See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

($ in thousands except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

($ in thousands except per share amounts)

(Unaudited) 

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES 

Consolidated Statements of Changes in Stockholders’ Equity 

($ in thousands except per share amounts)

(Unaudited) 

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited) 

See accompanying notes to condensed consolidated financial statements

Note 1. Organization and Description of Business

Organization and Description of Business

Spherix Incorporated (the “Company”) is an intellectual property company incorporated in the State of Delaware that owns patented and unpatented intellectual property.  The Company was formed in 1967 as a scientific research company and for much of its history pursued drug development including through Phase III clinical studies which were discontinued.  Through the Company’s acquisition of patents and patent applications developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”) and Harris Corporation from North South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities.

The Company is currently a patent commercialization company focused on generating revenues from the monetization of intellectual property, or IP. Such monetization includes, but is not limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and managing a licensing campaign, or through the settlement and litigation of patents. We intend to generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that we own, that we manage for others, or that others manage on our behalf. To date, we have generated minimal revenues and no assurance can be provided that our business model will be successful.

The Company continually worksIn addition to enhance its portfolioour patent monetization efforts, since the fourth quarter of intellectual property through acquisitions2017, we have been transitioning to focus our efforts as a technology development company. These efforts have focused on biotechnology research and strategic partnerships.blockchain technology research. The Company’s missionbiotechnology research development includes investments in Hoth Therapeutics Inc. and the proposed merger with CBM BioPharma, Inc. (“CBM”).

Hoth Therapeutics is a development stage biopharmaceutical company focused on proprietary therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. To treat indications impacting more than 32 million Americans, Hoth is working to partner with inventors, or other entities, who own undervalued intellectual property. The Company then works with the inventors or other entities todevelop and commercialize the IP.BioLexa™ Platform, a proprietary, patented, drug compound platform developed at the University of Cincinnati. The BioLexa™ Platform has achieved positive results at preclinical studies conducted at the University of Miami.

In March 2016,addition to Hoth, the Company is proposing a merger with CBM. In October 2018, the Company entered into an agreement (which was subsequently amendedand plan of merger, subject to shareholder approval, with CBM BioPharma, Inc. (“CBM”), a pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 15,000,000 shares of the Company’s common stock with CBM continuing as the surviving corporation in Aprilthe merger.

In the field of blockchain research, the Company previously entered into an agreement and May 2016)plan of merger, subject to shareholder approval, with Equitable IP Corporation (“Equitable”DatChat, Inc. (the “DatChat Merger”), a secure messaging application that utilizes blockchain technology. After further negotiations, the Company determined not to facilitatepursue a merger with DatChat and on August 8, 2018, entered into a Securities Purchase Agreement with DatChat pursuant to which the monetizationCompany and DatChat agreed to terminate the DatChat Merger and the Company agreed to make a $1,000,000 strategic investment in DatChat which consisted of its patents (the “Monetization Agreement”).(a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChat by the Company, and (c) an obligation of the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 4.37% of the issued and outstanding common stock of DatChat. Pursuant to the MonetizationSecurities Purchase Agreement, the Company is working together with Equitableapplied a total of approximately $152,000 prior advances towards its investment in DatChat (“Prior Incurred Amount”), including $131,000 of compensation related costs and $21,000 professional fees. The Company also recorded approximately $348,000 compensation expenses payable to further develop and revise its ongoing litigation plan. See Note 7 for additional details surroundingDatChat (“Payable to DatChat”) in addition to the Monetization Agreement.$152,000 advances to reach the $500,000 maximum.

The breakdown of investment at Datchat as September 30, 2018 are as follows ($ in thousands): 

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:

Management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months.

The Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flowsflow 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 termlonger-term business plan.plan to support new technologies and help advance innovation. The Company’s working capital amounted to approximately $2.6$2.3 million at September 30, 2017, and net income amounted to approximately $0.5 million and net loss approximately $2.3 million for the three and nine months ended September 30, 2017. The Company had an approximately $144.1 million of accumulated deficit as of September 30, 2017.2018. Absent generation of sufficient revenue from the execution of the Company’s long termlong-term business plan, the Company will need to obtain additional debt or equity financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or operations.  If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all. On July 18, 2017, the Company entered into an underwriting agreement with Laidlaw & Company (UK) Ltd. with respect to the issuance and sale of an aggregate of 1,250,000 shares of the Company’s common stock, par value $0.0001 per share, in a firm commitment underwritten public offering which closed on July 24, 2017. Each share was sold for a price of $2.00 for aggregate gross proceeds of $2.5 million, with net proceeds of approximately $2.1 million, after deducting the underwriting discounts and commissions (equivalent to 8% of gross proceeds) and estimated offering expenses.

Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. The Company may be forced to litigate against others to enforce or defend its intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which the Company is involved may allege defenses and/or file counterclaims or initiate inter partiesinter-party reviews in an effort to avoid or limit liability and damages for patent infringement or cause the Company to incur additional costs as a strategy.  If such efforts are successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents. The patents could be declared invalid by a court or the United States Patent and Trademark Office, in whole or in part, or the costs of the Company can increase. Recent rulings also create an increased risk that if the Company is unsuccessful in litigation it could be responsible to pay the attorneys’ fees and other costs of defendants by lowering the standard for legal fee shifting sought by defendants in patent cases.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Note 3. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology Corp. (“Nuta”), Spherix Portfolio Acquisition II, Inc. (“SPXII”SPAII”), Guidance IP, LLC (“Guidance”), Directional IP, LLC (“Directional”), Spherix Management Services, LLC (“SMS”), Spherix Delaware Merger Sub Inc. (“Merger Sub”), Spherix Merger Subsidiary, Inc (“SMSI”) and NNPT, LLC (“NNPT”). All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation of derivative liabilities, the valuation of investments and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions.

Concentration of Cash

The Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents. As of September 30, 2018 and December 31, 2017, the Company had $0.1 million and 0.2 million, respectively, in cash and cash equivalents. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Marketable Securities

Marketable securities are classified as trading and are carried at fair value. The Company’s marketable securities consist of corporate bonds and highly liquid mutual funds and exchange-traded & closed-end funds which are valued at quoted market prices.

DuringThe realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three months ended September 30, 2017 and 2016, the Company incurred realized losses of approximately $174,000 and realized gains of approximately $56,000, respectively, and unrealized gains of approximately $124,000 and $91,000, respectively, on its investments in marketable securities, which are included in other income, net on the consolidated statements of operations. In addition, during the three months ended September 30, 2017 and 2016, the Company earned dividend income of approximately $18,000 and $2,000, respectively, which is included in other income, net on the consolidated statement of operations.

During the nine months ended September 30, 2018 and 2017 and 2016, the Company incurred realized losses of approximately $303,000 and $66,000, respectively, and unrealized gains (losses) of approximately $262,000 andare as follows ($62,000), respectively, on its investments in marketable securities, which are included in other income, net on the consolidated statements of operations. In addition, during the nine months ended September 30, 2017 and 2016, the Company earned dividend income of approximately $72,000 and $19,000, respectively, which is included in other income, net on the consolidated statement of operations.thousands):

The Company reinvested such dividend income into its marketable securities during the nine months ended September 30, 20172018 and 2016.2017. The fair values of such marketable securities held as of September 30, 20172018 and December 31, 20162017 were $4.7$3.4 million and $6.0$4.0 million, respectively.

The marketable securities were classified as a Level 2 financial instrument at September 30, 2018 (see Note 8).

Investment

The Company elected the fair value option forrecords its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”). at fair value. As of September 30, 2017,2018, the fair value of this investment was $1,020,000 (see Note 4).$1,700,000. The Company also records its investment in TheBit Daily LLC, a Delaware limited liability company (“TheBit Daily”) at fair value. As of September 30, 2018, the fair value of this investment was $25,000. In addition, the Company made an $1,000,000 investment in DatChat on August 8, 2018. These investments were classified as a Level 3 financial instrument at September 30, 2017.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements2018 (see Note 8).

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as an unrealized gain on investment in the Condensed Consolidated Statements of Operations.

Accounting for Warrants

The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 6).

Net Loss per Share

Basic loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. Net income (loss) attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible preferred stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The following table summarizes the earnings (loss) per share calculation (in thousands, except per share amount):

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2018 and 2017 are as follows:

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement when the services have been provided to the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related to revenue generated from its settlement and licensing agreements. The appropriate recognition of revenue is determined as one performance obligation and revenue is recognized upon delivery of the final performance obligations, including the license for past and future use and the release.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company recognizes revenue under ASC 606,Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “RevenueRevenue from Contracts with Customers” (“ASU 2014-09”), which requires entities toCustomers. The core principle of the new revenue standard is that a company should recognize revenue in a way that depictsto depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entitycompany expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure aboutfollowing five steps are applied to achieve that core principle:

In order to identify the nature, amount, timingperformance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and uncertaintyidentify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtaina “distinct” good or fulfill a contract. The FASB has subsequently issued ASU No. 2016-10, Revenue from Contracts with Customer (Topic 606) Identifying Performance Obligations and Licensing to address issues arising from implementationservice (or bundle of goods or services) if both of the new revenue recognition standard. ASU 2014-09 and ASU 2016-10following criteria are effective for interim and annual periods beginning January 1, 2018, and may be adopted earlier, butmet:

If a good or service is not before January 1, 2017. distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The revenue standards are requiredtransaction price is the amount of consideration to which an entity expects to be adopted by taking eitherentitled in exchange for transferring promised goods or services to a full retrospectivecustomer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

Variable consideration is included in the transaction price only to the extent that it is probable that a modified retrospective approach. significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The Companytransaction price is currently evaluating the impactallocated to each performance obligation on a relative standalone selling price basis.

The transaction price allocated to each performance obligation is recognized when that ASU 2014-09 and 2016-10 will have onperformance obligation is satisfied, at a point in time or over time as appropriate.

As of September 30, 2018, there were no contract assets or liabilities associated with the Company’s financial statementssettlement and determininglicensing agreements. During the transition method, includingnine months ended September 30, 2018, the period of adoption, that it will apply.Company did not generate any revenue.

In January 2016, the FASB issued ASU No. 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities.Recently Issued Accounting Standards ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU No. 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842), which supersedes FASB ASC Topic 840,Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In March 2016, the FASB issued ASU 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations(“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. The amendments in ASU 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU 2016-08 on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new pronouncement on its consolidated statements of cash flows.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

In January 2017, the FASB issued ASU No. 2017-04,Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting forGoodwill Impairment. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.

In May 2017, the Financial Accounting Standards Board (the FASB) issued ASU 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, (ASU 2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on the Company’s financial position or results of operations.

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire   instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

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 is currently assessing the effect this guidance may have on its financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated Financial Statements.

Recently Adopted Accounting PronouncementsStandards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach. The Company has determined that its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated and accumulated deficit as of January 1, 2018 was decreased by approximately $3.2 million so that the Company will not recognize revenue on earnings statements in the future as to its license.

In MarchJanuary 2016, the FASB issued ASU No. 2016-09,2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the provisions of ASU 2016-01 on January 1, 2018. The adoption of this update did not impact the Company’s consolidated financial statements and related disclosures.  

In May 2017, the Financial Accounting Standards Board (the FASB) issued ASU 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, Improvements(ASU 2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to Employee Share-Based Payment Accounting (“ASU 2016-09”). Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value upchange to the amountterms or conditions of taxes owed using the maximum statutory tax ratea share-based payment award. The amendments in the employee’s applicable jurisdiction(s). ASU 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows2017-09 should be classified. In addition, companies will now haveapplied prospectively to elect whether to account for forfeituresan award modified on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimatingafter the number of awards expected to be forfeited and adjusting the estimate when itadoption date. This ASU is likely to change, as is currently required. The amendments of this ASU are effective for reportingfiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted but all of the guidance must be2017. The Company adopted in the same period. EffectiveASU 2017-09 on January 1, 2017, the Company began accounting for forfeitures as they occur. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making2018. The adoption of this election under ASU 2016-09, the Company estimated their forfeiture rate at 0%, or they did not have a significant historymaterial impact on the Company’s financial position or results of forfeitures.operations.

Note 4. Investment in Hoth Therapeutics, Inc.

On June 30, 2017 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchase of an aggregate of 6,800,000 shares of common stock, par value $0.0001 (the “Shares”), of Hoth, for a purchase price of $675,000. As of the Closing Date, Hoth had a total of 17,000,000 shares of common stock issued and outstanding. Hoth is a development stage biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema. Hoth’s primary asset is a sublicense agreement with Chelexa Biosciences, Inc. (“Chelexa”) pursuant to which Chelexa has granted Hoth an exclusive sublicense to use its BioLexa products for the treatment of eczema.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Under the Purchase Agreement, following the occurrence of a Going Public Event (as defined below), Hoth covenants to timely file all reports required to be filed under the Securities Exchange Act of 1934 (the “Exchange Act”) and to take all necessary steps to cause the Shares to be approved for listing or quotation on a trading market such as NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX. A “Going Public Event” means (i) an initial public offering of Hoth’s securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) Hoth’s entry into a merger, consolidation, transfer or share exchange transaction pursuant to which Hoth becomes subject to the reporting requirements of the Exchange Act.

The Company adopted therecords this investment at fair value option for this investment and will record any changerecorded changes in fair value in the statement of operations (see Note 6)8).  

Note 5. Investment in TheBit Daily LLC

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

The Company records this investment at fair value and changes in fair value are recorded (see Note 8).  

Note 6. Investment in DatChat, Inc.

On August 8, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with DatChat. Under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat. See Note 1 for further explanation.

As described in Note 3 to these condensed consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for its investment in DatChat. The Company records its investment at fair value and changes in fair value are recorded in the statement of operations (see Note 8).

Note 5.7. Intangible Assets

Patent Portfolio and Patent Rights

The Company’s intangible assets with finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible assets were subject to amortization. The carrying amounts related to acquired intangible assets as of September 30, 20172018 are as follows ($ in thousands):

The amortization expenses related to acquired intangible assets for the nine months ended September 30, 20172018 and 20162017 are as follows ($ in thousands):

The Company reviews its patent portfolio for impairment as a single asset group whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2018, the Company determined that certain events occurred that were indicators of a potential impairment. In accordance with ASC 360-10, the Company first estimated the future undiscounted cash flows anticipated to be generated by the patent portfolio based on the Company’s current usage and future plans for the patent portfolio over its remaining weighted average useful life. Given the short-term nature of the patents the undiscounted cash flows approximate discounted cash flows. The analysis concluded that the carrying amount of the patent portfolio was not recoverable at September 30, 2018. As a result, the Company performed an analysis to determine if the carrying value of the patent portfolio exceeded its fair value. As a result, the Company determined that the fair value of the patent portfolio at September 30, 2018 was $1.5 million. The Company recorded a $1.1 million impairment charge against its patent portfolio in the third quarter of 2018. The new cost basis of the patent portfolio of $1.5 million will be amortized over its weighted average remaining useful life of 1.00 years.

The future amortization of these intangible assets was based on the adjusted carrying amount. Future amortization of all patents is as follows ($ in thousands):

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Equitable Agreement

In March 2016, the Company entered into an agreement (which was subsequently amended) with Equitable IP Corporation (“Equitable”) to facilitate the monetization of the Company’s patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement, the Company has worked together with Equitable to develop and refine the Company’s ongoing litigation plan. Under the Monetization Agreement, Equitable is obligated to use its best, commercially reasonable efforts to monetize the Company’s patents. To that end, Equitable has filed several litigations, one of which is currently pending. The Company will share net monetization revenue derived from all monetization activity equally with Equitable. To facilitate the litigation plan, approximately 186 of over 330 of the Company’s patents and applications have been assigned to Equitable, which will pay all maintenance and prosecution fees going forward. No assigned patents may be transferred by Equitable to a third party without the Company’s consent. In the event that all terms of the Monetization Agreement are met by December 2017, the Company will further assign approximately 140 additional patents and applications to Equitable for monetization. The Company has retained a grant-back license to practice all transferred patents.

The Company has concluded that the Monetization Agreement did not constitute a sale of the patents. The Company’s retention of the right to use the patents, the requirement for the Company’s consent to any sale, and the significant economic benefits the Company retained with respect to the litigation, licensing and sale proceeds, did not meet the sale of patent criteria. The Monetization Agreement has been treated as an agreement to outsource its licensing activities to an outside servicer for contingent fees based on the success of the servicer’s efforts. As such, the Company will not remove the patents from its consolidated balance sheet, and will record its share of litigation, licensing, and sales proceeds, if any, when those proceeds are received, or when due if the other revenue recognition criteria are met under ASC 605,Revenue Recognition.

Note 6.8. Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts and other receivables, marketable securities, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company uses three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for identical assets or liabilities  

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable  

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The following table presents the Company’s assets and liabilities that are measured at fair value at September 30, 20172018 and December 31, 20162017 ($ in thousands):

There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2017.2018.

Level 2 Valuation Techniques

The fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 Valuation Techniques

Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Financial assets consist of the Company’s investment in Hoth. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s consolidated statements of operations.

On July 21, 2015, the Company issued the July 2015 Warrants to purchase an aggregate of 370,263 shares of common stock to the investors in the July 2015 Financing. The July 2015 Warrants became exercisable on January 22, 2016 for a period of 5 years at an exercise price of $8.17 per share. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in the July 2015 Warrants) at the Company and therefore are classified as liabilities. The July 2015 Warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

On December 7, 2015, the Company issued Series A warrants to purchase up to 1,052,624 shares of common stock and Series B warrants to purchase up to 842,099 shares of common stock contained in such offering. Series A Warrants had an exercise price of $3.80 per share and were exercisable at any time between December 7, 2015 and May 6, 2016. 852,624 shares of Series A warrants expired unexercised on May 24, 2016, and no Series A Warrants remain outstanding as of December 31, 2016. Series B Warrants have an exercise price of $4.75 per share and are exercisable at any time between December 7, 2015 and December 6, 2020. The Warrants require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

The Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes 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 Condensed Consolidated Financial Statementscash 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 September 30, 2018 and December 31, 2017 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 for the nine months ended September 30, 20172018 and 20162017 that are measured at fair value on a recurring basis ($ in thousands):

The Company owns approximately 34% of common shares in Hoth as of September 30, 2018. The value of the Company’s investment in Hoth was determined based on a valuation which takes into consideration, when applicable, cash received, cost ofincreased by approximately $0.7 million during the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values at which the Company’s investment in Hoth is carried on its books are adjusted to estimated fair value at the end of each quarter taking into account general economic and stock market conditions and those characteristics specific to Hoth.nine months ended September 30, 2018.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets for the nine months ended September 30, 2018 and 2017 that are measured at fair value on a recurring basis:

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as an unrealized gain on investment in the Consolidated Statements of Operations.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The fair value of the investment in Hoth at September 30, 2017 was approximately $1.0 million. The underlying stock price of Hoth was estimated to be $0.15 per share based on Hoth’s fundraising activity and the Option Pricing Method Backsolve in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issues as Compensation. The valuation of the underlying shares included the following assumptions: risk-free rate – 1.39%, company volatility - 75%, expected term or time to maturity – 1.5 years.

Note 7. RPX License Agreement

On November 23, 2015, the Company and RPX Corporation (“RPX”) entered into a Patent License Agreement (the “RPX License Agreement”) under which the Company granted RPX the right to sublicense various patent license rights to certain RPX clients. The consideration to the Company included: (i) the transfer to the Company for cancellation of its remaining outstanding Series I Redeemable Convertible Preferred Stock (the “Series I Preferred Stock”), as to which a $5,000,000 mandatory redemption payment would have been due from the Company on or by December 31, 2015; (ii) the transfer to the Company for cancellation of 13%, or 57,076 shares, of its Series H Convertible Preferred Stock (the “Series H Preferred Stock”) then held by RPX, having a total carrying amount of $4,765,846 at the time the stock was issued to Rockstar; (iii) cancellation of the only outstanding security interest on 101 of the Company’s patents and patent applications that originated at Nortel Networks (“Nortel”) and were purchased by the Company from Rockstar, which security interest had previously been transferred to RPX by Rockstar (“RPX Security Interest”); and (iv) $300,000 in cash to the Company. While the license granted to RPX is non-exclusive and the duration of the license is for the life of the patents, the Company’s ongoing obligations in the arrangement is to provide certain specific RPX licensors with a non-exclusive license to any new patents that may be acquired by or exclusively licensed to the Company during the two-year period following the effective date of the agreement. Therefore, the Company will recognize $0.6 million revenue ratably over the two-year period that it is obligated to provide these RPX licensees with licenses to such new patents. During the years ended December 31, 2016 and 2015, the Company recorded approximately $290,000 and $31,000, respectively, in revenue related to the amortization of the license.

On May 23, 2016, the Company, and RPX, entered into a second, separate, Patent License Agreement (the “RPX License”) under which the Company granted RPX the right to sublicense various patent rights only to current RPX clients (as of May 23, 2016). In exchange for the rights granted by the Company under the RPX License, the Company received the following consideration: (i) a cash payment made to the Company in May 2016 in the amount of $4,355,000; and (ii) cancellation of 100% of the remaining 381,967 shares of the Company’s outstanding Series H Convertible Preferred Stock currently held by RPX, having a total carrying amount of $31,894,244 at the time the stock was issued to Rockstar Consortium US LP (“Rockstar”).

In consideration of the above, the Company granted RPX the rights to grant to its current clients: (i) a fully paid portfolio license, to the extent such parties did not already have licenses to the Company’s patents; (ii) a covenant-not-to-sue current RPX clients for supply of chipsets; (iii) a standstill of litigation involving any patents acquired in the next five years (“Standstill”).

The Company also granted to Alcatel-Lucent a license to the portfolio acquired from the Harris Corporation.

During the three and nine months ended September 30, 2017, the Company recorded approximately $314,000 and $932,000, respectively, in revenue related to the amortization of the license.

Under a separate agreement between the Company and RPX, dated May 23, 2016, the Company granted RPX the ability to grant to VTech Telecommunications Ltd. (“VTech”) a sublicense for a fully paid portfolio license in exchange for an additional $20,000 in cash consideration.

The license granted under the terms of the RPX License described herein does not extend to entities/companies that are not clients of RPX and provide chipsets or other hardware to current RPX clients.

The carrying value of Series H Convertible Preferred Stock on the extinguishment date was estimated at approximately $31.9 million. The fair value on the same date was estimated at approximately $414,000 based upon equivalent common shares that the Series H Convertible Preferred Stock could have converted into at the closing price on May 23, 2016. This resulted in the Company receiving cash from RPX of $4.4 million, a deemed capital contribution of approximately $31.5 million, short term deferred revenue $1.1 million and long term deferred revenue of $3.7 million.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

A summary of quantitative information with respect to the RPX transaction on May 23, 2016valuation methodology and significant unobservable inputs used for the Company’s valuation in Hoth that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of September 30, 2018 and December 31, 2017 is as follows:

The investment in Hoth Therapeutics was valued using a hybrid probability weighted expected return method, with scenarios including (1) Hoth continuing to operate as a private company through an estimated potential exit date, and (2) Hoth undergoing an IPO in the near future. The private-company scenario utilizes a reverse option pricing method (backsolve) based on the recent Series A transaction. Key inputs to the backsolve, in addition to the Series A price, include volatility (75.00%) and expected maturity (1.0 years). The IPO scenario is based on initial value indications proposed by investment bankers. The primary inputs, in addition to the pre-money value indications, include the estimated time to IPO (end of November) and a discount rate of 15%. The valuation conclusion is sensitive to the probability weightings assigned to each scenario. The weightings (1/3 IPO scenario, 2/3 private company scenario), were determined according to management expectations regarding exit opportunities, based on what was known or knowable as of September 30, 2018.

The deferred revenue will be amortized over a 5-year service periodcosts of its investment in the BitDaily and DatChat approximate fair value as there have been no significant changes to its investment since the RPX License includes a standstill agreement which requires Spherix to provide the licensee with the right to use any future acquired patents for five years.date of purchase.

ASC 260-10-S99-2,EffectIntangible Assets Measured at Fair Value on a Non-Recurring Basis using Level 3 Inputs

The following tables presents the Calculation of Earnings per ShareCompany’s hierarchy for the Redemption or Induced Conversion of Preferred Stock, requires the gain or loss on extinguishment of equity-classified preferred stock to be included in net income per common stockholder used to calculate earnings per share (similar to the treatment of dividends paid on preferred stock). The difference between (1) thenonfinancial assets measured at fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted from (or added to) net income to arriveon a non-recurring basis (in thousands):

The Company’s intangible assets are measured at income available to common stockholders in the calculation of earnings per share.fair value on a non-recurring basis using Level 3 inputs. See Note 7 for valuation techniques for patents.

Note 8.9. Stockholders’ Equity and Redeemable Convertible Preferred Stock

Restated Certificate of Incorporation

On March 4, 2016, the Company implemented a Reverse Stock Split with a ratio of 1-for-19. The par value and other terms of the common stock were not affected by the Reverse Stock Split. In addition, the amendment to the Company’s certificate of incorporation that effected the Reverse Stock Split simultaneously reduced the number of authorized shares of Common Stock from 200,000,000 to 100,000,000.

Common Stock

On July 18, 2017,March 19, 2018, the Company entered into an underwritingclosed a public offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of the Company’s registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement with(the “Agreement”) between the Company and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts basis with respect to the issuance and sale of an aggregate of 1,250,000offering (the “Placement Agent”), that was entered into on March 14, 2018. The Company sold 2,222,222 shares of the Company’sits common stock par value $0.0001 per share, in the offering at a firm commitment underwritten public offering which closed on July 24, 2017. Each share was sold for apurchase price of $2.00 for aggregate gross proceeds of $2,500,000, with net proceeds of approximately $2.1 million, after deducting the underwriting discounts and commissions (equivalent to 8% of gross proceeds) and estimated offering expenses. 

Preferred Stock

The Company had designated separate series of its capital stock as of September 30, 2017 and December 31, 2016 as summarized below:

$1.35 per share.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Warrants

A summary of warrant activity for the nine months ended September 30, 20172018 is presented below:

Stock Options

Also approved by the Company’s stockholders onOn February 26, 2016 was an amendment to the Company’s 2014 Equity Incentive Plan, which increased the number of shares of common stock authorized to be issued pursuant to the 2014 Plan from 4,161,892 to 8,250,000 prior to effectuation of the 1:19 reverse stock split. As a result of the split, the total share authorization under the plan was reduced to 434,210 shares.

During the second quarter ended June 30, 2017,16, 2018, pursuant to and subject to the available number of shares reserved under the 2014 Plan, the Company issued an aggregate of 15,788150,000 options to purchase common stock of the Company to fourthree of its directors. The aggregate grant date fair value of these options was approximately $12,000.$0.2 million. These stock options vested over six months.

On May 3, 2018, a new director was granted options to purchase 50,000 shares of the Company’s common stock, at an exercise price of $1.04 per share, which options vested 50% at May 3, 2018 with the remaining 50% vesting at May 3, 2019. The aggregate grant date fair value of these options was approximately $46,000. These stock options vest over one year.  twelve months.

A summary of option activity under the Company’s employee stock option plan for the nine months ended September 30, 20172018 is presented below:

A summary of option activity under the Company’s non-employee stock option plan for the nine months ended September 30, 20172018 is presented below:

Stock-based compensation associated with the amortization of stock option expense was approximately $2,000$28,000 and $5,000$2,000 for the three months ended September 30, 20172018 and 2016,2017, and was approximately $13,000$208,000 and $26,000$13,000 for the nine months ended September 30, 2018 and 2017, and 2016, respectively.

Restricted Stock UnitsAwards

On February 16, 2018, the Company granted three of its directors 20,000 shares of restricted common stock each. The grant date fair value of each restricted stock award was approximately $27,000. These restricted stock awards vested immediately.

On March 14, 2017, 35,969April 26, 2018, the Company issued 25,410 shares of its common stock to an employee for services pursuant to an employment agreement. The grant date fair value of this restricted stock units (“RSUs”) were delivered to Anthony Hayes. 23,287 shares of common stock were withheld (ataward was approximately $27,000 (based upon the closing price of the Company'sCompany’s common stock on the NASDAQ Capital Market on March 14, 2017) to satisfy the tax obligation relating to the vesting of the RSUs.

April 26, 2018). This restricted stock award vested immediately.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Stock-based Compensation

Stock-based compensation for the three and nine months ended September 30, 20172018 and 20162017 was comprised of the following ($ in thousands):