Notes to Condensed Consolidated Financial
Statements
Note
1. Organization and Description of Business
Organization
and Description of Business
Spherix
Incorporated (the “Company”) is an intellectual property company incorporated in the State of Delaware that owns patented
and unpatented intellectual property. The Company was formed in 1967 as a scientific research company and for much
of its history pursued drug development including through Phase III clinical studies which were discontinued. Through
the Company’s acquisition of patents and patent applications developed by Nortel Networks Corporation from Rockstar Consortium
US, LP (“Rockstar”) and Harris Corporation from North South Holdings Inc. (“North South”) in 2013, the
Company has expanded its activities.
The
Company is a patent commercialization company focused on generating revenues from the monetization of intellectual property, or
IP. Such monetization includes, but is not limited to, acquiring IP from patent holders in order to maximize the value of
the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents. We
intend to generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies
that we own, that we manage for others, or that others manage on our behalf. To date, we have generated minimal revenues and no
assurance can be provided that our business model will be successful.
The
Company continually works to enhance its portfolio of intellectual property through acquisition and strategic partnerships. The
Company’s mission is to partner with inventors, or other entities, who own undervalued intellectual property. The Company
then works with the inventors or other entities to commercialize the IP.
Note
2. Liquidity and Financial Condition
The
Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding
(non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities
through:
●
|
managing current cash and
cash equivalents on hand from the Company’s past debt and equity offerings,
|
●
|
seeking additional
funds raised through the sale of additional securities in the future,
|
●
|
seeking additional
liquidity through credit facilities or other debt arrangements, and
|
●
|
increasing revenue
from its patent portfolios, license fees and new business ventures.
|
Management
believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months.
The
Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow
to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital
to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies
and help advance innovation. The Company’s working capital amounted to approximately $4.4 million at March 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.
Disputes
regarding the assertion of patents and other intellectual property rights are highly complex and technical. The Company may be
forced to litigate against others to enforce or defend its intellectual property rights or to determine the validity and scope
of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which the Company
is involved may allege defenses and/or file counterclaims or initiate inter-party reviews in an effort to avoid or limit liability
and damages for patent infringement or cause the Company to incur additional costs as a strategy. If such efforts are
successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents.
The patents could be declared invalid by a court or the United States Patent and Trademark Office, in whole or in part, or the
costs of the Company can increase. Recent rulings also create an increased risk that if the Company is unsuccessful in litigation
it could be responsible to pay the attorneys’ fees and other costs of defendants by lowering the standard for legal fee
shifting sought by defendants in patent cases.
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology
Corp. (“Nuta”), Spherix Portfolio Acquisition II, Inc. (“SPXII”), Guidance IP, LLC (“Guidance”),
Directional IP, LLC (“Directional”), Spherix Management Services, LLC (“SMS”) and NNPT, LLC (“NNPT”).
All significant intercompany balances and transactions have been eliminated in consolidation.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Use
of Estimates
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that affect
certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the period. The Company’s significant estimates and
assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation of derivative
liabilities, the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain
of the Company’s estimates, including the carrying amount of the intangible assets, could be affected by external conditions,
including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could
have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company
considers all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents.
As of March 31, 2018 and December 31, 2017, the Company had $63,000 and $0.2 million, respectively, in cash and cash equivalents.
The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Marketable
Securities
Marketable
securities are classified as trading and are carried at fair value. The Company’s marketable securities consist of corporate
bonds and highly liquid mutual funds and exchange-traded & closed-end funds which are valued at quoted market prices.
During
the three months ended March 31, 2018 and 2017, the Company incurred realized losses of approximately $98,000 and $93,000, respectively,
and unrealized losses of approximately $58,000 and unrealized gains of approximately $72,000, 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 March 31, 2018 and 2017, the Company earned dividend income of approximately $33,000 and $8,000, 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 three months ended March 31, 2018 and 2017.
The fair values of such marketable securities held as of March 31, 2018 and December 31, 2017 were $5.6 million and $4.0 million,
respectively.
The
marketable securities were classified as a Level 2 financial instrument at March 31, 2018 (see Note 7).
Investment
The
Company elected the fair value option for its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”).
As of March 30, 2018, the fair value of this investment was $1,020,000. The Company also elected the fair value option for its
investment in TheBit Daily LLC, a Delaware limited liability company (“TheBit Daily”). As of March 31, 2018, the fair
value of this investment was $25,000. The investments were classified as a Level 3 financial instrument at March 31, 2018 (see
Note 4).
While
the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date.
The
decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis
and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been
elected, are recognized as an unrealized gain on investment in the Consolidated Statements of Operations.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Net income (loss) attributable to common stockholders includes the effect of the deemed
capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial
conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of
the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes
the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation
of net loss per share if their effect would be anti-dilutive.
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share
at March 31, 2018 and 2017 are as follows:
|
|
As of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
2,926
|
|
Warrants to purchase common stock
|
|
|
1,249,754
|
|
|
|
1,251,709
|
|
Options to purchase common stock
|
|
|
478,490
|
|
|
|
309,037
|
|
Total
|
|
|
1,731,170
|
|
|
|
1,563,672
|
|
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement when the services have been provided to the customer, the sales price is fixed
or determinable and collectability is probable. Our material revenue stream is related to revenue generated from its settlement
and licensing agreements. the appropriate recognition of revenue is determined as one performance obligation and revenue is recognized
upon delivery of the final performance obligations, including the license for past and future use and the release.
The
Company recognizes revenue under ASC 606,
Revenue from Contracts with Customers
. The core principle of the new revenue
standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
●
Step 1: Identify the contract with the customer
●
Step 2: Identify the performance obligations in the contract
●
Step 3: Determine the transaction price
●
Step 4: Allocate the transaction price to the performance obligations in the contract
●
Step 5: Recognize revenue when the company satisfies a performance obligation
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services
in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition
of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
|
•
|
The
customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service is capable
of being distinct).
|
|
•
|
The
entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (i.e., the promise to transfer the good
or service is distinct within the context of the contract).
|
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
Variable consideration
●
Constraining estimates of variable consideration
●
The existence of a significant financing component in the contract
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
●
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 March 31, 2018, there were no contract assets or liabilities associated the Company’s with settlement and licensing agreements.
During the three months ended March 31, 2018, the Company did not generate any revenue.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes FASB ASC Topic 840,
Leases (Topic
840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and
lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will
determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term
of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with
a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted
for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after
December 15, 2018, with early adoption permitted upon issuance. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial position and results of operations.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
, (ASU 2017-11). Part I of this update addresses the complexity
of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument
or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from
Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content
is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain
nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not
have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related
disclosures.
Recently
Adopted Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition
principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective
approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company
adopted the new standard effective January 1, 2018, using the modified retrospective approach. The Company has determined that
its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time
when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s
deferred revenue related to its licenses was eliminated and accumulated deficit as of January 1, 2018 was decreased by approximately
$3.2 million so that the Company will not recognize revenue on earnings statements in the future as to its license.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
In
January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No.
2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation
of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the
accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No.
2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The Company adopted the provisions of ASU 2016-01 on January 1, 2018. The adoption of this update did not
impact the Company’s consolidated financial statements and related disclosures.
In
May 2017, the Financial Accounting Standards Board (the FASB) issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
, (ASU 2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and
(2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment
award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted
ASU 2017-09 on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position
or results of operations.
Note
4. Investment in Hoth Therapeutics, Inc.
On
June 30, 2017 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of
6,800,000 shares of common stock, par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. The
Company adopted the fair value option for this investment. There was no change in fair value for this investment during the three
months ended March 31, 2018 (see Note 7).
Note
5. Investment in TheBit Daily LLC
On
March 23, 2018, Spherix Incorporated purchased 8.0% of the issued and outstanding limited liability company membership interests
of TheBit Daily LLC, a development stage media and education platform focused on the blockchain and cryptocurrency space, for
a subscription price of $25,000.
The
Company adopted the fair value option for this investment and recorded changes in fair value, if any, in the statement of operations (see
Note 7).
Note
6. Intangible Assets
Patent
Portfolio and Patent Rights
The
Company’s intangible assets with finite lives consist of its patents and patent rights. For all periods presented, all of
the Company’s identifiable intangible assets were subject to amortization. The carrying amounts related to acquired intangible
assets as March 31, 2018 are as follows ($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2017, net
|
|
$
|
3,578
|
|
|
|
2.67
|
|
Amortization expenses
|
|
|
(338
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at March 31, 2018, net
|
|
$
|
3,240
|
|
|
|
2.43
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The
amortization expenses related to acquired intangible assets for the three months ended March 31, 2018 and 2017 are as follows
($ in thousands):
|
|
Amortization Expense for the Three Months Ended March 31,
|
|
Date Acquired and Description
|
|
2018
|
|
|
2017
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
18
|
|
|
$
|
18
|
|
9/10/13 - North South patent portfolio
|
|
|
5
|
|
|
|
5
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
315
|
|
|
|
315
|
|
|
|
$
|
338
|
|
|
$
|
338
|
|
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
|
|
Nine Months Ended December 31, 2018
|
|
|
54
|
|
|
|
17
|
|
|
|
964
|
|
|
|
1,035
|
|
Year Ended December 31, 2019
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2020
|
|
|
71
|
|
|
|
22
|
|
|
|
639
|
|
|
|
732
|
|
Year Ended December 31, 2021
|
|
|
71
|
|
|
|
22
|
|
|
|
—
|
|
|
|
93
|
|
Thereafter
|
|
|
4
|
|
|
|
3
|
|
|
|
—
|
|
|
|
7
|
|
Total
|
|
$
|
271
|
|
|
$
|
86
|
|
|
$
|
2,883
|
|
|
$
|
3,240
|
|
Note
7. Fair Value of Financial Assets and Liabilities
Financial
instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are
carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company
measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
following table presents the Company’s assets and liabilities that are measured at fair value at March 31, 2018 and December
31, 2017 ($ in thousands):
|
|
Fair value measured at March 31, 2018
|
|
|
|
Total carrying value at March 31,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
5,574
|
|
|
$
|
—
|
|
|
$
|
5,574
|
|
|
$
|
—
|
|
Investments at fair value
|
|
$
|
1,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
634
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
634
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
|
|
Fair value measured at December 31, 2017
|
|
|
|
Total carrying value at December 31,
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - mutual and exchange traded funds
|
|
$
|
3,998
|
|
|
$
|
—
|
|
|
$
|
3,998
|
|
|
$
|
—
|
|
Investments at fair value
|
|
$
|
1,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
822
|
|
There
were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2018.
Level
2 Valuation Techniques
The
fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that
the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A
significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result
in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change
in fair value of warrant liabilities” in the Company’s consolidated statements of operations.
The
Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded
at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the
Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the
option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance
of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted
for as derivative liabilities.
A
summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the
Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and
as of March 31, 2018 and December 31, 2017 is as follows:
Warrants
|
|
|
|
|
Date of valuation
|
|
March 31, 2018
|
|
December 31, 2017
|
Risk-free interest rate
|
|
2.39%
|
|
1.98%
|
Expected volatility
|
|
100.00% - 135.30%
|
|
100.00% - 132.21%
|
Expected life (in years)
|
|
2.69-2.81
|
|
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for
the three months ended March 31, 2018 and 2017 that are measured at fair value on a recurring basis ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Beginning balance
|
|
$
|
822
|
|
|
$
|
702
|
|
Fair value adjustment of warrant liabilities
|
|
|
(188
|
)
|
|
|
122
|
|
Ending balance
|
|
$
|
634
|
|
|
$
|
824
|
|
The
Company owns approximately 36% of common shares in Hoth as of March 31, 2018. The value of the Company’s investment in There
were no changes in Hoth’s inputs to value its investment during the three months ended March 31, 2018.
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets for the
three months ended March 31, 2018 and 2017 that are measured at fair value on a recurring basis:
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Beginning balance
|
|
$
|
1,020
|
|
|
$
|
—
|
|
Purchase of investment in TheBit Daily LLC at fair value
|
|
|
25
|
|
|
|
—
|
|
Ending balance
|
|
$
|
1,045
|
|
|
$
|
—
|
|
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 March 31, 2018 and December 31, 2017 is as follows:
Date of valuation
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
1.39
|
%
|
|
|
1.39
|
%
|
Expected volatility
|
|
|
75.00
|
%
|
|
|
75.00
|
%
|
Expected life (in years)
|
|
|
0.75
|
|
|
|
1.00
|
|
Note
8. Stockholders’ Equity and Redeemable Convertible Preferred Stock
Series
D Convertible Preferred Stock
On
April 2, 2013, the Company designated 1,488,152 shares of preferred stock as Series D Preferred Stock. In connection with the
acquisition of North South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible
Preferred Stock (“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred
Stock has a stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of Common Stock. Upon the
liquidation, dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled
to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated
value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each
holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled
to such number of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible
into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation
and the conversion limitations described below. At no time may shares of Series D Preferred Stock be converted if such conversion
would cause the holder to hold in excess of 4.99% of issued and outstanding Common Stock, subject to an increase in such limitation
up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to the Company. The conversion ratio
of the Series D Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares
and similar recapitalization transactions.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
As
of March 31, 2018 and December 31, 2017, 4,725 shares of Series D Preferred Stock remained issued and outstanding.
Series
D-1 Convertible Preferred Stock
On
November 20, 2013, the Company designated 1,379,685 shares of preferred stock as Series D-1 Preferred Stock. The Company’s
Series D-1 Convertible Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each
share of Series D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share
of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series
D-1 Preferred Stock shall be entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in
cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an
“as converted” basis. Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters
submitted to the Company’s stockholders and shall be entitled to such number of votes equal to the number of shares of Common
Stock such shares of Series D-1 Preferred Stock are convertible into at such time, taking into account the beneficial ownership
limitations set forth in the governing Certificate of Designation. At no time may shares of Series D-1 Preferred Stock
be converted if such conversion would cause the holder to hold in excess of 9.99% of issued and outstanding Common Stock. The
conversion ratio of the Series D-1 Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination
of shares and similar recapitalization transactions. The Company commenced an exchange with holders of Series D Convertible
Preferred Stock pursuant to which the holders of the Company’s outstanding shares of Series D Preferred Stock acquired in
the Merger could exchange such shares for shares of the Company’s Series D-1 Preferred Stock on a one-for-one basis.
As
of March 31, 2018 and December 31, 2017, 834 shares of Series D-1 Preferred Stock remained issued and outstanding.
Common
Stock
On
March 19, 2018, the Company closed a public offering of common stock for gross proceeds of approximately $3.0 million. The offering
was a shelf takedown off of the Company’s registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant
to a placement agency agreement (the “Agreement”) between the Company and Laidlaw & Company (UK) Ltd., the sole
placement agent, on a best-efforts basis with respect to the offering (the “Placement Agent”), that was entered into
on March 14, 2018. The Company sold 2,222,222 shares of its common stock in the offering at a purchase price of $1.35 per share.
Warrants
A
summary of warrant activity for the three months ended March 31, 2018 is presented below:
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.92
|
|
Outstanding as of March 31, 2018
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
2.7
|
|
Exercisable as of March 31, 2018
|
|
|
1,249,754
|
|
|
$
|
8.98
|
|
|
$
|
—
|
|
|
|
2.67
|
|
Stock
Options
During
the three months ended March 31, 2018, pursuant to and subject to the available number of shares reserved under the 2014 Plan,
the Company issued an aggregate of 150,000 options to purchase common stock of the Company to three of its directors. The aggregate
grant date fair value of these options was approximately $0.2 million. These stock options vest over six months.
SPHERIX INCORPORATED
AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
A
summary of option activity under the Company’s employee stock option plan for the three months ended March 31, 2018 is presented
below:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
325,597
|
|
|
$
|
78.20
|
|
|
$
|
5,999
|
|
|
|
3.2
|
|
Employee options granted
|
|
|
150,000
|
|
|
|
1.50
|
|
|
|
—
|
|
|
|
9.9
|
|
Outstanding as of March 31, 2018
|
|
|
475,597
|
|
|
$
|
54.01
|
|
|
$
|
2,842
|
|
|
|
5.1
|
|
Options vested and expected to vest
|
|
|
475,597
|
|
|
$
|
54.01
|
|
|
$
|
2,842
|
|
|
|
5.1
|
|
Options vested and exercisable
|
|
|
392,705
|
|
|
$
|
65.10
|
|
|
$
|
1,421
|
|
|
|
4.2
|
|
A summary of option activity under the
Company’s non-employee stock option plan for the three months ended March 31, 2018 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.4
|
|
Outstanding as of March 31, 2018
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.2
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.2
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
—
|
|
|
|
3.2
|
|
Stock-based compensation associated with
the amortization of stock option expense was approximately $0.1 million and $4,000 for the three months ended March 31, 2018 and
2017, respectively.
Restricted Stock Awards
On February 16, 2018, the Company granted
each of its three directors 20,000 shares of restricted common stock. The restricted stock award vested immediately. The grant
date fair value of each restricted stock award was approximately $27,000. These restricted stock awards vested immediately.
Stock-based Compensation
Stock-based compensation for the three
months ended March 31, 2018 and 2017 was comprised of the following ($ in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Employee restricted stock awards
|
|
$
|
80
|
|
|
$
|
4
|
|
Employee stock option awards
|
|
|
108
|
|
|
|
—
|
|
Total compensation expense
|
|
$
|
188
|
|
|
$
|
4
|
|
Unamortized stock-based compensation expense
was immaterial at March 31, 2018.
Note 9. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of patented technology.
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of business. There were no pending material claims or legal matters as of the date of this report other than the following matters:
International License Exchange of America,
LLC Litigations
Under our Monetization Agreement with Equitable,
ILEA filed the patent infringement litigation below.
|
●
|
On May 15, 2017, litigation against ADTRAN, Inc. case number 1:17-cv-00562-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent and U.S. Patent Nos. 5,959,990; 6.970,461; 7,478,167; 7,274,704; and 7,277,533. On January 22, 2018, ILEA filed a notice of voluntary dismissal and the court terminated the case.
|
SPHERIX INCORPORATED
AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
Optic153 LLC Litigations
Under our Monetization Agreement with Equitable,
Optic 153 LLC, an Equitable subsidiary, has filed the following litigations relating to patents acquired under the terms of settlement
of one of our prior litigations:
|
●
|
On March 15, 2018, litigation against Lumentum Operations LLC, Case No. 1:18-cv-00406-VAC-CJB, in the in the U.S. District Court for the District of Delaware, related to alleged infringement of U.S. Patent No. 6,587,261. Lumentum’s Answer is currently due on June 4, 2018.
|
Counterclaims
In the ordinary course of business, we,
or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed
on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated
by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can
provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results
from operations.
Note 10. DatChat, Inc.
The Merger
On March 12, 2018, the Company entered
into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Spherix, Spherix Merger Subisdiary Inc.,
a Nevada corporation and a wholly-owned Subsidiary of Spherix (“Merger Sub”), DatChat, Inc., a Nevada corporation (“DatChat”),
and Darin Myman in the capacity as the representative from and after the effective time of the Merger (the “Effective Time”)
for the stockholders of DatChat as of immediately prior to the Effective Time (the “Stockholder Representative”).
Pursuant to the Merger Agreement, subject
to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Merger Agreement (the “Closing”),
Merger Sub will merge with and into DatChat (the “Merger”), with DatChat continuing as the surviving corporation in
the Merger. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time: (i) all shares of capital
stock of DatChat (the “DatChat Stock”) issued and outstanding immediately prior to the Effective Time will be converted
into the right to receive the Stockholder Merger Consideration (as defined below).
On May 3, 2018, Spherix, Merger Sub, DatChat
and the Stockholder Representative entered into that certain First Amendment to Agreement and Plan of Merger (the “Amendment”),
pursuant to which the Merger Agreement was amended to reduce the Stockholder Merger Consideration from 46,153,846 shares of Spherix
common stock to 34,615,385 shares of Spherix common stock.
Merger Consideration
At or prior to the Closing, Spherix, the
Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow
Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the Parties (the “Escrow
Agreement”), pursuant to which Spherix shall deposit with the Escrow Agent from the Stockholder Merger Consideration (as
defined below) the following numbers of shares of Spherix common stock (the sum of such amounts, the “Escrow Shares”
): (i) a number of shares Spherix common stock equal to 10% of the Stockholder Merger Consideration shares (including any equity
securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted,
the “Indemnity Escrow Shares”), to be held in a segregated escrow account (the “Indemnity Escrow Account”)
and disbursed by the Escrow Agent and (ii) a number of shares Spherix common stock equal 90% of the Stockholder Merger Consideration
shares (including any equity securities paid as dividends or distributions with respect to such shares or into which such shares
are exchanged or converted, the “ Distribution Escrow Shares ”), to be held in a segregated escrow account (the “Distribution
Escrow Account”) and disbursed by the Escrow Agent. Each stockholder of DatChat at the Effective Time (each, a “DatChat
Stockholder”) shall receive its pro rata share of the Stockholder Merger Consideration, less its pro rata portion of the
Escrow Shares held in the Escrow Account, based on the number of shares of DatChat Stock owned by such DatChat Stockholder as compared
to the total number of shares of DatChat Stock owned by all DatChat Stockholders as of immediately prior to the Effective Time.
The Indemnity Escrow Shares shall serve as a security for, and a source of payment of, the indemnity rights of the Spherix indemnified
parties’. The Distribution Escrow Shares will be released from escrow over time in accordance with the schedule and restrictions
as agreed upon by Spherix and the Stockholder Representative and set forth in the Escrow Agreement. Pursuant to the Amendment,
as consideration for the Merger, Spherix shall deliver to the stockholders of DatChat an aggregate of 34,615,385 shares of Spherix
common stock (the “Stockholder Merger Consideration”), with each share of Spherix common stock valued at $1.30 per
share.