible assets were subject to amortization. The carrying amounts related to acquired intangible
assets as of September 30, 2017 are as follows ($ 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
|
|
|
(1,027
|
)
|
|
|
|
|
Patent
Portfolios and Patent Rights at
September 30, 2017, net
|
|
$
|
3,924
|
|
|
|
2.91
|
|
The
amortization expenses related to acquired intangible assets for the nine months ended September 30, 2017 and 2016 are as follows
($ in thousands):
|
|
Amortization
Expense for the Three Months Ended September 30,
|
|
|
Amortization
Expense for the Nine Months Ended September 30,
|
|
Date
Acquired and Description
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
7/24/13
- Rockstar patent portfolio
|
|
$
|
18
|
|
|
$
|
26
|
|
|
$
|
53
|
|
|
$
|
78
|
|
9/10/13 - North South
patent portfolio
|
|
|
5
|
|
|
|
8
|
|
|
|
16
|
|
|
|
23
|
|
12/31/13
- Rockstar patent portfolio
|
|
|
323
|
|
|
|
502
|
|
|
|
958
|
|
|
|
1,497
|
|
|
|
$
|
346
|
|
|
$
|
536
|
|
|
$
|
1,027
|
|
|
$
|
1,598
|
|
The
future amortization of these intangible assets was based on the adjusted carrying amount. Future amortization of all patents is
as follows ($ in thousands):
|
|
Rockstar
|
|
|
North
South
|
|
|
Rockstar
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Total
|
|
|
|
24-Jul-13
|
|
|
10-Sep-13
|
|
|
31-Dec-13
|
|
|
Amortization
|
|
Six Months
Ended December 31, 2017
|
|
|
18
|
|
|
|
6
|
|
|
|
323
|
|
|
|
347
|
|
Year Ended December
31, 2018
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December
31, 2019
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December
31, 2020
|
|
|
71
|
|
|
|
22
|
|
|
|
638
|
|
|
|
731
|
|
Year Ended December
31, 2021
|
|
|
71
|
|
|
|
22
|
|
|
|
—
|
|
|
|
93
|
|
Thereafter
|
|
|
4
|
|
|
|
3
|
|
|
|
—
|
|
|
|
7
|
|
Total
|
|
$
|
306
|
|
|
$
|
97
|
|
|
$
|
3,521
|
|
|
$
|
3,924
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Equitable Agreement
In March 2016, the Company entered into
an agreement (which was subsequently amended) with Equitable IP Corporation (“Equitable”) to facilitate the monetization
of the Company’s patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement, the Company
has worked together with Equitable to develop and refine the Company’s ongoing litigation plan. Under the Monetization Agreement,
Equitable is obligated to use its best, commercially reasonable efforts to monetize the Company’s patents. To that end, Equitable
has filed several litigations, one of which is currently pending. The Company will share net monetization revenue derived from
all monetization activity equally with Equitable. To facilitate the litigation plan, approximately 186 of over 330 of the Company’s
patents and applications have been assigned to Equitable, which will pay all maintenance and prosecution fees going forward. No
assigned patents may be transferred by Equitable to a third party without the Company’s consent. In the event that all terms
of the Monetization Agreement are met by December 2017, the Company will further assign approximately 140 additional patents and
applications to Equitable for monetization. The Company has retained a grant-back license to practice all transferred patents.
The Company has concluded that the
Monetization Agreement did not constitute a sale of the patents. The Company’s retention of the right to use the
patents, the requirement for the Company’s consent to any sale, and the significant economic benefits the Company
retained with respect to the litigation, licensing and sale proceeds, did not meet the sale of patent criteria. The
Monetization Agreement has been treated as an agreement to outsource its licensing activities to an outside servicer for
contingent fees based on the success of the servicer’s efforts. As such, the Company will not remove the patents from
its consolidated balance sheet, and will record its share of litigation, licensing, and sales proceeds, if any, when those
proceeds are received, or when due if the other revenue recognition criteria are met under ASC 605,
Revenue
Recognition
.
Note 6. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash
equivalents, accounts and other receivables, marketable securities, 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 Condensed Consolidated Financial Statements
The following table presents the Company’s
assets and liabilities that are measured at fair value at September 30, 2017 and December 31, 2016 ($ in thousands):
|
|
Fair value measured at September 30, 2017
|
|
|
|
|
|
|
Total carrying value at September 30,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual funds
|
|
$
|
4,735
|
|
|
$
|
—
|
|
|
$
|
4,735
|
|
|
$
|
—
|
|
Investment in Hoth
|
|
$
|
1,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
961
|
|
|
|
Fair value measured at December 31, 2016
|
|
|
|
|
|
|
Total carrying value at December 31,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - corporate bonds
|
|
$
|
6,025
|
|
|
$
|
211
|
|
|
$
|
5,814
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
702
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
702
|
|
There were no transfers between Level 1, 2 or 3
during the nine months ended September 30, 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 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. Financial assets consist
of the Company’s investment in Hoth. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy
are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A significant decrease in the volatility or a significant
decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes
in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s
consolidated statements of operations.
On July 21, 2015, the Company issued the July 2015
Warrants to purchase an aggregate of 370,263 shares of common stock to the investors in the July 2015 Financing. The July 2015
Warrants became exercisable on January 22, 2016 for a period of 5 years at an exercise price of $8.17 per share. The warrants require,
at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in the July 2015 Warrants)
at the Company and therefore are classified as liabilities. The July 2015 Warrants have been recorded at their fair value using
the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This
model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as
well as volatility.
On December 7, 2015, the Company issued Series
A warrants to purchase up to 1,052,624 shares of common stock and Series B warrants to purchase up to 842,099 shares of common
stock contained in such offering. Series A Warrants had an exercise price of $3.80 per share and were exercisable at any time between
December 7, 2015 and May 6, 2016. 852,624 shares of Series A warrants expired unexercised on May 24, 2016, and no Series A Warrants
remain outstanding as of December 31, 2016. Series B Warrants have an exercise price of $4.75 per share and are exercisable at
any time between December 7, 2015 and December 6, 2020. The Warrants require the issuance of registered shares upon exercise, do
not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities. The
Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Series 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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
A summary of quantitative information with respect
to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized
within Level 3 of the fair value hierarchy at the date of issuance and as of September 30, 2017 is as follows:
Date of valuation
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Risk-free interest rate
|
|
|
1.62%
|
|
|
|
1.93%
|
|
Expected volatility
|
|
|
100.00% - 134.57%
|
|
|
|
100% - 133.79%
|
|
Expected life (in years)
|
|
|
3.19 - 3.31
|
|
|
|
3.93 - 4.06
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The risk-free interest rate was based on rates
established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based on
an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement
feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s
underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date
of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its
common stock, and does not expect to pay dividends on its common stock in the future.
The following table sets forth a summary of the
changes in the fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2017 and
2016 that are measured at fair value on a recurring basis ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Beginning balance
|
|
$
|
702
|
|
|
$
|
2,959
|
|
Fair value adjustment of warrant liabilities
|
|
|
259
|
|
|
|
(2,055
|
)
|
Ending balance
|
|
$
|
961
|
|
|
$
|
904
|
|
The value of the Company’s investment in
Hoth was determined based on a valuation which takes into consideration, when applicable, cash received, cost of the investment,
market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable
third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values
at which the Company’s investment in Hoth is carried on its books are adjusted to estimated fair value at the end of each
quarter taking into account general economic and stock market conditions and those characteristics specific to Hoth.
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 financial liabilities
|
|
|
|
September 30,
2017
|
|
Beginning balance
|
|
$
|
—
|
|
Fair value of Hoth upon issuance
|
|
|
675
|
|
Change in fair value of Hoth
|
|
|
345
|
|
Ending balance
|
|
$
|
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 an unrealized gain on investment
in the Consolidated Statements of Operations.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The fair value of the investment in Hoth at September
30, 2017 was approximately $1.0 million. The underlying stock price of Hoth was estimated to be $0.15 per share based on Hoth’s fundraising
activity and the Option Pricing Method Backsolve in accordance with the guidelines outlined in the American Institute of
Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issues as Compensation. The
valuation of the underlying shares included the following assumptions: risk-free rate – 1.39%, company volatility - 75%,
expected term or time to maturity – 1.5 years.
Note 7. RPX License Agreement
On November 23, 2015, the Company and RPX Corporation
(“RPX”) entered into a Patent License Agreement (the “RPX License Agreement”) under which the Company granted
RPX the right to sublicense various patent license rights to certain RPX clients. The consideration to the Company included: (i)
the transfer to the Company for cancellation of its remaining outstanding Series I Redeemable Convertible Preferred Stock (the
“Series I Preferred Stock”), as to which a $5,000,000 mandatory redemption payment would have been due from the Company
on or by December 31, 2015; (ii) the transfer to the Company for cancellation of 13%, or 57,076 shares, of its Series H Convertible
Preferred Stock (the “Series H Preferred Stock”) then held by RPX, having a total carrying amount of $4,765,846 at
the time the stock was issued to Rockstar; (iii) cancellation of the only outstanding security interest on 101 of the Company’s
patents and patent applications that originated at Nortel Networks (“Nortel”) and were purchased by the Company from
Rockstar, which security interest had previously been transferred to RPX by Rockstar (“RPX Security Interest”); and
(iv) $300,000 in cash to the Company. While the license granted to RPX is non-exclusive and the duration of the license is for
the life of the patents, the Company’s ongoing obligations in the arrangement is to provide certain specific RPX licensors
with a non-exclusive license to any new patents that may be acquired by or exclusively licensed to the Company during the two-year
period following the effective date of the agreement. Therefore, the Company will recognize $0.6 million revenue ratably over the
two-year period that it is obligated to provide these RPX licensees with licenses to such new patents. During the years ended December
31, 2016 and 2015, the Company recorded approximately $290,000 and $31,000, respectively, in revenue related to the amortization
of the license.
On May 23, 2016, the Company, and RPX, entered
into a second, separate, Patent License Agreement (the “RPX License”) under which the Company granted RPX the right
to sublicense various patent rights only to current RPX clients (as of May 23, 2016). In exchange for the rights granted by the
Company under the RPX License, the Company received the following consideration: (i) a cash payment made to the Company in May
2016 in the amount of $4,355,000; and (ii) cancellation of 100% of the remaining 381,967 shares of the Company’s outstanding
Series H Convertible Preferred Stock currently held by RPX, having a total carrying amount of $31,894,244 at the time the stock
was issued to Rockstar Consortium US LP (“Rockstar”).
In consideration of the above, the Company granted
RPX the rights to grant to its current clients: (i) a fully paid portfolio license, to the extent such parties did not already
have licenses to the Company’s patents; (ii) a covenant-not-to-sue current RPX clients for supply of chipsets; (iii) a standstill
of litigation involving any patents acquired in the next five years (“Standstill”).
The Company also granted to Alcatel-Lucent a license
to the portfolio acquired from the Harris Corporation.
During the three and nine months ended
September 30, 2017, the Company recorded approximately $314,000 and $932,000, respectively, in revenue related to the amortization
of the license.
Under a separate agreement between the Company and RPX, dated May 23, 2016, the Company granted RPX the
ability to grant to VTech Telecommunications Ltd. (“VTech”) a sublicense for a fully paid portfolio license in exchange
for an additional $20,000 in cash consideration.
The license granted under the terms of the RPX
License described herein does not extend to entities/companies that are not clients of RPX and provide chipsets or other hardware
to current RPX clients.
The carrying value of Series H Convertible Preferred
Stock on the extinguishment date was estimated at approximately $31.9 million. The fair value on the same date was estimated at
approximately $414,000 based upon equivalent common shares that the Series H Convertible Preferred Stock could have converted into
at the closing price on May 23, 2016. This resulted in the Company receiving cash from RPX of $4.4 million, a deemed capital contribution
of approximately $31.5 million, short term deferred revenue $1.1 million and long term deferred revenue of $3.7 million.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
A summary of information with respect the RPX transaction on May 23,
2016 is as follows:
Stock price on May 22, 2016
|
|
$
|
2.06
|
|
|
|
|
|
|
Series H Assumptions
|
|
|
|
|
Series H Shares
|
|
|
381,967
|
|
Series H - Liquidation preference
|
|
$
|
83.50
|
|
Series H -Carrying value
|
|
$
|
31,894,245
|
|
|
|
|
|
|
Equivalent common shares - Series H
|
|
|
201,035
|
|
Fair Value of Series H preferred
|
|
$
|
414,133
|
|
|
|
|
|
|
Contribution/Deemed dividend
|
|
$
|
31,480,112
|
|
The deferred revenue will be amortized over a 5-year
service period as the RPX License includes a standstill agreement which requires Spherix to provide the licensee with the right
to use any future acquired patents for five years.
ASC 260-10-S99-2,
Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock
, requires the gain or loss on extinguishment
of equity-classified preferred stock to be included in net income per common stockholder used to calculate earnings per share (similar
to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred
to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted
from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.
Note 8. Stockholders’ Equity and Redeemable Convertible Preferred
Stock
Restated Certificate of Incorporation
On March 4, 2016, the Company implemented a Reverse
Stock Split with a ratio of 1-for-19. The par value and other terms of the common stock were not affected by the Reverse Stock
Split. In addition, the amendment to the Company’s certificate of incorporation that effected the Reverse Stock Split simultaneously
reduced the number of authorized shares of Common Stock from 200,000,000 to 100,000,000.
Common Stock
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 1,250,000 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 $2.00 for aggregate gross proceeds of $2,500,000, 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.
Preferred Stock
The Company had designated separate series of its
capital stock as of September 30, 2017 and December 31, 2016 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
Par Value
|
|
Conversion Ratio
|
Series "A"
|
|
|
—
|
|
|
—
|
|
$
|
0.0001
|
|
N/A
|
Series "C"
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
0.05:1
|
Series “D"
|
|
|
4,725
|
|
|
4,725
|
|
|
0.0001
|
|
0.53:1
|
Series “D-1"
|
|
|
834
|
|
|
834
|
|
|
0.0001
|
|
0.53:1
|
Series “F-1"
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
0.05:1
|
Series “H"
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
0.53:1
|
Series “I”
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
1.05:1
|
Series “J”
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
0.05:1
|
Series “K”
|
|
|
—
|
|
|
—
|
|
|
0.0001
|
|
263.16:1
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Warrants
A summary of warrant activity for the nine months
ended September 30, 2017 is presented below:
|
|
|
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Total
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life
(in years)
|
|
Outstanding
as of December 31, 2016
|
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
$
|
—
|
|
|
|
3.91
|
|
Expired
|
|
|
|
(557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
September 30, 2017
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
3.17
|
|
Exercisable as of
September 30, 2017
|
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
3.17
|
|
Stock Options
Also approved by the Company’s stockholders
on February 26, 2016 was an amendment to the Company’s 2014 Equity Incentive Plan, which increased the number of shares of
common stock authorized to be issued pursuant to the 2014 Plan from 4,161,892 to 8,250,000 prior to effectuation of the 1:19 reverse
stock split. As a result of the split, the total share authorization under the plan was reduced to 434,210 shares.
During the second quarter ended June 30, 2017,
pursuant to and subject to the available number of shares reserved under the 2014 Plan, the Company issued an aggregate of 15,788
options to purchase common stock of the Company to four of its directors. The aggregate grant date fair value of these options
was approximately $12,000. These stock options vest over one year.
A summary of option activity under the Company’s
employee stock option plan for the nine months ended September 30, 2017 is presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Total
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
Outstanding as of December
31, 2016
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
—
|
|
|
|
4.1
|
|
Employee options granted
|
|
|
15,788
|
|
|
|
1.02
|
|
|
|
7,420
|
|
|
|
4.7
|
|
Employee
options expired
|
|
|
(176
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of
September 30, 2017
|
|
|
325,703
|
|
|
$
|
78.24
|
|
|
$
|
7,697
|
|
|
|
3.5
|
|
Options vested and
expected to vest
|
|
|
325,703
|
|
|
$
|
78.24
|
|
|
$
|
7,697
|
|
|
|
3.5
|
|
Options vested and
exercisable
|
|
|
317,811
|
|
|
$
|
80.15
|
|
|
$
|
3,987
|
|
|
|
3.4
|
|
A summary of option activity under the Company’s
non-employee stock option plan for the nine months ended September 30, 2017 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2016
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
4.4
|
|
Non-employee options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of September 30, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.7
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.7
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.7
|
|
Stock-based compensation associated with the amortization
of stock option expense was approximately $2,000 and $5,000 for the three months ended September 30, 2017 and 2016, and was approximately
$13,000 and $26,000 for the nine months ended September 30, 2017 and 2016, respectively.
Restricted Stock Units
On March 14, 2017, 35,969 restricted stock
units (“RSUs”) were delivered to Anthony Hayes. 23,287 shares of common stock were withheld (at the closing price of
the Company's common stock on the NASDAQ Capital Market on March 14, 2017) to satisfy the tax obligation relating to the vesting
of the RSUs.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Stock-based Compensation
Stock-based compensation for the three and nine
months ended September 30, 2017 and 2016 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Employee stock option awards
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
|
26
|
|
Non-employee restricted stock awards
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
255
|
|
Employee restricted stock units
|
|
|
—
|
|
|
|
49
|
|
|
|
—
|
|
|
|
72
|
|
Total compensation expense
|
|
$
|
2
|
|
|
$
|
54
|
|
|
$
|
13
|
|
|
$
|
353
|
|
Stock-based compensation was approximately $2,000
and $54,000 for the three months ended September 30, 2017 and 2016, and was approximately $13,000 and $0.4 million for the nine
months ended September 30, 2017 and 2016, respectively. Unamortized stock-based compensation expense was immaterial at
September 30, 2017.
Note 9. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the Company
actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of patented technology.
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of business. There were no pending material claims or legal matters as of the date of this report other than the following matters:
Spherix Incorporated v. Uniden Corporation et
al., Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas
On August 30, 2013, we initiated litigation against
Uniden Corporation and Uniden America Corporation (collectively “Uniden”) in
Spherix Incorporated v. Uniden Corporation
et al.
, Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas (“the Court”)
for infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 6,614,899; and 6,965,614 (collectively, the “Asserted Patents”).
The complaint alleges that Uniden has manufactured, sold, offered for sale and/or imported technology that infringes the Asserted
Patents. We sought relief in the form of a finding of infringement of the Asserted Patents, an accounting of all damages sustained
by us as a result of Uniden’s infringement, actual damages, enhanced damages under 35 U.S.C. Section 284, attorney’s
fees and costs. On June 3, 2014, in an effort to narrow the case, the parties filed a stipulation dismissing without prejudice
all claims and counterclaims related to U.S. Patent No. 5,752,195. On September 4, 2014, Uniden America Corporation, together with
VTech Communications, Inc., filed a request for
inter partes
review (“IPR”) of U.S. Patent No. 5,581,599 (the
“’599 Patent”) and 6,614,899 (the “’899 Patent”) in the United States Patent and Trademark
Office. On March 3, 2015, the U.S. Patent Trial and Appeal Board (“PTAB”) entered decisions instituting, on limited
grounds, IPR proceedings regarding a portion of the claims for the two Spherix patents. On March 19, 2015, the Court issued its
Markman
order, construing a total of 13 claim terms that had been disputed by the parties. On April 2, 2015, we filed an
Amended Complaint with Jury Demand and the parties filed a Settlement Conference Report informing the Court that the parties have
not yet resumed settlement negotiations. On September 10, 2015, the Court stayed the case and ordered the parties to file a status
report within 10 days of the Patent Office issuing its decision in the IPR proceedings. On October 13, 2015, the Court ordered
the case administratively closed until the PTAB issued its final written decisions. On February 3, 2016, the PTAB issued its final
decisions in the IPR proceedings, finding invalid eight of the 15 asserted claims of the ’599 Patent and all asserted claims
of the ’899 Patent. Our deadline to file a Notice of Appeal of the PTAB’s decision to the United States Court of Appeals
for the Federal Circuit was set for April 6, 2016. On February 29, 2016, at the parties’ joint request, the Court ordered
that the stay of the case remain in effect for 30 days so the parties may work to resolve the case without further Court intervention.
The parties timely filed a Joint Status Report on March 31, 2016, in which we requested that the stay remain in effect pending
the Federal Circuit issuing a ruling in connection with the appeal of IPR2014-01431 relating to the ’599 Patent. On April
1, 2016, we filed our Patent Owner’s Notice of Appeal in IPR2014-01431. On April 11, 2016, the Court granted the parties’
motion to continue the stay. On January 12, 2017, we settled the case with Uniden and Uniden took a license under the Asserted
Patents and the appeal to the Federal Circuit continued with the Patent and Trademark Office (“PTO”) as an adverse
party. On July 25, 2017, after full briefing and oral argument, the Federal Circuit issued an order affirming the PTAB’s
decision relating to the ’599 Patent.
International License Exchange of America, LLC
v. Fairpoint Communications, Inc., Case No. 1:16-cv-00305-RGA, in the United States District Court for the District of Delaware
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
On April 26, 2016, we initiated litigation against
Fairpoint Communications, Inc. in
Spherix Incorporated v. Fairpoint Communications, Inc.
, Case No. 1:16-cv-00305-RGA, in
the United States District Court for the District of Delaware (the “Court”) for infringement of U.S. Patent No. RE40,999
(the ’999 Patent”). In the Complaint, we sought relief in the form of a finding of infringement of the ’999 Patent,
damages sufficient to compensate us for Fairpoint’s infringement together with pre-and post-judgment interest and costs,
a declaration that the case is exceptional under 35 U.S.C. § 285, and the Company’s attorney’s fees. On October
13, 2016, Fairpoint filed its answer with no counterclaims. On November 16, 2016, International License Exchange of America, LLC,
a wholly-owned subsidiary of Equitable (“ILEA”), filed a motion to substitute itself as the plaintiff, consistent with
our Monetization Agreement with Equitable. On November 17, 2016, the Court granted ILEA’s motion. On June 22, 2017, the Court
entered a Scheduling Order setting the Markman hearing for August 22, 2018 and jury trial for October 28, 2019. On August 31, 2017,
the parties filed a joint stipulation of dismissal and, on September 1, 2017, the Court terminated the case.
International License Exchange of America, LLC
Litigations
Under our Monetization Agreement with Equitable,
ILEA has filed the patent infringement litigations listed below.
|
●
|
On August 12, 2016, litigation against Cincinnati Bell, Inc., case number 1:16-cv-00715-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of U.S. Patent No. RE40,999 (“the ’999 patent”), U.S. Patent No. 6,970,461, and U.S. Patent No. 7,478,167. On March 8, 2017, Cincinnati Bell filed a motion to dismiss, alleging lack of personal jurisdiction and improper venue. On March 29, 2017, the parties filed a joint motion to stay all deadlines until April 29, 2017, stating that the parties have reached an agreement in principal to resolve all claims asserted in the case. On April 3, 2017, the court granted the parties motion to stay all deadlines until April 29, 2017. On May 5, 2017, the Court ordered the parties to file a joint status report by three days from the date of the order. On May 5, 2017, the parties filed a joint stipulation of dismissal and the Court terminated the case.
|
|
●
|
On August 12, 2016, litigation against Frontier Communications Corporation, case number 1:16-cv-00714-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On May 16, 2017, ILEA filed an agreed motion to stay all deadlines in the case, stating that the parties had reached an agreement in principal in the case and needed time to finalize the written agreement. On May 19, 2017, the Court granted the motion and stayed all deadlines until June 19, 2017. On June 19, 2017, ILEA filed a notice of voluntary dismissal and the Court terminated the case.
|
|
●
|
On August 12, 2016, litigation against Echostar Corporation, case number 1:16-cv-00716-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On April 17, 2017, ILEA filed a notice of voluntary dismissal of the case, and on April 18, 2017, the Court closed the case.
|
|
●
|
On August 15, 2016, litigation against ATN International, Inc. Commnet Wireless, LLC Choice Communications LLC, and Choice Communications, LLC (“Choice Wireless”), case number: 1:16-cv-00718-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On April 12, 2017, the parties jointly dismissed the case by filing a stipulation dismissing the case with prejudice.
|
|
●
|
On August 15, 2016, litigation against Sprint Corporation and Clearwire Corporation case number 1:16-cv-00719-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On May 1, 2017, ILEA filed a notice of voluntary dismissal of the case, and the court closed the case on May 2, 2017.
|
|
●
|
On August 16, 2016, litigation against ViaSat, Inc., case number 1:16-cv-00720-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On March 7, 2017, ViaSat filed a motion to dismiss, alleging failure to state a plausible claim of patent infringement. On March 21, 2017, ILEA filed its brief in opposition to the motion to dismiss. On March 28, 2017, ViaSat filed its reply brief on the motion to dismiss. On May 19, 2017, the Court issued an order granting ViaSat’s motion to dismiss, but granted ILEA leave to amend the complaint no later than three weeks from the date of the order. On May 30, 2017, ILEA filed its amended complaint. On July 24, 2017, the parties filed a joint motion to dismiss the case. On July 25, 2017, the Court granted the motion and closed the case.
|
|
●
|
On September 9, 2016, litigation against Fortinet Inc., case number 1:16-cv-00795-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On March 7, 2017, Fortinet filed its answer to the Complaint. On June 14, 2017, the Court ordered the parties to file a status report within three days of the order. On June 16, 2017, the parties filed the joint status report stating that the parties have executed a written settlement agreement resolving the case. On July 6, 2017, ILEA filed a stipulation of dismissal with prejudice and the Court closed the case.
|
|
●
|
On September 9, 2016, litigation against GTT Communications, Inc., case number 1:16-cv-00796-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent. On May 19, 2017, the parties filed a motion to extend time to answer the complaint until June 5, 2017. On May, 22, 2017, the Court granted the motion. On June 5, 2017, ILEA filed a notice of voluntary dismissal and the Court terminated the case.
|
|
●
|
On November 22, 2016, litigation against Alcatel-Lucent SA and Alcatel-Lucent USA Inc., case number 1:16-cv-01077-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ’999 patent and U.S. Patent Nos. 7,158,515; 6,222,848; 6,578,086; and 6,697,325. On March 28, 2017, ILEA filed a notice of voluntary dismissal of the case and on that date the court closed the case.
|
|
●
|
On May 4, 2017, litigation against NTT
Communications ICT Solutions Pty Ltd., NTT America, Inc., and NTT Security (US) Inc., case number 1:17-cv-00508-UNA, in the U.S.
District Court for the District of Delaware, related to alleged infringement of the ‘999 patent and the ‘990 patent.
On November 8, 2017, ILEA filed a notice of voluntary dismissal of the case.
|
SPHERIX
INCORPORATED AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
●
|
On May 15, 2017, litigation against ADTRAN, Inc. case number 1:17-cv-00562-RGA, in the U.S. District Court
for the District of Delaware, related to alleged infringement of the ‘999 patent and U.S. Patent Nos. 5,959,990; 6.970,461;
7,478,167; 7,274,704; and 7,277,533. The current deadline for filing an answer is December 6, 2017.
|
In
July 2016, a lawsuit relating to the ’999 Patent was dismissed in anticipation of settlement with the counterparty. In May
2017, settlement was reached, pursuant to which the counterparty granted to Equitable the right to monetize a portfolio of 112
patents (the “Settlement Patents”). Pursuant to the Company’s Monetization Agreement with Equitable, the Company
is entitled to receive a portion of the net revenue generated by Equitable’s monetization of the Settlement Patents.
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.