Proxy Statement - Notice of Shareholders Meeting (preliminary) (pre 14a)

Date : 06/19/2019 @ 11:02AM
Source : Edgar (US Regulatory)
Stock : Spherix Inc (SPEX)
Quote : 1.79  -0.06 (-3.24%) @ 9:35PM

Proxy Statement - Notice of Shareholders Meeting (preliminary) (pre 14a)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

 

Filed by the Registrant ☒

 

Filed by a Party other than the Registrant ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material under §240.14a-12

 

SPHERIX INCORPORATED
(Name of Registrant as Specified In Its Charter)
 
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1) Title of each class of securities to which transaction applies:
     
  (2) Aggregate number of securities to which transaction applies:
     
  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
     
  (4) Proposed maximum aggregate value of transaction:
     
  (5) Total fee paid:
     
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1) Amount Previously Paid:
     
  (2) Form, Schedule or Registration Statement No.:
     
  (3) Filing Party:
     
  (4) Date Filed:
     

 

 

 

 

 

 

 

One Rockefeller Plaza, 11 th Floor

New York, New York 10020

www.spherix.com

 

 

 

Notice of Special Meeting of Stockholders

 

 

 

[                      ], 2019

 

To our Stockholders:

 

Notice is hereby given that the Special Meeting of Stockholders (the “Special Meeting”) of Spherix Incorporated, a Delaware corporation (the “Company,” “Spherix,” “our,” “we” or “us”), will be held as a “virtual meeting” via live audio webcast on [             ], [             ], at 12:00 p.m. Eastern Time for the following purposes, as more fully described in the accompanying proxy statement (the “Proxy Statement”):

 

(1) To authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L convertible preferred stock (the “Series L Preferred Stock”), issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company and CBM BioPharma, Inc. (“CBM”), as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock);
(2) To amend Spherix’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000;
(3) To transact other business that may properly come before the meeting and any postponement(s) or adjournment(s) thereof.

 

Pursuant to our amended and restated bylaws, our Board has fixed the close of business on [                 ] as the record date (the “Record Date”) for determination of stockholders entitled to notice and to vote at the Special Meeting and any adjournment thereof. Holders of our common stock, Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock are entitled to vote at the Special Meeting. This notice, the Proxy Statement and proxy card will be first sent or made available to stockholders on or around [                 ].

 

Our special meeting will be a “virtual meeting” of stockholders which will be conducted exclusively online via live audio webcast.

 

You will be able to attend the Special Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19 on [                 ], [                 ], 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the 16-digit Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you receive materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely log on, vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and participate in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.

 

Your vote is important. Whether or not you plan to attend the Special Meeting, please vote your shares by promptly completing, signing and returning the enclosed proxy card using the enclosed envelope. The enclosed envelope requires no postage if mailed within the United States. You may also vote your shares over telephone or the Internet in accordance with the instructions on the proxy card. 

 

  BY ORDER OF THE BOARD OF DIRECTORS
   
  By:      
    Robert J. Vander Zanden
Chairman of the Board

 

 

 

 

TABLE OF CONTENTS

 

  Page
SUMMARY 1
Summary Term Sheet 1
The Companies 2
The Acquisition 3
Structure of the Acquisition 3
Consideration to be Received in the Acquisition by CBM 3
Interests of CBM Directors and Executive Officers in the Acquisition 3
Interests of Spherix Directors and Executive Officers in the Acquisition 3
Anticipated Accounting Treatment 3
Regulatory Matters 3
Conditions to Completion of the Acquisition 3
Timing of the Acquisition 4
Termination of the Asset Agreement 4
Selected Historical Consolidated Financial Data of Spherix 5
Market Price and Comparative Dividend Information 6
Dividends and Other Distributions 6
   
RISK FACTORS 7
Risk Factors Relating to Spherix 7
Risk Factors Relating to CBM 13
Risk Factors Relating to the Acquisition 24
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 24
   
THE ACQUISITION 25
Background of the Acquisition 26
Spherix Board of Directors’ Recommendation 27
Interests of Spherix Directors and Executive Officers in the Acquisition 27
Anticipated Accounting Treatment 28
   
THE ASSET PURCHASE AGREEMENT 28
 
INFORMATION ABOUT THE COMPANIES 30
   
SPHERIX INCORPORATED 30
General 30
Intellectual Property and Patent Rights 32
   
CBM BIOPHARMA, INC. 33
KPC34 33
DHA-dFdC 34
Development Plan 34
Intellectual Property 34
Competition 34
Government Regulation 34
Reimbursement 40
Employees 41
Legal Proceedings 41
Dividends 41

 

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SPHERIX’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 42
Overview 42
Results of Operations 44
Liquidity and Capital Resources 44
Contractual Obligations 45
   
THE SPHERIX SPECIAL MEETING 46
Date, Time and Place 46
Purpose of the Spherix Special Meeting 46

 Spherix Record Date; Stock Entitled to Vote

46
Quorum 46
Votes Required for Approval 47
Voting by Spherix Directors and Executive Officers 47
Voting by Holders of Record 47

  Effects of Abstentions and Failures to Vote   

47

Voting of Shares Held in Street Name

48
Stockholder’s Vote 48
Solicitation of Proxies 48
Stockholders Sharing an Address 48
Other Matters to Come Before the Meeting 48
   
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 54
Management of Spherix 54
Section 16(a) Beneficial Ownership Reporting Compliance 55
Code of Ethics 55
Audit Committee 55
Compensation Committee 56
Nominating Committee 56
Stockholder Communications with Board of Directors 56
   
EXECUTIVE COMPENSATION 57
Summary of Compensation 57
Narrative Disclosure to Summary Compensation Table 58
Potential Payment upon Termination or Change in Control 58
Outstanding Equity Awards 59
Securities Authorized for Issuance under Equity Compensation Plans 60
Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management 60
Certain Relationships and Related Transactions, Director Independence 62
DESCRIPTION OF CAPITAL STOCK OF SPHERIX 64
General 64
Common Stock 64
Preferred Stock 64
   
INDEPENDENT REGISTERED ACCOUNTING FIRM 66

 

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FUTURE SPHERIX STOCKHOLDER AND CBM STOCKHOLDER PROPOSALS 67
   
WHERE YOU CAN FIND MORE INFORMATION 68
   
INDEX TO FINANCIAL STATEMENTS F-1
   
ANNEX A ASSET PURCHASE AGREEMENT AND AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT    Annex A-1
     
ANNEX B FORM OF CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION Annex B-1
     
ANNEX C FORM OF CERTIFICATE OF DESIGNATIONS OF THE SERIES L PREFERRED STOCK Annex C-1
     
ANNEX D FORM OF LEAK-OUT AGREEMENT Annex D-1

 

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PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
[                  ], 2019

 

Your proxy is solicited by the Board of Directors for our Special Meeting of Stockholders (the “Special Meeting”), to be held on [                  ], [                  ], 2019, at 12:00 p.m. Eastern Time. Our Special Meeting will be a “virtual meeting” of stockholders, which will be conducted exclusively online via live audio webcast. The Company’s principal executive office is located at One Rockefeller Plaza, 11th Fl., New York, NY 10020, and the telephone number is 212-745-1374.

 

At the Special Meeting, you will be asked to consider and vote upon the following matters:

 

(1)

To authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between Spherix Incorporated (the “Company”) and CBM BioPharma, Inc. (“CBM”), as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019 (as amended, the “Asset Agreement”), in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock);

 

(2) To amend Spherix’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000; and

 

(3) To transact other business that may properly come before the meeting and any postponement(s) or adjournment(s) thereof.

 

The Board of Directors has fixed the close of business on [                 ], 2019 as the record date (the “Record Date”) for determining stockholders entitled to notice of and to vote at the Special Meeting and any adjournment thereof. The notice of the Special Meeting (the “Notice”), this Proxy Statement and the proxy card will be first sent or made available to stockholders on or around [                 ].

 

You will be able to attend the Special Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19 on [                 ], [                 ], 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the 16-digit Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you receive materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely log on, vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and participate in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING TO BE HELD ON [         ], 2019: THE NOTICE, PROXY STATEMENT AND PROXY CARD ARE AVAILABLE AT WWW.PROXYVOTE.COM.

 

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QUESTIONS AND ANSWERS ABOUT THE ACQUISITION AND THE MEETING

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the acquisition and the stockholder meeting. These questions and answers may not address all of the questions that may be important to you as a Spherix stockholder. To better understand these matters, and for a description of the legal terms governing the acquisition, you should carefully read this entire proxy statement, including the annexes. See “Where You Can Find More Information” beginning on page 68. All references in this proxy statement to “Spherix” refer to Spherix Incorporated, a Delaware corporation, and its subsidiaries; unless otherwise indicated or as the context requires, all references in this proxy statement to “we” refer to Spherix; all references to the “Asset Agreement” refer to the Asset Purchase Agreement, dated as of May 15, 2019, by and among Spherix and CBM BioPharma, Inc. (“CBM”), as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, a copy of which is attached as Annex A to this proxy statement.

 

Q: Why am I receiving this proxy statement?

 

A: Spherix and CBM have entered into an Asset Agreement, pursuant to which Spherix will purchase substantially all of the assets of CBM. A copy of the Asset Agreement is included as Annex A to this proxy statement.

 

We have included in this proxy statement important information about the acquisition, the Asset Agreement and the Spherix Special Meeting. You should read this information carefully and in its entirety. The enclosed voting materials allow you to vote your shares without attending the stockholder meeting. Your vote is very important and we encourage you to submit your proxy as soon as possible.

 

Q: What proposals are Spherix stockholders being asked to consider?

 

A: Spherix stockholders are being asked to:

 

authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of the Asset Agreement, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock);

  

amend Spherix’s Certificate of Incorporation to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000; and

 

approve the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the proposals described above.

 

Q: What are the recommendations of the Spherix board of directors?

 

A: The board of directors has approved the Asset Agreement and the other transactions contemplated thereby and determined that the Asset Agreement and the acquisition are advisable and in the best interests of the Spherix stockholders.

 

THE SPHERIX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SPHERIX STOCKHOLDERS VOTE “ FOR ” THE PROPOSAL TO APPROVE THE ISSUANCE OF SPHERIX COMMON STOCK TO COMPLY WITH NASDAQ LISTING RULE 5635(A), VOTE “ FOR ” THE PROPOSAL TO AMEND SPHERIX’S CERTIFICATE OF INCORPORATION TO DECREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK, AND VOTE “ FOR ” THE PROPOSAL TO ADJOURN THE SPECIAL MEETING FOR ANY PURPOSE, including to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the proposals mentioned above . See “The Acquisition—Spherix Board of Directors’ Recommendation” beginning on page 27.

 

Q: When and where will the Special Meeting be held?

 

A: You will be able to attend the Special Meeting via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19 on [                 ], [                 ], 2019, at 12:00 p.m. Eastern Time. Upon visiting the meeting website, you will be prompted to enter the 16-digit Control Number provided to you on your Notice of Internet Availability of Proxy Materials or on your proxy card if you receive materials by mail. The unique Control Number allows us to identify you as a stockholder and will enable you to securely log on, vote and submit questions during the Special Meeting on the meeting website. Further instructions on how to attend and participate in the Special Meeting via the Internet, including how to demonstrate proof of stock ownership, are available at www.proxyvote.com.

 

Q: Who is entitled to vote at the Special Meeting?

 

A: Pursuant to its amended and restated bylaws, the board of directors has fixed the close of business on [                      ], 2019 as the “record date” for determination of stockholders entitled to notice and to vote at the Special Meeting and any adjournment or postponements thereof. Holders of Spherix common stock, Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock (collectively, the “Voting Capital”) are entitled to vote at the Special Meeting. As of the record date there were [                   ] shares of Spherix common stock outstanding, 4,725 shares of Series D Preferred Stock outstanding and 834 shares of Series D-1 Preferred Stock outstanding.

 

v

 

 

Each share of Spherix common stock is entitled to one vote on each matter properly brought before the Special Meeting. The outstanding Series D Preferred Stock and Series D-1 Preferred Stock are entitled to the following number of votes subject to the beneficial ownership limitations described below:

 

Series D Preferred Stock – 0.1238 votes per preferred share; and 

 

Series D-1 Preferred Stock – 0.1238 votes per preferred share.

 

Beneficial ownership limitations on Spherix preferred stock prevents the conversion or voting of such preferred stock if the number of shares of common stock to be issued pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of common stock or other voting stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act, as amended, and the rules thereunder) more than:

 

4.99% of all the Common Stock outstanding at such time, in the case of Series D Preferred Stock; and

 

9.99% of all the Common Stock outstanding at such time, in the case of Series D-1 Preferred Stock.

 

As of the record date, no stockholder’s ownership of our preferred stock had violated the ownership limitations set forth above and, as a result, no reductions of voting rights have been made.

 

A list of stockholders of record entitled to vote at the special meeting will be available for inspection at our principal executive offices located at One Rockefeller Plaza, 11th Floor, New York, NY 10020 for a period of at least 10 days prior to the special meeting and during the meeting. The stock transfer books will not be closed between the record date and the date of the Special Meeting.

 

Q: What constitutes a quorum for the Special Meeting?

 

A: To carry on business at the Special Meeting, we must have a quorum.  A quorum is present when a majority of the shares entitled to vote, as of the Record Date, are represented in person or by proxy.  Thus, holders of the Voting Capital representing at least [                    ] votes must be represented in person or by proxy to have a quorum.  Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the Special Meeting.  Abstentions and broker non-votes will be counted towards the quorum requirement.  Shares owned by us are not considered outstanding or considered to be present at the Special Meeting.  If there is not a quorum at the Special Meeting, our stockholders may adjourn the meeting.

 

Q: What vote of Spherix stockholders is required to approve the Spherix proposals?

 

A:

Proposal   Vote Required  

Broker  

Discretionary  

Vote Allowed  

Authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock)   A majority of the votes cast   No
         

Approval of the amendment to Spherix’s certificate of incorporation to decrease the authorized common stock from 100,000,000 shares to 99,000,000 shares

 

A majority of the shares entitled to vote

 

Yes

         
Adjournment of the Special Meeting   A majority of the votes cast   Yes

 

Q: How do Spherix stockholders vote?

 

A: Spherix stockholders have three voting options. You may vote using one of the following methods:

 

Internet . You can vote over the Internet by accessing the website at www.proxyvote.com , and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card.

  

Telephone . If you hold shares directly in your own name and are the holder of record, you can vote by telephone by calling the toll-free number [         ] in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If, however, you hold the shares through a broker (“street name”) and not in your own name, then follow the specific instructions included in your proxy materials, including the specific phone number to use to vote your shares by phone.

 

Mail . You can vote by mail by simply completing, signing, dating and mailing your proxy card in the postage-paid envelope included with this proxy statement.

 

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Q: Who will be the directors of Spherix if the acquisition is consummated?

 

A: There will be no changes to the board of directors of Spherix Incorporated after the consummation of the acquisition.

 

Q: If my shares are held in “street name” by a broker or other nominee, will my broker or nominee vote my shares for me?

 

A: If you are a Spherix stockholder, your broker or other nominee does not have authority to vote on non-routine matters. The share issuance proposal is considered a non-routine matter. The proposal to amend the Company’s certificate of incorporation to decrease the Company’s authorized common stock is a routine matter on which brokers or other nominees have the authority to vote. Your broker or other nominee will vote your shares held by it in “street name” with respect to these matters only if you provide instructions to it on how to vote. You should follow the directions your broker or other nominee provides.

 

Q: What if I do not vote on the matters relating to the acquisition?

 

A: If you are a Spherix stockholder and you fail to vote or fail to instruct your broker or other nominee how to vote on any of the Spherix stockholder proposals (e.g. the acquisition proposal), it will have no effect on such proposals. It will be treated as not counting toward a quorum, for it is a “non-vote.”

 

Q: May I change my vote after I have delivered my proxy or voting instruction card?

 

A: Yes. You may change your vote at any time before your proxy is voted at your Special Meeting. You may do this in one of three ways:

 

by sending a notice of revocation to the corporate secretary of Spherix, dated as of a later date than the date of the proxy and received prior to the Special Meeting;

 

by sending a completed proxy card bearing a later date than your original proxy card and mailing it so that it is received prior to the Special Meeting, as applicable; or

 

by logging on to the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so and following the instructions on the proxy card.

 

Your attendance alone will not revoke any proxy.

 

If your shares are held in an account at a broker or other nominee, you should contact your broker or other nominee to change your vote.

 

Q: Do I have appraisal/dissenters’ rights?

 

A: Spherix stockholders do not have appraisal rights in connection with the acquisition.

 

Q: Should I send in my stock certificates now?

 

A: No. Please do not send your stock certificates with your proxy card.

 

You will keep your existing stock certificates, which will continue to represent the number of shares of Spherix common stock equal to the number of Spherix shares you now hold.

 

Q: Whom should I call if I have questions about the proxy materials or voting procedures?

 

A: If you have questions about the acquisition, or if you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement or the enclosed proxy card, you should contact the proxy solicitation agent for the company in which you hold shares. You should contact [             ], the proxy solicitation agent for Spherix, by mail at [             ], by telephone toll free at [             ]. If your shares are held in a stock brokerage account or by a bank or other nominee, you should contact your broker, bank, or other nominee for additional information.

 

Q: What do I need to do now?

 

A: After carefully reading and considering the information contained in this proxy statement, including the annexes, please vote your shares as soon as possible so that your shares will be represented at the Special Meeting. Please follow the instructions set forth on the proxy card or on the voting instruction form provided by the record holder if your shares are held in the name of your broker or other nominee. 

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SUMMARY

 

This summary highlights selected information contained in this proxy statement and may not contain all the information that is important to you. Spherix and CBM urge you to read carefully this proxy statement in its entirety, as well as the annexes.

 

Summary of Term Sheet

 

  Spherix will purchase and acquire from CBM, CBM’s Purchased Assets (as defined in the Asset Agreement), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board.

 

Spherix will pay aggregate consideration of $8,000,000 to CBM consisting of (i) an aggregate number of shares of Common Stock equal to $7,000,000 (the “Stock Consideration”) comprised of (A) an aggregate number of shares of Common Stock equal to 9.9% of the issued and outstanding shares of Common Stock as of the Closing Date (as defined in the Asset Agreement) (the “Common Stock Consideration”) based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of Spherix to 9.9% of Spherix’s issued and outstanding Common Stock, and (B) such number of shares of nonvoting Series L Preferred Stock (as defined herein) as shall be equal to the Stock Consideration less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) cash consideration in the amount of $1,000,000 (the “Cash Consideration Amount”, and together with the Stock Consideration, the “Purchase Consideration”), less the sum of (A) the amount of any Affiliate Receivables (as defined in the Asset Agreement), (B) the amount of the outstanding Indebtedness (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the Asset Agreement), if any, to the recipients thereof.

  

The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by Spherix of the first Qualified Financing (as defined in the Asset Agreement) after the Closing Date. Upon consummation of a Qualified Financing by Spherix, Spherix will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by Spherix in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by Spherix until the Cash Consideration Amount is satisfied in full.

  

Spherix, CBM, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow Agreement in form and substance reasonably satisfactory to the parties (the “Escrow Agreement”), pursuant to which the Company shall deposit with the Escrow Agent 10% of the Stock Consideration (including any equity securities paid in the future as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “Escrow Shares”), to be held in a segregated escrow account (the “Escrow Account”) and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.

 

The obligations of Spherix and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of Spherix and CBM, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority (as defined in the Asset Agreement) which makes the transaction illegal, and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the Asset Agreement) to enjoin or restrict the transaction; and (d) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the Asset Agreement, and no Material Adverse Effect (as defined in the Asset Agreement) having occurred with respect to either Spherix or CBM since the date of the Asset Agreement.

 

The Asset Agreement may be terminated (i) by mutual written consent of Spherix and CBM, (ii) by written notice by Spherix or CBM if any of the conditions to Closing (as defined in the Asset Agreement) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of Spherix or CBM of any representation, warranty, covenant or obligation under the Asset Agreement), (iii) by written notice by Spherix or CBM if a Governmental Authority has issued an Order or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing is due to breach or violation of Spherix or CBM of any representation, warrant, covenant or obligation under the Asset Agreement), (iv) by written notice of Spherix if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by Spherix of any of its representations, warranties, covenants or obligations, or (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the Asset Agreement) on Spherix following the date of the Asset Agreement. In the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by Spherix of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice by CBM to Spherix, or (ii) by either Spherix or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by Spherix pursuant to the Asset Agreement is not approved by Spherix’s stockholders at a duly held special meeting of Spherix, Spherix will issue to CBM or CBM’s designee an aggregate of 250,000 shares of Spherix’s Common Stock (the “Buyer Termination Fee”) within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

 

1

 

 

In connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into that certain Leak-Out Agreement (the “Leak-Out Agreement”), in the form attached as Annex D to this proxy statement, whereby CBM will agree that for a period of 21 months following the Closing Date (such period, the “Restricted Period”), neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer, directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such lock-up shall in no event extend beyond the Restricted Period.

 

The Companies

 

Spherix Incorporated

 

One Rockefeller Plaza, 11 th Floor

New York, NY 10020

(212) 745-1372

 

Spherix Incorporated is a technology development company committed to the fostering of innovative ideas. Spherix Incorporated was formed in 1967 as a scientific research company and for much of our history pursued drug development, including through Phase III clinical studies, which were largely discontinued in 2012.  In 2012 and 2013, we shifted our focus to being a firm that owns, develops, acquires and monetizes intellectual property assets. Such monetization included, but was not limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, commercializing the IP, or through the settlement and litigation of patents.  

 

Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have been transitioning to a technology development company. The Company made no investments in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the third quarter of 2017, with its proposed merger agreement with DatChat, Inc. in March 2018 and with its agreement with CBM BioPharma, Inc. in October 2018. On May 15, 2019, the Company restructured the terms of its proposed merger with CBM and entered into the Asset Agreement to purchase substantially all of the assets of CBM.

 

CBM BioPharma, Inc.

6427 Lake Washington Boulevard Northeast

Kirkland, WA 98053

973-738-0967

 

CBM is a privately held pharmaceutical company with exclusive drug development rights from partners including Wake Forest University and the University of Texas at Austin. CBM is dedicated to translating fundamental biological insights into new drugs and treatments that address unmet medical needs. CBM currently has two drug candidates focused on the treatment of two cancers, acute myeloid leukemia (“AML”) and pancreatic cancer. CBM was formed as a corporation in December 2017 under the laws of the State of Delaware.

 

2

 

 

The Acquisition

 

Structure of the Acquisition

 

Spherix and CBM have entered into an Asset Agreement pursuant to which Spherix will acquire substantially all of the assets of CBM.

 

Consideration to be Received in the Acquisition by CBM

 

At the time of completion of the acquisition, Spherix will acquire substantially all of the assets of CBM and CBM will receive (i) seven million dollars ($7,000,000) of Spherix’s securities consisting of (a) an aggregate number of shares of Spherix common stock equal to 9.9% of the issued and outstanding shares of Spherix common stock as of the date of the Closing valued at $3.61 per share, and (b) a number of shares of Series L Preferred Stock convertible into shares of common stock at $3.61 per share with a stated value equal to the balance of the Stock Consideration; and (ii) cash consideration in the amount of One Million Dollars ($1,000,000), which amount will be held back at the closing until certain equity financing milestones are met. 

 

Interests of CBM Directors and Executive Officers in the Acquisition

 

In considering the recommendation of CBM’s board of directors with respect to the Asset Agreement, Spherix stockholders should be aware that CBM’s executive officers and directors have financial interests in the acquisition.

 

Additionally, as of the date of this proxy statement, Spherix owns 50,000 shares of CBM common stock, or 20% of the issued and outstanding shares of CBM common stock.  

 

Interests of Spherix Directors and Executive Officers in the Acquisition

 

In considering the recommendation of Spherix’s board of directors with respect to the Asset Agreement, Spherix stockholders should be aware that Spherix’s sole executive officer and some of its directors have financial interests in the acquisition that are different from, or in addition to, those of Spherix’s stockholders generally. As of the date of this preliminary proxy statement, Anthony Hayes, the sole executive officer of Spherix, owns 12,280 shares of Spherix common stock and options to purchase 12,389 shares of Spherix common stock. The non-executive members of the board of directors of Spherix, Robert J. Vander Zanden, Tim S. Ledwick, Eric Weisblum and Gregory James Blattner own 4,944, 7,059, 4,706 and 0 shares of Spherix common stock, respectively, and have options to purchase 17,961, 14,555, 13,626 and 11,766 shares of Spherix common stock, respectively. The Spherix board of directors was aware of these interests and considered them, among other matters, in negotiating and approving the Asset Agreement and making its recommendation that the Spherix stockholders approve and adopt the Asset Agreement and the transactions contemplated thereby.

 

For further discussion of the implications of the acquisition on Spherix’s compensation arrangements with its named executive officers, see “The Acquisition—Interests of Spherix Directors and Executive Officers in the Acquisition” beginning on page 27, and “Potential Payment Upon Termination or Change in Control” beginning on page 58.

 

Anticipated Accounting Treatment

 

It is anticipated that the transaction will be accounted for by Spherix as an asset acquisition of CBM rather than as a business combination under ASC 805, Business Combinations. 

 

Regulatory Matters

 

The acquisition does not meet the thresholds for furnishing notification and other information to the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission (the “FTC”) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the parties are not aware of any other regulatory filings or approvals that are required in connection with the acquisition.

 

For a more complete discussion of regulatory matters relating to the acquisition, see “The Acquisition—Regulatory Approvals Required for the Acquisition” beginning on page 27.

 

Conditions to Completion of the Acquisition

 

The obligations of the parties to consummate the acquisition is subject to various conditions, including the following mutual conditions of the parties unless waived: (i) the approval of the Asset Agreement and the transactions contemplated thereby and related matters by the requisite vote of CBM’s stockholders; (ii) the approval by Spherix stockholders of the issuance of the Stock Consideration to CBM; (iii) receipt of requisite governmental and third party approvals; (iv) no law or order preventing or prohibiting the acquisition or the other transactions contemplated by the Asset Agreement; and (v) no pending litigation to enjoin or restrict the consummation of the Closing.

 

3

 

 

In addition, unless waived by CBM, the obligations of CBM to consummate the acquisition are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries:

 

  The representations and warranties of Spherix being true and correct as of the date of the Asset Agreement and as of the Closing (subject to Material Adverse Effect);

 

  Spherix having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Asset Agreement required to be performed or complied with on or prior the date of the Closing; and

 

  Absence of any Material Adverse Effect with respect to Spherix since the date of the Asset Agreement.

 

Unless waived by Spherix, the obligations of Spherix to consummate the Acquisition are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries:

 

  The representations and warranties of CBM being true and correct as of the date of the Asset Agreement and as of the Closing (subject to Material Adverse Effect (as defined in the Asset Agreement);

 

  CBM having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Asset Agreement required to be performed or complied with on or prior to the Closing Date; and

 

  Absence of any Material Adverse Effect with respect to CBM since the date of the Asset Agreement.

 

Timing of the Acquisition

 

The acquisition is expected to be completed in the third calendar quarter of 2019, subject to the receipt of any necessary regulatory approvals and the satisfaction or waiver of other closing conditions, and in no event later than December 31, 2019.

 

Termination of the Asset Agreement

 

The Asset Agreement may be terminated prior to the closing date as follows:

 

by mutual written consent of Spherix and CBM;
     
by written notice by either Spherix or CBM if the closing has not occurred on or prior to December 31, 2019;
     
by written notice by either Spherix or CBM if a governmental authority of competent jurisdiction shall have issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Asset Agreement, and such order or other action has become final and non-appealable;
     
by written notice by either party of the other party’s material breach of a representation, warranty, covenant or agreement, or if the other party’s representations or warrants becomes inaccurate and such breach or inaccuracy is incurable or is not cured within the earlier of 20 days after written notice of the breach or inaccuracy is provided or December 31, 2019;
     
by written notice by Spherix if there has been a Material Adverse Effect on CBM since the date of the Asset Agreement which is continuing and uncured; or
     
by written notice by Spherix or CBM if Spherix holds a Special Meeting of its stockholders and it does not receive the requisite stockholder approval to.

 

In the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to the Asset Agreement is not approved by the Company’s stockholders at a duly held special meeting of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

 

4

 

 

Selected Historical Consolidated Financial Data of Spherix

 

You should read the following selected historical consolidated financial data in conjunction with the consolidated financial statements of Spherix as of December 31, 2018 and 2017 and for each of the years in the two year period ended December 31, 2018 and the condensed consolidated financial statements of Spherix as of March 31, 2019 and for the three months ended March 31, 2019 and 2018, which are furnished with this proxy statement. See “Index to Financial Statements” beginning on page F-1. The selected historical consolidated statements of operations data for the two-year period ended December 31, 2018 and the selected historical consolidated balance sheet data as of December 31, 2018 and 2017 have been derived from the audited consolidated financial statements of Spherix. The selected historical consolidated statement of operations data for the three months ended March 31, 2019 and 2018 and the selected historical consolidated balance sheet data as of March 31, 2019 have been derived from the unaudited condensed consolidated financial statements of Spherix. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, which Spherix considers necessary for a fair presentation of the information set forth therein. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire year ended December 31, 2019.

 

    Three Months Ended
March 31,
    Years Ended
December 31,
 
    2019     2018     2018     2017  
Revenues   $ -     $ -     $ 28     $ 1,236  
                                 
Operating costs and expenses                                
Amortization of patent portfolio   $ -     $ 338       1,405       1,373  
Compensation and related expenses (including stock-based compensation)     181       355       1,012       2,059  
Professional fees     399       597       1,569       1,038  
Impairment of intangible assets                     2,173       -  
Acquisition costs     11       145       230       -  
Other selling, general and administrative     122       142       513       588  
Total operating expenses     713       1,577       6,902       5,058  
Loss from operations     (713 )     (1,577 )     (6,874 )     (3,822 )
                                 
Other (expenses) income                                
Other income (expenses), net     92       (97 )     (333 )     291  
Change in fair value of investment     (475 )     -       8,194       345  
Change in fair value of warrant liabilities     (53 )     188       740       (120 )
Total other (expenses) income     (436 )     91       8,601       516  
Net loss   $ (1,149 )   $ (1,486 )   $ 1,727     $ (3,306 )
                                 
Net income (loss) per share attributable to common stockholders, basic and diluted                                
Basic   $ (0.57 )   $ (0.96 )   $ 0.91     $ (2.54 )
Diluted   $ (0.57 )   $ (0.96 )   $ 0.91     $ (2.54 )
                                 
Weighted average number of common shares outstanding,                                
Basic     2,010,025       1,549,481       1,896,057       1,303,209  
Diluted     2,010,025       1,549,481       1,896,745       1,303,209  

 

5

 

 

    March 31     December 31     December 31  
    2019     2018     2017  
Balance Sheet Data (in thousands):                  
Cash, cash equivalents and short-term investments   $ 1,702     $ 2,723     $ 4,195  
Working capital     885       1,752       1,768  
Total assets     11,937       13,251       8,972  
Total liabilities     982       1,153       4,866  
Accumulated deficit     (141,232 )     (140,083 )     (145,055 )
Total stockholders’ equity     10,955       12,098       4,106  
Total liabilities and stockholders' equity     11,937       13,251       8,972  

 

Market Price and Comparative Dividend Information

 

Spherix’s common stock is listed on Nasdaq under the symbol “SPEX.”

 

The closing market price of Spherix common stock on May 14, 2019, the trading day prior to the announcement of the Asset Agreement, was $3.37. The market price of Spherix common stock will fluctuate between the date of this proxy statement and the completion of the acquisition. No assurance can be given concerning the market prices of Spherix common stock before the completion of the acquisition or Spherix common stock after the completion of the acquisition. The market value of the Spherix common stock that CBM’s stockholders will receive in connection with the acquisition may vary significantly from the prices shown in the table above. Spherix and CBM urge Spherix stockholders and CBM to obtain current market quotations for shares of Spherix common stock before making any decision regarding the approval and adoption of the Asset Agreement and the approval of the issuance of Spherix common stock to CBM or the approval and adoption of the Asset Agreement by CBM.

 

Dividends and Other Distributions

 

No dividends were declared or paid by Spherix with respect to its common stock since inception and Spherix does not anticipate paying any cash dividends on its capital stock in the foreseeable future.

 

No dividends were declared or paid by CBM with respect to its common stock since inception and CBM does not anticipate paying any cash dividends on its capital stock in the foreseeable future.

 

6

 

RISK FACTORS

 

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement and the annex hereto, before you decide whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement. The risks and uncertainties described below are not the only risks and uncertainties facing Spherix or CBM in the future. Additional risks and uncertainties not presently known or that are currently considered to be immaterial may also materially and adversely affect the business operations or the business operations or stock price of Spherix following the transactions described in this proxy statement. If any of the following risks or uncertainties occurs, the business, financial condition or operating results of Spherix or CBM could materially suffer. In that event, the trading price of your securities could decline.

 

Risk Factors Relating to Spherix

 

Spherix’s business is, and following the completion of the acquisition, Spherix’s business will continue to be, subject to the risks described below. If any of the risks described below actually materializes, the business, financial results, financial condition, or stock price of Spherix could be materially adversely affected. For this section, Spherix is also referred to as “we,” “us,” or “our.”

 

Risks Related to Spherix’s Business

 

Because we have a limited operating history to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by an early-stage company.

 

Since we have a limited operating history in our current business of technology development, it will make it difficult for investors and securities analysts to evaluate our business and prospects.  You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history.  Investors should evaluate an investment in our securities in light of the uncertainties encountered by early stage companies in an intensely competitive industry.  The technology development industry is intensely competitive and there can be no assurance that our efforts to identify and target development stage technology companies with intellectual property we can acquire or license will be successful or that we will be able to become profitable.

 

We continue to incur operating losses and may not achieve profitability.

 

Our loss from operations for three months ended March 31, 2019 and 2018, for the years ended December 31, 2018 and 2017 was $0.7 million, $1.6 million, $6.9 million and $3.8 million, respectively. Our net loss for the three months ended March 31, 2019 and 2018 was $1.1 million and $1.5 million, respectively, net income for the year ended December 31, 2018 was $1.7 million and net loss for the year ended December 31, 2017 was $3.3 million. Our accumulated deficit was $141.2 million and $140.1 million at March 31, 2019 and December 31, 2018, respectively. We recognized $0 in revenue for three months ended March 31, 2019 and 2018, $28,000 and $1.2 million in revenue in December 31, 2018 and 2017, respectively. Our ability to become profitable depends upon our ability to generate revenue from the monetization of intellectual property. We do not know when, or if, we will generate any revenue from such monetization. Even though our revenue may increase, we expect to incur significant additional losses while we grow and expand our business. We cannot predict if and when we will achieve profitability. Our failure to achieve and sustain profitability could negatively impact the market price of our common stock.

 

We expect to need additional capital to fund our growing operations and if we are unable to obtain sufficient capital, we may be forced to limit the scope of our operations.

 

We expect that for our business to grow we will need additional working capital.  If adequate additional debt and/or equity financing is not available on reasonable terms or at all, we may not be able to continue to expand our business or pay our outstanding obligations, and we will have to modify our business plans accordingly.  These factors would have a material adverse effect on our future operating results and our financial condition. 

 

If we reach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease our activities and dissolve the Company.  In such an event, we will need to satisfy various creditors and other claimants, severance, lease termination and other dissolution-related obligations and we may not have sufficient funds to pay to our stockholders.

 

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.

 

7

 

 

Our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2018, our internal control over financial reporting was not effective, due to our lack of segregation of duties, and lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control over financial reporting in the future.

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

 

Due to our net losses, negative cash flow and negative working capital, in their report on our audited financial statements for the year ended December 31, 2018, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. 

  

We may seek to internally develop additional new inventions and intellectual property, which would take time and be costly.  Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.

 

Part of our business may include the internal development of new inventions or intellectual property that we will seek to monetize. For example, as a result of our acquisition of certain shares of common stock of Hoth Therapeutics, Inc. (“Hoth”) in June 2017, we have indirectly acquired certain sublicensing rights for BioLexa products developed by Chelexa Biosciences, Inc., for the treatment of eczema. Hoth is developing BioLexa’s applications in the aesthetic dermatology field to help treat and reduce post-procedure infections, accelerate healing and improve clinical outcomes for patients undergoing procedures and also intends to implement FDA testing procedures for BioLexa. Should we choose to assist in the development of BioLexa’s applications and/or internally develop any other inventions or intellectual property, such aspect of our business will require significant capital and will take time to achieve.  Such activities may also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources in such activities.

 

In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would heavily rely upon, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally, including the following:

 

patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;

 

we may be subject to interference proceedings;

 

we may be subject to opposition proceedings in the U.S. or foreign countries;

 

any patents that are issued to us may not provide meaningful protection;

 

we may not be able to develop additional proprietary technologies that are patentable;

 

other companies may challenge patents issued to us;

 

other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies;

 

other companies may design around technologies we have developed; and

 


enforcement of our patents could be complex, uncertain and very expensive.

 

We cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss our business.

 

Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

 

8

 

 

Our ability to raise additional capital may be adversely affected by certain of our agreements.

 

Our ability to raise additional capital for use in our operating activities may be adversely impacted by the terms of a securities purchase agreement, dated as of July 15, 2015 (the “Securities Purchase Agreement”), between us and the investors who purchased securities in our July 2015 offering of our common stock and warrants for the purchase of our common stock. The Securities Purchase Agreement provides that, until the warrants issued thereunder are no longer outstanding, we will not effect or enter into a variable rate transaction, which includes issuances of securities whose prices or conversion prices may vary with the trading prices of or quotations for the shares of our common Stock at any time after the initial issuance of such securities, as well as the entry into agreements where our stock would be issued at a future-determined price. These warrants may remain outstanding as late as January 22, 2021, when the warrants expire in accordance with their terms. These restrictions may have an adverse impact on our ability to raise additional capital, or to use our cash to make certain payments that we are contractually obligated to make.

 

We are exploring and evaluating strategic alternatives and there can be no assurance that we will be successful in identifying, or completing any strategic alternative or that any such strategic alternative will yield additional value for shareholders.

 

Our management and Board of Directors has commenced a review of strategic alternatives which could result in, among other things, a sale, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. For example, on May 15, 2019, we entered into an Asset Agreement with CBM, pursuant to which we will purchase substantially all of CBMs assets. CBM is a privately pharmaceutical company focused on the development of cancer treatments. There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction, and there can be no assurance that the transaction with CBM will close. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

 

We may be unsuccessful at integrating future acquisitions.

 

If we find appropriate opportunities in the future, we may acquire businesses to strategically increase the number of patents in our portfolio and pursue monetization. For example, on June 30, 2017, we acquired a stake in Hoth Therapeutics, Inc. (“Hoth”), a development stage biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. Hoth has a sublicense from Chelexa Biosciences, Inc. to use Chelexa’s BioLexa products for the treatment of eczema and such sublicense includes the right to further sublicense to third parties to make, use, have made, import, offer for sale and sell BioLexa products. There can be no guarantee that Hoth will be successful in its efforts to monetize its sublicense agreement with Chelexa. In addition, on March 12, 2018, we entered into an agreement and plan of acquisition with DatChat, pursuant to which we were going to acquire 100% ownership of DatChat, which is a privately held personal privacy platform focused on encrypted communication, internet security and digital rights management, which we subsequently terminated on August 8, 2018. Most recently, on May 15, 2019, we entered into an Asset Agreement with CBM, pursuant to which we will purchase substantially all of CBMs assets. There can be no guarantee that we will be successful in closing the transaction contemplated by the Asset Agreement with CBM or that we will be successful in managing the operations of CBM, which is in the early stages of development of cancer treatments.

 

As we acquire businesses or substantial stakes in certain businesses, the process of integration may produce unforeseen operating difficulties and expenditures, fail to result in expected synergies or other benefits and absorb significant attention of our management that would otherwise be available for the ongoing development of our business. In addition, in the event of any future acquisitions, we may record a portion of the assets we acquire as goodwill, other indefinite-lived intangible assets or finite-lived intangible assets. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The recoverability of goodwill and indefinite-lived intangible assets is dependent on our ability to generate sufficient future earnings and cash flows. Changes in estimates, circumstances or conditions, resulting from both internal and external factors, could have a significant impact on our fair valuation determination, which could then have a material adverse effect on our business, financial condition and results of operations. We cannot guarantee that we will be able to identify suitable acquisition opportunities, consummate any pending or future acquisitions or that we will realize any anticipated benefits from any such acquisitions. 

 

Our acquisitions of patent assets may be time consuming, complex and costly, which could adversely affect our operating results.

 

Identifying and targeting development stage technology companies and acquiring their patents or other intellectual property assets, which are critical to our business plan, are often time consuming, complex and costly to consummate.  We may elect to not pursue any additional patents while we focus our efforts on monetizing our existing assets.  We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated.  As a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not consummated, or if we determine to acquire additional patents or other assets.  Even if we are able to identify a particular target, there is no guarantee that we will generate sufficient revenue related to such target’s underlying intellectual property assets to offset the acquisition costs, and we may be required to pay significant amounts of deferred purchase price if we monetize those patents above certain thresholds.  While we will seek to conduct confirmatory due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a seller who does not have complete analysis of infringements or claims, have valid or sole title or ownership to those assets, or otherwise provides us with flawed ownership rights, including invalid or unenforceable assets.  In those cases, we may be required to spend significant resources to defend our interest in the patent assets and, if we are not successful, our acquisition may be worthless, in which case we could lose part or all of our investment in the assets.

 

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We may also identify targets with patent or other intellectual property assets that cost more than we are prepared to spend with our own capital resources.  We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to be unprofitable for us.  Acquisitions involving issuance of our securities could be dilutive to existing stockholders and could be at prices lower than those prices reflected in the trading markets.  These higher costs could adversely affect our operating results and, if we incur losses, the value of our securities will decline.  The integration of acquired assets may place a significant burden on management and our internal resources.  The diversion of management attention and any difficulties encountered in the integration process could harm our business.

 

As we are targeting technology companies in the development stage, their patents and technologies are in the early stages of adoption.  Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at which our licensees or others adopt our patents and technologies in their products and services.  As a result, there can be no assurance as to whether technologies we acquire or develop will have value that can be realized through licensing or other activities.

 

Any failure to maintain or protect our patent assets or other intellectual property rights could significantly impair our return on investment from such assets and harm our brand, our business and our operating results.

 

Our ability to operate our new line of business and compete in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired patent assets and other intellectual property.  To protect our proprietary rights, we will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions.  No assurances can be given that any of the measures we undertake to protect and maintain our assets will have any measure of success.

 

We are required to spend significant time and resources to maintain the effectiveness of our assets by paying maintenance fees and making filings with the USPTO.  We may acquire patent assets, including patent applications, which require us to spend resources to prosecute the applications with the USPTO prior to issuance of patents.  Further, there is a material risk that patent related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability claims, or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and adversely affect our business.  For instance, in connection with inter partes review in our now-settled litigations with VTech and Uniden, the Patent Trial and Appeals Board has found that certain portions of the claims relating to certain of our patents are invalid. Regardless of whether any such claims are valid or can be successfully asserted, defending such claims could cause us to incur significant costs and could divert resources away from our other activities.

 

Despite our efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our intellectual property:

 

our applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;

 

issued trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing other properties;

 

our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or

 

our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute.

 

Moreover, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business or enforce our patents against infringers in foreign countries. If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated, and our business would be harmed.

 

We may be unable to issue securities under our shelf registration statement, which may have an adverse effect on our liquidity.

 

We have filed a shelf registration statement on Form S-3 with the SEC.  The registration statement, which has been declared effective, was filed in reliance on Instruction I.B.6. of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period.  At the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6. may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including availability of our existing S-3 under the 1/3 limitation calculations set forth in Instruction I.B.6 of Form S-3, the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital.  Furthermore, Instruction I.B.6. of Form S-3 requires that the issuer have at least one class of common equity securities listed and registered on a national securities exchange. If we are not able to maintain compliance with applicable NASDAQ rules, we will no longer be able to rely upon that Instruction. If we cannot sell securities under our shelf registration, we may be required to utilize more costly and time-consuming means of accessing the capital markets, which could materially adversely affect our liquidity and cash position.

 

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Risks Related to Ownership of Our Common Stock

 

We face evolving regulation of corporate governance and public disclosure that may result in additional expenses and continuing uncertainty.

 

As a public company, we incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, or SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices.  Our management and other personnel devote a substantial amount of time towards maintaining compliance with these requirements. These rules, regulations and standards are subject to varying interpretations, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.  This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.  We intend to invest the resources necessary to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us, which could be costly and time-consuming, and our reputation and business may be harmed.

 

Our common stock may be delisted from The NASDAQ Capital Market if we fail to comply with continued listing standards.

 

Our common stock is currently traded on The NASDAQ Capital Market under the symbol “SPEX.”  If we fail to meet any of the continued listing standards of The NASDAQ Capital Market, our common stock could be delisted from The NASDAQ Capital Market.  These continued listing standards include specifically enumerated criteria, such as:

 

a $1.00 minimum closing bid price;

 

stockholders’ equity of $2.5 million;

 

500,000 shares of publicly-held common stock with a market value of at least $1 million;

 

300 round-lot stockholders; and

 

compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority.

 

On November 27, 2018, we received a deficiency notice from The Nasdaq Stock Market (“Nasdaq”) informing the Company that its common stock, par value $0.0001 per share, failed to comply with the $1.00 minimum bid price required for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). Nasdaq’s letter advised the Company that, based upon the closing bid price during the period from October 15, 2018 to November 26, 2018, the Company no longer meets this test.

 

Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has been provided an initial compliance period of 180 calendar days, or until May 28, 2019, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days prior to May 28, 2019. On May 9, 2019, we effected a 4.25-for-one reverse split of our common stock to regain compliance with this requirement. On May 24, 2019, the Company received a notice of compliance from Nasdaq.

 

In addition, on January 11, 2019, the Company received written notice (the “Notice”) from the Listing Qualifications Department (the “ Staff ”) of Nasdaq indicating that, based upon the Company’s non-compliance with Nasdaq Listing Rule 5620(a), which requires an issuer to hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end (the “ Annual Meeting Rule ”), the Company would be required to submit a plan to regain compliance with the Annual Meeting Rule for the Staff’s consideration by no later than February 25, 2019. The Notice has no immediate impact on the Company’s listing or trading in the Company’s securities on Nasdaq.

 

The Company was provided an extension of up to 180 calendar days from the Company’s fiscal year end, through July 1, 2019, to evidence compliance with the Annual Meeting Rule. As announced to the Company’s stockholders on a Current Report on Form 8-K filed on April 16, 2019, the Company conducted its annual meeting of stockholders on April 15, 2019. On April 18, 2019, the Company received a notice of compliance with the Annual Meeting Rule from Nasdaq.

 

There can be no assurance that we will be able to remain in compliance in the future. In particular, our share price may continue to decline for a number of reasons, including many that are beyond our control. See “ Our share price may be volatile and there may not be an active trading market for our common stock ”.

 

If we fail to comply with NASDAQ’s continued listing standards, we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements.  In addition, delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all. Further, delisting of our common stock would likely result in our common stock becoming a “penny stock” under the Exchange Act.  

 

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Our share price may be volatile and there may not be an active trading market for our common stock.

 

There can be no assurance that the market price of our common stock will not decline below its present market price or that there will be an active trading market for our common stock. The market prices of technology or technology related companies have been and are likely to continue to be highly volatile. Fluctuations in our operating results and general market conditions for technology or technology related stocks could have a significant impact on the volatility of our common stock price. We have experienced significant volatility in the price of our common stock. From January 1, 2017 through December 31, 2018, the share price of our common stock (on a split-adjusted basis) ranged from a high of $3.92 to a low of $0.57. The reason for the volatility in our stock is not well understood and may continue.  Factors that may have contributed to such volatility include, but are not limited to:

 

introduction of new technologies by us or our competitors;

 

government regulations and laws;

 

public sentiment relating to our industry;

 

developments in patent or other proprietary rights;

 

the number of shares issued and outstanding;

 

the number of shares trading on an average trading day;

 

performance of companies in the non-performing entity space generally;

 

announcements regarding other participants in the technology and technology related industries, including our competitors;

 

block sales of our shares by stockholders to whom we have sold stock in private placements, or the cessation of transfer restrictions with respect to those shares; and

 

market speculation regarding any of the foregoing.

 

We could fail in future financing efforts or be delisted from The NASDAQ Capital Market if we fail to receive stockholder approval when needed.

 

We are required under the NASDAQ rules to obtain stockholder approval for any issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that is not deemed to be a “public offering” by NASDAQ. Funding of our operations and acquisitions of assets may require issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding, but we might not be successful in obtaining the required stockholder approval for such an issuance. If we are unable to obtain financing due to stockholder approval difficulties, such failure may have a material adverse effect on our ability to continue operations.

 

Our shares of common stock are thinly traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise desire to liquidate their shares.

 

Our common stock has been “thinly-traded” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. Our trading volumes are further adversely affected by the 1-for-19 reverse stock split that was effective as of March 4, 2016. In addition, we believe that due to the limited number of shares of our common stock outstanding, an options market has not been established for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies available for larger companies with broader shareholder bases which prevents institutions and others from acquiring or trading in our securities. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

 

Because of the Rights Agreement and “anti-takeover” provisions in our Certificate of Incorporation and Bylaws, a third party may be discouraged from making a takeover offer that could be beneficial to our stockholders.

 

Effective as of January 24, 2013, we adopted a shareholder rights plan which was amended and restated as of June 9, 2017. The effect of this rights plan and of certain provisions of our Certificate of Incorporation, By-Laws, and the anti-takeover provisions of the Delaware General Corporation Law, could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, or make more costly any attempt to acquire control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.

  

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Dividends on our common stock are not likely.

 

During the last five years, we have not paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable future.  Investors must look solely to the potential for appreciation in the market price of the shares of our common stock to obtain a return on their investment.

 

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

 

Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Anthony Hayes, our Chief Executive Officer, is important to the management of our business and operations and the development of our strategic direction. The loss of the services of any such individual and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

 

Risk Factors Relating to CBM BioPharma, Inc.

 

Risks Relating to Clinical Development and Commercialization of Our Product Candidates

 

If we are unable to generate revenues from our drug candidates, our ability to create stockholder value will be limited.

 

Our two lead product candidates, which include (1) our KPC34 drug candidate, which technology we licensed from Wake Forest University and (2) our DHA-dFdC drug candidate, which technology we licensed from the University of Texas at Austin, are both in the pre-clinical stage. We may not be successful in obtaining acceptance from the regulatory authorities to start our clinical trials. If we do not obtain such acceptance, the time in which we expect to commence clinical programs for any product candidate will be extended and such extension will increase our expenses and increase our need for additional capital. Moreover, there is no guarantee that our clinical trials will be successful or that we will continue clinical development in support of an approval from the regulatory authorities for any indication. We note that most drug candidates never reach the clinical development stage and even those that do commence clinical development have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore, our business currently depends entirely on the successful development, regulatory approval and commercialization of our product candidates, which may never occur.

 

If we fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully commercialize our product candidates, our business would be harmed and the value of our securities would decline.

 

We must be evaluated in light of the uncertainties and complexities affecting a pre-commercial biopharmaceutical company. We have not completed clinical development for any of our product candidates. We cannot assure you that our planned clinical development for our product candidates will be completed in a timely manner, or at all, or that we, or any future partner, will be able to obtain approval for our product candidates from the FDA or any foreign regulatory authority.

 

Regulatory agencies, including the FDA must approve our product candidates before they can be marketed or sold. The approval process is lengthy, requires significant capital expenditures, and is uncertain as to outcome. Our ability to obtain regulatory approval of any product candidate depends on, among other things, completion of additional clinical trials, whether our clinical trials demonstrate statistically significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product candidates, and whether the regulatory agencies agree that the data from our future clinical trials are sufficient to support approval for any of our product candidates. The final results of our current and future clinical trials may not meet FDA or other regulatory agencies' requirements to approve a product candidate for marketing, and the regulatory agencies may otherwise determine that our manufacturing processes or facilities are insufficient to support approval. We, and our current and potential future collaborators, may need to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other regulatory agency approval, we or our collaborators may not be successful in commercializing approved product candidates. If any of these events occur, our business could be materially harmed and the value of our securities would decline.

 

We, or our collaborators, may face delays in completing our clinical trials, and may not be able to complete them at all.

 

Clinical trials necessary to support an application for approval to market any of our product candidates have not been completed. Our, or our collaborators', current and future clinical trials may be delayed, unsuccessful, or terminated as a result of many factors, including, but not limited to:

 

delays in reaching agreement on trial design and clinical study protocol with investigators and regulatory authorities in various countries where our clinical trials are being conducted;

 

governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy or guidelines;

 

adding new clinical trial sites;

 

reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

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the actual performance of CROs and clinical trial sites in ensuring the proper and timely conduct of our clinical trials;

 

adverse effects experienced by subjects in clinical trials;

 

manufacturing sufficient quantities of product candidates for use in clinical trials;

 

delay or failure in achieving study efficacy endpoints and completing data analysis for a trial;

 

regulators or institutional review boards, or IRBs, may not authorize us to commence a clinical trial;

 

regulators or IRBs may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;

 

we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

 

patients may not complete clinical trials due to safety issues, side effects, such as injection site discomfort, a belief that they are receiving placebo instead of our product candidates, or other reasons;

 

patients with serious diseases included in our clinical trials may die or suffer other adverse medical events for reasons that may not be related to our product candidates;

 

in those trials where our product candidate is being tested in combination with one or more other therapies, deaths may occur that may be attributable to the other therapies;

 

we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;

 

product candidates may demonstrate a lack of efficacy during clinical trials;

 

personnel conducting clinical trials may fail to properly administer our product candidates; and

 

our collaborators may decide not to pursue further clinical trials.

 

In addition, we may rely on academic institutions, medical institutions, physician practices and CROs to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. We have less control over the timing and other aspects of these clinical trials than if we conducted the monitoring and supervision entirely on our own. Third parties may not perform their responsibilities for our clinical trials on our anticipated schedule or consistent with a clinical trial protocol or applicable regulations. We also may rely on CROs to perform our data management and analysis. They may not provide these services as required or in a timely or compliant manner, and we may be held legally responsible for any or all of their performance failures or inadequacies.

 

If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or eliminated. In addition, any delays in completing our clinical trials will increase our costs, slow our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of our product candidates.

 

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If we encounter difficulties enrolling patients in our clinical trials, our clinical trials could be delayed or otherwise adversely affected.

 

Clinical trials for our product candidates will require us to identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients with required or desired characteristics to conduct our clinical trials in a timely manner, if at all. Patient enrollment is affected by factors including, but not limited to:

 

severity of the disease under investigation;

 

design of the trial protocol;

 

the size and nature of the patient population;

 

eligibility criteria for the study in question;

 

lack of a sufficient number of patients who meet the enrollment criteria for our clinical trials;

 

delays in characterizing a patient's infection to allow us to select a product candidate, which may lead patients to seek to enroll in other clinical trials or seek alternative treatments;

 

perceived risks and benefits of the product candidate under study;

 

availability of competing therapies and clinical trials;

 

efforts to facilitate timely enrollment in clinical trials;

 

scheduling conflicts with participating clinicians;

 

patient referral practices of physicians;

 

the ability to monitor patients adequately during and after treatment; and

 

proximity and availability of clinical trial sites for prospective patients.

 

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We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive, or the trials are not well designed.

 

Clinical trials must be conducted in accordance with FDA regulations governing clinical studies, or other applicable foreign government guidelines, and are subject to oversight by the FDA, other foreign governmental agencies and IRBs/Ethic Committees at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under current Good Manufacturing Practices, or cGMP, and may require large numbers of test subjects. Clinical trials may be suspended by the FDA, other foreign governmental agencies or us for various reasons, including, but not limited to:

 

deficiencies in the conduct of the clinical trials, including failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols;

 

deficiencies in the clinical trial operations or trial sites;

 

the product candidate may have unforeseen adverse side effects;

 

the time required to determine whether the product candidate is effective may be longer than expected;

 

deaths or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments;

 

the product candidate may not appear to be more effective than current therapies;

 

the quality or stability of the product candidate may fall below acceptable standards; and

 

insufficient quantities of the product candidate might be available to complete the trials.

 

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. Due to these and other factors, our product candidates could take longer to gain regulatory approval than we expect or we may never gain approval for any product candidates, which could reduce or eliminate our revenue by delaying or terminating the commercialization of our product candidates.

 

We may not be able to obtain orphan drug marketing exclusivity for our product candidates in the United States and/or the European Union.

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition (with a population of less than 200,000), which is defined as one occurring in a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the United States. In the EU, following the opinion of the EMA's Committee for Orphan Medicinal Products, the European Commission grants orphan drug designation to a product if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product, without the incentives derived from orphan medicinal product status, would not generate sufficient return in the EU to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those affected by the condition.

 

Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug is entitled to a period of marketing exclusivity, which precludes the FDA or the European Commission and the competent authorities in the EU Member States from approving another marketing application for the same drug (or similar medicinal product in the European Union) for that time period, except in limited circumstances. The applicable period is seven years in the U.S. and 10 years in the EU. The EU exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

 

Although we may apply for orphan drug designation for our product candidates we may develop in both the U.S. and EU, applicable regulatory authorities may not grant us this designation. In addition, even if such status is obtained for any product candidate that we may develop, that exclusivity may not effectively protect the candidate from competition because other drugs, such as those with different active ingredients or molecular structures, can be approved for the same condition. Furthermore, even after an orphan drug is approved, the FDA can subsequently approve another drug for the same condition if the FDA concludes that the later drug is clinically superior, in that it is shown to be safer, more effective or makes a major contribution to patient care. In the EU, a marketing authorization may be granted to a similar product during the 10-year period of market exclusivity for the same therapeutic indication at any time if:

 

The second applicant can establish in its application that its product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

 

The holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

 

The holder of the marketing authorization for the original orphan medicinal product cannot supply enough orphan medicinal product.

 

Any inability to secure orphan drug designation or to maintain the exclusivity benefits of this designation could have an adverse impact on our ability to develop and commercialize our product candidates, depending on the extent to which we would be protected by other patents and regulatory exclusivities, and may adversely affect our business, prospects, financial condition and results of operations.

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Any product candidate for which we, or our collaborators, obtain marketing approval could be subject to restrictions or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

 

Any product candidate that we, or our collaborators, obtain marketing approval for, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continuing requirements of the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information, reports, facility registration and product listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers' communications regarding off-label use. If we market our products outside of their approved indications, we will be subject to enforcement action for off-label marketing.

 

In addition, later discovery of previously unknown problems with these products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including, but not limited to:

 

restrictions on such products, manufacturers or manufacturing processes;

 

restrictions on the labeling or marketing of a product;

 

restrictions on product distribution or use;

 

requirements to conduct post-marketing clinical trials;

 

warning or untitled letters;

 

withdrawal of the products from the market;

 

refusal to approve pending applications or supplements to approved applications that we submit;

 

recall of products, fines, restitution or disgorgement of profits or revenue;

 

suspension or withdrawal of marketing approvals;

 

refusal to permit the import or export of our products;

 

product seizure; and

 

injunctions or the imposition of civil or criminal penalties.

 

The FDA's policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we, or our collaborators, are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we, or our collaborators, are not able to maintain regulatory compliance, any marketing approval that was obtained could be lost, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

 

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

 

Undesirable side effects caused by our product candidates could cause us, our collaborators, or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label, the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities, or litigation by injured patients, if any.

 

As a result of any side effects, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development, or deny approval, of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

 

Additionally, if one or more of our product candidates receives marketing approval, and we, our collaborators, or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including, but not limited to:

 

regulatory authorities may withdraw approvals of such product;

 

regulatory authorities may require additional warnings on the label;

 

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

we may be sued and held liable for harm caused to patients; and

 

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects. 

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If we cannot conduct the non-clinical testing required by regulatory authorities to demonstrate an acceptable toxicity profile for our product candidates in non-clinical studies, we will not be able to initiate or continue clinical trials or obtain approval for our product candidates.

 

In order to move a product candidate into human clinical trials, we must first demonstrate an acceptable toxicity profile in preclinical testing. Furthermore, in order to obtain approval, we must also demonstrate safety in various non-clinical tests. We may not have conducted or may not conduct the types of non-clinical testing required by regulatory authorities, or future non-clinical tests may indicate that our product candidates are not safe for use. Preclinical and non-clinical testing is expensive, time-consuming and has an uncertain outcome. In addition, success in initial non-clinical testing does not ensure that later non-clinical testing will be successful. We may experience numerous unforeseen events during, or as a result of, the non-clinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including, but not limited to:

 

our preclinical and non-clinical testing may produce inconclusive or negative safety results, which may require us to conduct additional non-clinical testing or to abandon product candidates;

 

our product candidates may have unfavorable pharmacology or toxicity characteristics;

 

our product candidates may cause undesirable side effects such as negative immune responses that lead to complications;

 

our enrolled patients may have allergies that lead to complications after treatment; and

 

the FDA or other regulatory authorities may determine that additional safety testing is required.

 

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

 

To be commercially successful, physicians must be persuaded that using our products are effective alternatives to existing therapies and treatments.

 

We believe that physicians will not widely adopt our products unless they determine, based on experience, clinical data, and published peer-reviewed journal articles, that the use of our products provides an effective alternative to other means of treatment. Patient studies or clinical experience may indicate that treatment with our products does not provide patients with sufficient benefits in quality of life. We believe that recommendations and support for the use of our products from influential physicians will be essential for widespread market acceptance. Our products are still in the pre-clinical development stage and it is premature to attempt to gain support from physicians at this time. We can provide no assurance that such support will ever be obtained. If our products do not receive such support from these physicians and from long-term data, physicians may not use or continue to use, and hospitals may not purchase or continue to purchase, our products.

 

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved.

 

We do not have a sales and marketing infrastructure. We may seek additional third-party collaborators for the commercialization of our product candidates. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote some of our product candidates if and when they are approved, which would be expensive and time-consuming. Alternatively, we may elect to outsource these functions to third parties. Either approach carries significant risks. For example, recruiting and training a sales force is expensive and time-consuming and, if done improperly, could delay a product launch and result in limited sales. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel. Outsourcing sales and marketing capabilities will depend on our ability to enter into and maintain agreements with other companies having sales, marketing and distribution capabilities, the ability of such companies to successfully market and sell our product candidates, and our ability to enter into such agreements on terms favorable to us.

 

Factors that may inhibit our efforts to commercialize our products on our own include, but are not limited to:

 

our inability to recruit, manage and retain adequate numbers of effective sales and marketing personnel;

 

the inability of marketing personnel to develop effective marketing materials;

 

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

Entry into agreements with third parties to sell and market our product candidates will subject us to a number of risks, including, but not limited to, the following:

 

we may be required to relinquish important rights to our products or product candidates;

 

we may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization of our product candidates;

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distributors or collaborators may experience financial difficulties;

 

our distributors or collaborators may not devote sufficient time to the marketing and sales of our products; and

 

business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or ability to complete its obligations under any arrangement.

 

The availability and amount of reimbursement for our product candidates, if approved, and the manner in which government and private payors may reimburse for any potential products, are uncertain.

 

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or similar regulatory authorities outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower prices than in the United States.

 

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, but also have their own methods and approval process Asset Agreement from Medicare coverage and reimbursement determinations. It is difficult to predict at this time what third party payors will decide with respect to the coverage and reimbursement for our product candidates. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

 

Reimbursement may impact the demand for, and/or the price of, any product for which we obtain marketing approval. Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of our products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available.

 

The U.S. government, state legislatures and foreign governmental entities have shown significant interest in implementing cost containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and coverage and requirements for substitution of generic products for branded prescription drugs.

 

Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit our products from coverage and limit payments for pharmaceuticals.

 

In addition, we expect that the increased emphasis on managed care and cost containment measures in the U.S. by third-party payors and government authorities to continue and will place pressure on pharmaceutical pricing and coverage. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more drug products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

Our revenue stream will depend upon third-party reimbursement.

 

The commercial success of our products in both domestic and international markets will be substantially dependent on whether third-party coverage and reimbursement is available for patients that use our products. However, the availability of insurance coverage and reimbursement for newly approved eczema therapies is uncertain, and therefore, third-party coverage may be particularly difficult to obtain even if our products are approved by the FDA as safe and efficacious. Patients using existing approved therapies are generally reimbursed all or part of the product cost by Medicare or other third-party payors. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs, and, as a result, they may not cover or provide adequate payment for these products. Submission of applications for reimbursement approval generally does not occur prior to the filing of an NDA for that product and may not be granted for as long as many months after NDA approval. In order to obtain reimbursement arrangements for these products, we or our commercialization partners may have to agree to a net sales price lower than the net sales price we might charge in other sales channels. The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare may limit our revenue. Initial dependence on the commercial success of our products may make our revenues particularly susceptible to any cost containment or reduction efforts. 

 

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Risks Relating to Our Financial Position and Need for Additional Capital

 

We expect to continue to incur increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

 

We are a pre-clinical-stage biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we expect to continue to incur significant research and development and other expenses related to our ongoing operations.

 

To become and remain profitable, we or our partners must succeed in developing our product candidates, obtaining regulatory approval for them, and manufacturing, marketing and selling those products for which we or our partners may obtain regulatory approval. We or they may not succeed in these activities, and we may never generate revenue from product sales that is significant enough to achieve profitability. Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, upfront payments pursuant to collaboration agreements, government grants and capital lease and equipment financing. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Our ability to achieve profitability is dependent on our ability, alone or with others, to complete the development of our products successfully, obtain the required regulatory approvals, manufacture and market our proposed products successfully or have such products manufactured and marketed by others, and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.

 

We will require substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

 

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. Development of our product candidates will require substantial additional funds to conduct research, development and clinical trials necessary to bring such product candidates to market and to establish manufacturing, marketing and distribution capabilities. We expect our development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our clinical programs. Our future capital requirements will depend on many factors, including, among others:

 

the scope, rate of progress, results and costs of our preclinical and non-clinical studies, clinical trials and other research and development activities;

 

the scope, rate of progress and costs of our manufacturing development and commercial manufacturing activities;

 

the cost, timing and outcomes of regulatory proceedings, including FDA review of any Biologics License Application, or BLA, or New Drug Application, or NDA, that we file;

 

payments required with respect to development milestones we achieve under our in-licensing agreements;

 

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

 

the costs associated with commercializing our product candidates, if they receive regulatory approval;

 

the cost and timing of establishing sales and marketing capabilities;

 

competing technological efforts and market developments;

 

changes in our existing research relationships;

 

our ability to establish collaborative arrangements to the extent necessary;

 

revenues received from any future products;

 

the ability to achieve and receive milestone payments for products licensed to collaborators; and

 

payments received under any future strategic collaborations.

 

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We anticipate that we will continue to generate significant losses for the next several years as we incur expenses to complete our clinical trial programs for our product candidates, build commercial capabilities, develop our pipeline and expand our corporate infrastructure.

 

We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to seek additional funding through public or private equity or debt financings, collaborative relationships, capital lease transactions or other available financing transactions. However, there can be no assurance that additional financing will be available on acceptable terms, if at all, and such financings could be dilutive to existing security holders. Moreover, in the event that additional funds are obtained through arrangements with collaborators, such arrangements may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves.

 

If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs. Our failure to obtain adequate financing when needed and on acceptable terms would have a material adverse effect on our business, financial condition and results of operations.

 

Even if we can raise additional funding, we may be required to do so on terms that are dilutive to you.

 

The capital markets have been unpredictable in the recent past for unprofitable companies such as ours. In addition, it is generally difficult for development stage companies to raise capital under current market conditions. The amount of capital that a company such as ours is able to raise often depends on variables that are beyond our control. As a result, we may not be able to secure financing on terms attractive to us, or at all. If we are able to consummate a financing arrangement, the amount raised may not be sufficient to meet our future needs. If adequate funds are not available on acceptable terms, or at all, our business, including our results of operations, financial condition and our continued viability will be materially adversely affected.

 

Risks Relating to Competitive Factors

 

We compete in an industry characterized by extensive research and development efforts and rapid technological progress.

 

New discoveries or commercial developments by our competitors could render our potential products obsolete or non-competitive.

 

New developments occur and are expected to continue to occur at a rapid pace in our industry, and there can be no assurance that discoveries or commercial developments by our competitors will not render some or all of our potential products obsolete or non-competitive, which could have a material adverse effect on our business, financial condition and results of operations. New data from commercial and clinical-stage products continue to emerge and it is possible that these data may alter current standards of care, completely precluding us from further developing our product candidates or preventing us from getting them approved by regulatory agencies. Further, it is possible that we may initiate a clinical trial or trials for our product candidates, only to find that data from competing products make it impossible for us to complete enrollment in these trials, resulting in our inability to file for marketing approval with regulatory agencies. Even if these products are approved for marketing in a particular indication or indications, they may have limited sales due to particularly intense competition in these markets.

 

We expect to compete with fully integrated and well-established pharmaceutical and biotechnology companies in the near- and long-term. Most of these companies have substantially greater financial, research and development, manufacturing and marketing experience and resources than we do and represent substantial long-term competition for us. Such companies may succeed in discovering and developing pharmaceutical products more rapidly than we do or pharmaceutical products that are safer, more effective or less costly than any that we may develop. Such companies also may be more successful than we are in manufacturing, sales and marketing. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established biotechnology companies. Academic institutions, governmental agencies and other public and private research organizations also conduct clinical trials, seek patent protection and establish collaborative arrangements for the development of product candidates.

 

We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, reimbursement coverage, price and patent position. There can be no assurance that our competitors will not develop safer and more effective products, commercialize products earlier than we do, or obtain patent protection or intellectual property rights that limit our ability to commercialize our products.

 

There can be no assurance that our issued patents or pending patent applications, if issued, will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with proprietary protection or a competitive advantage.

 

Our competitors may develop and market products that are less expensive, more effective, safer or reach the market sooner than our product candidates, which may diminish or eliminate the commercial success of any products we may commercialize.

 

The biopharmaceutical industry is highly competitive. There are many public and private biopharmaceutical companies, public and private universities and research organizations actively engaged in the discovery and research and development of products similar to our product candidates.

 

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Many of our competitors, either alone or with their strategic collaborators, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drugs, obtaining FDA and other regulatory approvals, and the commercialization of those products. Accordingly, our competitors may be more successful in obtaining approval for drugs and achieving widespread market acceptance. Our competitors' drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render our product candidates obsolete or non-competitive before we can recover the significant expenses of developing and commercializing any of our product candidates. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available.

 

We also compete with other pre-clinical and clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render our product candidates obsolete even before they begin to generate any revenue.

 

In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of any of our product candidates that receive marketing approval. If the FDA approves the commercial sale of any of our product candidates, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, product price, reimbursement coverage by government and private third-party payors, and patent position. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the marketplace.

 

Our product candidates may not be accepted in the marketplace; therefore, we may not be able to generate significant revenue, if any.

 

Even if our product candidates are approved for sale, physicians and the medical community may not ultimately use them or may use them only in applications more restricted than we expect. Our product candidates, if successfully developed, will compete with a number of traditional products, including antibiotics, and immunotherapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our product candidates will also compete with new products currently under development by such companies and others. Physicians will prescribe a product only if they determine, based on experience, clinical data, side effect profiles, reimbursement for their patients and other factors, that it is beneficial as compared to other products currently in use. Furthermore, physicians have been prescribing traditional antibiotics for decades and may be resistant to switching to new, less established therapies. Many other factors influence the adoption of new products, including marketing and distribution restrictions, course of treatment, adverse publicity, product pricing, the views of thought leaders in the medical community and reimbursement by government and private third-party payors.

 

Risks Relating to our Reliance on Third Parties

 

We may rely on third parties to conduct our preclinical studies and our clinical trials and to store and distribute our products for the clinical trials we conduct. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

 

We may rely on third parties, such as CROs, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA requires us to comply with Good Laboratory Practice for conducting and recording the results of our preclinical studies and Good Clinical Practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials, to ensure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with GCP, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be more costly than expected or budgeted, extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

 

Our CROs will not be our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and resources to our clinical and preclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other product development activities that could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our therapeutic candidates. If any such event were to occur, our financial results and the commercial prospects for our therapeutic candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

 

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If any of our relationships with these potential third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. Further, switching or adding additional CROs involves additional costs and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which could materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

 

In addition, our future clinical trials will require a sufficient number of test subjects to evaluate the safety and effectiveness of our therapeutic candidates. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.

 

We also rely on other third parties to store and distribute our products for the clinical trials that we conduct. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our therapeutic candidates or commercialization of our products, if approved, producing additional losses and depriving us of potential product revenue.

 

We may explore new strategic collaborations that may never materialize or may fail.

 

We may, in the future, periodically explore a variety of new strategic collaborations in an effort to gain access to additional product candidates or resources. At the current time, we cannot predict what form such a strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be complicated and time-consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic collaborations.

 

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Risk Factors Relating to the Acquisition

 

The Company may not be able to successfully integrate the business of CBM and realize the anticipated benefits of the asset acquisition.

 

Realization of the anticipated benefits of the CBM asset acquisition will depend on our ability to successfully integrate our businesses and operations with CBM. We will be required to devote significant management attention and resources to integrating its business practices, operations, and support functions. The process of integrating CBM’s operations could cause an interruption of, or loss of momentum in, our business and financial performance, and in CBM’s business and financial performance as well. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business, financial results.

 

Our stockholders will have a reduced ownership and voting interest after the acquisition and will exercise less influence over our management and policies than they did prior to the Acquisition.

 

Our stockholders currently have the right to vote in the election of our board of directors on other matters affecting us. When, and if the acquisition occurs, because of the issuance of shares of common stock to the CBM shareholders, our current stockholders will hold a percentage ownership of the post-acquisition company that is much smaller than the stockholder’s current percentage ownership of ours. Because of this, our current stockholders will have less influence over the management and policies of the Company than they now have after the consummation of the acquisition.

 

The acquisition of substantially all of the assets of CBM is subject to certain conditions to closing that could result in the acquisition not being completed or being delayed, either of which could negatively impact its stock price and future business and results of operations.

 

Completion of the acquisition is subject to a number of customary conditions, including, but not limited to, the approval of the issuance of Spherix common stock pursuant to the Asset Agreement by our stockholders. In addition, if any governmental authority shall have enacted, issued, promulgated or enforced any law or order which has the effect of making the transactions or agreements contemplated by the Asset Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by the Asset Agreement, CBM may elect not to consummate the Acquisition. There is no assurance that we will satisfy the conditions necessary for completion of the acquisition. If any of the conditions to the acquisition are not satisfied or, where waiver is permissible, waived, the acquisition will not be consummated. Failure to complete the acquisition would prevent us from realizing the anticipated benefits of the acquisition. We have already and expect to continue to incur significant costs associated with transaction fees, professional services, taxes and other costs related to the acquisition. In the event that the acquisition is not completed, we will remain liable for these costs and expenses. In addition, the current market price of our common stock may reflect a market assumption that the acquisition will occur, and a failure to complete the acquisition could result in a negative perception by the market of ours generally and a resulting decline in the market price of our common stock. The market price may also decline if the market disapproves of the Acquisition. Any delay in the consummation of the acquisition or any uncertainty about the consummation of the acquisition could also negatively impact our stock price and future business and results of operations. The acquisition may not be consummated, there may be a delay in the consummation of the acquisition or the acquisition may not be consummated on the terms contemplated by the Asset Agreement.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks, uncertainties and other factors, including the risk that the acquisition will not be consummated, as the acquisition is subject to certain closing conditions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding the expected timing of the completion of the acquisition; the ability to obtain approval for listing on the Nasdaq of the shares of common stock of Spherix issuable in connection with the acquisition; the ability to obtain approvals from the stockholders of Spherix and CBM and to complete the acquisition considering the various closing conditions; any statements of the plans, strategies and objectives of management for future operations; any statements regarding product development, product extensions, product integration or product marketing; continued compliance with government regulations, changing legislation or regulatory environments; any statements of expectation or belief and any statements of assumptions underlying any of the foregoing. In addition, if and when the acquisition is consummated, there will be risks and uncertainties related to successfully integrating the products and employees of the Spherix and CBM, as well as the ability to ensure continued regulatory compliance, performance and/or market growth. These risks, uncertainties and other factors, and the general risks associated with the businesses of Spherix and CBM described herein and in the reports and other documents filed with the SEC, could cause actual results to differ materially from those referred to in the forward-looking statements. You are cautioned not to rely on these forward-looking statements. All forward-looking statements are based on information currently available to Spherix and CBM and are qualified in their entirety by this cautionary statement. Spherix and CBM anticipate that subsequent events and developments will cause their views to change. The information contained in this proxy statement speaks as of the date hereof and Spherix and CBM have or undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

 

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THE ACQUISITION

 

The following is a discussion of the acquisition and the material terms of the Asset Agreement between Spherix and CBM. You are urged to read carefully the Asset Agreement in its entirety, a copy of which is attached as Annex A to this proxy statement and incorporated by reference herein.

 

In October 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with CBM, a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 3,529,411 shares of the Company’s common stock with CBM continuing as the surviving corporation in the merger.

 

On May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an Agreement and Plan of Merger dated October 10, 2018 (the “CBM Merger Agreement”) and entered into the Asset Agreement with CBM, whereby the Company purchased CBM’s Purchased Assets (as defined in the Asset Agreement), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

 

In connection with the execution of the Asset Agreement, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

 

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A) the Common Stock Consideration based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of the Company to 9.9% of the Company’s issued and outstanding Common Stock, and (B) such number of shares of nonvoting Series L Preferred Stock as shall be equal to the Stock Consideration less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) the Cash Consideration Amount, less the sum of (A) the amount of any Affiliate Receivables (as defined in the Asset Agreement), (B) the amount of the outstanding Indebtedness (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the Asset Agreement T) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the Asset Agreement), if any, to the recipients thereof. The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first Qualified Financing (as defined in the Asset Agreement) after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.

 

The Company is prohibited from issuing shares of Common Stock under the Asset Agreement which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee (as defined in the Merger Agreement).

  

Additionally, at or prior to the closing, the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement, pursuant to which the Company shall deposit with the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.

 

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The obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the Asset Agreement) to enjoin or restrict the transaction; and (d) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the Asset Agreement.

 

The Asset Agreement may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the Asset Agreement) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the Asset Agreement), (iii) by written notice by the Company or CBM if a Governmental Authority (as defined in the Asset Agreement) has issued an Order (as defined in the Asset Agreement) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the Asset Agreement), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, or (v) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the Asset Agreement) on the Company following the date of the Asset Agreement. In the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to the Asset Agreement is not approved by the Company’s stockholders at a duly held special meeting of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

  

In connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into the Leak-Out Agreement, whereby CBM will agree that during the Restricted Period, neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer, directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such lock-up shall in no event extend beyond the Restricted Period.

 

Background of the Acquisition

 

In the middle of July 2018, CBM and the Company commenced preliminary discussions regarding CBM’s technology and a possible transaction between the companies. On approximately July 24, 2018, the Company began a general technology overview of CBM’s assets and the Company began conducting due diligence on CBM.

 

From the end of July through October 2018, the Company received and reviewed scientific literature from CBM, including, but not limited to, presentations on acute myeloid leukemia (“AML”) and pancreatic cancer as well as papers published by Wake Forest University in the field of oncology related to CBM’s assets. During this same time period, representatives of CBM and the Company had discussions regarding CBM’s assets, CBM’s patents and possible deal terms. The dates of these calls included, but were not limited to, July 25, July 27, August 3, August 10, August 17, August 21, September 4, September 12, September 14, September 19, September 25, October 1, October 8, October 9, October 10 and October 11, 2018. In the middle of September 2018, the Company conducted due diligence calls with representatives from Wake Forest University with whom CBM has a licensing agreement, to discuss and review CBM’s technology as well as specific topics such as the chemical structure of KPC34, CBM’s AML drug candidate, patent coverage of the chemical structure, yearly patient costs of KPC34, Wake Forest University’s proposal for a Phase 1 study, development timelines and costs, and FDA exclusivity, including orphan drug status.

 

On July 24, 2018, Spherix’s management and members of its board of directors met with Dr. Tom Wilkie, CBM’s Chief Scientific Officer, to review and discuss CBM’s technology, including a presentation on CBM’s intellectual property assets.

 

On September 21, 2018, members of the Company’s board of voted to proceed with the merger and authorized management to finalize terms.

 

On October 16, 2018, the Company filed a Current Report on Form 8-K to announce its proposed merger with CBM. The consummation of such merger was conditioned upon, among other things, receipt of requisite approval by the Company’s stockholders and CBM’s stockholders.

 

After the October 16, 2018 announcement, the Company continued to conduct pre-closing due diligence which included a pre-clinical analysis of KPC34 to review KPC34 mechanisms to identify other types of cancers that might respond well to KPC34. Specifically, the Company analyzed cancers with target gene expressions indicative of high levels of PLC and PKC mRNA. This analysis revealed that uveal melanoma, low grade glioma, AML and adrenocortical carcinoma have gene profiles which KPC34 could potentially respond to as an effective treatment. In addition, the Company and CBM worked together to produce a short video presentation demonstrating, in simple terms, KPC34 mechanisms, one of the two main compounds that form the cornerstone of the CBM merger.

 

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On January 9, February 14, March 4, March 19, March 27, April 10, April 12, 2019, April 15 and April 19, 2019, various telephonic discussions were conducted with Scott Wilfong, Chief Executive Officer of CBM, to address the terms of the merger and the preference of CBM shareholders to be passive shareholders of Spherix rather than control persons after the completion of the merger.  As a result of those discussions, it was agreed that the CBM shareholders would receive convertible preferred stock instead of common stock, which preferred stock has all of the characteristics of common stock but limits each holders’ beneficial interest of Spherix common stock to less than 3% on an individual basis, 19.9% on an aggregate basis.  Additionally, upon completion of further due diligence since the time that the initial agreement was signed, it was decided that Spherix would purchase substantially all of CBM’s assets at a lower purchase price instead of proceeding with a merger in recognition of CBM having a lower valuation.

 

Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of CBM and (ii) certain securities and uncertificated rights of DatChat from an existing shareholder of CBM and DatChat for an aggregate purchase price of $350,000. The investment represents a 20% interest in CBM, and the securities and rights of DatChat that were purchased include: (a) a senior convertible note issued by DatChat with outstanding principal of $300,000, with an initial conversion rate of $0.20 per share (b) a warrant to purchase 2,250,000 shares of DatChat common stock at an initial exercise price of $0.20 per share, (c) an option to acquire an additional $300,000 senior convertible note and a warrant to purchase 1,500,000 shares of DatChat common stock, (d) a contingent option to purchase 500,000 shares of DatChat common stock from an existing DatChat stockholder, and (e) a contingent option to put 200,000 shares of DatChat common stock, subject to certain terms and conditions. The transaction closed on May 28, 2019.

 

On May 16, 2019, the Company filed a Current Report on Form 8-K to announce its proposed restructuring of the CBM merger as an asset acquisition. The consummation of such transaction is conditioned upon, among other things, receipt of requisite approval by the Company’s stockholders and CBM’s stockholders. 

 

Spherix Board of Directors’ Recommendation

 

The board of directors of Spherix has unanimously determined that the issuance of common stock of Spherix pursuant to the Asset Agreement with CBM are advisable, fair to, and in the best interests of the Spherix stockholders. In approving and authorizing the issuance and the Asset Agreement itself, the board of directors considered a number of factors, including, among others, the facts discussed in the following paragraphs. Although the foregoing discussion sets forth the material factors considered by the Spherix board of directors in reaching its conclusion, it may not include all the factors considered by the Spherix board of directors. In light of the number and wide variety of factors considered in connection with its evaluation of the acquisition, the Spherix board of directors did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The Spherix board of directors viewed its position and determinations as being based on all of the information available and the factors presented to it and considered by it. In addition, individual directors may have given different weight to different factors.

 

In reaching its decision, the Spherix board of directors consulted with its senior management, financial advisor and outside legal counsel. These consultations included discussions regarding strategic and operational matters, the historical and future price for Spherix common stock, past and current business operations and financial condition and performance.

 

The decision of the Spherix board of directors to enter into the Asset Agreement was the result of careful consideration by the Spherix board of directors of numerous factors, including that the Company will realize synergistic benefits upon the acquisition of substantially all of the assets of CBM.

 

The Spherix board of directors also identified and considered negative factors, including the following:

 

It is possible that the closing conditions relating to the consummation of the acquisition will not be met.

 

The Asset Agreement substantially limits any outside opportunities Spherix might otherwise have with other potential business combination opportunities.

 

It should be noted that this explanation of the reasoning of the board of directors of Spherix and certain information presented in this section is forward-looking in nature and, therefore, that information should be read in light of the factors discussed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” in this proxy statement.

 

Interests of Spherix Directors and Executive Officers in the Acquisition

 

When you consider the recommendation of Spherix’s board of directors in favor of approval of the acquisition, you should keep in mind that Spherix’s directors and officers have interests in the acquisition that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

 

Those executive officers who will receive compensatory benefits as a result of the acquisition have an interest in the consummation of the acquisition that may be influenced by the benefits that inure to themselves and not to the stockholders in general.

 

The Spherix board of directors was aware of these interests and considered them, among other matters, in negotiating and approving the Asset Agreement and making its recommendation that the Spherix stockholders approve and adopt the Asset Agreement and the transactions contemplated thereby. The board of directors undertook such measures as, for example, reliance on third-party advisors, full mutual disclosure of the directors’ and officers’ interests and relationships to minimize or eliminate the risks inherent in such disparities in interest. Notwithstanding, it cannot be stated to a certainty that the Spherix board of directors’ measures to assure that the potential influence from the foregoing disparities in interests of the directors and executive officers from the interests of the other stockholders of Spherix have been eliminated from the deliberations and decisions of the Spherix board of directors.

 

Regulatory Approvals Required for the Acquisition

 

The acquisition does not meet the thresholds for furnishing pre-acquisition notification and other information to the Antitrust Division of the U.S. Department of Justice and the FTC under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the parties are not aware of any other regulatory filings or approvals that are required in connection with the acquisition.]

 

 

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Anticipated Accounting Treatment

 

It is anticipated that the transaction will be accounted for by Spherix as an asset acquisition of CBM rather than as a business combination under ASC 805, Business Combinations. 

 

THE ASSET PURCHASE AGREEMENT

 

The following discussion summarizes material provisions of the Asset Agreement, a copy of which is attached as Annex A to this proxy statement and is incorporated by reference into this proxy statement. The rights and obligations of the parties are governed by the express terms and conditions of the Asset Agreement and not by this summary or any other information contained in this proxy statement. This summary is qualified in its entirety by reference to the Asset Agreement, which we urge you to read carefully and in its entirety, as well as this proxy statement, before making any decisions regarding the acquisition.

 

The Asset Agreement has been included to provide information regarding the terms of the acquisition. In your review of the representations and warranties contained in the Asset Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances under which a party to the Asset Agreement may have the right to not close the acquisition if the representations and warranties of another party prove to be untrue due to a change in circumstance or otherwise, and allocate risk between the parties to the Asset Agreement, rather than establishing matters of fact.

 

The Asset Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Asset Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Asset Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Asset Agreement and subsequent developments or new information qualifying a representation or warranty to the extent material to an investment decision have been included in this proxy statement. The representations, warranties and covenants in the Asset Agreement are also modified in important part by the underlying disclosure schedules which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to stockholders and were used for the purpose of allocating risk among the parties rather than establishing factual matters. Spherix and CBM do not believe that these disclosure letters contain information that is material to an investment decision.

 

Any subsequent developments or new information material to an investment decision have been included in this proxy statement. The representations and warranties and other provisions of the Asset Agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this proxy statement and the annex. The representations, warranties, pre-closing covenants and pre-closing obligations contained in the Asset Agreement do not survive the effective time of the acquisition.

 

On May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an Agreement and Plan of Merger dated October 10, 2018 (the “CBM Merger Agreement”) and entered into the Asset Agreement with CBM, whereby the Company purchased CBM’s Purchased Assets (as defined in the Asset Agreement), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

 

In connection with the execution of the Asset Agreement, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

 

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A) the Common Stock Consideration based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of the Company to 9.9% of the Company’s issued and outstanding Common Stock, and (B) such number of shares of nonvoting Series L Preferred Stock as shall be equal to the Stock Consideration less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) the Cash Consideration Amount, less the sum of (A) the amount of any Affiliate Receivables (as defined in the Asset Agreement), (B) the amount of the outstanding Indebtedness (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the Asset Agreement T) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the Asset Agreement), if any, to the recipients thereof. The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first Qualified Financing (as defined in the Asset Agreement) after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.

 

The Company is prohibited from issuing shares of Common Stock under the Asset Agreement which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.

  

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Additionally, at or prior to the closing, the Company, CBM, and the Escrow Agent, shall enter into an Escrow Agreement, pursuant to which the Company shall deposit with the Escrow Agent 10% of the Stock Consideration (including any equity securities paid in the future as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “Escrow Shares”), to be held in the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.

 

In connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into the Leak-Out Agreement, whereby CBM will agree that during the Restricted Period, neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer, directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such lock-up shall in no event extend beyond the Restricted Period.

 

The obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the Asset Agreement) to enjoin or restrict the transaction; and (d) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the Asset Agreement.

 

The Asset Agreement may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the Asset Agreement) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the Asset Agreement), (iii) by written notice by the Company or CBM if a Governmental Authority (as defined in the Asset Agreement) has issued an Order (as defined in the Asset Agreement) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the Asset Agreement), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, or (v) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the Asset Agreement) on the Company following the date of the Asset Agreement.

 

On May 30, 2019 the Asset Agreement was amended by Amendment No. 1 to the Asset Purchase Agreement to include a termination fee in the Asset Agreement whereby, in the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to the Asset Agreement is not approved by the Company’s stockholders at a duly held special meeting of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

 

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INFORMATION ABOUT SPHERIX AND CBM

 

Spherix Incorporated

One Rockefeller Plaza

New York, NY 10020

(212) 745-1374

 

General

 

Spherix Incorporated is a technology development company committed to the fostering of innovative ideas. Spherix Incorporated was formed in 1967 as a scientific research company and for much of our history pursued drug development, including through Phase III clinical studies, which were largely discontinued in 2012.  In 2012 and 2013, we shifted our focus to being a firm that owns, develops, acquires and monetizes intellectual property assets. Such monetization included, but was not limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, commercializing the IP, or through the settlement and litigation of patents.  

 

Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have been transitioning to a technology development company. The Company made no investments in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter of 2017, with its agreement with DatChat, Inc. in March 2018 and with its agreement with CBM BioPharma, Inc. in October 2018.

 

CBM BioPharma, Inc. Transaction

 

In October 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with CBM BioPharma, Inc. (“CBM”), a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 15,000,000 shares of the Company’s common stock with CBM continuing as the surviving corporation in the acquisition. On May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an agreement and plan of merger and entered into the Asset Agreement with CBM, whereby the Company purchased substantially all of CBM’s assets, including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board.

 

DatChat Securities Purchase Agreement and Share Purchase Agreement

 

In March 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”), subject to shareholder approval, with DatChat, Inc. (the “DatChat Merger”), a secure messaging application that utilizes blockchain technology, as amended on May 3, 2018. After further negotiations, the Company determined not to pursue a merger with DatChat and on August 8, 2018, entered into a securities purchase agreement (the “Securities Purchase Agreement”) with DatChat pursuant to which the Company and DatChat agreed to terminate the DatChat Merger and each of the parties to the Merger Agreement agreed to release and discharge and hold harmless each of the other parties with respect to the transaction contemplated by the Merger Agreement.

 

In addition to the termination, under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of (a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation of the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 4.37% of the issued and outstanding common stock of DatChat. In the event that DatChat completes a public offering of its securities pursuant to an effective registration statement or a merger, consolidations, transfer or share exchange transaction to pursuant to which DatChat becomes subject to the reporting requirements of the Securities Exchange Act of 1934, DatChat agreed to certain covenants in connection with certain reporting and information disclosure requirements.

 

Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of CBM and (ii) certain securities and uncertificated rights of DatChat from an existing shareholder of CBM and DatChat for an aggregate purchase price of $350,000. The investment represents a twenty percent (20%) interest in CBM, and the securities and rights of DatChat that were purchased include: (a) a senior convertible note issued by DatChat with outstanding principal of $300,000, with an initial conversion rate of $0.20 per share, (b) a warrant to purchase 2,250,000 shares of DatChat common stock at an initial exercise price of $0.20 per share, (c) an option to acquire an additional $300,000 senior convertible note and a warrant to purchase 1,500,000 shares of DatChat common stock, (d) a contingent option to purchase 500,000 shares of DatChat common stock from an existing DatChat stockholder, and (e) a contingent option to put 200,000 shares of DatChat common stock, subject to certain terms and conditions.

 

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Patent Monetization Activities

 

In July 2013, we acquired 7 patents in the field of mobile communications from Rockstar Consortium US LP (“Rockstar”), which was launched in 2011 by Apple, Inc., Microsoft Corporation, Sony Corporation, Blackberry Limited and LM Ericsson Telephone Company as an intellectual property licensing company to manage a patent portfolio related to the pre-bankruptcy technology and businesses of Nortel Networks (“Nortel”).  

 

In September 2013, we acquired North South Holdings, Inc. (“North South”) and its 222 patents in the fields of wireless communications, satellite, solar, and radio frequency and 2 patents in the field of pharmaceutical distribution. The 222 patents were originally developed by Harris Corporation, a leader in defense communications and electronics.

 

In December 2013, we acquired an additional 101 patents and patent applications covering, among other things, internet access and video and data transmission, from Rockstar in consideration for approximately $60 million of our securities consisting of common stock and preferred stock.  

 

We have not generated any significant revenues from our intellectual property monetization platform. We have incurred losses from operations for the years ended December 31, 2018 and 2017 of $6.9 million and $3.8 million, respectively.  Our accumulated deficit was $140.1 million at December 31, 2018.  In 2018, the Company took a $1,405,000 amortization expense on its patent portfolio and patent rights and an impairment loss of $2,173,000. Therefore, at December 31, 2018, the value of the Company’s patent portfolio and patent rights was zero.

 

Acquisition of shares of Hoth Therapeutics, Inc.

 

On June 30, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of 1,700,000 shares of common stock, par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. As of December 31, 2018, Hoth had approximately 5 million shares of common stock issued and outstanding, which has been retroactively restated to reflect the 1-for-4 reverse stock split effected by Hoth on December 6, 2018. Hoth is a development stage biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. Hoth’s primary asset is a sublicense agreement with Chelexa Biosciences, Inc. (“Chelexa”) pursuant to which Chelexa has granted Hoth an exclusive sublicense to use its BioLexa Platform, a proprietary, patented, drug compound platform developed at the University of Cincinnati. Hoth intends to develop BioLexa’s applications in the aesthetic dermatology field to help treat and reduce post-procedure infections, accelerate healing and improve clinical outcomes for patients undergoing procedures. Hoth will be implementing FDA testing procedures for BioLexa. In addition to the Purchase Agreement, the Company and Hoth entered into a Registration Rights Agreement, pursuant to which Hoth is obligated to register for resale on a registration statement on Form S-1 under the Securities Act, all of the shares. Further, the Company, Hoth and Hoth’s existing shareholders have entered into a Shareholders Agreement, pursuant to which Spherix shall have a right to appoint one director to the board of directors of Hoth for so long as the Company holds at least 10% of the issued and outstanding common stock of Hoth.

 

On February 14, 2019, the Company purchased an aggregate of 35,714 shares of the common stock of Hoth in connection with Hoth’s initial public offering, which was consummated on February 20, 2019, at a purchase price of $5.60 per share, for an aggregate purchase price of $200,000. Hoth’s common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”. The Company entered into a lock-up agreement with Hoth pursuant to which the Company has agreed not to sell any shares of Hoth common stock or common stock equivalents until February 20, 2022, which is the 36 month anniversary of the consummation of Hoth’s initial public offering, (the “Spherix Securities”) until February 20, 2022, which is the 36 month anniversary of the consummation of Hoth’s initial public offering, provided, however (i) Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an aggregate of 10% of the initially issued Spherix Securities, provided further that the recipients of the Spherix Securities shall not be permitted to resell such Spherix Securities until six months after the date of the Initial Public Offering, (ii) beginning 12 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities, (iii) beginning 24 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities and (iv) beginning 36 months after the date of the Hoth initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, the Spherix Securities without any restrictions.

 

Mellow Scooters Investment

 

On November 23, 2018, the Company entered into a Security Purchase Agreement with Mellow Scooters, LLC (“Mellow Scooters”), a leading-edge company that enables anyone to own and operate a personal fleet of electric scooters and dockless bicycles to generate revenue. Mellow Scooters agreed to sell 250 Units to the Company, representing 25% of its issued and outstanding limited liability company membership interests for a subscription price of $106,000. The $106,000 consisted of (a) a cash payment of $30,000, (b) the forgiveness of prior advances made to Mellow Scooters by the Company, and (c) an obligation of the Company to pay certain specific future expenses of Mellow Scooters (amounts in clauses (b) and (c) not to exceed a maximum of $76,000 in the aggregate). As of December 31, 2018, the Company has applied a total of approximately $74,000 prior advances towards its investment in Mellow Scooters, including $71,000 compensation related cost and $3,500 professional fees. The Company also recorded $2,000 payable for professional fees of Mellow Scooter in addition to the $74,000 advances to reach the $76,000 maximum. Mellow Scooters recently launched its operations, focused on the scooter rental market in the Washington, D.C. area via its website www.borrowmellow.com .

 

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March 2018 Shelf Takedown

 

On March 19, 2018, we closed a public offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of our registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement (the “Place Agency Agreement”) between us and Laidlaw, the sole placement agent, on a best-efforts basis with respect to the offering that was entered into on March 14, 2018. We sold 522,876 shares of its common stock in the offering at a purchase price of $1.35 per share. The material terms of the offering are described in a prospectus supplement which was filed by us with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act on March 16, 2018.  

 

TheBit Daily LLC Investment

 

On March 23, 2018, the Company purchased 8.0% of the issued and outstanding limited liability company membership interests of TheBit Daily LLC, a development stage media and education platform focused on the blockchain and cryptocurrency space, for a subscription price of $25,000.

 

Our principal executive offices are located at One Rockefeller Plaza, New York, NY 10020, our telephone number is (212) 745-1374, and our Internet website address www.spherix.com .

 

Our common stock trades on the NASDAQ Capital Market under the symbol SPEX.

 

Available Information

 

Our principal Internet address is www.spherix.com.  We make available free of charge on www.spherix.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

Competition

 

We encounter significant competition from others seeking to target development stage technology companies in order to acquire interests in intellectual property assets and monetize such assets. This includes an increase in the number of competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire.  Most of our competitors have much longer operating histories, and significantly greater financial and human resources, than we do.

 

We also compete with venture capital firms, strategic corporate buyers and various industry leaders for identifying and targeting technology acquisitions and licensing opportunities.  Many of these competitors may have more financial and human resources than we do.  As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.

  

Other companies may develop competing technologies that offer better or less expensive alternatives to the patented technologies that we may acquire and/or out-license.  Many potential competitors may have significantly greater resources than we do.  Technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or uneconomical.

 

Intellectual Property and Patent Rights

 

Our intellectual property is primarily comprised of trade secrets, patented know-how, issued and pending patents, copyrights and technological innovation relating to our past business of patent monetization through litigation activities.

 

The portfolio we were working with Equitable to monetize pursuant to the Monetization Agreement is comprised of over 290 patents and patent applications (the “Portfolio”).  The Portfolio includes both U.S. and foreign patents and pending patent applications in the wireless communications and telecommunication sectors including data, optical and voice technology, antenna technology, Wi-Fi, base station functionality, and cellular.  

 

Most of the patents in the Portfolio are publicly accessible on the Internet website of the U.S. Patent and Trademark Office at www.uspto.gov.

 

The lives of the patent rights in the Portfolio have a wide duration ranging from 2019 to 2026.  

 

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Employees

 

As of March 31, 2019, Spherix has six full-time employees, none of which are represented by a labor union or covered by a collective bargaining agreement.  

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

CBM BioPharma, Inc.

6427 Lake Washington Boulevard Northeast

Kirkland, Washington 98053

973-738-0967

 

CBM BioPharma, Inc. (“CBM”) is a privately held pharmaceutical company with exclusive drug development rights from partners including Wake Forest University and the University of Texas at Austin. CBM is dedicated to translating fundamental biological insights into new drugs and treatments that address unmet medical needs. CBM currently has two drug candidates focused on the treatment of two cancers, acute myeloid leukemia (“AML”) and pancreatic cancer.

 

CBM was formed as a corporation in December 2017 under the laws of the State of Delaware. Its principal offices are at 6427 Lake Washington Boulevard Northeast, Kirkland, Washington 98053.

 

KPC34

 

Developed at the Wake Forest School of Medicine, CBM’s AML drug candidate (“KPC34”) is designed to bypass the resistant mechanisms in AML cancer cells. In preclinical studies in mice, KPC34 has shown to be a superior treatment to gemcitabine, the current state of the art treatment for AML and has served to double the mean survival time of mice versus the current standard of care treatments. KPC34 has also been shown to be more effective in AML relapse cases in mice, notably increasing the lifespan of mice treated with the drug.

 

KPC34 is able to be orally administered, which may be critical for patients that are unable to tolerate repeated cycles of chemotherapy. Because of the low AML patient population, FDA orphan drug status will be sought for KPC34.

 

License Agreement with Wake Forest University

 

On April 17, 2018, CBM entered into a license agreement (the “WF Agreement”) with Wake Forest University Health Sciences (“WF”). The WF Agreement granted to CBM an exclusive, royalty-bearing license to WF’s and The University of North Carolina at Chapel Hill’s patents relating to the KPC34 drug candidate (the “WF Patent Rights”). The WF Agreement also granted to CBM the right to sublicense.

 

CBM paid WF an upfront license fee of $10,000 and will owe an additional $10,000 per year to WF beginning on the third anniversary of the WF Agreement. In addition, CBM is obligated to pay to WF a single-digit royalty fee and certain other milestone and other payments upon sales milestones. The aggregate milestone payments under the WF Agreement are up to $1,400,000. In addition, as consideration for entering into the WF Agreement, CBM issued WF 5,000 shares of common stock to WF, which equaled 2% of CBM’s issued and outstanding capital stock at the effective date of the WF Agreement.

 

The term of the WF Agreement continues until the expiration of the last of the WF Patent Rights to expire or the expiration of market exclusivity via orphan drug status or new chemical entity status (or their non-U.S. equivalents), or until the WF Agreement is earlier terminated. CBM may terminate the WF Agreement upon 90 days’ prior written notice. Either party may terminate the WF Agreement upon a breach of the WF Agreement that has not been cured in 90 days. Additionally, the WF Agreement will automatically terminate in the event CBM becomes insolvent, makes an assignment for the benefit of creditors, or if a petition for bankruptcy is filed.

 

DHA-dFdC

 

Developed at the University of Texas at Austin, CBM’s pancreatic cancer drug candidate (“DHA-dFdC”) has shown positive results in preclinical studies, inhibiting pancreatic tumor growth in clinically relevant transgenic mouse models. Pancreatic cancer is a deadly disease that affects millions of people around the world.

 

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DHA-dFdC has been shown to be well tolerated in preclinical toxicity tests, has demonstrated activities against other cancers (e.g. leukemia, lung, melanoma) and may stimulate immunogenic cell death to activate host antitumor immunity.

 

Patent License Agreement with the University of Texas at Austin

 

On April 12, 2018, CBM entered into a patent license agreement (the “UT Agreement”) with the University of Texas at Austin on behalf of the Board of Regents of the University of Texas System (“UT”). The UT Agreement granted to CBM an exclusive, royalty-bearing license to certain patent applications related to nucleobase analogue derivatives and their applications, and specifically to the DHA-dFdC drug candidate (the “UT Patent Rights”). The UT Agreement also granted to CBM the right to sublicense.

 

CBM paid UT an upfront license fee of $5,000 and CBM is obligated to pay UT a tiered license fee annually up to $35,000, in addition to certain other milestone and other payments. The aggregate milestone payments under the UT Agreement are up to $1,350,000.

 

The term of the UT Agreement continues until the expiration of the UT Patent Rights, or until the UT Agreement is earlier terminated. CBM may terminate the UT Agreement upon 90 days’ prior written notice. UT may terminate the agreement upon any of the following events:

 

CBM fails to make a payment within 30 days written notice of default;

 

A breach of the UT Agreement occurs that has not been cured in 60 days;

 

CBM breaches the agreement three or more times in any 12-month period; and

 

CBM initiates any proceeding or action to challenge the validity, enforceability, or scope of the UT Patent Rights.

 

Additionally, the UT Agreement will automatically terminate upon any of the following events:

 

CBM becomes insolvent, makes an assignment for the benefit of creditors, or if a petition for bankruptcy is filed; and

 

CBM is dissolved or liquidated.

 

CBM’s Development Plan

 

CBM’s drug candidates are in the preclinical stage. CBM anticipates making an IND filing for KPC34 by the end of 2019 and start a Phase 1 trial in 2020.

 

Intellectual Property

 

CBM’s success depends, in part, on its ability to obtain, maintain, and enforce patents and other proprietary protections of our commercially important technologies and product candidates, to operate without infringing the proprietary rights of others, and to maintain trade secrets or other proprietary know-how, both in the U.S. and other countries.

 

CBM’s patent estate includes 8 licensed patents. Five patents relate to its KPC34 candidate and three patents relate to its DHA-dFdC candidate.

 

Competition

 

The biopharmaceutical industry is characterized by rapidly advancing technologies, strong emphasis on proprietary products and significant competition. CBM faces potential competition from many sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and government agencies and public and private research institutions. Any product candidates that CBM successfully develops and commercializes will compete with any existing therapies and new therapies that may become available in the future.

 

Government Regulation

 

CBM operates in a highly regulated industry that is subject to significant federal, state, local and foreign regulation. CBM’s present and future business has been, and will continue to be, subject to a variety of laws including, the Federal Food, Drug, and Cosmetic Act, or FDC Act, and the Public Health Service Act, among others.

 

The FDC Act and other federal and state statutes and regulations govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of potential products. As a result of these laws and regulations, product development and product approval processes are very expensive and time-consuming.

 

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FDA Approval Process

 

In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDC Act and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, or biologic license applications, or BLAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.

 

Pharmaceutical product development in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug or biologic for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

 

Preclinical tests include laboratory evaluation as well as animal trials to assess the characteristics and potential pharmacology and toxicity of the product. The conduct of the preclinical tests must comply with federal regulations and requirements including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

 

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not objected to the IND within this 30-day period, the clinical trial proposed in the IND may begin.

 

Clinical trials involve the administration of the investigational drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with federal regulations and good clinical practices, or GCP, as well as under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

 

The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The clinical trial protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

 

Clinical trials to support NDAs or BLAs, which are applications for marketing approval, are typically conducted in three sequential Phases, but the Phases may overlap. In Phase 1, the initial introduction of the investigational drug candidate into healthy human subjects or patients, the investigational drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population, to determine the effectiveness of the investigational drug for a particular indication or indications, dosage tolerance and optimum dosage, and identify common adverse effects and safety risks. In the case of product candidates for severe or life-threatening diseases such as pneumonia, the initial human testing is often conducted in patients rather than in healthy volunteers.

 

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If an investigational drug demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 clinical trials are undertaken to obtain additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the investigational drug and to provide adequate information for its labeling.

 

After completion of the required clinical testing, an NDA or, in the case of a biologic, a BLA, is prepared and submitted to the FDA. FDA approval of the marketing application is required before marketing of the product may begin in the United States. The marketing application must include the results of all preclinical, clinical and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls.

 

The FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of marketing applications. Most such applications for non-priority drug products are reviewed within ten months. The review process may be extended by the FDA for three additional months to consider new information submitted during the review or clarification regarding information already provided in the submission. The FDA may also refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving a marketing application, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.

 

Additionally, the FDA will inspect the facility or the facilities at which the drug product is manufactured. The FDA will not approve the NDA or, in the case of a biologic, the BLA unless compliance with cGMPs is satisfactory and the marketing application contains data that provide substantial evidence that the product is safe and effective in the indication studied. Manufacturers of biologics also must comply with FDA’s general biological product standards.

 

After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues an approval letter or a complete response letter. A complete response letter outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed in a resubmission of the marketing application, the FDA will re-initiate review. If the FDA is satisfied that the deficiencies have been addressed, the agency will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. It is not unusual for the FDA to issue a complete response letter because it believes that the drug product is not safe enough or effective enough or because it does not believe that the data submitted are reliable or conclusive.

 

An approval letter authorizes commercial marketing of the drug product with specific prescribing information for specific indications. As a condition of approval of the marketing application, the FDA may require substantial post-approval testing and surveillance to monitor the drug product’s safety or efficacy and may impose other conditions, including labeling restrictions, which can materially affect the product’s potential market and profitability. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

 

Orphan Drug Act in the United States

 

The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for orphan drug designation. Orphan drug designation must be requested before submitting a BLA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the holder of the approval is entitled to a seven-year exclusive marketing period in the U.S. for that product except in very limited circumstances. For example, a drug that the FDA considers to be clinically superior to, or different from, another approved orphan drug, even though for the same indication, may also obtain approval in the U.S. during the seven-year exclusive marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug.

 

Orphan Designation and Exclusivity in the European Union

 

Products authorized as “orphan medicinal products” in the EU are entitled to certain exclusivity benefits. In accordance with Article 3 of Regulation (EC) No. 141/2000 of the European Parliament and of the Council of 16 December 1999 on orphan medicinal products, a medicinal product may be designated as an orphan medicinal product if: (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the European Union when the application is made, or (b) the product, without the incentives derived from orphan medicinal product status, would not generate sufficient return in the European Union to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those affected by the condition.

 

An application for orphan drug designation must be submitted before the application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

 

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Products authorized in the EU as orphan medicinal products are entitled to 10 years of market exclusivity. The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may be granted to a similar product during the 10-year period of market exclusivity for the same therapeutic indication at any time if:

 

The second applicant can establish in its application that its product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior; 

 

The holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or 

 

The holder of the marketing authorization for the original orphan medicinal product cannot supply enough orphan medicinal product.

 

Other Regulatory Requirements

 

Once a NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of therapeutic products, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet.

 

Biologics may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new BLA or BLA supplement, before the change can be implemented. A BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA supplements as it does in reviewing BLAs. We cannot be certain that the FDA or any other regulatory agency will grant approval for our product candidates for any other indications or any other product candidate for any indication on a timely basis, if at all.

 

Adverse event reporting and submission of periodic reports is required following FDA approval of a BLA. The FDA also may require post-marketing testing, known as Phase 4 testing, risk evaluation and mitigation strategies, and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control as well as product manufacturing, packaging, and labeling procedures must continue to conform to cGMPs after approval. Manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.

 

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Healthcare Reform in the United States

 

In the United States, there have been, and continue to be, a number of legislative and regulatory changes and proposed changes to the healthcare system that could affect the future results of pharmaceutical manufactures’ operations. In particular, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce healthcare costs. Most recently, the Patient Protection and Affordable Care Act, or PPACA, was enacted in March 2010, which includes measures to significantly change the way healthcare is financed by both governmental and private insurers. Among the provisions of the PPACA of greatest importance to the pharmaceutical and biotechnology industry are the following:

 

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs; 

 

implementation of the federal physician payment transparency requirements, sometimes referred to as the “Physician Payments Sunshine Act”; 

 

a licensure framework for follow-on biologic products; 

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; 

 

establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services, or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending; 

 

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price, or AMP; 

 

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics, including our product candidates, that are inhaled, infused, instilled, implanted or injected; 

 

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; 

 

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; 

 

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70% commencing January 1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; and 

 

expansion of the entities eligible for discounts under the Public Health program.

 

Some of the provisions of the PPACA have yet to be implemented, and there have been legal and political challenges to certain aspects of the PPACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed repeal legislation, two bills affecting the implementation of certain taxes under the PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. More recently, in July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA qualified health plans and health insurance issuers under the PPACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Congress may consider other legislation to repeal or replace elements of the PPACA.

 

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Many of the details regarding the implementation of the PPACA are yet to be determined, and at this time, the full effect that the PPACA would have on a pharmaceutical manufacturer remains unclear. In particular, there is uncertainty surrounding the applicability of the biosimilars provisions under the PPACA. The FDA has issued several guidance documents, and withdrew others, but no implementing regulations on biosimilars have been adopted. A number of biosimilar applications have been approved over the past few years. The regulations that are ultimately promulgated and their implementation are likely to have considerable impact on the way pharmaceutical manufacturers conduct their business and may require changes to current strategies. A biosimilar is a biological product that is highly similar to an approved drug notwithstanding minor differences in clinically inactive components, and for which there are no clinically meaningful differences between the biological product and the approved drug in terms of the safety, purity, and potency of the product.

 

Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. HHS has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. Although a number of these, and other potential, proposals will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and or administrative measures to control drug costs. At the state level, legislatures have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm a pharmaceutical manufacturer’s business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce ultimate demand for certain products or put pressure product pricing, which could negatively affect a pharmaceutical manufacturer’s business, results of operations, financial condition and prospects.

 

Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (“Right to Try Act”) was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under an FDA expanded access program.

 

In addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While no one cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm a pharmaceutical manufacturer’s ability to generate revenue. Increases in importation or re-importation of pharmaceutical products from foreign countries into the United States could put competitive pressure on a pharmaceutical manufacturer’s ability to profitably price products, which, in turn, could adversely affect business, results of operations, financial condition and prospects. A pharmaceutical manufacturer might elect not to seek approval for or market products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue generated from product sales. It is also possible that other legislative proposals having similar effects will be adopted.

 

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Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing and leadership. No one can be sure whether future changes to the regulatory environment will be favorable or unfavorable to business prospects. For example, average review times at the FDA for marketing approval applications can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.

 

Regulation in the European Union

 

The EU, for example, there is a centralized approval procedure that authorizes marketing of a product in all countries of the EU, which includes most major countries in Europe. If this procedure is not used, approval in one country of the European Union can be used to obtain approval in another country of the EU under two simplified application processes, the mutual recognition procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the European registration procedures, pricing and reimbursement approvals are also required in most countries.

 

Other Regulations

 

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances and biological materials. We may incur significant costs to comply with such laws and regulations now or in the future.

 

Reimbursement

 

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that can require the provision of supporting scientific, clinical and cost effectiveness data for the use of drug or biologic products to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or similar regulatory authorities outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers operating costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower prices than in the U.S.

 

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, but also have their own methods and approval process from Medicare coverage and reimbursement determinations. It is difficult to predict what third party payors will decide with respect to coverage and reimbursement for new drug and biologic product candidates. An inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products could have a material adverse effect on a pharmaceutical manufacturer’s operating results, ability to raise capital needed to commercialize products and overall financial condition.

 

Reimbursement may impact the demand for, and/or the price of, any product which obtains marketing approval. Even if coverage is obtained for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications. Patients are unlikely to use products unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of the products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available.

 

The U.S. government, state legislatures and foreign governmental entities have shown significant interest in implementing cost containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and coverage and requirements for substitution of generic products for branded prescription drugs. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit our products from coverage and limit payments for pharmaceuticals.

 

In addition, it is expected that the increased emphasis on managed care and cost containment measures in the United States by third-party payors and government authorities will continue and place further pressure on pharmaceutical pricing and coverage. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more drug products that gain regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

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Employees

 

As of May 31, 2019, CBM had 1 full-time employee, 0 part-time employees and 2 consultants.

 

CBM’s corporate headquarters are located in Kirkland, Washington.

 

Legal Proceedings

 

CBM is not currently a party to any legal proceedings. From time to time, CBM may be involved in legal proceedings or subject to claims incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on CBM because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

 

Dividends

 

CBM has never paid or declared any cash dividends on its common stock, and CBM does not anticipate paying any cash dividends on its common stock prior to the acquisition.

 

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SPHERIX MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this proxy statement. The following discussion includes certain forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.

 

Overview

 

We are a technology development company committed to the fostering of innovative ideas. Spherix Incorporated was formed in 1967 as a scientific research company and for much of our history pursued drug development including through Phase III clinical studies which were largely discontinued in 2012. In 2012 and 2013, we shifted our focus to being a firm that owns, develops, acquires and monetizes intellectual property assets. Such monetization included, but was not limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, commercializing the IP, or through the settlement and litigation of patents.  

 

Our activities generally include the acquisition and development of patents through internal or external research and development. In addition, we seek to acquire existing rights to intellectual property through the acquisition of already issued patents and pending patent applications, both in the United States and abroad. We may alone, or in conjunction with others, develop products and processes associated with technology development and monetizing related intellectual property.

 

Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have been transitioning to a technology development company. The Company made no investments in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the 3rd quarter of 2017, and with its agreement with DatChat, Inc. (“DatChat”) in March 2018 (which was subsequently terminated in August 2018). 

 

Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of CBM BioPharma, Inc. and (ii) certain securities and uncertificated rights of DatChat from an existing shareholder of CBM and DatChat for an aggregate purchase price of $350,000. The investment represents a 20% interest in CBM, and the securities and rights of DatChat that were purchased include: (a) a senior convertible note issued by DatChat with outstanding principal of $300,000, with an initial conversion rate of $0.20 per share (b) a warrant to purchase 2,250,000 shares of DatChat common stock at an initial exercise price of $0.20 per share, (c) an option to acquire an additional $300,000 senior convertible note and a warrant to purchase 1,500,000 shares of DatChat common stock, (d) a contingent option to purchase 500,000 shares of DatChat common stock from an existing DatChat stockholder, and (e) a contingent option to put 200,000 shares of DatChat common stock, subject to certain terms and conditions . The transaction is expected to close within 10 business days of the execution of the agreement.

 

In October 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with CBM BioPharma, Inc. (“CBM”), a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 3,529,411 shares of the Company’s common stock with CBM continuing as the surviving corporation in the merger.

 

On February 15, 2019, Hoth announced the pricing of its initial public offering (“IPO) of 1,250,000 shares of its common stock at an initial offering price to the public of $5.60 per share. All shares of common stock were offered by Hoth. In addition, Hoth granted the underwriters a 30-day option to purchase up to an additional 187,500 shares of common stock at the initial public offering price, less the underwriting discount, to cover over-allotments, if any.

 

Hoth’s common stock commenced trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”.  The IPO closed on February 20, 2019. As of the date of this report, the Company and its affiliates own approximately 19% of Hoth.

 

On May 15, 2019, the Company restructured the terms of its proposed merger with CBM as agreed to in an Agreement and Plan of Merger dated October 10, 2018 (the “CBM Merger Agreement”) and entered into the Asset Agreement with CBM, whereby the Company purchased CBM’s Purchased Assets (as defined in the Asset Agreement), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

 

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In connection with the execution of the Asset Agreement, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

 

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A) the Common Stock Consideration based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of the Company to 9.9% of the Company’s issued and outstanding Common Stock, and (B) such number of shares of nonvoting Series L Preferred Stock as shall be equal to the Stock Consideration less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) the Cash Consideration Amount, less the sum of (A) the amount of any Affiliate Receivables (as defined in the Asset Agreement), (B) the amount of the outstanding Indebtedness (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the Asset Agreement), if any, to the recipients thereof. The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first Qualified Financing (as defined in the Asset Agreement) after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.

  

The Company is prohibited from issuing shares of Common Stock under the Asset Agreement which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.

  

Additionally, at or prior to the closing, the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement, pursuant to which the Company shall deposit with the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.

 

The obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the Asset Agreement) to enjoin or restrict the transaction; and (d) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the Asset Agreement.

 

The Asset Agreement may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the Asset Agreement) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the Asset Agreement), (iii) by written notice by the Company or CBM if a Governmental Authority (as defined in the Asset Agreement) has issued an Order (as defined in the Asset Agreement) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the Asset Agreement), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, or (v) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the Asset Agreement) on the Company following the date of the Asset Agreement.

 

On May 10, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by the Company’s board of directors under authority granted by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April 15, 2019, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”).  Unless the context otherwise requires, all references in this report to shares of our common stock, including prices per share of our common stock, reflect the Reverse Stock Split.

 

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Results of Operations

 

Three months ended March 31, 2019 compared to three months ended March 31, 2018

 

During the three months ended March 31, 2019 and 2018, we incurred a loss from operations of approximately $0.7 million and $1.6 million, respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.3 decrease in amortization of patent portfolio, $0.2 million decrease in professional fees, $0.1 million decrease in acquisition costs and $0.2 million decrease in compensation and related expenses.

 

During the three months ended March 31, 2019, other expenses was approximately $0.4 million as compared to approximately $91,000 of other income for the comparable prior period. The increase of other expenses was primarily attributed to a $0.5 million decrease in change in fair value of warrant liabilities and investments recorded at fair value. 

 

Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended December 31, 2017

 

For the year ended December 31, 2018 and 2017, revenue was approximately $28,000 and $1.2 million, respectively. The $28,000 for the year ended December 31, 2018 is a settlement from monetization pursuant to agreement with Equitable. The $1.2 million for the year ended December 31, 2017 primarily represents the amortization of deferred revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23, 2015 and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated through a debit in the amount of approximately $3.2 million through the accumulated deficit at the beginning of 2018. The Company will not recognize revenue from the RPX license or the other patents in its portfolio in the future. 

 

For the year ended December 31, 2018 and 2017, we incurred a loss from operations of $6.9 million and $3.8 million, respectively. The increase in net loss was primarily attributed to $2.2 million increase in impairment of intangible assets, $1.2 million decrease in revenue, $0.5 million increase in professional fees and $0.1 million increase in acquisition costs related to the DatChat Merger, and was partially offset by $1.0 million decrease in compensation and related expenses.

 

For the year ended December 31, 2018 and 2017, other income was approximately $8.6 million and $0.5 million, respectively. The increase in other income was primarily attributed to $7.8 million increase in fair value of our investment in Hoth and $0.9 million increase in change in fair value of warrant liabilities, and was partially offset by $0.6 million decrease in other income.

 

Liquidity and Capital Resources

 

We continue to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While we continue to implement our business strategy, we intend to finance our activities through:  

 

managing current cash and cash equivalents on hand from our 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.

 

Our ultimate success is dependent on our ability to obtain additional financing and generate sufficient cash flow to meet our obligations on a timely basis.  Our business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies and help advance innovation. Our working capital amounted to approximately $0.9 million at March 31, 2019 and approximately $1.8 million at December 31, 2018. Absent generation of sufficient revenue from the execution of our long-term business plan, we will need to obtain additional debt or equity financing, especially if we experience downturns in our business that are more severe or longer than anticipated, or if we experience significant increases in expense levels resulting from being a publicly-traded company or operations.  If we attempt to obtain additional debt or equity financing, we cannot assume that such financing will be available to the Company on favorable terms, or at all.

 

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about our ability to continue as a going concern within one year from the date of this filing. The consolidated financial statements have been prepared assuming that we will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

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Cash Flows from Operating Activities

 

For the three months ended March 31, 2019 and 2018, net cash used in operations was approximately $0.9 million and $1.1 million, respectively. The cash used in operating activities for the three months ended March 31, 2019 primarily resulted from a net loss of $1.1 million, and partially offset by change in fair value of investment of $0.5 million. The cash used in operating activities for the three months ended March 31, 2018 primarily resulted from a net loss of $1.5 million, and partially offset by amortization expenses of $0.3 million. 

 

For the year ended December 31, 2018 and 2017, net cash used in operations was $2.7 million and $3.3 million, respectively.  The cash used in operating activities for the year ended December 31, 2018 primarily resulted from $8.2 million change in fair value of our investment in Hoth and $0.7 million change in fair value of warrant liabilities, and partially offset by a net income of $1.7 million, impairment of goodwill and intangible assets of $2.2 million and amortization of patent portfolio expenses of $1.4 million. The cash used in operating activities for the year ended December 31, 2017 primarily resulted from a net loss of $3.3 million.

 

Cash Flows from Investing Activities

 

For the three months ended March 31, 2019 and 2018, net cash provided by investing activities was approximately $1.3 million and net cash used in investing activities was approximately $1.8 million, respectively. The cash provided by investing activities primarily resulted from our sale of marketable securities for the three months ended March 31, 2019 of $4.4 million, partially offset by our purchase of marketable securities of $2.8 million. The cash used in investing activities primarily resulted from our purchase of marketable securities for the three months ended March 31, 2018 of $5.3 million, partially offset by our sale of marketable securities of $3.6 million.

 

For the year ended December 31, 2018, net cash used in investing activities was approximately $0.2 million. The cash used in investing activities primarily resulted from our purchase of marketable securities for the year ended December 31, 2018 of $14.3 million, purchase of investment at fair value of $0.9 million, and was partially offset by our sale of marketable securities of $15.1 million. For the year ended December 31, 2017, net cash provided by investing activities was approximately $1.3 million. The cash provided by investing activities primarily resulted from our sale of marketable securities for the year ended December 31, 2017 of $14.2 million, partially offset by our investment in Hoth for $0.7 million and by our purchase of marketable securities of $12.3 million.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities for the three months ended March 31, 2019 was $0. Cash provided by financing activities for the three months ended March 31, 2018 was approximately $2.7 million, which related to issuance of common stock.

 

Net cash provided by financing activities for the year ended December 31, 2018 was approximately $2.7 million, which related to issuance of 522,876 shares of its common stock. Net cash flows provided by financing activities during the year ended December 31, 2017 was $2.1 million, which related to the net proceeds from an underwritten public offering of 294,118 shares of our common stock.

 

The Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan. The Company’s working capital amounted to approximately $1.8 million at December 31, 2018. Absent generation of sufficient revenue from the execution of the Company’s long-term business plan, the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or operations. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.

 

We have filed a shelf registration statement on Form S-3 with the SEC. The registration statement, which has been declared effective, was filed in reliance on Instruction I.B.6 of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period. At the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6 may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital.

 

In connection with the consummation of the initial public offering of Hoth, the Company entered into a lock-up agreement with Hoth pursuant to which the Company has agreed not to sell any shares of Hoth common stock or common stock equivalents beneficially owned or acquired by Spherix (the “Spherix Securities”) until February 20, 2022, which is the 36 month anniversary of the consummation of Hoth’s initial public offering, provided, however (i) Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an aggregate of 10% of the initially issued Spherix Securities, provided further that the recipients of the Spherix Securities shall not be permitted to resell such Spherix Securities until six months after the date of the Initial Public Offering, (ii) beginning 12 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities, (iii) beginning 24 months after the date of Hoth’s initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, up to an additional 10% of the initially issued Spherix Securities and (iv) beginning 36 months after the date of the Hoth initial public offering, Spherix may offer, sell, contract to sell, hypothecate, pledge, dividend or distribute to its shareholders or otherwise dispose of, directly or indirectly, the Spherix Securities without any restrictions. 

 

Contractual Obligations

 

None.

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THE SPHERIX SPECIAL MEETING

 

Date, Time and Place

 

These proxy materials are delivered in connection with the solicitation by Spherix’s board of directors of proxies to be voted at the Spherix Special Meeting, which is to be held on [ ], 2019, beginning at 12:00 p.m., Eastern time, via live audio webcast by visiting Spherix’s virtual meeting website at www.virtualshareholdermeeting.com/SPEX19.

 

Purpose of the Spherix Special Meeting

 

At the Spherix Special Meeting, Spherix stockholders will be asked to consider and vote on proposals to:

 

authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock);

 

amend Spherix’s Certificate of Incorporation to decrease the number of authorized shares of Spherix common stock from 100,000,000 to 99,000,000; and

 

approve the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the proposals described above.

  

Spherix Record Date; Stock Entitled to Vote

 

Pursuant to its amended and restated bylaws, the board of directors has fixed the close of business on [                       ], 2019 as the “record date” for determination of stockholders entitled to notice and to vote at the Special Meeting and any adjournment or postponements thereof. Holders of Spherix common stock, Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock are entitled to vote at the Special Meeting. As of the record date there were [                       ] shares of Spherix common stock outstanding.

 

Each share of Spherix common stock is entitled to one vote on each matter properly brought before the Special Meeting. The outstanding Series D Preferred Stock and Series D-1 Preferred Stock are entitled to the following number of votes subject to the beneficial ownership limitations described below:

 

  Series D Preferred Stock – 0.1238 votes per preferred share; and

 

  Series D-1 Preferred Stock – 01238 votes per preferred share.

 

Beneficial ownership limitations on Spherix preferred stock prevents the conversion or voting of such preferred stock if the number of shares of common stock to be issued pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of common stock or other voting stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act, as amended, and the rules thereunder) more than:

 

4.99% of all the Common Stock outstanding at such time, in the case of Series D Preferred Stock; and

 

9.99% of all the Common Stock outstanding at such time, in the case of Series D-1 Preferred Stock.

 

The list of all stockholders of reco rd on the record date will be available at the Special Meeting and at Spherix’s executive offices at One Rockefeller Plaza, 11 th Floor, New York, New York 10020, (212) 745-1374, for the ten (10) days preceding the Special Meeting.

  

Quorum

 

At the Spherix Special Meeting, the presence in person or by proxy of the holders of shares of common stock representing a majority of the votes which could be cast by the holders of all outstanding shares of common stock and preferred stock entitled to vote at the meeting constitutes a quorum at such Special Meeting under the Delaware General Corporate Law (the “DGCL”).

 

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Votes Required for Approval

 

Proposal   Vote Required  

Broker  

Discretionary  

Vote Allowed  

Authorize, for purposes of complying with Nasdaq Listing Rule 5635(a), the issuance of shares of our common stock, including shares of our common stock underlying Series L Preferred Stock, issued by us pursuant to the terms of that certain Asset Purchase Agreement, dated May 15, 2019, by and between the Company and CBM BioPharma, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated May 30, 2019, in an amount equal to or in excess of 20% of our common stock outstanding before the issuance of such common stock and such Series L Preferred Stock (including upon the operation of anti-dilution provisions contained in such Series L Preferred Stock)   A majority of the votes cast   No

 

Approval of the amendment to Spherix’s certificate of incorporation to decrease the authorized common stock from 100,000,000 to 99,000,000

 

 

A majority of the shares entitled to vote

 

 

Yes

 

Adjournment of the Special Meeting

 

 

A majority of the votes cast

 

 

Yes

 

Q: How do Spherix stockholders vote?

 

Voting by Spherix Directors and Executive Officers

 

On the Spherix record date, directors and executive officers of Spherix and their affiliates owned and were entitled to vote 28,989 shares of Spherix common stock, or approximately 1.31% of the total voting power of the shares of Spherix common stock outstanding on that date. Spherix currently expects that its directors and executive officers will vote “FOR” the proposal to authorize the issuance of shares of Spherix common stock, vote “FOR” the proposal to amend the Spherix Certificate of Incorporation to decrease the number of authorized shares of Spherix common stock, and vote “FOR” the proposal to approve the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the proposals mentioned above.

 

Voting by Holders of Record

 

If you own shares of Spherix common stock in your own name, you are an “owner of record.” This means that you may use the enclosed proxy card to tell the persons named as proxies how to vote your shares of Spherix common stock. If you fail to vote, the proxies cannot vote your shares of Spherix common stock at the Spherix Special Meeting. If you are an owner of record then you have three voting options:

 

Internet . You can vote over the Internet by accessing the website at  www.proxyvote.com and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card.

 

Telephone . If you hold shares directly in your own name and are the holder record, you can vote by telephone by calling the toll-free number 1-800-690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If, however, you hold the shares through a broker (“street name”) and not in your own name, then follow the specific instructions included in your proxy materials, including the specific phone number to use to vote your shares by phone.

 

Mail . You can vote by mail by simply completing, signing, dating and mailing your proxy card in the postage-paid envelope included with this proxy statement.

 

Spherix requests that Spherix stockholders complete and sign the accompanying proxy and return it to Spherix as soon as possible in the enclosed postage–paid envelope. When the accompanying proxy is returned properly executed, the shares of Spherix stock represented by it will be voted at the Spherix Special Meeting in accordance with the instructions contained on the proxy card.

 

If you are a Spherix stoc kholder, your broker or other nominee does not have authority to vote on the proposal to issue Spherix common stock pursuant to the Asset Agreement. Your broker or other nominee will vote your shares held by it in “street name” with respect to these matters only if you provide instructions to it on how to vote. You should follow the directions your broker or other nominee provides.

 

The Internet and telephone proxy procedures are designed to authenticate stockholders identities, to allow stockholders to give their proxy voting instructions and to confirm that these instructions have been properly recorded. Votes directed by the Internet or telephone through such a program must be received by [       ] p.m., Eastern time, on  [                   , 2019].

 

Your vote is very important. Whether or not you plan to attend the Special Meeting, please promptly complete and return your proxy card in the enclosed envelope, or authorize the individuals named on your proxy card to vote your shares by calling the toll–free telephone number or by using the Internet as described in the instructions included with your proxy card.

 

Effects of Abstentions and Failures to Vote

 

If you are a Spherix stockholder and you fail to respond with a vote or fail to instruct your broker or other nominee how to vote on the approval of the proposed charter amendments, this will be a “non-vote” and it will have no effect on the proposal to authorize the issuance of Spherix common stock. If you are a Spherix stockholder and you fail to respond with a vote or fail to instruct your broker or other nominee how to vote on any of the Spherix stockholder proposals (e.g. the acquisition proposal) other than approval of the proposed charter amendments, it will have no effect on such proposals. Broker non-votes will be counted as present for the purpose of determining a quorum.

 

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Voting of Shares Held in Street Name

 

If your shares are held in a street name, you must instruct the organization who holds your shares how to vote your shares.  If you do not provide voting instructions, your shares will not be voted on any non-routine proposal.  This vote is called a “broker non-vote.”  If you sign your proxy card, but do not provide instructions on how your broker should vote, your broker will vote your shares as recommended by our board.  Broker non-votes are not included in the tabulation of the voting results of any of the proposals and, therefore, do not effect these proposals.

 

The proposal to approve the issuance of Spherix common stock to comply with Nasdaq Rule 5635(a) is considered non-routine and therefore brokers cannot use discretionary authority to vote shares on such proposal.  Please submit your vote instruction form so your vote is counted.

 

Stockholder’s Vote

 

You may change your vote at any time before your proxy is voted at the Special Meeting. You may do this in one of three ways:

 

by sending a notice of revocation to the corporate secretary, dated as of a later date than the date of the proxy and received prior to the Special Meeting;

 

by sending a completed proxy card bearing a later date than your original proxy card and mailing it so that it is received prior to the Special Meeting; or

 

by logging on to the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so and following the instructions on the proxy card.

 

Your attendance alone will not revoke any proxy.

 

Written notices of revocation and other communications about revoking Spherix proxies should be addressed to:

 

Spherix Incorporated

One Rockefeller Plaza, 11 th Floor

New York, NY 10020

Attention: Corporate Secretary

 

If your shares are held in street name, you should follow the instructions of your broker regarding the revocation of proxies.

 

Once voting on a particular matter is completed at the Spherix Special Meeting, a Spherix stockholder will not be able to revoke its proxy or change its vote as to that matter.

 

All shares represented by valid proxies that Spherix receives through this solicitation and that are not revoked will be voted in accordance with the instructions on the proxy card. If you do not indicate how your shares should be voted on a matter, the shares represented by your proxy will be voted as the Board recommends on each of the enumerated proposals and with regard to any other matters that may be properly presented at the Special Meeting and all matters incident to the conduct of the meeting.

 

Solicitation of Proxies

 

Spherix will bear the entire cost of soliciting proxies from its stockholders. In addition to the solicitation of proxies by mail, Spherix will request that banks, brokers and other record holders send proxies and proxy material to the beneficial owners of Spherix common stock and secure their voting instructions, if necessary. Spherix will reimburse the record holders for their reasonable expenses in taking those actions.

 

Spherix has also made arrangements with [                     ] to assist in soliciting proxies and in communicating with stockholders and has agreed to pay them a fee of approximately $[                       ] plus reasonable expenses for these services. If necessary, Spherix may also use several of its regular employees, who will not be specially compensated, to solicit proxies from Spherix stockholders, either personally or by telephone, the Internet, facsimile or letter.

 

Stockholders Sharing an Address

 

Spherix may send a single set of stockholder documents to any household at which two or more stockholders reside. This process is called “householding.” This reduces the volume of duplicate information received at your household and helps us to reduce costs. Your materials may be householded based on your prior express or implied consent. If your materials have been householded and you wish to receive separate copies of these documents, or if you are receiving duplicate copies of these documents and wish to have the information householded, you may write or call Spherix at the following address or phone number: One Rockefeller Plaza, 11 th Floor, New York, NY 10020, (212) 745-1372.

 

Other Matters to Come Before the Meeting

 

The Spherix board of directors is not aware of any business to be acted upon at the Special Meeting other than the proposal discussed herein. Pursuant to the DGCL and the Spherix amended and restated bylaws, only the business described in the notice of the Special Meeting of the stockholders will be conducted at such meeting.

 

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Proposal No. 1—Approval of the Issuance of Our Common Stock Pursuant to Nasdaq Listing Rule 5635(a)

 

Background

 

On May 15, 2019, the Company restructured the terms of its proposed merger with CBM and entered into the Asset Agreement with CBM, whereby the Company agreed to purchase CBM’s Purchased Assets (as defined in the Asset Agreement), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

 

In connection with the execution of the Asset Agreement, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

 

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A) the Common Stock Consideration based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of the Company to 9.9% of the Company’s issued and outstanding Common Stock, and (B) such number of shares of nonvoting Series L Preferred Stock as shall be equal to the Stock Consideration less the value of the shares of Common Stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) the Cash Consideration Amount, less the sum of (A) the amount of any Affiliate Receivables (as defined in the Asset Agreement), (B) the amount of the outstanding Indebtedness (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the Asset Agreement) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the Asset Agreement), if any, to the recipients thereof. The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first Qualified Financing (as defined in the Asset Agreement) after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.

 

The Company is prohibited from issuing shares of Common Stock under the Asset Agreement which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the Asset Agreement, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.

 

Additionally, at or prior to the closing, the Company, CBM, and the Escrow Agent, shall enter into the Escrow Agreement, pursuant to which the Company shall deposit with the Escrow Agent the Escrow Shares, to be held in the Escrow Account and disbursed by the Escrow Agent. Such Escrow Shares shall be held in the Escrow Account for a period of six months following Closing and shall serve as a security for, and a source of payment for, CBM’s obligations to the Company and its representatives and any successor or assign thereof under the Asset Agreement. Any Escrow Shares remaining in escrow and not subject to pending indemnification claims after the six month escrow period expires shall be released from the Escrow Account and disbursed to CBM.

   

The obligations of the Company and CBM to consummate the transaction are subject to: (i) (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the Asset Agreement) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the Asset Agreement) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the Asset Agreement) being brought by a third-party non-Affiliate (as defined in the Asset Agreement) to enjoin or restrict the transaction; and (dii) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the Asset Agreement, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the Asset Agreement.

 

In connection with the Asset Agreement, at Closing, Spherix and CBM shall enter into the Leak-Out Agreement, whereby CBM will agree that during the Restricted Period, neither CBM nor any affiliate of CBM, collectively, shall sell, dispose or otherwise transfer, directly or indirectly, during any calendar month during the Restricted Period, shares acquired pursuant to the Asset Agreement in an amount more than 5% of the issued and outstanding shares of Spherix common stock as of the end of each month immediately preceding any such disposition following the Closing Date. Such restriction shall be subject to certain exceptions, including but not limited to transfers of Stock Consideration to certain permitted transferees. Additionally, so long as the bid price of Spherix common stock is at or above $1.00 (subject to adjustment), CBM and its affiliates may sell shares: (a) at a bona-fide sales price greater than $4.25 (subject to adjustment), provided that sales on the applicable date (excluding sales made pursuant to clause (b) below, if any) do not exceed 20% of the trading volume of Spherix common stock as reported by Bloomberg, LP for such date or (b) at a bona-fide sales price greater than $5.00 (subject to adjustment). Additionally, CBM agrees that in the event that, during the Restricted Period, Spherix engages the services of an investment bank to undertake a registered offering of Spherix’s equity securities, if required by the lead investment bank, CBM shall enter into a reasonable and customary lock-up with such investment bank for a period of at least 30 days but no more than 90 days upon closing of the transaction, provided, that such lock-up shall in no event extend beyond the Restricted Period.

 

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The Asset Agreement may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the Asset Agreement) are not satisfied or waived by September 30, 2019 (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the Asset Agreement), (iii) by written notice by the Company or CBM if a Governmental Authority (as defined in the Asset Agreement) has issued an Order (as defined in the Asset Agreement) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Asset Agreement (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the Asset Agreement), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is or has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, or (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the Asset Agreement) on the Company following the date of the Asset Agreement. In the event that the Asset Agreement is terminated on or prior to December 31, 2019 (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the Asset Agreement, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to the Asset Agreement is not approved by the Company’s stockholders at a duly held special meeting of the Company, the Company will issue to CBM or CBM’s designee the Buyer Termination Fee within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

 

Series L Preferred Stock

 

The Stock Consideration is comprised of Common Stock Consideration and Series L Preferred Stock. The terms and conditions of such Series L Preferred Stock are as follows:

 

Designation and Amount

 

[                     ] ([                     ]) shares of Series L Preferred Stock constitute the class of preferred.

 

Dividends

 

The Series L Preferred Stock is entitled to receive, and the Company will pay, dividends on shares of Series L Preferred Stock equal (on an-converted basis) to and in the same form as dividends actually paid on shares of Common Stock of the Company, when, as and if such dividends are paid on shares of the Common Stock.

 

Voting Rights

 

The Series L Preferred Stock shall have no voting rights. However, as long as any shares of the Series L Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series L Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series L Preferred Stock or alter or amend the Series L Preferred Stock Certificate of Designation in the form attached as Annex C to this proxy statement, (b) amend the Company’s Certificate of Incorporation or other charter documents in any manner that adversely affects any rights of the holders of the Series L Preferred Stock, (c) increase the number of authorized shares of the Series L Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

 

Optional Conversion

 

The Series L Preferred Stock is convertible, at any time and from time to time from and after the original issue date at the option of the holder thereof, into that number of shares of Common Stock equal to the number of shares of Preferred Stock subject to conversion (not to exceed 9.9% of the number of shares of Common Stock issued and outstanding immediately prior to the closing of the transactions contemplated by the Asset Agreement).

 

Share Reserve

 

So long as shares of Series L Preferred Stock are outstanding, the Company shall reserve and keep available such number of shares of Common Stock to be sufficient to issue the Conversion Shares.

 

Subsequent Rights Offerings

 

In the event that the Company issues additional shares of Common Stock and/or any rights, warrants, or other securities exercisable or exchangeable for shares of Common Stock (the “Purchase Rights”), then each holder of Series L Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if the holder held the number of shares of Common Stock acquirable upon complete conversion of its Series L Preferred Stock immediately prior to the date of such Purchase Rights.

 

50

 

 

Liquidation Preference

 

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “ Liquidation ”), the holders of the Series L Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Common Stock would receive if the Series L Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock. The Company shall mail written notice of any such Liquidation, not less than forty-five (45) days prior to the payment date stated therein, to each holders of the Series L Preferred Stock.

 

Reasons for Seeking Stockholder Approval

 

Our common stock is listed on The Nasdaq Capital Market and, as such, we are subject to the Nasdaq Marketplace Rules. Nasdaq Rule 5635(a) requires that an issuer obtain stockholder approval prior to the issuance of common stock in certain circumstances, including for an issuance of common stock to be issued in connection with the acquisition of stock or assets of another company if such issuance would equal 20% or more of the common stock or voting power of the issuer’s outstanding voting power before the issuance (as determined pursuant to the Nasdaq Rules).

 

Consequences of Not Approving this Proposal

 

If the Company does not obtain stockholder approval for this Proposal 1, the Company will be unable to consummate the acquisition contemplated by the Asset Agreement, as stockholder approval is a condition to closing the transactions contemplated by the Asset Agreement. Thus, we will need to seek approval from our stockholders at a future special or annual meeting of stockholders for such issuance.

 

Consequences of Approving the Proposal

 

If our stockholders approve this Proposal 1, current stockholders will experience immediate and significant dilution to their current equity ownership in the Company. If this Proposal 1 is approved, the Company will issue shares of common stock to satisfy its obligations pursuant to the Asset Agreement and would reserve shares of common stock underlying the Series L Preferred Stock issuable pursuant to the Asset Agreement.

 

Interests of Directors and Executive Officers

 

Our directors and executive officers have no substantial interests, directly or indirectly, in the matters set forth in this proposal except to the extent of their ownership of shares of common stock.

 

No Appraisal Rights

 

Under Delaware law, stockholders are not entitled to appraisal rights with respect to this proposal and the Company will not independently provide stockholders with any such rights.

 

Vote Required; Recommendation of the Board of Directors

 

If a quorum is present, the approval of the issuance of shares pursuant to the Asset Agreement to comply with Nasdaq Rule 5635(a) requires the affirmative vote of a majority of the votes cast.

 

The Spherix board of directors recommends a vote “FOR” the proposal to approve, pursuant to Nasdaq Listing Rule 5635(a), the issuance of shares of the Company’s common stock, including shares underlying Series L Preferred Stock, pursuant to the Asset Agreement.

 

For a more complete description of Spherix’s reasons for the acquisition and the recommendation of the Spherix board of directors, see “The Acquisition—Spherix Board of Directors’ Recommendation” beginning on page 27.

 

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Proposal No. 2—Approval of the Amendment to the Certificate of Incorporation to Decrease the Authorized Common Stock

 

The Spherix board of directors has approved the proposed decrease in authorized common stock of Spherix from 100,000,000 to 99,000,000 for the primary purpose of reducing tax liability in the State of Delaware, and has determined that it is advisable and in the best interests of its stockholders to amend the certificate of incorporation in the form attached as Annex B to this proxy statement.

 

As a Delaware corporation, we are required to pay Delaware franchise tax. Delaware franchise tax is calculated based upon several variables, including a company’s number of total outstanding shares as compared to the company’s number of authorized shares of capital stock. The greater the difference between the number of shares outstanding and the number of shares authorized, the greater the tax liability. In order to reduce our Delaware franchise tax liability, our Board has determined that it is in our best interest and that of our stockholders to amend our Certificate of Incorporation to decrease the number of authorized shares of our common stock from 100,000,000 shares to 99,000,000 shares. Subject to changes in the franchise tax rates by Delaware, we believe this proposed amendment of our amended and restated certificate of incorporation will result in annual Delaware franchise tax savings in the future. Such decrease still maintains an adequate reserve of authorized but unissued shares to save time and money in responding to future events requiring the issuance of additional shares of our common stock, such as private placements or equity offerings. The proposed share decrease will not change the number of shares of common stock outstanding, nor will it have any immediate effect or change to the rights of current holders of the Company’s common stock or their percentage voting or ownership interest of the Company. The share decrease will not change the par value of the common stock or the number of shares of preferred stock that the Company is authorized to issue.

 

If approved, the proposed amendment to our certificate of incorporation to decrease the authorized shares of common stock will be effective upon filing with the Secretary of State of the State of Delaware. However, even if our stockholders approve the proposed amendment, our Board retains discretion under Delaware law not to implement the proposed amendment. If our Board were to exercise such discretion, the number of authorized shares would remain at the current level.

 

If approved, the amendment to the certificate of incorporation will be effective upon the filing of such amendment to the Certificate of Incorporation in the form attached as Annex B with the Secretary of State of Delaware with such filing to occur, if at all, at the sole discretion of the Board.

 

Vote Required; Recommendation of the Board of Directors

 

If a quorum is present, the approval of the amendment to the certificate of incorporation of Spherix to decrease the authorized common stock requires the affirmative vote of a majority of the shares entitled to vote.

 

The Spherix board of directors recommends a vote “ FOR ” the proposal to approve the amendment to the certificate of incorporation to decrease the authorized common stock.

 

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Proposal No. 3—Approval to Adjourn the Special Meeting

 

For this proposal, Spherix is also referred to as “we,” “us,” or “our.”

 

The Spherix board of directors has determined that the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the proposals described herein, is advisable and in the best interests of Spherix and its stockholders and has approved the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the proposals described herein.

 

Vote Required; Recommendation of the Board of Directors

 

The Special Meeting may be adjourned by the affirmative vote of a majority of the votes cast. Abstentions will have no direct effect on the outcome of this proposal.

 

The Spherix board of directors recommends a vote “ FOR ” the proposal to approve the adjournment of the Special Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the proposals.

 

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Management of Spherix

 

Directors

 

The following table sets forth the name, age and position of each current director and officer of Spherix.

 

            Director
Name   Age   Position   Since
Robert J. Vander Zanden (1)(2)(3)   73   Director and Chairman of the Board   2004
Anthony Hayes   51   Chief Executive Officer and Director   2013
Tim S. Ledwick (1)(2)   61   Director   2015
Eric Weisblum (1)(2)(3)   49   Director   2016
Gregory James Blattner (2)(3)   41   Director   2018

 

(1) Member of our Audit Committee.
   
(2) Member of our Compensation Committee.
   
(3) Member of our Nominating Committee.

 

The biographies of our current directors are as follows:

 

Dr. Robert J. Vander Zanden

 

Dr. Robert J. Vander Zanden, a Board member since 2004, having served as a Vice President of R&D at Kraft Foods International, brings a long and distinguished career in applied technology, product commercialization, and business knowledge of the food science industry to us. Additionally, Mr. Vander Zanden has specific experience in developing organizations designed to deliver against corporate objectives. Dr. Vander Zanden holds a Ph.D. in Food Science and an M.S. in Inorganic Chemistry from Kansas State University, and a B.S. in Chemistry from the University of Wisconsin - Platteville, where he was named a Distinguished Alumnus in 2002. In his 30-year career, he has been with ITT Continental Baking Company as a Product Development Scientist; with Ralston Purina’s Protein Technology Division as Manager Dietary Foods R&D; with Keebler as Group Director, Product and Process Development (with responsibility for all corporate R&D and quality); with Group Gamesa, a Frito-Lay Company, as Vice President, Technology; and with Nabisco as Vice President of R&D for their International Division. With the acquisition of Nabisco by Kraft Foods, he became the Vice President of R&D for Kraft’s Latin American Division. Dr. Vander Zanden retired from Kraft Foods in 2004. He currently holds the title of Adjunct Professor and Lecturer in the Department of Food, Nutrition and Packaging Sciences at Clemson University, where he also is a member of their Industry Advisory Board. His focus on achieving product and process innovation through training, team building and creating positive working environments has resulted in his being recognized with many awards for product and packaging innovation. Mr. Vander Zanden executive experience provides him with valuable business expertise, which the Board believes qualifies him to serve as a director of the Company.

 

Anthony Hayes

 

Mr. Anthony Hayes, a director and Chief Executive Officer since 2013, has served as the Chief Executive Officer of North South since March 2013 and since June 2013, as a consultant to our Company. Mr. Hayes was the fund manager of JaNSOME IP Management LLC and JaNSOME Patent Fund LP from August 2012 to August 2013, both of which he co-founded. Mr. Hayes was the founder and Managing Member of Atwater Partners of Texas LLC from March 2010 to August 2012 and a partner at Nelson Mullins Riley & Scarborough LLP from May 1999 to March 2010. Mr. Hayes received his Juris Doctorate from Tulane University School of Law and his B.A. in economics from Mary Washington College. The Board believes Mr. Hayes is qualified to serve as a director of the Company based on his expansive knowledge of, and experience in, the patent monetization sector, as well as because of his intimate knowledge of the Company through his service as Chief Executive Officer. On March 10, 2017, as a result of Mr. Frank Reiner’s resignation as Chief Financial Officer, Mr. Hayes began serving as the Company’s Principal Accounting Officer.

 

Tim S. Ledwick

 

Mr. Tim S. Ledwick, who joined as a director in 2015, is currently the Chief Financial Officer of Management Health Solutions, a private equity-backed company that provides software solutions and services to hospitals focused on reducing costs through superior inventory management practices. In addition, since 2012 he has served on the board and as Chair of the Audit Committee of Telkonet, Inc. (TKOI) a smart energy management technology company. From 2007 to 2011, Mr. Ledwick provided CFO consulting services to AdvantageResourcing (former Advantage Human Resourcing, Inc.) a $150 million services firm and, in addition, from 2007-2008 also acted as special advisor to The Dellacorte Group, a middle market financial advisory firm focused on transactions between $100 million and $1 billion. From 2002 through 2006, Tim was a member of the Board of Directors and Executive Vice President-CFO of Dictaphone Corporation playing a lead role in developing a business plan which revitalized the company, resulting in the successful sale of the firm and delivering a seven times return to shareholders. From 2001-2002, Mr. Ledwick was brought on as CFO to lead the restructuring efforts of Lernout & Hauspie Speech Products, a Belgium-based NASDAQ listed speech technology company, whose market cap had at one point reached a high of $9 billion. From 1999 through 2001, he was CFO of Cross Media Marketing Corp, an $80 million public company headquartered in New York City, playing a lead role in the firm’s acquisition activity, tax analysis and capital raising. Mr. Ledwick is a member of the Connecticut Society of Certified Public Accountants and received his B.B.A. in accounting from The George Washington University and his M.S. in Finance from Fairfield University. The Board believes that Mr. Ledwick’s executive experience and financial expertise qualifies him to serve as a director of the Company. 

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Eric Weisblum

 

Mr. Eric Weisblum, who joined as a director in 2016, is currently the Chief Executive Officer and a director of Point Capital Inc. (OTC:PTCI), where he has been employed since 2013 and prior to that was President of Sableridge Capital for five years. In addition to being an active investor in both public and private companies, Mr. Weisblum provides managerial assistance and guidance to help companies execute on their business strategy. Mr. Weisblum has reviewed, invested and worked with numerous public and private companies, and he has overseen the execution of M&A strategy in the micro-cap and small cap markets. Mr. Weisblum also co-founded Whalehaven, a hedge fund that has invested in over 100 public companies to date. Prior to Whalehaven, Mr. Weisblum was employed by M.H. Meyerson & Co. Inc., a full-service financial and investment-banking firm, with individual and institutional accounts. At M.H. Meyerson, Mr. Weisblum traded equities on behalf of numerous established funds, and originated, structured, and placed structured financing transactions. As a result, Mr. Weisblum brings with him nearly 20 years of experience in structuring and trading financial instruments. Mr. Weisblum holds a B.A. from the University of Hartford’s Barney School of Business. The Company believes Mr. Weisblum’s extensive experience with corporate and M&A strategy make him a qualified appointee as director.

 

Gregory James Blattner

 

Mr. Gregory James Blatter, who joined as a director in 2018, has nearly five years of experience in the alternative investment technology industry. Since January 2014, he has served as the Director of Business Development at Agio, a progressive managed information technology and cybersecurity services provider, where he is responsible for sales and account management of enterprise accounts. Prior to Agio, from May 2013 to December 2013, Mr. Blattner was a business development manager for the Eikon platform at Thomson Reuters. From 2010 to 2013, Mr. Blattner was a sales manager at American Express for its foreign exchange business. From 2005 to 2009, Mr. Blattner held various positions at JPMorgan, first in the operational risk management arm of the investment bank and later in Foreign Exchange product sales for its treasury services business. From 2000 to 2004, Mr. Blattner was an Associate at Morgan Stanley’s corporate treasury funding desk. He earned a bachelor’s degree from Iona College. The Company believes Mr. Blattner’s extensive experience in technology and operations solutions make him a qualified appointee as director.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act, requires our directors and executive officers, and anyone who beneficially owns ten percent (10%) or more of our Common Stock, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of Common Stock. Anyone required to file such reports also need to provide us with copies of all Section 16(a) forms they file.

 

Based solely upon a review of (i) copies of the Section 16(a) filings received during or with respect to 2018 and (ii) certain written representations of our officers and directors, we believe that all filings required to be made pursuant to Section 16(a) of the Exchange Act during and with respect to 2018 were filed in a timely manner.

 

Code of Ethics

 

We have adopted a Code of Ethics, which is available on our website at www.spherix.com.

 

Audit Committee

 

We have a standing Audit Committee. The Audit Committee members are Mr. Ledwick, Chair, Dr. Vander Zanden and Mr. Weisblum. The Committee has authority to review our financial records, deal with our independent auditors, recommend financial reporting policies to the Board, and investigate all aspects of our business. The Audit Committee Charter is available for your review on our website at www.spherix.com. Each member of the Audit Committee satisfies the independence requirements and other criteria established by NASDAQ and the SEC applicable to audit committee members. The Board has determined that Mr. Ledwick meets the requirements of an audit committee financial expert as defined in the SEC and NASDAQ rules.

 

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Compensation Committee

 

The Compensation Committee oversees the compensation for our executive officers and recommends various incentives for key employees to encourage and reward increased corporate financial performance, productivity and innovation. Its current members Dr. Vander Zanden, Mr. Blattner, Mr. Weisblum (Chairman), and Mr. Ledwick. The Compensation Committee Charter is available on our website at www.spherix.com.

 

Nominating Committee

 

The Nominating Committee presents and recommends to the Board, for approval by the Board, the proposed Board of Directors for election by the stockholders. Its members are Mr. Weisblum, Dr. Vander Zanden and Mr. Blattner (Chairman). The Nominating Committee Charter is available on our website at www.spherix.com. The Nominating Committee does not have any formal minimum qualifications for director candidates. The Nominating Committee identifies candidates by first evaluating current members of the Board who are willing to continue in service. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Nominating Committee then identifies the desired skills and experience of a new candidate(s).

 

Among other factors, when considering a prospective candidate, the Nominating Committee considers a candidate’s business experience and skills, attributes pertinent to Company business, personal integrity and judgment, and possible conflicts of interest. To date, the Nominating Committee has not utilized the services of any search firm to assist it in identifying director candidates. The Nominating Committee’s policy is to consider director candidate recommendations from its stockholders which are received prior to any annual meeting of stockholders, including confirmation of the candidate’s consent to serve as a director.

 

Stockholder Communications with the Board of Directors

 

As a stockholder of Spherix, you may communicate in writing at any time with the entire board of directors or any individual director (addressed to “Board of Directors” or to a named director), c/o Spherix Incorporated, Attention: Hayley Behrmann, One Rockefeller Plaza, 11th Fl., New York, NY 10020, or via e-mail at info@spherix.com. All appropriate communications will be promptly relayed to the appropriate Directors. Our administrator will coordinate all responses.

 

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EXECUTIVE COMPENSATION

 

The following Summary of Compensation table sets forth the compensation paid by our Company during the two years ended December 31, 2018, to all Executive Officers earning in excess of $100,000 during any such year.

 

Summary of Compensation

  

Name and Principal Position   Year   Salary ($)     Bonus ($)     Stock
Awards ($)
    Option
Awards ($)
    Non-Equity Incentive Plan Compensation ($)(1)     Change in Pension
Value and Non-Qualified Deferred Compensation Earnings ($)
    All Other Compensation ($)     Total ($)  
Anthony Hayes, Chief Executive Officer, Director,   2018     349,010       (3 )                                   349,010  
Principal Accounting Officer and Principal Financial Officer (2)   2017     349,430       490,000       88,499       3,045                         930,974  
Frank Reiner, Interim Chief Financial Officer (until March 10, 2017) (4)   2017     53,817                                     289,504       343,321  

 

(1) Awards pursuant to the Spherix Incorporated 2013 Incentive Compensation Plan and 2014 Plan.
   
(2) On March 14, 2017, 8,464 restricted stock units (“RSUs”) were delivered to Anthony Hayes. 5,480 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.
   
(3) Amount of 2018 bonus is not calculable as of the date of this report.
   
(4) All stock options to Mr. Reiner were granted in accordance with ASC Topic 718. On March 10, 2017, Mr. Reiner and the Company entered into a separation agreement and general release, pursuant to which Mr. Reiner received payments due to him under the terms of his employment agreement as well as a lump sum payment of $18,504 in lieu of his right to continue health insurance coverage under the Company’s group health plan.

 

Narrative Disclosure to Summary Compensation Table

 

Executive Officer Agreements

 

On April 1, 2016, we entered into an employment agreement with Mr. Anthony Hayes pursuant to which Mr. Hayes serves as the Chief Executive Officer for a period of one year, subject to renewal. In consideration for his employment, we agreed to pay Mr. Hayes a base salary of $350,000 per annum. Mr. Hayes will be entitled to receive an annual bonus in an amount equal to up to 100% of his base salary if we meet or exceed certain criteria adopted by our Compensation Committee. We further agreed to grant executive restricted stock units, pursuant to the Corporation’s 2014 Equity Incentive Plan, with respect to 27,886 shares of the Company’s common stock. One-half of the grant was to vest if as of December 31, 2016, the Corporation has pro-forma cash of at least five million dollars ($5,000,000) (cash plus any cash used for a Board-approved extraordinary acquisition or transaction reconstituting the Company’s core operations, less accrued bonuses) and one-half shall vest upon the Company meeting certain agreed upon criteria. As of December 31, 2016, 13,943 restricted stock units were vested and 13,943 restricted stock units were forfeited.

 

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On October 19, 2017, the Company entered into an amendment to the employment agreement of Mr. Hayes, pursuant to which, effective January 1, 2017, Mr. Hayes was entitled to receive an annual cash bonus in an amount equal to up to $250,000 if the Company meets or exceeds certain criteria adopted by the Compensation Committee of the Company’s Board of Directors. In addition, Mr. Hayes was awarded a restricted stock unit grant for 7,059 shares of the Company’s common stock under the Company’s 2014 Equity Incentive Plan. Such grant shall vest in installments, in tandem with the satisfaction of the same criteria to which the cash bonus is subject. If all criteria are met, 100% of the grant of restricted stock units shall vest upon the determination of the Compensation Committee, which in any event shall not be later than March 15, 2018. All other terms of Mr. Hayes’ employment agreement, effective as of April 1, 2016, remain in full force and effect.

 

Potential Payment upon Termination or Change in Control

 

Under the April 1, 2016 employment agreement with Mr. Hayes, we have agreed to, in the event of termination by us without “cause” or pursuant to a change in control, grant Mr. Hayes, in addition to reimbursement of any documented, unreimbursed expenses incurred prior to such date, (i) any unpaid compensation and vacation pay accrued during the term of the Employment Agreement, and any other benefits accrued to him under any of our benefit plans outstanding at such time, (ii) twelve (12) months base salary at the then current rate to be paid in a single lump sum within thirty (30) days of Mr. Hayes’ termination, (iii) continuation for a period of twelve (12) months of any benefits as extended to our executive officers from time to time, including but not limited to group health care coverage and (iv) payment on a pro rata basis of any annual bonus or other payments earned in connection with any bonus plans to which Mr. Hayes was a participant as of the date of termination. In addition, any options or restricted stock shall be immediately vested upon termination of Mr. Hayes’s employment without “cause” or pursuant to a change in control.

 

Under the March 14, 2014 employment agreement with Mr. Frank Reiner, in the event of a termination or non-renewal of his employment without “cause” or pursuant to the consummation of a change in control, we have agreed to grant Mr. Reiner in addition to reimbursement of any documented, unreimbursed expenses incurred prior to such date, (i) any unpaid compensation and vacation pay accrued during two years commencing on March 14, 2014 or any then applicable extension of the term of Mr. Reiner’s employment, and any other benefits accrued to him under any of our benefit plans outstanding at such time, (ii) twelve (12) months’ base salary at the then current rate to be paid in a single lump sum within sixty (60) days of Mr. Reiner’s termination, (iii) continuation for a period of twelve (12) months of any benefits as extended to our executive officers from time to time and (iv) payment on a pro rata basis of any annual bonus or other payments earned in connection with any bonus plans to which Mr. Reiner was a participant as of the date of termination. In addition, any options or restricted stock shall be immediately vested upon termination or non-renewal of Mr. Reiner’s employment without “cause” or pursuant to a change in control. In March 2017, Mr. Reiner and the Company agreed not to renew Mr. Reiner’s employment agreement and Mr. Reiner received his non-renewal compensation. On March 10, 2017, Mr. Reiner and the Company entered into a separation agreement and general release, pursuant to which Mr. Reiner received payments due to him under the terms of his employment agreement as well as a lump sum payment of $18,504 in lieu of his right to continue health insurance coverage under the Company’s group health plan.

 

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Outstanding Equity Awards at December 31, 2018

  

    Option Awards
    Number of Securities     Number of Securities            
    Underlying Unexercised     Underlying Unexercised     Option     Option
Name   Options (#)
Exercisable
    Options (#)
Unexercisable
    Exercise
Price ($)
    Expiration
Date
Anthony Hayes     9,290               -     $ 571.71     4/1/2023
      3,096       -     $ 230.95     4/3/2019
      1,239       -     $ 144.54     7/15/2019
      930       -     $ 8.42     5/2/2021
      930       -     $ 4.34     5/30/2022

 

Director Compensation

 

The following table summarizes the compensation paid to non-employee directors during the year ended December 31, 2018.

 

    Fees earned or
paid in cash ($)
    Stock
Awards ($)
(1)
    Option
Awards ($)
(1)
    Non-Equity Incentive Plan
Compensation ($)
    Change in Pension
Value and Non-Qualified Deferred
Compensation
Earnings ($)
    All Other
Compensation($)
    Total
($)
 
Eric Weisblum (2)     60,000       26,600       57,613                         144,213  
Robert J. Vander Zanden (3)     60,000       26,600       57,613                         144,213  
Tim Ledwick (4)     60,000       26,600       57,613                         144,213  
Gregory Blattner (5)     39,561             45,649                         85,210  

 

(1) All stock options were granted in accordance with ASC Topic 718.
   
(2) Mr. Weisblum was paid $60,000 in cash compensation for his service as a director in 2018. In addition, in February 2018, Mr. Weisblum was granted options to purchase 11,765 shares of Common Stock, with a term of ten years and an exercise price of $6.38, vesting with 50% vesting immediately and the remaining 50% vesting on the six months anniversary of the date of issue.
   
(3) Mr. Vander Zanden was paid $60,000 in cash compensation for his service as a director in 2018. In addition, in February 2018, Mr. Vander Zanden was granted options to purchase 11,765 shares of Common Stock, with a term of ten years and an exercise price of $6.38, vesting with 50% vesting immediately and the remaining 50% vesting on the six months anniversary of the date of issue.
   
(4) Mr. Ledwick was paid $60,000 in cash compensation for his service as a director in 2018. In addition, in February 2018, Mr. Ledwick was granted options to purchase 11,765 shares of Common Stock, with a term of five years and an exercise price of $6.38, vesting with 50% vesting immediately and the remaining 50% vesting on the six months anniversary of the date of issue.
   
(5) Mr. Blattner was paid $39,561 in cash compensation for his service as a director in 2018. In addition, in May 2018, Mr. Blattner was granted options to purchase 11,765 shares of Common Stock, with a term of five years and an exercise price of $4.42, vesting with 50% vesting immediately and the remaining 50% vesting on the one year anniversary of the date of issue.

  

Non-employee directors received the following annual compensation for service as a member of the Board for the fiscal year ended December 31, 2018:

 

Annual Retainer   $ 60,000     To be paid in cash in four equal quarterly installments.
Stock Options     50,000     Options to acquire shares of our Common Stock, pursuant to and subject to the available number of shares under the 2014 Plan, to be granted on the date of our Special Meeting. The options will have an exercise price equal to the closing price on the trading day immediately preceding the date of issuance and be exercisable for a period of ten (10) years with 50% vesting immediately on the date of issue and the remaining 50% vesting on the six month anniversary date of the issue so long as the optionee has not been removed as a director of Spherix for cause.
Additional Retainer   $ 5,000     To be paid to the Chairman of the Board upon election annually.

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2018.

 

Plan Category   Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)     Weighted average exercise price of outstanding options, warrants and rights     Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1)) (2)  
Equity compensation plans approved by security holder     124,381     $ 209.22       12,585  
Equity compensation plans not approved by security holder     -       -       -  
      124,381               12,585  

 

(1) Consists of options to acquire 24,840 shares of our common stock under the 2013 Equity Incentive Plan and 99,541 under the 2014 Equity Incentive Plan.
   
(2) Consists of shares of Common Stock available for future issuance under our equity incentive plans.

 

Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management

 

The following tables set forth certain information concerning the number of shares of our Common Stock owned beneficially as of [______, 2019] by (i) our officers and directors as a group and (ii) each person (including any group) known to us to own more than 5% of our Common Stock. As of [______ , 2019] there were 2,205,819 shares of Common Stock outstanding, 4,725 shares of Series D Preferred Stock outstanding and 834 shares of Series D-1 Preferred Stock Outstanding. Unless otherwise indicated, it is our understanding and belief that the stockholders listed possess sole voting and investment power with respect to the shares shown.

 

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    Common Stock
Beneficially
Owned(2)
    Series D Preferred
Stock(2)
    Series D-1 Preferred
Stock(2)
 
Name of Beneficial Owner(1)   Shares     Percentage     Shares     Percentage     Shares     Percentage  
                                     
Robert J. Vander Zanden     22,905 (3)     1.13 %                        
Anthony Hayes     24,669 (4)     1.22 %                        
Tim S. Ledwick     21,614 (5)     1.08 %                        
Eric Weisblum     18,332 (6)     *                          
Gregory James Blattner     11,766 (7)     *                                  
All Directors and Officers as a Group (5 persons)             4.76 %                        
                                                 
Stockholders                                                
Daniel W. Armstrong 611 Loch Chalet Ct Arlington, TX 76012-3470                 1,350       28.57 %            
                                                 
R. Douglas Armstrong 570 Ocean Dr. Apt 201 Juno Beach, FL 33408-1953                 450       9.52 %            
                                                 
Thomas Curtis
4280 10 Oaks Road
Dayton, MD 21036-1124
                900       19.05 %            
                                                 
Francis Howard
376 Victoria Place
London, SW1 V1AA
United Kingdom
                900       19.05 %            
                                                 
Charles Strogen
6 Winona Ln
Sea Ranch Lakes, FL
33308-2913
                1,125       23.81 %            
                                                 
Chai Lifeline Inc.
151 West 30th Street, Fl 3
New York, NY 10001-4027
                            834       100 %

 

* Less than 1% of the outstanding shares of the Company Common Stock.

 

(1) Under Rule 13d-3 of the Exchange Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares: (i) voting power, which includes the power to vote or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

 

(2) Based on 2,205,819 shares of our Common Stock outstanding as of [______, 2019] and takes into account the beneficial ownership limitations governing the Series D Preferred Stock and Series D-1 Preferred Stock. Beneficial ownership limitations on our Series D Preferred Stock prevent the conversion or voting of the stock if the number of shares of Common Stock to be issued pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of Common Stock owned by the same holder at the time, the number of shares of Common Stock which would result in such holder beneficially owning more than 4.99% of all of the Common Stock outstanding at such time, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to us. Beneficial ownership limitations on our Series D-1 Preferred Stock prevent the conversion or voting of the stock if the number of shares of Common Stock to be issued pursuant to such conversion or to be voted would exceed, when aggregated with all other shares of Common Stock owned by the same holder at the time, the number of shares of Common Stock which would result in such holder beneficially owning more than 9.99% of all of the Common Stock outstanding at such time. 

 

(3) Includes 4,944 shares of Common Stock, 17,961 options for purchase of Common Stock exercisable as of [______, 2019].

 

(4) Includes 12,280 shares of Common Stock, and 12,389 options for purchase of Common Stock exercisable as of [______, 2019].

 

(5) Includes 7,059 shares of Common Stock, 14,555 options for purchase of Common Stock exercisable as of [______, 2019].

 

(6) Includes 4,706 shares of Common Stock, 13,626 options for purchase of Common Stock exercisable as of [______, 2019].

 

(7) Includes 11,766 options for purchase of Common Stock exercisable as of [______, 2019]. 

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Effective January 1, 2013, and as amended and restated on June 9, 2017, the Company and Equity Stock Transfer, LLC entered into a Rights Agreement, which was subsequently assigned to Transfer Online Inc. as Rights Agent on June 20, 2016. The Rights Agreement provides each stockholder of record a dividend distribution of one “right” for each outstanding share of Common Stock. Rights become exercisable at the earlier of ten days following: (1) a public announcement that an acquirer has purchased or has the right to acquire 10% or more of our Common Stock, or (2) the commencement of a tender offer which would result in an offer or beneficially owning 10% or more of our outstanding Common Stock. All rights held by an acquirer or offer or expire on the announced acquisition date, and all rights expire at the close of business on December 31, 2020, subject to further extension. Each right entitles a stockholder to acquire, at a price of $7.46 per one nineteen-hundredths of a share of our Series A Preferred Stock, subject to adjustments, which carries voting and dividend rights similar to one share of our Common Stock. Alternatively, a right holder may elect to purchase for the stated price an equivalent number of shares of our Common Stock at a price per share equal to one-half of the average market price for a specified period. In lieu of the stated purchase price, a right holder may elect to acquire one-half of the Common Stock available under the second option. The purchase price of the preferred stock fractional amount is subject to adjustment for certain events as described in the Agreement. At the discretion of a majority of the Board of Directors and within a specified time period, we may redeem all of the rights at a price of $0.001 per right. The Board may also amend any provisions of the Agreement prior to exercise.

 

Certain Relationships and Related Transactions, Director Independence

 

The current Board of Directors consists of Mr. Tim S. Ledwick, Mr. Anthony Hayes, Dr. Robert J. Vander Zanden, Mr. Eric Weisblum and Mr. Gregory James Blattner. The Board of Directors has determined that Dr. Vander Zanden, Mr. Ledwick, Mr. Weisblum and Mr. Blattner are independent directors within the meaning of the applicable NASDAQ rules. Our Audit, Compensation, and Nominating Committees consist solely of independent directors.

 

On June 30, 2015, our Board of Directors appointed Frank Reiner as Interim Chief Financial Officer. Pursuant to Mr. Reiner’s employment agreement with the Company, dated as of March 14, 2014, as amended, the term of Mr. Reiner’s employment was one year and automatically extended for additional one-year terms unless no less than 60 days’ prior written notice of non-renewal is given by Mr. Reiner or us. Mr. Reiner’s base salary under his employment agreement was $235,000 per year, but in connection with being named Interim Chief Financial Officer, the Board of Directors authorized an amendment to Mr. Reiner’s employment agreement to increase Mr. Reiner’s base salary to $271,000. On March 10, 2017, Mr. Reiner and the Company entered into a separation agreement and general release, pursuant to which Mr. Reiner received payments due to him under the terms of his employment agreement as well as a lump sum payment of $18,504 in lieu of his right to continue health insurance coverage under the Company’s group health plan.

 

We have not adopted written policies and procedures specifically for related person transactions. Our Board of Directors is responsible to approve all related party transactions, and approved each of the transactions set forth above.

 

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Documents Incorporated by Reference

 

The SEC allows us to “incorporate by reference” information into this proxy statement. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be a part of this Proxy Statement, except for any information that is superseded by information that is included directly in this Proxy Statement or in any other subsequently filed document that also is incorporated by reference herein.

 

This Proxy Statement incorporates by reference our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 12, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019, filed with the SEC on May 15, 2019.

 

 

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DESCRIPTION OF CAPITAL STOCK OF SPHERIX

 

We have summarized below the material terms of Spherix’s common stock to be issued upon consummation of the acquisition. This summary is qualified in its entirety by reference to Delaware law, the Spherix certificate of incorporation and the bylaws, which we encourage you to read. For greater detail on the provisions that may be important to you, please read the Spherix amended and restated certificate of incorporation, as well as its amendments, and the amended and restated bylaws of Spherix, filed as Exhibits 3.1, 3.2, 3.4 and 3.3 respectively, to Spherix’s Annual Report on Form 10-K filed with the SEC on March 12, 2019.

 

General

 

The following description of common stock summarizes the material terms and provisions of the common stock and is not complete. For the complete terms of our common stock, please refer to our Amended and Restated Certificate of Incorporation, which may be further amended from time to time, any certificates of designation for our preferred stock, and our amended and restated bylaws, as amended from time to time. The Delaware General Corporation Law (“DCGL”) may also affect the terms of these securities.

 

On April 24, 2014, we filed an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, which was previously approved by our stockholders at our annual meeting held on February 6, 2014.

 

The Amended and Restated Certificate of Incorporation, among other things, increases our authorized number of shares of common stock to 200,000,000 shares from 50,000,000 shares. The Amended and Restated Certificate of Incorporation also requires us to indemnify our directors, officer and agents and advance expenses to such persons to the fullest extent permitted by Delaware law.

 

Additionally, on April 22, 2014, we filed a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating our Series B Convertible Preferred Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock and returning them to authorized but undesignated shares of our preferred stock. In addition, on January 1, 2013, we filed a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating our Series A Preferred Stock and returning them to authorized but undesignated shares of our preferred stock. 

 

Amended and 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.

 

On May 10, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by the Company’s board of directors under authority granted by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April 15, 2019, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”). Unless the context otherwise requires, all references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect the Reverse Stock Split. Fractional shares were not issued, and the final number of shares were rounded up to the next whole share.

 

Common Stock

 

Subject to the rights of the preferred stock, holders of common stock are entitled to receive such dividends as are declared by our board of directors out of funds legally available for the payment of dividends. We presently intend to retain any earnings to fund the development of our business. Accordingly, we do not anticipate paying any dividends on our common stock for the foreseeable future. Any future determination as to declaration and payment of dividends will be made at the discretion of our board of directors.

 

In the event of the liquidation, dissolution, or winding up of the Company, each outstanding share of our common stock will be entitled to share equally in any of our assets remaining after payment of or provision for our debts and other liabilities.

 

Holders of common stock are entitled to one vote per share on matters to be voted upon by stockholders. There is no cumulative voting for the election of directors, which means that the holders of shares entitled to exercise more than fifty percent (50%) of the voting rights in the election of directors are able to elect all of the directors.

 

Holders of common stock have no preemptive rights to subscribe for or to purchase any additional shares of common stock or other obligations convertible into shares of common stock which we may issue after the date of this proxy statement.

 

All of the outstanding shares of common stock are fully paid and non-assessable. Holders of our common stock are not liable for further calls or assessments.

 

The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.

 

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Preferred Stock

 

Our Amended and Restated Certificate of Incorporation authorizes 50,000,000 shares of preferred stock. Our board of directors is authorized, without further stockholder action, to establish various series of such preferred stock from time to time and to determine the rights, preferences and privileges of any unissued series including, among other matters, any dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms, the number of shares constituting any such series, and the description thereof and to issue any such shares. Although there is no current intent to do so, our board of directors may, without stockholder approval, issue shares of an additional class or series of preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of the common stock.

 

One of the effects of the preferred stock may be to enable the board of directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of the management.

 

The DGCL provides that the holders of preferred stock will have the right to vote separately as a class on any proposal involving certain fundamental changes in the rights of holders of that series of preferred stock. This right is in addition to any voting rights provided for in the applicable certificate of designation.

 

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. Preferred stock could be issued quickly with terms designed to delay or prevent a change in control of our Company or make removal of management more difficult. Additionally, the issuance of preferred stock could have the effect of decreasing the market price of our common stock.

 

The Company had designated separate series of its capital stock as of December 31, 2018 and December 31, 2017 as summarized below:

 

    Number of Shares Issued            
    and Outstanding as of            
    December 31,
2018
    December 31,
2017
    Par Value     Conversion Ratio
Series “D”     4,725       4,725       0.0001     0.53:1
Series “D-1”     834       834       0.0001     0.53:1

 

Series D Convertible Preferred Stock

 

In connection with the acquisition of North South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred Stock (“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock has a stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and the conversion limitations described below. At no time may shares of Series D Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of issued and outstanding Common Stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to the Company. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.

 

As of December 31, 2018 and 2017, 4,725 shares of Series D Preferred Stock remained issued and outstanding.

 

Series D-1 Convertible Preferred Stock

 

The Company’s Series D-1 Convertible Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D-1 Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation. 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 December 31, 2018 and 2017, 834 shares of Series D-1 Preferred Stock remained issued and outstanding. 

 

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INDEPENDENT REGISTERED ACCOUNTING FIRM

 

The consolidated financial statements of Spherix for the years ended December 31, 2018 and 2017, which are included with this proxy statement has been audited by Marcum LLP, independent registered public accounting firm, as set forth in their report thereon, including therein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

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FUTURE SPHERIX STOCKHOLDER PROPOSALS

 

Requirements for Stockholder Proposals Relating to Matters Other than Nominations for and Elections of Directors to Be Brought Before the 2020 Annual Meeting of Stockholders.  To be timely for our 2020 annual meeting of stockholders, any written notice of a proposal of