UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-05576
SPHERIX INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware | 52-0849320 | |
(State
or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
One Rockefeller Plaza
New York, NY 10020
(Address of principal executive offices)
(212) 745-1374
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files.) Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |
Non-accelerated Filer | ☒ | Smaller Reporting Company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.0001 par value | SPEX | The Nasdaq Capital Market LLC |
As of August 14, 2019, there were 2,354,421 shares of common stock outstanding.
Spherix Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 2019
Index
Page No. | ||
Part I. Financial Information | ||
Item 1. | Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 | 1 | |
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 | 2 | |
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 | 3 | |
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 | 4 | |
Notes to the Condensed Consolidated Financial Statements (Unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 |
Item 4. | Controls and Procedures | 17 |
Part II. Other Information | ||
Item 1. | Legal Proceedings | 18 |
Item 1A. | Risk Factors | 18 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
Item 5. | Other Information | |
Item 6. | Exhibits | 20 |
Signatures | 21 |
i
Part I. Financial Information
Item 1. Financial Statements
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in thousands except share and per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 564 | $ | 17 | ||||
Marketable securities | 817 | 2,700 | ||||||
Prepaid expenses and other assets | 106 | 188 | ||||||
Total current assets | 1,487 | 2,905 | ||||||
Property and equipment, net | - | 1 | ||||||
Investments | 10,565 | 10,345 | ||||||
Total assets | $ | 12,052 | $ | 13,251 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 232 | $ | 132 | ||||
Accrued salaries and benefits | 605 | 732 | ||||||
Warrant liabilities | 8 | 82 | ||||||
Payable to DatChat | - | 207 | ||||||
Total current liabilities | 845 | 1,153 | ||||||
Total liabilities | 845 | 1,153 | ||||||
Stockholders' equity | ||||||||
Series D: 4,725 shares issued and outstanding at June 30, 2019 and December 31, 2018; liquidation value of 0.0001 per share | - | - | ||||||
Series D-1: 834 shares issued and outstanding at June 30, 2019 and December 31, 2018; liquidation value of 0.0001 per share | - | - | ||||||
Common stock, 0.0001 par value, 100,000,000 shares authorized; 2,321,091 and 2,010,028 shares issued at June 30, 2019 and December 31, 2018; 2,321,088 and 2,010,025 shares outstanding at June 30, 2019 and December 31, 2018 | - | - | ||||||
Additional paid-in-capital | 153,347 | 152,445 | ||||||
Treasury stock, at cost, 3 shares at March 31, 2019 and December 31, 2018 | (264 | ) | (264 | ) | ||||
Accumulated deficit | (141,876 | ) | (140,083 | ) | ||||
Total stockholders' equity | 11,207 | 12,098 | ||||||
Total liabilities and stockholders' equity | $ | 12,052 | $ | 13,251 |
See accompanying notes to condensed consolidated financial statements
1
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
($ in thousands except share and per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Operating costs and expenses | ||||||||||||||||
Amortization of patent portfolio | $ | - | $ | 343 | $ | - | $ | 681 | ||||||||
Compensation and related expenses (including stock-based compensation) | 175 | 342 | 356 | 697 | ||||||||||||
Professional fees | 548 | 395 | 947 | 992 | ||||||||||||
Acquisition costs | 66 | 66 | 77 | 211 | ||||||||||||
Other selling, general and administrative | 99 | 116 | 221 | 258 | ||||||||||||
Total operating expenses | 888 | 1,262 | 1,601 | 2,839 | ||||||||||||
Loss from operations | (888 | ) | (1,262 | ) | (1,601 | ) | (2,839 | ) | ||||||||
Other (expenses) income | ||||||||||||||||
Other income (expenses) , net | (28 | ) | (93 | ) | 64 | (190 | ) | |||||||||
Change in fair value of investment | 145 | 680 | (330 | ) | 680 | |||||||||||
Change in fair value of warrant liabilities | 127 | 277 | 74 | 465 | ||||||||||||
Total other income (expense) | 244 | 864 | (192 | ) | 955 | |||||||||||
Net income (loss) | $ | (644 | ) | $ | (398 | ) | $ | (1,793 | ) | $ | (1,884 | ) | ||||
Net income (loss) per share attributable to common stockholders, basic and diluted | ||||||||||||||||
Basic | $ | (0.30 | ) | $ | (0.20 | ) | $ | (0.87 | ) | $ | (1.06 | ) | ||||
Diluted | $ | (0.30 | ) | $ | (0.20 | ) | $ | (0.87 | ) | $ | (1.06 | ) | ||||
Weighted average number of shares outstanding, basic and diluted | ||||||||||||||||
Basic | 2,124,631 | 2,008,382 | 2,067,645 | 1,780,199 | ||||||||||||
Diluted | 2,124,631 | 2,008,382 | 2,067,645 | 1,780,199 |
See accompanying notes to condensed consolidated financial statements
2
SPHERIX INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
($ in thousands except share and per share amounts)
(Unaudited)
For the Three Months Ended June 30, 2019
Common Stock | Preferred Stock | Additional Paid-in | Treasury Stock | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
Balance at March 31, 2019 | 2,010,025 | $ | - | 5,559 | $ | - | $ | 152,451 | 3 | $ | (264 | ) | $ | (141,232 | ) | $ | 10,955 | |||||||||||||||||||
Issuance of common stock and prefunded common stock warrants, net of offering cost | 221,000 | - | - | - | 787 | - | - | - | 787 | |||||||||||||||||||||||||||
Exercise of prefunded common stock warrants | 201,961 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Exchange of common shares for prefunded warrants | (115,269 | ) | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Fractional shares adjusted for reverse split | 3,371 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 109 | - | - | - | 109 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | (644 | ) | (644 | ) | |||||||||||||||||||||||||
Balance at June 30, 2019 | 2,321,088 | $ | - | 5,559 | $ | - | $ | 153,347 | 3 | $ | (264 | ) | $ | (141,876 | ) | $ | 11,207 |
For the Three Months Ended June 30, 2018
Common Stock | Preferred Stock | Additional Paid-in | Treasury Stock | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
Balance at March 31, 2018 | 2,004,046 | $ | - | 5,559 | $ | - | $ | 152,313 | 3 | $ | (264 | ) | $ | (143,296 | ) | $ | 8,753 | |||||||||||||||||||
Stock-based compensation | 5,979 | - | - | - | 98 | - | - | - | 98 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (398 | ) | (398 | ) | |||||||||||||||||||||||||
Balance at June 30, 2018 | 2,010,025 | $ | - | 5,559 | $ | - | $ | 152,411 | 3 | $ | (264 | ) | $ | (143,694 | ) | $ | 8,453 |
For the Six Months Ended June 30, 2019
Common Stock | Preferred Stock | Additional Paid-in | Treasury Stock | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2018 | 2,010,025 | $ | - | 5,559 | $ | - | $ | 152,445 | 3 | $ | (264 | ) | $ | (140,083 | ) | $ | 12,098 | |||||||||||||||||||
Issuance of common stock and prefunded common stock warrants, net of offering cost | 221,000 | - | - | - | 787 | - | - | - | 787 | |||||||||||||||||||||||||||
Exercise of prefunded common stock warrants | 201,961 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Exchange of common shares for prefunded warrants | (115,269 | ) | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Fractional shares adjusted for reverse split | 3,371 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 115 | - | - | - | 115 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (1,793 | ) | (1,793 | ) | |||||||||||||||||||||||||
Balance at June 30, 2019 | 2,321,088 | $ | - | 5,559 | $ | - | $ | 153,347 | 3 | $ | (264 | ) | $ | (141,876 | ) | $ | 11,207 |
For the Six Months Ended June 30, 2018
Common Stock | Preferred Stock | Additional Paid-in | Treasury Stock | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | 1,467,052 | $ | - | 5,559 | $ | - | $ | 149,425 | 3 | $ | (264 | ) | $ | (145,055 | ) | $ | 4,106 | |||||||||||||||||||
Issuance common stock in equity raise, net of offering cost | 522,876 | - | - | - | 2,700 | - | - | - | 2,700 | |||||||||||||||||||||||||||
Stock-based compensation | 20,097 | - | - | - | 286 | - | - | - | 286 | |||||||||||||||||||||||||||
Cumulative effect of the changes related to adoption of ASC 606 | - | - | - | - | - | 3,245 | 3,245 | |||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (1,884 | ) | (1,884 | ) | |||||||||||||||||||||||||
Balance at June 30, 2018 | 2,010,025 | $ | - | 5,559 | $ | - | $ | 152,411 | 3 | $ | (264 | ) | $ | (143,694 | ) | $ | 8,453 |
See accompanying notes to condensed consolidated financial statements
3
SPHERIX INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (1,793 | ) | $ | (1,884 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization of patent portfolio | - | 681 | ||||||
Change in fair value of investment | 330 | (680 | ) | |||||
Change in fair value of warrant liabilities | (74 | ) | (465 | ) | ||||
Stock-based compensation | 115 | 286 | ||||||
Depreciation expense | - | 17 | ||||||
Realized loss on marketable securities | 98 | 275 | ||||||
Unrealized loss (gain) on marketable securities | (138 | ) | 17 | |||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other assets | 82 | 4 | ||||||
Accounts payable and accrued expenses | 100 | 150 | ||||||
Accrued salaries and benefits | (127 | ) | (103 | ) | ||||
Payable to DatChat | (207 | ) | - | |||||
Accrued lease liabilities | - | (48 | ) | |||||
Net cash used in operating activities | (1,614 | ) | (1,750 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of marketable securities | (4,954 | ) | (10,047 | ) | ||||
Sale of marketable securities | 6,878 | 9,119 | ||||||
Purchase of investments at fair value | (550 | ) | (25 | ) | ||||
Purchase of property and equipment | - | (16 | ) | |||||
Net cash provided by (used in) investing activities | 1,374 | (969 | ) | |||||
Cash flows from financing activities | ||||||||
Cash from issuance common stock, net of offering cost | 787 | 2,700 | ||||||
Net cash provided by financing activities | 787 | 2,700 | ||||||
Net increase (decrease) in cash and cash equivalents | 547 | (19 | ) | |||||
Cash and cash equivalents, beginning of period | 17 | 197 | ||||||
Cash and cash equivalents, end of period | $ | 564 | $ | 178 |
See accompanying notes to condensed consolidated financial statements
4
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”) is technology development company committed to the fostering of innovative ideas. The Company was incorporated in 1967 in the State of Delaware as a scientific research company, and for much of its history pursued drug development including through Phase III clinical studies which were discontinued.
The Company was formerly focused on commercializing and monetizing patents by acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents.
Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to its patent monetization efforts, since the fourth quarter of 2017, the Company has been transitioning to focus its efforts as a technology development company. These efforts have focused on biotechnology research and blockchain technology research. The Company’s biotechnology research development includes investments in Hoth Therapeutics Inc. and the proposed merger with CBM BioPharma, Inc. (“CBM”).
Reverse Stock Split
On May 10, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by the Company’s board of directors under authority granted by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April 15, 2019, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”). Unless the context otherwise requires, all references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect the Reverse Stock Split. Fractional shares were not issued, and the final number of shares were rounded up to the next whole share.
CBM Asset Acquisition
Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company purchased 50,000 shares of CBM for $350,000.
In addition, on May 15, 2019, the Company restructured the terms of its proposed merger with CBM and entered into an Asset Purchase Agreement (the “APA”) with CBM. In connection with the execution of the APA, the agreement and plan of merger between with CBM, dated as of October 10, 2018, 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 $8.0 million to CBM consisting of an aggregate number of shares of common stock equal to $7.0 million (based upon a per share price of $3.61) and cash consideration in the amount of $1.0 million. The cash consideration is held back and becomes payable to CBM upon the consummation by the Company of the first sale by the Company of common stock, Series L convertible preferred stock or any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000 (a “Qualified Financing”) after the closing date, upon which 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 obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities and third parties. The APA may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the APA) are not satisfied or waived by September 30, 2019. The transactions contemplated by the APA remain subject to shareholder approval of the Company and CBM.
Note 2. Liquidity and Financial Condition
The Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities through:
● | managing current cash and cash equivalents on hand from the Company’s past debt and equity offerings, |
● | seeking additional funds raised through the sale of additional securities in the future, |
● | seeking additional liquidity through credit facilities or other debt arrangements, and |
5
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies and help advance innovation. The Company’s working capital amounted to approximately $0.6 million at June 30, 2019. Absent generation of sufficient revenue from the execution of the Company’s long-term business plan, the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or operations. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.
Because of recurring operating losses and net operating cash flow deficits there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing. The condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of June 30, 2019, condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018, condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
Use of Estimates
The accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP. This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported expenses during the period. The Company’s significant estimates and assumptions include the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the carrying amount of its investments, could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Significant Accounting Policies
Other than as described below, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
6
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Net Income Loss per Share
Basic loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
7
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2019 and 2018 are as follows:
As of June 30, | ||||||||
2019 | 2018 | |||||||
Convertible preferred stock | 688 | 688 | ||||||
Warrants to purchase common stock | 285,273 | 294,072 | ||||||
Options to purchase common stock | 100,407 | 124,396 | ||||||
Total | 386,368 | 419,156 |
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company does not have any long-term leases, therefore the adoption of this standard on January 1, 2019 did not have a material impact on the Company’s condensed consolidated financial position and results of operations.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2017-11 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements
8
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 4. Investments in Marketable Securities
The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and six months ended June 30, 2019 and 2018, which are recorded as a component of other (expenses) income on the consolidated statements of operations, are as follows ($ in thousands):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Realized gain (loss) | $ | (25 | ) | $ | (177 | ) | $ | (98 | ) | $ | (275 | ) | ||||
Unrealized gain (loss) | (10 | ) | 41 | 138 | (17 | ) | ||||||||||
Dividend income | 7 | 44 | 24 | 78 | ||||||||||||
$ | (28 | ) | $ | (92 | ) | $ | 64 | $ | (214 | ) |
Note 5. Investment in Hoth Therapeutics, Inc.
On February 20, 2019, Hoth closed its initial public offering (“IPO) at an initial offering price to the public of $5.60 per share. The Company records this investment at fair value and records any change in fair value in the statements of operations (see Note 6). The following summarizes the Company investment in Hoth:
Security Name | Shares Owned as of June 30, 2019 | Fair value per Share as of June 30, 2019 | Fair value as of June 30, 2019 (in thousands) | |||||||||
HOTH | 1,735,714 | $ | 5.81 | $ | 10,084 |
The fair value of Hoth common shares as of June 30, 2019 was based on the closing price of $5.81 reported on The Nasdaq Capital Market as of June 28, 2019.
Note 6. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities
Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s assets and liabilities that are measured at fair value at June 30, 2019 and December 31, 2018 ($ in thousands):
Fair value measured at June 30, 2019 | ||||||||||||||||
Total at June 30, | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
2019 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Marketable securities - mutual and exchange traded funds | $ | 817 | $ | 817 | $ | - | $ | - | ||||||||
Investments in Hoth | $ | 10,084 | $ | 10,084 | $ | - | $ | - | ||||||||
Liabilities | ||||||||||||||||
Fair value of warrant liabilities | $ | 8 | $ | - | $ | - | $ | 8 |
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SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
In May 2019, the Company purchased 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. The aggregate purchase price was nominal. As a result of the nominal purchase price associated with is transaction, the Company reviewed its existing holdings in DatChat and reduced its existing carrying amount from $1.0 million to $0.
The table above excludes the Company’s investment in Mellow Scooters for $0.1 million and its other investments for $0.1 million as of June 30, 2019. Such investments were recorded on adjusted cost method measurement alternative in accordance with ASU 2016-01.
Fair value measured at December 31, 2018 | ||||||||||||||||
Total at December 31, | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
2018 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Marketable securities - mutual and exchange traded funds | $ | 2,700 | $ | 2,700 | $ | - | $ | - | ||||||||
Investments in Hoth | $ | 9,214 | $ | - | $ | - | $ | 9,214 | ||||||||
Liabilities | ||||||||||||||||
Fair value of warrant liabilities | $ | 82 | $ | - | $ | - | $ | 82 |
Due to the Hoth’s IPO in February 2019, the Company’s investment in Hoth was transferred from Level 3 to Level 1 during the six months ended June 30, 2019 and there were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2018.
Level 3 Valuation Techniques - Liabilities
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s consolidated statements of operations.
The Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities.
A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2019 and December 31, 2018 is as follows:
Date of valuation | June 30, 2019 | December 31, 2018 | ||
Risk-free interest rate | 1.75% - 1.92% | 2.48% | ||
Expected volatility | 67.11% - 100.00% | 72.03% - 103.13% | ||
Contractual life (in years) | 1.44-2.00 | 1.94-2.06 | ||
Expected dividend yield | - | - |
The risk-free interest rate was based on rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock and does not expect to pay dividends on its common stock in the future.
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SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the six months ended June 30, 2019 and 2018 ($ in thousands):
Fair Value of Level 3 financial liabilities | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Beginning balance | $ | 82 | $ | 822 | ||||
Fair value adjustment of warrant liabilities | (74 | ) | (465 | ) | ||||
Ending balance | $ | 8 | $ | 357 |
Note 7. Stockholders’ Equity and Convertible Preferred Stock
Common Stock
Registered Common Stock and Warrant Financing
On May 29, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) for the sale by the Company of 221,000 shares of the Company’s common stock, at a purchase price of $2.60 per share, and pre-funded common stock purchase warrants to purchase up to 86,692 shares of common stock at a purchase price of $2.5999 per Warrant, which represents the per share purchase price, less a $0.0001 per share exercise price for each of the warrants (“Penny Warrants”). The Company sold the shares and warrants for net proceeds of approximately $787 thousand which transaction closed on May 31, 2019.
Common Stock Warrant Exchange
On June 6, 2019, the Company entered into an amendment to the Purchase Agreement, pursuant to which the Purchaser surrendered an aggregate of 115,269 shares to the Company and the Company issued 115,269 Penny Warrants to the Purchaser in order to limit the Purchaser’s beneficial ownership.
The exchange of 115,269 Penny Warrants do not meet the definition of a derivative under ASC 815 because their fair value at issuance is equal to the fair value of the shares underlying the warrant. As such, they have the characteristics of a prepaid forward sale of equity. Since the shares underlying the Penny Warrants are issuable for little or no consideration, they are considered outstanding in the context of earnings per share, as discussed in ASC 260-10-45-13.
Warrants
A summary of warrant activity for the six months ended June 30, 2019 is presented below:
Warrants | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
Outstanding as of December 31, 2018 | 294,072 | $ | 38.15 | $ | - | 1.92 | ||||||||||
Issued | 235,294 | - | 587,881 | 0.28 | ||||||||||||
Exercised | (201,961 | ) | - | 504,882 | - | |||||||||||
Expired | (8,799 | ) | 476.66 | - | - | |||||||||||
Outstanding as of June 30, 2019 | 318,606 | $ | 22.05 | 82,999 | 1.43 |
On May 29, 2019, the Company entered into the Master Service Agreement (“MSA”) with a consultant, World Wide Holdings, LLC (“Consultant”). In consideration for services provided by Consultant, the Company paid to Consultant three warrants, with each warrant immediately exercisable for 33,333 shares of common stock with a $0.01 strike price. The first warrant of 33,333 was issued on June 28, 2019. The Company recorded $0.1 million in stock-based compensation during the three-month ended June 30, 2019 related to this arrangement.
11
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Stock Options
A summary of option activity under the Company’s stock option plan for the six months ended June 30, 2019 is presented below:
Number of Shares | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
Outstanding as of December 31, 2018 | 124,381 | $ | 209.22 | $ | - | 4.8 | ||||||||||
Employee options expired | (23,664 | ) | 378.67 | - | - | |||||||||||
Non-employee options expired | (310 | ) | 571.71 | - | - | |||||||||||
Outstanding as of June 30, 2019 | 100,407 | $ | 169.21 | $ | - | 5.5 | ||||||||||
Options vested and expected to vest | 100,407 | $ | 169.21 | $ | - | 5.5 | ||||||||||
Options vested and exercisable | 100,407 | $ | 169.21 | $ | - | 5.5 |
Stock-based Compensation
Stock-based compensation for the three and six months ended June 30, 2019 and 2018 was comprised of the following ($ in thousands):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Employee restricted stock awards | $ | - | $ | 27 | $ | - | $ | 107 | ||||||||
Employee stock option awards | 2 | 71 | 8 | 179 | ||||||||||||
Non-employee warrant awards | 107 | - | 107 | - | ||||||||||||
Total compensation expense | $ | 109 | $ | 98 | $ | 115 | $ | 286 |
Note 8. Commitments and Contingencies
Legal Proceedings
In the past, in the ordinary course of business, the Company actively pursued legal remedies to enforce its intellectual property rights and to stop unauthorized use of technology. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. The Company knows of no pending material claims or legal matters against it as of the date of this report.
Note 9. Subsequent Events
On August 9, 2019, the Company entered into an At The Market Offering Agreement (the “Offering Agreement”) with H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time to time through H.C. Wainwright shares of the Company’s common stock having an aggregate offering price of up to $1.2 million (the “Shares”). The Company will pay H.C. Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide H.C.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All references to “we,” “us,” “our” and the “Company” refer to Spherix Incorporated, a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise.
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. These efforts have focused on biotechnology research and blockchain technology research. The Company’s biotechnology research development includes investments in: (i) 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, (ii) DatChat, Inc. (“DatChat”), a privately held personal privacy platform focused on encrypted communication, internet security and digital rights management, and (iii) a proposed acquisition of assets of CBM BioPharma, Inc. (“CBM”), a pharmaceutical company focusing on the development of cancer treatments.
Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company purchased (i) 50,000 shares of common stock of CBM BioPharma, Inc. (“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 22, 2019.
On February 20, 2019, Hoth closing on its initial public offering of 1,250,000 shares of its common stock at an initial offering price to the public of $5.60 per share, which commenced trading on The Nasdaq Capital Market on February 15, 2019 under the symbol “HOTH”. As of the date of this report, the Company and its affiliates own approximately 19% of Hoth.
In October 2018, the Company entered into an agreement and plan of merger (the “CBM Merger Agreement”) with CBM, pursuant to which all shares of capital stock of CBM would 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 and entered into an Asset Purchase Agreement (the “APA”) with CBM, whereby the Company purchased certain assets of CBM, including, among other things:
● | a License Agreement with Wake Forest University Health Sciences, dated as of April 17, 2018 relating to certain technologies in the areas of acute myeloid leukemia (AML), and acute lymphoblastic leukemia (ALL), which License Agreement includes the following patent rights: |
○ | U.S. Patent 6,670,341, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells” issued December 30, 2003 |
○ | U.S. Patent 7,026,469, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells” issued April 11, 2006 |
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○ | U.S. Patent 7,309,696, titled “Novel phospholipid conjugates double-targeting HIV” issued December 18, 2007 |
○ | U.S. Patent 7,638,528, titled “Compositions and methods for targeting cancer cells” issued December 29, 2009 |
○ | U.S. Patent 8,138,200, titled “Compositions and methods for double-targeting virus infections and targeting cancer cells” issued March 20, 2012 |
● | a Patent License Agreement with the University of Texas at Austin on behalf of the Board of Regents of the University of Texas System, dated as of April 12, 2018, relating to certain technologies in the area of pancreatic cancer treatment, which Patent License Agreement includes the following patent rights: |
○ | US Patent 61/933,035, titled “Nucleobase Analogue Derivatives and their applications” filed January 29, 2014 |
○ | PCT/US2015/013454, titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015 |
○ | US App 15/115,393, titled “Nucleobase analogue derivatives and their applications” filed January 29, 2015 |
● | consulting contract with CBM’s Chief Scientific Officer, entered into on July 23, 2018, pursuant to which the consultant is paid $50,000 annually |
● | contracts with five Scientific Advisory Board members, pursuant to which each member is paid $20,000 annually. |
As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) an aggregate number of shares of common stock equal to $7,000,000 (the “Stock Consideration”) comprised of (A) an aggregate number of shares of common stock equal to 9.9% of the issued and outstanding shares of common stock as of the date that the acquisition closes (the “Closing Date”) (the “Common Stock Consideration”) based on a per share purchase price of $3.61, subject to adjustment (the “Buyer Common Stock Price”), which ultimately limits CBM’s maximum voting control of 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) cash consideration in the amount of $1,000,000 (the “Cash Consideration Amount”, and together with the Stock Consideration, the “Purchase Consideration”). The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first sale by Spherix of common stock, Series L convertible preferred stock or any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000 (a “Qualified Financing”) after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.
Upon the execution of the APA, the Company and CBM agreed to terminate the CBM Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived that certain termination fee due to CBM pursuant to the CBM Merger Agreement.
Additionally, at or prior to the Closing, the Company, CBM, and 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 APA. 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 any relevant governmental authorities or any third parties, and the shareholders of the Company and CBM, (b) the absence of any law being enacted, issued, promulgated, enforced or entered, or any order by any federal or national, state or provincial, municipal or local government, governmental authority, regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality, political subdivision, court, tribunal, official arbitrator or arbitral body in each case whether domestic or foreign (each a “Governmental Authority”) which makes the transaction illegal, and (c) no pending action being brought by a third-party non-affiliate to enjoin or restrict the transaction; (d) the Company holding a special meeting of its stockholders to approve, among other things, the issuance of the Stock Consideration; and (e) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties’ obligations, agreements and covenants under the APA, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the APA. “Material Adverse Effect” means, with respect to CBM, any event, fact, condition, change, circumstance, occurrence or effect, which, either individually or in the aggregate with all other events, facts, conditions, changes, circumstances, occurrences or effects, (a) has had, or would reasonably be expected to have, a material adverse effect on the business, operations, properties, prospects, assets, liabilities, value, condition (financial or otherwise), licenses or results of operations of CBM’s business or the Purchased Assets or the Assumed Liabilities or (b) does or would reasonably be expected to materially impair or delay the ability of CBM to perform its obligations under the APA and the ancillary documents or to consummate the transactions contemplated hereby and thereby; provided, however, that a Material Adverse Effect will not include any adverse effect or change resulting from any change, circumstance or effect relating to (A) the economy in general, (B) securities markets, regulatory or political conditions in the United States (including terrorism or the escalation of any war, whether declared or undeclared or other hostilities), (C) changes in applicable laws or generally accepted accounting principles or the application or interpretation thereof or (D) a natural disaster (provided, that in the cases of clauses (A) through (D), CBM’s business is not disproportionately affected by such event as compared to other similar companies and businesses in similar industries and geographic regions as CBM’s business).
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The APA may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing are not satisfied or waived by December 31, 2019 (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the APA), (iii) by written notice by the Company or CBM if a Governmental Authority has issued an order or taken action restraining, enjoining or prohibiting the transactions contemplated by the APA (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the APA), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect on the Company following the date of the APA, or (vii) by written notice by the Company or CBM in the event that Company’s stockholders did not approve the issuance of the Stock Consideration at a special meeting of Company .. In the event that the APA 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 APA, 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 Company’s stockholders did not approve the issuance of the Stock Consideration at a duly held special meeting of the Company, the Company will issue to CBM or CBM’s designee an aggregate of 250,000 shares of the Company’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.
In connection with the APA, at Closing, Spherix and CBM shall enter into that certain Leak-Out Agreement, 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 APA 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.
On May 30, 2019, the Company entered into Amendment No. 1 (the “Amendment”) to the APA, pursuant to which the APA was amended to include a termination fee whereby, in the event that the APA 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 APA, 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 APA 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 an aggregate of 250,000 shares of the Company’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.
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 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.
15
On May 29, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single accredited investor (the “Purchaser”) pursuant to which the Company sold 221,000 shares (the “Shares”) of Common Stock at a purchase price of $2.60 per share, and pre-funded common stock purchase warrants to purchase up to 86,692 shares of Common Stock (the “Warrants”) at a purchase price of $2.5999 per Warrant, which represents the per Share purchase price, less a $0.0001 per share exercise price for each of the Warrants. The Company sold the Shares and Warrants for aggregate gross proceeds of approximately $799,991 which transaction closed on May 31, 2019. On June 6, 2019, the Company entered into an amendment (the “Amendment”) to the Purchase Agreement, pursuant to which the Purchaser surrendered an aggregate of 115,269 Shares to the Company and the Company issued an aggregate of 115,269 Warrants to the Purchaser in order to limit the Purchaser’s beneficial ownership in the Company to 4.99%. The Warrants are immediately exercisable for $0.0001 per share until exercised in full, except that a holder will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage upon notice to the Company, but in no event in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice. The Warrants may also be exercisable on a “cashless” basis. The Company received net proceeds of approximately $799,979 from the sale of the Shares and Warrants.
Results of Operations
Three months ended June 30, 2019 compared to three months ended June 30, 2018
During the three months ended June 30, 2019 and 2018, we incurred a loss from operations of approximately $0.9 million and $1.3 million, respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.3 decrease in amortization of patent portfolio and $0.2 million decrease in compensation and related expenses.
During the three months ended June 30, 2019 and 2018, other income was approximately $0.2 million and $0.9 million, respectively. The decrease in other income was primarily attributed to a $0.5 million decrease in change in investments recorded at fair value, and partially offset by $0.2 million decrease in change in fair value of warrant liabilities. During the three months ended June 30, 2019, we recorded a change in fair value adjustment of $(1.0) million related to our investment in DatChat; offset by a $1.1 million unrealized gain on our investment in Hoth as the closing stock price Hoth increased from $5.15 as of March 29, 2019 to $5.81 as of June 28, 2019.
Six months ended June 30, 2019 compared to six months ended June 30, 2018
During the six months ended June 30, 2019 and 2018, we incurred a loss from operations of approximately $1.6 million and $2.8 million, respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.7 decrease in amortization of patent portfolio, $0.3 million decrease in compensation and related expenses, $0.1 million decrease in professional fees and $0.1 million decrease in acquisition costs related to the DatChat transaction.
During the six months ended June 30, 2019 and 2018, other income (expense) was approximately $(0.2) million and $1.0 million, respectively. The decrease of other income (expense) was primarily attributed to a $1.0 million decrease in change in fair value of investments and a $0.4 million decrease in the fair value of warrant liabilities, and partially offset by $0.3 million decrease in other expenses. During the six months ended June 30, 2019, we recorded a change in fair value adjustment of $(1.0) million related to our investment in DatChat; offset by an $0.6 million unrealized gain on our investment in Hoth as the closing stock price Hoth increased from $5.60 as of the IPO date to $5.81 as of June 28, 2019.
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 $0.6 million at June 30, 2019. 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.
16
Cash Flows from Operating Activities - For the six months ended June 30, 2019 and 2018, net cash used in operations was approximately $1.6 million and $1.8 million, respectively. The cash used in operating activities for the six months ended June 30, 2019 primarily resulted from a net loss of $1.8 million, $0.1 million unrealized loss on marketable securities and $0.2 million changes in assets and liabilities, and partially offset by $0.3 million change in fair value of our investment. The cash used in operating activities for the six months ended June 30, 2018 primarily resulted from a net loss of $0.4 million, $0.7 million change in fair value of our investment in Hoth and $0.5 million change in fair value of warrant liabilities, and partially offset by amortization expenses of $0.3 million.
Cash Flows from Investing Activities - For the six months ended June 30, 2019 and 2018, net cash provided by investing activities was approximately $1.4 million and net cash used in investing activities was approximately $1.0 million, respectively. The cash provided by investing activities primarily resulted from our sale of marketable securities for the six months ended June 30, 2019 of $6.9 million, partially offset by our purchase of marketable securities of $5.0 million. The cash used in investing activities primarily resulted from our purchase of marketable securities for the six months ended June 30, 2018 of $10.0 million, partially offset by our sale of marketable securities of $9.1 million.
Cash Flows from Financing Activities - Cash provided by financing activities for the six months ended June 30, 2019 was $0.8 million, which reflects the net proceeds from investors in exchange of issuance of common stock and prefunded common stock warrants. Cash provided by financing activities for the six months ended June 30, 2018 was approximately $2.7 million, which related to issuance of 2,222,222 shares of its common stock.
Off-balance sheet arrangements.
None.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not required for smaller reporting companies.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
With respect to the quarter ended June 30, 2019, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective as of June 30, 2019 due to the material weaknesses in our internal controls over financial reporting. We have a lack of segregation of duties, and a lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2019 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. | Other Information |
Item 1. | Legal Proceedings |
In the past, in the ordinary course of business, we actively pursued legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technology. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. We know of no pending material claims or legal matters against us as of the date of this report.
Counterclaims
In the ordinary course of business, we, or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results from operations.
Item 1A. | Risk Factors |
Investing in our common stock is subject to a number of risks and uncertainties. You should carefully consider the risk factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, in other reports we file with the SEC, and below.
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 October 10, 2018, we entered into an agreement and plan of merger with CBM, pursuant to which all shares of capital stock of CBM would be converted into 3,529,411 shares of the Company’s common stock. On May 15, 2019, we restructured the Company restructured the terms of its proposed merger with CBM and entered into the APA, pursuant to which the Company agreed to purchase certain assets of CBM, including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (“AML”), acute lymphoblastic leukemia (“ALL”) and pancreatic cancer and contracts with a chief scientist and an advisory board. CBM is a privately held 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 merger 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 October 10, 2018, we entered into an agreement and plan of merger with CBM, pursuant to which CBM would be the surviving corporation in the merger. On May 15, 2019, we restructured the Company restructured the terms of its proposed merger with CBM and entered into the APA, pursuant to which the Company agreed to purchase certain assets of CBM, including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (“AML”), acute lymphoblastic leukemia (“ALL”) and pancreatic cancer and contracts with a chief scientist and an advisory board. There can be no guarantee that we will be successful in closing the transaction contemplated by the 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.
18
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.
If the CBM Asset Acquisition is completed, 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 Asset Acquisition and will exercise less influence over our management and policies than they did prior to the Asset 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 Asset 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 Asset Acquisition.
The CBM Asset Acquisition is subject to certain conditions to closing that could result in the Asset 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 Asset Acquisition is subject to a number of customary conditions, including, but not limited to, the approval of the Asset Acquisition 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 Acquisition Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by the Asset Acquisition Agreement, CBM may elect not to consummate the Asset Acquisition. There is no assurance that we will satisfy the conditions necessary for completion of the Asset Acquisition. If any of the conditions to the Asset Acquisition are not satisfied or, where waiver is permissible, waived, the Asset Acquisition will not be consummated. Failure to complete the Asset Acquisition would prevent us from realizing the anticipated benefits of the Asset 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 Asset Acquisition. In the event that the Asset 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 Asset Acquisition will occur, and a failure to complete the Asset 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 Asset Acquisition. Any delay in the consummation of the Asset Acquisition or any uncertainty about the consummation of the Asset Acquisition could also negatively impact our stock price and future business and results of operations. The Asset Acquisition may not be consummated, there may be a delay in the consummation of the Asset Acquisition or the Asset Acquisition may not be consummated on the terms contemplated by the Asset Acquisition Agreement.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company purchased: (i) 50,000 shares of common stock 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 22, 2019.
Additionally, on May 15, 2019, the Company restructured the terms of its proposed merger with CBM and entered into an Asset Purchase Agreement with CBM, whereby the Company purchased agreed to purchase CBM’s Purchased Assets (as defined in the APA), including, among other things, a license agreement, university contracts, and contracts with a chief scientist and an advisory board. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview” for a description of the restructuring of the proposed transaction with CBM.
19
Item 6. | Exhibits |
20
Signatures
Pursuant to the requirements of the Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Spherix Incorporated (Registrant) | ||
Date: August 14, 2019 | By: | /s/ Anthony Hayes |
Anthony Hayes | ||
Chief Executive Officer | ||
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
21
Exhibit 31.1
Certification of
Principal Executive and Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Anthony Hayes, certify that:
1. | I have reviewed this report on Form 10-Q of Spherix Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Anthony Hayes | |
Anthony Hayes | |
Chief
Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
August 14, 2019 |
Exhibit 32.1
Certification of
Principal Executive and Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Anthony Hayes, Chief Executive Officer of Spherix Incorporated (the “Company”), in compliance with Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, to the best of my knowledge, the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 (the “Report”) filed with the Securities and Exchange Commission:
● | Fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
● | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Anthony Hayes | |
Anthony Hayes | |
Chief
Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
August 14, 2019 |
A signed copy of this written statement required by Section 906 has been provided to Spherix Incorporated and will be retained by Spherix Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Aug. 14, 2019 |
|
Document And Entity Information | ||
Entity Registrant Name | SPHERIX INC | |
Document Type | 10-Q | |
Amendment Flag | false | |
Entity Central Index Key | 0000012239 | |
Document Period End Date | Jun. 30, 2019 | |
Title of 12(g) Security | Common Stock, $0.0001 par value | |
Trading Symbol | SPEX | |
Security Exchange Name | NASDAQ | |
Current Fiscal Year End Date | --12-31 | |
Entity Interactive Data Current | Yes | |
Entity Incorporation, State or Country Code | DE | |
Entity File Number | 000-05576 | |
Entity's Reporting Status Current | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Shell Company | false | |
Entity Ex Transition Period | false | |
Entity Common Stock, Shares Outstanding | 2,354,421 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2019 |
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Jun. 30, 2019 |
Mar. 31, 2019 |
Dec. 31, 2018 |
---|---|---|---|
Common stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 | |
Common stock, authorized | 100,000,000 | 100,000,000 | |
Common stock, issued | 2,321,091 | 2,010,028 | |
Common stock, outstanding | 2,321,088 | 2,010,025 | |
Treasury stock | 3 | 3 | |
Series D Preferred Stock [Member] | |||
Preferred stock, issued | 4,725 | 4,725 | |
Preferred stock, outstanding | 4,725 | 4,725 | |
liquidation preference (in dollars per share) | $ 0.0001 | $ 0.0001 | |
Series D-1 Preferred Stock [Member] | |||
Preferred stock, issued | 834 | 834 | |
Preferred stock, outstanding | 834 | 834 | |
liquidation preference (in dollars per share) | $ 0.0001 | $ 0.0001 |
Organization and Description of Business |
6 Months Ended |
---|---|
Jun. 30, 2019 | |
Accounting Policies [Abstract] | |
Organization and Description of Business | Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”) is technology development company committed to the fostering of innovative ideas. The Company was incorporated in 1967 in the State of Delaware as a scientific research company, and for much of its history pursued drug development including through Phase III clinical studies which were discontinued.
The Company was formerly focused on commercializing and monetizing patents by acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents.
Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to its patent monetization efforts, since the fourth quarter of 2017, the Company has been transitioning to focus its efforts as a technology development company. These efforts have focused on biotechnology research and blockchain technology research. The Company’s biotechnology research development includes investments in Hoth Therapeutics Inc. and the proposed merger with CBM BioPharma, Inc. (“CBM”).
Reverse Stock Split
On May 10, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by the Company’s board of directors under authority granted by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders held on April 15, 2019, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”). Unless the context otherwise requires, all references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect the Reverse Stock Split. Fractional shares were not issued, and the final number of shares were rounded up to the next whole share.
CBM Asset Acquisition
Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company purchased 50,000 shares of CBM for $350,000.
In addition, on May 15, 2019, the Company restructured the terms of its proposed merger with CBM and entered into an Asset Purchase Agreement (the “APA”) with CBM. In connection with the execution of the APA, the agreement and plan of merger between with CBM, dated as of October 10, 2018, 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 $8.0 million to CBM consisting of an aggregate number of shares of common stock equal to $7.0 million (based upon a per share price of $3.61) and cash consideration in the amount of $1.0 million. The cash consideration is held back and becomes payable to CBM upon the consummation by the Company of the first sale by the Company of common stock, Series L convertible preferred stock or any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000 (a “Qualified Financing”) after the closing date, upon which 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 obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities and third parties. The APA may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing (as defined in the APA) are not satisfied or waived by September 30, 2019. The transactions contemplated by the APA remain subject to shareholder approval of the Company and CBM. |
Liquidity and Financial Condition |
6 Months Ended | |||||||||
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Jun. 30, 2019 | ||||||||||
Liquidity And Financial Condition Abstract | ||||||||||
Liquidity and Financial Condition | Note 2. Liquidity and Financial Condition
The Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities through:
The Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies and help advance innovation. The Company’s working capital amounted to approximately $0.6 million at June 30, 2019. Absent generation of sufficient revenue from the execution of the Company’s long-term business plan, the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or operations. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.
Because of recurring operating losses and net operating cash flow deficits there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing. The condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty. |
Summary of Significant Accounting Policies |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies | Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of June 30, 2019, condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018, condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
Use of Estimates
The accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP. This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported expenses during the period. The Company’s significant estimates and assumptions include the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the carrying amount of its investments, could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Significant Accounting Policies
Other than as described below, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.
Net Income Loss per Share
Basic loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2019 and 2018 are as follows:
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company does not have any long-term leases, therefore the adoption of this standard on January 1, 2019 did not have a material impact on the Company’s condensed consolidated financial position and results of operations.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2017-11 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements |
Investments in Marketable Securities |
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Investments in Marketable Securities | Note 4. Investments in Marketable Securities
The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and six months ended June 30, 2019 and 2018, which are recorded as a component of other (expenses) income on the consolidated statements of operations, are as follows ($ in thousands):
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Investment in Hoth Therapeutics, Inc. |
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Investment In Hoth Therapeutics Inc. | |||||||||||||||||||||||||||
Investment in Hoth Therapeutics, Inc. | Note 5. Investment in Hoth Therapeutics, Inc.
On February 20, 2019, Hoth closed its initial public offering (“IPO) at an initial offering price to the public of $5.60 per share. The Company records this investment at fair value and records any change in fair value in the statements of operations (see Note 6). The following summarizes the Company investment in Hoth:
The fair value of Hoth common shares as of June 30, 2019 was based on the closing price of $5.81 reported on The Nasdaq Capital Market as of June 28, 2019. |
Fair Value of Financial Assets and Liabilities |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Financial Assets and Liabilities | Note 6. Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s assets and liabilities that are measured at fair value at June 30, 2019 and December 31, 2018 ($ in thousands):
In May 2019, the Company purchased 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. The aggregate purchase price was nominal. As a result of the nominal purchase price associated with is transaction, the Company reviewed its existing holdings in DatChat and reduced its existing carrying amount from $1.0 million to $0.
The table above excludes the Company’s investment in DatChat for $1.1 million, its investment in Mellow Scooters for $0.1 million and its other investments for $0.1 million as of June 30, 2019. Such investments were recorded on adjusted cost method measurement alternative in accordance with ASU 2016-01.
Due to the Hoth’s IPO in February 2019, the Company’s investment in Hoth was transferred from Level 3 to Level 1 during the six months ended June 30, 2019 and there were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2018.
Level 3 Valuation Techniques - Liabilities
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s consolidated statements of operations.
The Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities.
A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2019 and December 31, 2018 is as follows:
The risk-free interest rate was based on rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock and does not expect to pay dividends on its common stock in the future.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the six months ended June 30, 2019 and 2018 ($ in thousands):
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Stockholders' Equity and Convertible Preferred Stock |
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Stockholders' Equity and Convertible Preferred Stock | Note 7. Stockholders’ Equity and Convertible Preferred Stock
Common Stock
Registered Common Stock and Warrant Financing
On May 29, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) for the sale by the Company of 221,000 shares of the Company’s common stock, at a purchase price of $2.60 per share, and pre-funded common stock purchase warrants to purchase up to 86,692 shares of common stock at a purchase price of $2.5999 per Warrant, which represents the per share purchase price, less a $0.0001 per share exercise price for each of the warrants (“Penny Warrants”). The Company sold the shares and warrants for net proceeds of approximately $787 thousand which transaction closed on May 31, 2019.
Common Stock Warrant Exchange
On June 6, 2019, the Company entered into an amendment to the Purchase Agreement, pursuant to which the Purchaser surrendered an aggregate of 115,269 shares to the Company and the Company issued 115,269 Penny Warrants to the Purchaser in order to limit the Purchaser’s beneficial ownership.
The exchange of 115,269 Penny Warrants do not meet the definition of a derivative under ASC 815 because their fair value at issuance is equal to the fair value of the shares underlying the warrant. As such, they have the characteristics of a prepaid forward sale of equity. Since the shares underlying the Penny Warrants are issuable for little or no consideration, they are considered outstanding in the context of earnings per share, as discussed in ASC 260-10-45-13.
Warrants
A summary of warrant activity for the six months ended June 30, 2019 is presented below:
On May 29, 2019, the Company entered into the Master Service Agreement (“MSA”) with a consultant, World Wide Holdings, LLC (“Consultant”). In consideration for services provided by Consultant, the Company paid to Consultant three warrants, with each warrant immediately exercisable for 33,333 shares of common stock with a $0.01 strike price. The first warrant of 33,333 was issued on June 28, 2019. The Company recorded $0.1 million in stock-based compensation during the three-month ended June 30, 2019 related to this arrangement.
Stock Options
A summary of option activity under the Company’s stock option plan for the six months ended June 30, 2019 is presented below:
Stock-based Compensation
Stock-based compensation for the three and six months ended June 30, 2019 and 2018 was comprised of the following ($ in thousands):
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Commitments and Contingencies |
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Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Note 8. Commitments and Contingencies
Legal Proceedings
In the past, in the ordinary course of business, the Company actively pursued legal remedies to enforce its intellectual property rights and to stop unauthorized use of technology. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. The Company knows of no pending material claims or legal matters against it as of the date of this report. |
Subsequent Events |
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Subsequent Events [Abstract] | |
Subsequent Events | Note 9. Subsequent Events
On August 9, 2019, the Company entered into an At The Market Offering Agreement (the “Offering Agreement”) with H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time to time through H.C. Wainwright shares of the Company’s common stock having an aggregate offering price of up to $1.2 million (the “Shares”). The Company will pay H.C. Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide H.C. |
Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of June 30, 2019, condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018, condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019. |
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Use of Estimates | Use of Estimates
The accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP. This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported expenses during the period. The Company’s significant estimates and assumptions include the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the carrying amount of its investments, could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions. |
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Significant Accounting Policies | Significant Accounting Policies
Other than as described below, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019. |
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Net Income Loss per Share | Net Income Loss per Share
Basic loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2019 and 2018 are as follows:
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Recently Issued Accounting Standards | Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements. |
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Recently Adopted Accounting Standards | Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company does not have any long-term leases, therefore the adoption of this standard on January 1, 2019 did not have a material impact on the Company’s condensed consolidated financial position and results of operations.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2017-11 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements |
Summary of Significant Accounting Policies (Tables) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of potentially dilute loss per share | Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2019 and 2018 are as follows:
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Investments in Marketable Securities (Tables) |
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Investments In Marketable Securities Tables Abstract | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of marketable securities | The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and six months ended June 30, 2019 and 2018, which are recorded as a component of other (expenses) income on the consolidated statements of operations, are as follows ($ in thousands):
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Investment in Hoth Therapeutics, Inc. (Tables) |
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Investment In Hoth Therapeutics Inc. | |||||||||||||||||||||||||||
Schedule of Company investment in Hoth | The following summarizes the Company investment in Hoth:
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Fair Value of Financial Assets and Liabilities (Tables) |
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of fair value assets and liabilities | The following table presents the Company’s assets and liabilities that are measured at fair value at June 30, 2019 and December 31, 2018 ($ in thousands):
The table above excludes the Company’s investment in DatChat for $1.1 million, its investment in Mellow Scooters for $0.1 million and its other investments for $0.1 million as of June 30, 2019. Such investments were recorded on adjusted cost method measurement alternative in accordance with ASU 2016-01.
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Schedule of fair value assumptions | A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2019 and December 31, 2018 is as follows:
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Schedule of fair value of the company's level 3 financial liabilities | The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the six months ended June 30, 2019 and 2018 ($ in thousands):
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Stockholders' Equity and Convertible Preferred Stock (Tables) |
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Jun. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity Note [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of warrant activity | A summary of warrant activity for the six months ended June 30, 2019 is presented below:
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Schedule of fair value of options granted | A summary of option activity under the Company’s stock option plan for the six months ended June 30, 2019 is presented below:
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Schedule of stock-based compensation | Stock-based compensation for the three and six months ended June 30, 2019 and 2018 was comprised of the following ($ in thousands):
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Liquidity and Financial Condition (Details Narrative) $ in Thousands |
6 Months Ended |
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Jun. 30, 2019
USD ($)
| |
Liquidity And Financial Condition Abstract | |
Working capital deficit | $ 600 |
Summary of Significant Accounting Policies (Details) - shares |
6 Months Ended | |
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Jun. 30, 2019 |
Jun. 30, 2018 |
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Potentially dilute securities excluded from calculation | 386,368 | 419,156 |
Convertible preferred stock [Member] | ||
Potentially dilute securities excluded from calculation | 688 | 688 |
Warrants to purchase common stock [Member] | ||
Potentially dilute securities excluded from calculation | 285,273 | 294,072 |
Options to purchase common stock [Member] | ||
Potentially dilute securities excluded from calculation | 100,407 | 124,396 |
Investments in Marketable Securities (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
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Investments In Marketable Securities Details Narrative Abstract | ||||
Realized gain (loss) | $ (25) | $ (177) | $ (98) | $ (275) |
Unrealized gain (loss) | (10) | 41 | 138 | (17) |
Dividend income | 7 | 44 | 24 | 78 |
Total Marketable Securities | $ (28) | $ (92) | $ 64 | $ (214) |
Investment in Hoth Therapeutics, Inc. (Details) - Hoth Therapeutics Inc [ember] $ / shares in Units, $ in Thousands |
Jun. 30, 2019
USD ($)
$ / shares
shares
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Shares Owned | shares | 1,735,714 |
Fair value per Share | $ / shares | $ 5.81 |
Fair value | $ | $ 10,084 |
Investment in Hoth Therapeutics, Inc (Details Narrative) - $ / shares |
Jun. 30, 2019 |
Feb. 20, 2019 |
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Common Stock [Member] | IPO [Member] | ||
Sale of stock, price per share (in dollars per share) | $ 5.81 | $ 5.60 |
Fair Value of Financial Assets and Liabilities (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Assets | ||
Marketable securities - mutual and exchange traded funds | $ 817 | $ 2,700 |
Investments in Hoth | 10,565 | 10,345 |
Liabilities | ||
Fair value of warrant liabilities | 8 | 82 |
Quoted prices in active markets (Level 1) [Member] | ||
Assets | ||
Marketable securities - mutual and exchange traded funds | 817 | 2,700 |
Investments in Hoth | 10,084 | |
Liabilities | ||
Fair value of warrant liabilities | ||
Significant other observable inputs (Level 2) [Member] | ||
Assets | ||
Marketable securities - mutual and exchange traded funds | ||
Investments in Hoth | ||
Liabilities | ||
Fair value of warrant liabilities | ||
Significant unobservable inputs (Level 3) [Member] | ||
Assets | ||
Marketable securities - mutual and exchange traded funds | ||
Investments in Hoth | 9,214 | |
Liabilities | ||
Fair value of warrant liabilities | $ 8 | $ 82 |
Fair Value of Financial Assets and Liabilities (Details 1) |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2019 |
Dec. 31, 2018 |
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Risk Free Interest Rate [Member] | ||
Measurement input | 0.0248 | |
Risk Free Interest Rate [Member] | Minimum [Member] | ||
Measurement input | 0.0175 | |
Risk Free Interest Rate [Member] | Maximum [Member] | ||
Measurement input | 0.0192 | |
Price Volatility [Member] | Minimum [Member] | ||
Measurement input | 0.6711 | 0.7203 |
Price Volatility [Member] | Maximum [Member] | ||
Measurement input | 100 | 1.0313 |
Expected Term [Member] | Minimum [Member] | ||
Expected life (in years) | 1 year 5 months 8 days | 1 year 11 months 8 days |
Expected Term [Member] | Maximum [Member] | ||
Expected life (in years) | 2 years | 2 years 22 days |
Fair Value of Financial Assets and Liabilities (Details 2) - Significant unobservable inputs (Level 3) [Member] - USD ($) $ in Thousands |
6 Months Ended | |
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Jun. 30, 2019 |
Jun. 30, 2018 |
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Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward] | ||
Beginning balance | $ 82 | $ 822 |
Fair value adjustment of warrant liabilities | (74) | (465) |
Ending balance | $ 8 | $ 357 |
Fair Value of Financial Assets and Liabilities (Details Narrative) - USD ($) $ in Thousands |
1 Months Ended | |||
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May 31, 2019 |
Jun. 30, 2019 |
Mar. 31, 2019 |
Dec. 31, 2018 |
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Investments | $ 10,565 | $ 10,345 | ||
Mellow Scooters [Member] | Accounting Standards Update 2016-01 [Member] | ||||
Investments | $ 100 | |||
OherI Investments [Member] | Accounting Standards Update 2016-01 [Member] | ||||
Investments | $ 100 | |||
Senior Convertible Note [Member] | DatChat [Member] | ||||
Description of senior convertible note issued | The Company purchased 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. The aggregate purchase price was nominal. As a result of the nominal purchase price associated with is transaction, the Company reviewed its existing holdings in DatChat and reduced its existing carrying amount from $1.0 million to $0. |
Stockholders' Equity and Convertible Preferred Stock (Details 2) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
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Total compensation expense | $ 109 | $ 98 | $ 115 | $ 286 |
Restricted Stock [Member] | Employee Restricted Stock Awards [Member] | ||||
Total compensation expense | 27 | 107 | ||
Stock Option [Member] | Employee [Member] | ||||
Total compensation expense | 2 | 71 | 8 | 179 |
Warrant [Member] | Non - Employee [Member] | ||||
Total compensation expense | $ 107 | $ 107 |
Subsequent Events (Details Narrative) - Subsequent Event [Member] - Market Offering Agreement [Member] - H.C. Wainwright & Co., LLC [Member] $ in Thousands |
Aug. 09, 2019
USD ($)
|
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Aggregate offering price of common stock | $ 1,200 |
Commission rate | 3.00% |
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