Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and persons controlling us, we understand that it is the SEC’s opinion that such indemnification is against public policy as expressed in the Securities Act and may therefore be unenforceable.
underwriters' option to purchase additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us for the shares.| | ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;Total |
| | ● | block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; |
| | | |
| | ● | privately negotiated transactions;Per Share | | | Without
Over-Allotment | | | With
Over-Allotment | |
| Public offering price | | $ | | | | $ | | | | $ | | |
| Underwriting discount | | $ | | | | $ | | | | $ | | |
| Proceeds, before expenses, to us | | $ | | | | $ | | | | $ | | |
We have agreed to pay an accountable expense allowance to the representative of the underwriters up to a maximum of $25,000; however, an allowance shall not be paid in connection with the over-allotment option if the over-allotment option is exercised, and we have agreed to pay all fees and expenses of the representative, including, without limitation, its legal fees and expenses, all such fees not to exceed $70,000 in the aggregate, inclusive of background check expenses. We have also agreed to pay the expenses relating to the offering, including, but not limited to, (1) all actual filing fees incurred in connection with the review of this offering by the Financial Industry Regulatory Authority, Inc., or FINRA, (2) all fees and expenses relating to the listing of our shares of common stock on the Nasdaq Capital Market, (3) all actual fees, expenses and disbursements relating to the registration, qualification or exemption of the shares of common stock being offered by this prospectus under state securities laws, or "blue sky" laws, or under the securities laws of foreign jurisdictions designated by the representative, (4) all actual fees, expenses and disbursements relating to the registration, qualification or exemption of our shares of common stock under the securities laws of such foreign jurisdictions as the representative may reasonably designate, (5) all actual fees, expenses and disbursements relating to background checks of our officers and directors not to exceed $10,000, (6) the costs of all mailing and printing of the underwriting documents as the representative may reasonably deem necessary, and (7) the legal fees and expenses and fees and expenses of any other agents and representatives of the Company incurred as a result of the offering.
| | ●66 | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; or |
| ● | a combination of any such methods of sale. |
The aggregate proceedsexpenses of the offering, not including the underwriting discount, are estimated at approximately $_______ and are payable by us.
Option to Purchase Additional Shares
We have granted an option to the underwriters, exercisable for 45 days after the date of this prospectus, to purchase up to ___________ additional Shares at the public offering price, less the underwriting discount. If the underwriters exercise this option, each underwriter will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional Shares proportionate to that underwriter's initial amount reflected in the above table.
Lock-Up Agreements
Pursuant to certain "lock-up" agreements, for a period of ninety (90) days from the effective date of the offering, we and our named executive officers and directors have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently acquired, without the prior written consent of the underwriter.
The representative may, in its sole discretion and at any time or from time to time before the termination of the lock-up periods release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our stockholders from anywho will execute a lock-up agreement, providing consent to the sale of shares prior to the common stock offeredexpiration of the lock-up period.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
In connection with the offering, the underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by it will beshort sales, and penalty bids or purchases for the purchasepurpose of pegging, fixing or maintaining the price of the common stock, less discountsin accordance with Regulation M under the Exchange Act:
•Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
•A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or commissions, if any.a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The selling stockholders reservesunderwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the rightopen market. In determining the source of shares to accept and, together with its agents from timeclose out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to time,the price at which they may purchase shares through their option to reject, in whole or in part, any proposed purchase of common stockadditional shares. A naked short position is more likely to be made directly or through agents. We would not receive any ofcreated if the proceeds from any such sale.
The selling stockholders also may resell all or a portionunderwriters are concerned that there could be downward pressure on the price of the shares in the open market transactions in reliance upon Rule 144 promulgated under the Securities Act, providedafter pricing that it meets the criteria and conform to the requirements of that rule.
The selling stockholders and any broker-dealers or agents that participatecould adversely affect investors who purchase in the
saleoffering.•Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions.
•Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be deemedhigher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Listing and Transfer Agent
Our Common Stock is listed on The NASDAQ Capital Market and trades under the symbol “SPEX.” The transfer agent of our Common Stock is Vstock Transfer, LLC, with an address at 18 Lafayette Place, Woodmere, NY 11598.
Electronic Distribution
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares of common stock to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters and selling group members that may make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters' websites and any information contained in any other website maintained by the underwriters is not part of this prospectus or the registration statement of which this prospectus forms a part.
Other Relationships
From time to time, certain of the underwriters and their affiliates have provided, and may provide in the future, various advisory, investment and commercial banking and other services to us in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions. However, except as disclosed in this prospectus, we have no present arrangements with any of the underwriters for any further services.
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, or the Relevant Member States, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, our securities will not be offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to the securities that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities may be made to the public in that Relevant Member State at any time:
to any legal entity that is a qualified investor as defined in the Prospectus Directive;
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the manager for any such offer; or
in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3(2) of the Prospectus Directive.
For the purposes of this provision, the expression an "offer of common shares to the public" in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common shares to be “underwriters”offered so as to enable an investor to decide to purchase or subscribe the common shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State. The expression "Prospectus Directive" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression "2010 PD Amending Directive" means Directive 2010/73/EU.
We have not authorized, and do not authorize the making of, any offer of shares through any financial intermediary on our behalf, other than offers made by the underwriters with a view to the final placement of the shares as contemplated by this prospectus. Accordingly, no purchaser of the securities, other than the underwriters, is authorized to make any further offer of the shares on our or the underwriters' behalf.
United Kingdom
Our securities may not be offered or sold and will not be offered or sold to any persons in the United Kingdom other than persons whose ordinary activities involve acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses and in compliance with all applicable provisions of the Financial Services and Markets Act 2000, or FSMA, with respect to anything done in relation to our securities in, from or otherwise involving the United Kingdom.
In addition, each underwriter:
has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act of 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to us; and
has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom.
Australia
No prospectus or other disclosure document (as defined in the Corporations Act 2001 (Cth) of Australia, or the Corporations Act) in relation to the securities has been or will be lodged with the Australian Securities & Investments Commission, or the ASIC. This document has not been lodged with ASIC and is only directed to certain categories of exempt persons. Accordingly, if you receive this document in Australia:
(1) you confirm and warrant that you are either:
(a) a "sophisticated investor" under section 708(8)(a) or (b) of the Corporations Act;
(b) a "sophisticated investor" under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant's certificate to us which complies with the requirements
of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made;
(c) a person associated with us under section 708(12) of the Corporations Act; or
(d) a "professional investor" within the meaning of Section 2(11)section 708(11)(a) or (b) of the Corporations Act, and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act, any offer made to you under this document is void and incapable of acceptance; and
(2) you warrant and agree that you will not offer any of the securities for resale in Australia within 12 months of those securities being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.
Hong Kong
The securities may not be offered or sold in Hong Kong by means of any document other than (1) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), (2) to "professional investors" within the meaning of the Securities Act.and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (3) in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Japan
The securities offered in this prospectus have not been and will not be registered under the Financial Instruments and Exchange Law of Japan. The securities have not been offered or sold and will not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan (including any corporation or other entity organized under the laws of Japan), except (i) pursuant to an exemption from the registration requirements of the Financial Instruments and Exchange Law and (ii) in compliance with any other applicable requirements of Japanese law.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the securities may not be circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (2) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA, or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.
Where the securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:
to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA;
where no consideration is or will be given for the transfer; or
where the transfer is by operation of law.
Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or the SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, us, or the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of the shares.
Canada
Resale Restrictions
The distribution of our securities in Canada is being made only in the provinces of Ontario, Quebec, Alberta, British Columbia and Manitoba on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any discounts, commissions, concessionsresale of the common stock in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or profit they earn onunder a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares may be underwriting discountscommon stock.
Representations of Purchasers
By purchasing securities in Canada and commissionsaccepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:
the purchaser is entitled under applicable provincial securities laws to purchase the securities without the benefit of a prospectus qualified under those securities laws as it is an "accredited investor" as defined under National Instrument 45-106—Prospectus and Registration Exemptions;
the purchaser is a "Canadian permitted client" as defined in National Instrument 31-103—Registration Requirements and Exemptions, or as otherwise interpreted and applied by the Canadian Securities Act. The selling stockholders are subjectAdministrators;
where required by law, the purchaser is purchasing as principal and not as agent;
the purchaser has reviewed the text above under "—Resale Restrictions"; and
the purchaser acknowledges and consents to the prospectus delivery requirementsprovision of specified information concerning the purchase of the securities to the regulatory authority that by law is entitled to collect the information, including certain personal information. For purchasers in Ontario, questions about such indirect collection of personal information should be directed to Administrative Support Clerk, Ontario Securities Act.Commission, Suite 1903, Box 55, 20 Queen Street West, Toronto, Ontario M5H 3S8 or on (416) 593-3684.
Rights of Action—Ontario Purchasers
Under Ontario securities legislation, certain purchasers who purchase any securities offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the securities, for rescission against us in the event that this prospectus contain a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the securities. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the securities. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the securities were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
TheEllenoff Grossman & Schole LLP, New York, New York, will pass upon the validity of the issuanceshares of the securitiesour common stock offered herebyhereby. Certain legal matters in connection with this offer will be passed upon for usthe underwriters by Baxter, Baker, Sidle, ConnSheppard, Mullin, Richter & Jones, P.A.
TheMarcum LLP, an independent registered public accounting firm, has audited our consolidated financial statements as of andincluded in our Annual Report on Form 10-K for the yearsyear ended December 31, 2012 and 2011, included2016, as set forth in their report dated March 31, 2017, which is incorporated by reference in this prospectus and elsewhere in the registration statement have been so includedstatement. Our consolidated financial statements are incorporated by reference in reliance upon theon Marcum LLP’s report, of Grant Thornton LLP, independent registered public accounting firm, upongiven on the authority of saidsuch firm as experts in accounting and auditing in giving said report.
auditing. The audited financial statements of North South Holdings, Inc. as of December 31, 2012 and for the period from November 9, 2012 (inception) through December 31, 2012 included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of Marcum LLP, an independent registered public accounting firm, upon the authority of said firm as experts in accounting and auditing in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
INORMATION AND INCORPORATION BY REFERENCEWe have filed with the SEC a registration statement on Form S-1 together with any amendments and related exhibits, under the Securities Act with respect to ourthe shares of common stock offered by this prospectus. Thehereby. This prospectus, which constitutes a part of the registration statement, contains additionaldoes not contain all of the information set forth in the registration statement or the exhibits filed with the registration statement. For further information about us and our shares ofthe common stock thatand warrants offered hereby, we refer you to the selling stockholders are offeringregistration statement and the exhibits filed with the registration statement. Statements contained in this prospectus.
prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the filed exhibits may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.We are subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, are required to file annual, quarterly and currentperiodic reports, proxy statements and other information with the SEC. You may read, without charge,These periodic reports, proxy statements and copy the documents we fileother information are available for inspection and copying at the SEC’s public reference rooms in Washington, D.C. at 100 F Street, NE, Room 1580, Washington, DC 20549,facilities and the website of the SEC referenced above. We make available free of charge, on or in New York, New Yorkthrough the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and Chicago, Illinois. You can request copiesamendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of these documents by writingthe Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website, other than as specifically incorporated by reference in this prospectus, is not part of this prospectus.
The SEC and paying a fee forallows us to incorporate by reference the copying cost. Please callinformation we file with it, which means that we can disclose important information to you by referring you to another document that we have filed separately with the SEC. The information incorporated by reference is considered to be part of this prospectus. Information in this prospectus supersedes information incorporated by reference that we filed with the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also availableprior to the public at no cost from the SEC’s website at http://www.sec.gov.
Index to Financial Statements Page
Audited Financial Statements for the Years ended December 31, 2012 and 2011
| | Page | |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 | | | F-3 | |
Consolidated Balance Sheets for the years ended December 31, 2012 and 2011 | | | F-4 | |
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and 2011 | | | F-5 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 | | | F-6 | |
Notes to Consolidated Financial Statements | | | F-7 | |
Unaudited Condensed Consolidated Financial Statements for the Three and Nine months ended September 30, 2013 and 2012
| | Page | |
Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 | | | F-24 | |
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 | | | F-25 | |
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 | | | F-26 | |
Notes to Condensed Consolidated Financial Statements | | | F-27 | |
North South Holdings Inc. and Subsidiary Consolidated Financial Statements
| | Page | |
Report of Independent Registered Public Accounting Firm | | | F-45 | |
Consolidated Balance Sheets | | | F-46 | |
Consolidated Statements of Operations | | | F-47 | |
Consolidated Statement of Changes in Stockholders' Equity | | | F-48 | |
Consolidated Statements of Cash Flows | | | F-49 | |
Notes to Consolidated Financial Statements | | | F-50 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Spherix Incorporated
We have audited the accompanying consolidated balance sheets of Spherix Incorporated (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spherix Incorporated and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
McLean, VA
March 20, 2013
Spherix Incorporated
Consolidated Statements of Operations
For the Years Ended December 31, 2012 and 2011
| | | 2012 | | | 2011 | |
| | | | | | | |
| Revenue | | $ | 19,922 | | | $ | - | |
| | | | | | | | | |
| Operating expense | | | | | | | | |
| Research and development expense | | | (727,091 | ) | | | (1,645,939 | ) |
| Selling, general and administrative expense | | | (2,764,836 | ) | | | (2,548,007 | ) |
| Total operating expense | | | (3,491,927 | ) | | | (4,193,946 | ) |
| Loss from operations | | | (3,472,005 | ) | | | (4,193,946 | ) |
| | | | | | | | | |
| Other Income from Change in Fair Value of Warrants | | | 1,202,489 | | | | 3,716,812 | |
| Loss on issuance of warrants | | | (621,983 | ) | | | (4,983 | ) |
| Interest income | | | 3,466 | | | | 3,455 | |
| Other income | | | - | | | | 51,261 | |
| Gain on settlement of obligations | | | - | | | | 845,000 | |
| (Loss) income from continuing operations before taxes | | | (2,888,033 | ) | | | 417,599 | |
| Income tax expense | | | - | | | | (14,485 | ) |
| (Loss) income from continuing operations | | | (2,888,033 | ) | | | 403,114 | |
| | | | | | | | | |
| Discontinued operations | | | | | | | | |
| Loss from discontinued operations | | | (968,991 | ) | | | (383,529 | ) |
| Income tax expense | | | - | | | | - | |
| Loss from discontinued operations | | | (968,991 | ) | | | (383,529 | ) |
| | | | | | | | | |
| Net (loss) income | | $ | (3,857,024 | ) | | $ | 19,585 | |
| | | | | | | | | |
| Net (loss) income per share, basic | | | | | | | | |
| Continuing operations | | $ | (10.56 | ) | | $ | 3.07 | |
| Discontinued operations | | $ | (3.54 | ) | | $ | (2.92 | ) |
| Net (loss) income per share | | $ | (14.10 | ) | | $ | 0.15 | |
| Net loss per share, diluted | | | | | | | | |
| Continuing operations | | $ | (10.56 | ) | | $ | (2.37 | ) |
| Discontinued operations | | $ | (3.54 | ) | | $ | (2.77 | ) |
| Net loss per share | | $ | (14.10 | ) | | $ | (5.14 | ) |
| | | | | | | | | |
| Weighted average shares outstanding, basic | | | 273,567 | | | | 131,285 | |
| Weighted average shares outstanding, diluted | | | 273,567 | | | | 138,346 | |
The accompanying notes to financial statements are an integral part of these financial statements.
Spherix Incorporated
Consolidated Balance Sheets
As of December 31, 2012 and 2011
| ASSETS | | 2012 | | | 2011 | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 4,498,237 | | | $ | 4,911,350 | |
| Trade accounts receivable, net of allowance of $0 and $8,174 | | | - | | | | - | |
| Other receivables | | | 3,425 | | | | 293 | |
| Prepaid research expenses | | | - | | | | 209,780 | |
| Prepaid expenses and other assets | | | 100,474 | | | | 116,565 | |
| Assets of segment held for sale | | | 104,265 | | | | 289,927 | |
| Total current assets | | | 4,706,401 | | | | 5,527,915 | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation | | | 24,009 | | | | 85,374 | |
| of $308,386 and $244,711 | | | | | | | | |
| Patents, net of accumulated amortization of $0 and $2,146 | | | - | | | | - | |
| Deposit | | | 25,625 | | | | 35,625 | |
| Assets of segment held for sale, non-current | | | - | | | | 6,108 | |
| Total assets | | $ | 4,756,035 | | | $ | 5,655,022 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 425,774 | | | $ | 269,996 | |
| Accrued salaries and benefits | | | 280,263 | | | | 242,550 | |
| Liabilities of segment held for sale | | | 25,040 | | | | 380,136 | |
| Total current liabilities | | | 731,077 | | | | 892,682 | |
| | | | | | | | | |
| Deferred rent | | | 45,081 | | | | 47,675 | |
| Warrant liability | | | 3,125,393 | | | | 916,621 | |
| Total liabilities | | | 3,901,551 | | | | 1,856,978 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity | | | | | | | | |
| Preferred stock, $0.0001 par value, 5,000,000 shares authorized; | | | | | | | | |
| 5,250 series B issued and 1 outstanding at December 31, 2012, | | | | | | | | |
| and December 31, 2011 | | | - | | | | - | |
| Common stock, $0.0001 par value, 50,000,000 shares authorized; | | | | | | | | |
| 814,114 and 155,150 issued, 813,713 and 154,749 | | | | | | | | |
| outstanding at December 31, 2012 and 2011, respectively | | | 82 | | | | 16 | |
| Paid-in capital in excess of par value | | | 36,630,406 | | | | 35,717,008 | |
| Treasury stock, 401 shares | | | (464,786 | ) | | | (464,786 | ) |
| Accumulated deficit | | | (35,311,218 | ) | | | (31,454,194 | ) |
| Total stockholders' equity | | | 854,484 | | | | 3,798,044 | |
| Total liabilities and stockholders' equity | | $ | 4,756,035 | | | $ | 5,655,022 | |
The accompanying notes to financial statements are an integral part of these financial statements.
Spherix Incorporated
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 2012 and 2011
| | | Preferred Stock | | | Common Stock | | | Paid-in | | | Treasury Stock | | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital in Excess of Par | | | Shares | | | Amount | | | Accumulated Deficit | | | Stockholders' Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, January 1, 2011 | | | 1 | | | $ | - | | | | 107,181 | | | $ | 11 | | | | 34,536,947 | | | | 401 | | | | (464,786 | ) | | | 31,473,779 | | | $ | 2,598,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of common stock, net of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| offering costs of $103,196 | | | - | | | | - | | | | 47,969 | | | | 5 | | | | 1,144,527 | | | | - | | | | - | | | | - | | | | 1,144,532 | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 35,534 | | | | - | | | | - | | | | - | | | | 35,534 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 19,585 | | | | 19,585 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | | 1 | | | | - | | | | 155,150 | | | | 16 | | | | 35,717,008 | | | | 401 | | | | (464,786 | ) | | | (31,454,194 | ) | | | 3,798,044 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of common stock, net of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| offering costs of $77,012 | | | - | | | | - | | | | 536,898 | | | | 54 | | | | 858,647 | | | | - | | | | - | | | | - | | | | 858,701 | |
| Stock-based compensation | | | - | | | | - | | | | 122,250 | | | | 12 | | | | 56,436 | | | | - | | | | - | | | | - | | | | 56,448 | |
| Fractional shares payment | | | - | | | | - | | | | (184 | ) | | | - | | | | (1,685 | ) | | | - | | | | - | | | | - | | | | (1,685 | ) |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,857,024 | ) | | | (3,857,024 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2012 | | | 1 | | | $ | - | | | | 814,114 | | | $ | 82 | | | | 36,630,406 | | | | 401 | | | | (464,786 | ) | | | (35,311,218 | ) | | $ | 854,484 | |
The accompanying notes to financial statements are an integral part of these financial statements.
Spherix Incorporated
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
| | | 2012 | | | 2011 | |
| Cash flows from operating activities | | | | | | |
| Net (loss) income | | | (3,857,024 | ) | | $ | 19,585 | |
| Adjustments to reconcile net (loss) income to net cash | | | | | | | | |
| used in operating activities: | | | | | | | | |
| Other Income from Change in Fair Value of Warrants | | | (1,202,489 | ) | | | (3,716,812 | ) |
| Issuance costs of warrants accounted for at fair value | | | 245,513 | | | | 230,604 | |
| Loss on issuance of warrants | | | 621,983 | | | | 4,983 | |
| Gain on settlement of obligation | | | - | | | | (845,000 | ) |
| Depreciation and amortization | | | 63,675 | | | | 66,308 | |
| Stock-based compensation | | | 56,448 | | | | 35,534 | |
| Provision for doubtful accounts | | | (8,174 | ) | | | 8,174 | |
| Changes in assets and liabilities: | | | | | | | | |
| Receivables | | | 5,042 | | | | 262,333 | |
| Prepaid expenses and other assets | | | 235,871 | | | | 289,830 | |
| Accounts payable and accrued expenses | | | 193,491 | | | | (366,885 | ) |
| Deferred rent | | | (2,594 | ) | | | (33,270 | ) |
| Deferred compensation | | | - | | | | (305,000 | ) |
| Net cash used in activities of continuing operations | | | (3,648,258 | ) | | | (4,349,616 | ) |
| Net cash used in activities of discontinued operations | | | (167,429 | ) | | | (10,044 | ) |
| Net cash used in operating activities | | | (3,815,687 | ) | | | (4,359,660 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Purchase of fixed assets | | | (2,309 | ) | | | (2,374 | ) |
| Net cash used in activities of continuing operations | | | (2,309 | ) | | | (2,374 | ) |
| Net cash provided by (used in) activities of discontinued operations | | | 4,102 | | | | (2,478 | ) |
| Net cash provided by (used in) investing activities | | | 1,793 | | | | (4,852 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from issuance of common stock and warrants | | | 3,724,991 | | | | 4,034,352 | |
| Issuance cost of common stock and warrants | | | (322,525 | ) | | | (333,800 | ) |
| Reverse stock split fractional share payment | | | (1,685 | ) | | | - | |
| Net cash provided by activities of continuing operations | | | 3,400,781 | | | | 3,700,552 | |
| Net cash provided by financing activities | | | 3,400,781 | | | | 3,700,552 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (413,113 | ) | | | (663,960 | ) |
| Cash and cash equivalents, beginning of year | | | 4,911,350 | | | | 5,575,310 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 4,498,237 | | | $ | 4,911,350 | |
| | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | |
| Cash paid for taxes | | $ | - | | | $ | 160,829 | |
The accompanying notes to financial statements are an integral part of these financial statements.
Spherix Incorporated
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
The Company previously operated via two principal segments, Biospherics, our biotechnology research and development business, and Health Sciences, a technical and regulatory consulting business. The Health Sciences business provided technical and regulatory consulting services to biotechnology and pharmaceutical companies, as well as providing technical support for the Company’s own R&D activities. The Company generally provided its consulting services on either a fixed price basis or on a “time and expenses” basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience.
During the years covered by this report, the Company had two wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., for its two operating segments. The Company’s Health Sciences contracts are in the name of Spherix Consulting, Inc. and the Company’s patents are in the name of Biospherics Incorporated. Spherix Incorporated provides management, strategic guidance, business development, marketing and other services to its subsidiaries. The operations of Spherix Consulting, Inc. have been retroactively adjusted as discontinued operations as a result of the December 3, 2012 sale of the subsidiary. Certain assets of Spherix Consulting, Inc. were retained by the Company but are presented as assets held for sale in the consolidated balance sheet at December 31, 2012 as they relate to the discounted operations.
On May 6, 2011, the Company effected a one-for-ten reverse split of its common stock. The Company implemented the reverse stock split under the authority granted to the Board of Directors by the Company's stockholders at the annual meeting of stockholders held on November 17, 2009. The reverse stock split reduced the number of outstanding shares of Common Stock from 25,624,872 shares to 2,562,488 shares at that time.
On September 21, 2012, the Company effected a one-for-twenty reverse split of its common stock. The Company implemented the reverse stock split under the authority granted to the Board of Directors by the Company's stockholders at the annual meeting of stockholders held on August 14, 2012. The reverse stock split reduced the number of outstanding shares of Common Stock from 4,159,777 shares to 207,806 shares. All per share amounts and outstanding shares, including all Common Stock equivalents, stock options, equity compensation plans, and warrants, have been retroactively adjusted in the Financial Statements and in the Notes to the Financial Statements for all periods presented to reflect the reverse stock split.
The consolidated financial statements include the accounts of Spherix Incorporated and Biospherics Incorporated. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
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,this prospectus. We incorporate by reference into this prospectus and the reported amountsregistration statement of revenue and expenses duringwhich this prospectus is a part the period. Significant estimates include the fair value of warrants, the valuation allowance on deferred tax assets, stock compensation expense, amortization and depreciation. Accordingly, actual results could differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three monthsinformation or less when purchased to be cash and cash equivalents. The Company maintains cash balances at several banks. Interest bearing accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December 31, 2012, the Company’s interest bearing deposits in excess of the FDIC limits was $4.5 million. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Property and Equipment and Depreciation
Property and equipment are stated at cost and consist of office furniture and equipment, computer hardware and software, and leasehold improvements. The Company computes depreciation and amortization under the straight-line method and typically over the following estimated useful lives of the related assets:
Office furniture and equipment 3 to 10 years
Computer hardware and software 3 to 5 years
Leasehold improvements are depreciated or amortized over the shorter of the term of the related lease or the estimated useful lives of the assets (generally 5 to 10 years). Major additions, improvements and renewals are capitalized at cost and ordinary repairs, maintenance, and renewals are expensed in the year incurred. Gains or losses from the sale or retirement of property and equipment result from the difference between sales proceeds (if any) and the assets’ net book value, and are recorded in the consolidated Statements of Operations.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicatedocuments listed below that the carrying amount of long-lived assets, including patents and property and equipment, may not be fully recoverable, the Company evaluates the probability that the future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. If any impairment is indicated as a result of this review, the Company would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value, determined based on the discounted future cash flows. In 2012 and 2011, no such impairment was noted.
Treasury Stock
The Company accounts for the treasury stock using the cost method, which treats it as a reduction in stockholders’ equity.
Common Stock Purchase Warrants
The Company accounts for the issuance of Common Stock purchase warrants issued in connectionwe have filed with the equity offerings in accordance with the provisionsSEC (Commission File No. 000-05576), excluding any portions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contractsCurrent Report on Form 8-K 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).
See Note 2 relatedare not deemed “filed” pursuant to the restatement for the accounting for stock purchase warrants.
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Accordingly the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the controlGeneral Instructions of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares as a component of stockholders’ equity.
Form 8-K:
The Company’s Series B Convertible Preferred Stock does not feature any redemption rights within the holders’ control or conditional redemption features not solely within the Company’s control as of December 31, 2012. Accordingly, the Series B Convertible Preferred Stock is presented as a component of stockholders’ equity.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. On time and expense contracts revenue is recognized at contractually agreed-upon rates based upon direct labor hours expended and other direct costs incurred. Revenue for fixed-price contracts is recognized under the proportional performance method based upon labor charged in relation to total expected labor charges. Losses, if any,our Annual Report on contracts are recorded during the period when first determined.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Selling, General and Administrative Expense
The Company’s selling, general and administrative expenses consist primarily of executive management salaries and fringe benefits, sales and marketing costs, finance and accounting, human resources, as well as general corporate costs and costs related to being a public company.
Other Income from Change in Fair Value of Warrants
The fair value of warrants is measured each quarter and the change in fair value between periods is recognized as other income or expense in the respective periods.
Loss on Issuance of Warrants
The loss on issuance of warrants reflects the difference in the fair market value of the warrants as determined using the Black-Scholes option valuation method and the proceeds received. The proceeds received from Warrants issued with other instruments (such as common stock or preferred stock) are determined based upon the fair value of liability classified warrants with the residual allocated to the other instruments.
Other Income
Other income consists of two grants from the U.S. Government awarded in October 2010 in support of the Company’s diabetes and triglyceride research. As a result, in 2011 the Company recognized $51,000 in other income and a related tax expense of $14,000. No grant awards were recognized in 2012.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established based upon periodic assessments made by management to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the current tax provision for the period and the change during the period in deferred tax assets and liabilities.
The Company’s policy is to recognize interest and penalties on tax liabilities as interest expense. At December 31, 2012 and 2011, the Company had no unrecognized income tax benefits and recognized no interest or penalties on income tax liabilities.
Discontinued operations
The operations of Spherix Consulting, Inc. have been retroactively adjusted as discontinued operations as a result of the December 3, 2012 sale. The Spherix Consulting segment generated nearly all of the Company’s revenue and provided technical support for the Company’s Biospherics segment.
| | | 2012 | | | 2011 | |
| Revenue | | $ | 728,312 | | | $ | 820,925 | |
| | | | | | | | | |
| Direct cost and operating expense | | | (417,428 | ) | | | (388,065 | ) |
| Selling, general and administrative expense | | | (1,279,875 | ) | | | (816,389 | ) |
Loss from discontinued operations before taxes | | $ | (968,991 | ) | | $ | (383,529 | ) |
Fair Value Information
We group financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 | Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from available pricing sources for market transactions involving identical assets or liabilities. |
Level 2 | Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The estimated fair value of the Company’s warrants was determined by the use of unobservable Level 3 inputs. The warrants are measured at estimated fair value using the Black-Scholes valuation model, which is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. Inherent in this model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our common stock at the date of issuance, and at each subsequent reporting period, based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on our historical rate. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates. However these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different.
At December 31, 2012 and 2011, the Company had approximately $3.1 million and $0.9 million of warrant liabilities, respectively (see note 9 – Warrant Liability). The Company’s other financial instruments, which consist only of cash and cash equivalents approximate their carrying value given their short maturities.
The following table summarizes the activity of Level 3 inputs measured on a recurring basisForm 10-K for the year ended December 31,
2012:| | | Fair Value Measurements of Warrants Using Significant Unobservable Inputs (Level 3) | |
| Balance at December 31, 2011 | | $ | 3,125,000 | |
| | | | | |
| Change in fair value of Warrant Liability | | | (2,208,000 | ) |
| | | | | |
| Balance at December 31, 2012 | | $ | 917,000 | |
Accounting for Stock-Based Compensation
The Company applies2016 filed with the fair value method, which requires that the fair value measurement of all employee share-based payments to employees, including grants of employee stock options, be expensed over their requisite service period basedSEC on their value at the grant date using their fair value, determined using a prescribed option-pricing model. The Company uses a Black-Scholes option valuation method to value stock options. For the years ended DecemberMarch 31, 2012 and 2011, the Company recognized $56,000 and $36,000, respectively, in stock based compensation expense relating to the issuance of 2,250 stock options awarded in November 2011, the issuance of 1,333 stock options awarded in April 2010 and the issuance of 2,950 stock options awarded in February 2006 (see Note 10, “Stockholders’ Equity”).2017;
Net (Loss) Income Per Share
Basic net (loss) income per common share has been computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the year. Diluted net income per common share has been computed by dividing net income by the weighted-average number of common shares outstanding plus an assumed increase in common shares outstanding for common stock equivalents. At December 31, 2012, the exercise price of 1,151 of the Company’s 7,163 outstanding options and 483,657 of the Company’s 550,664 warrants was below the average market price of the Company’s common stockOur Quarterly Report on Form 10-Q for the period however these were excluded fromended March 31, 2017 filed with the dilutive calculation as their inclusion would have been anti-dilutive. At December 31, 2011,SEC on May 12, 2017; and
our Current Reports on Form 8-K filed with the exercise price of 293sharesSEC on February 9, 2017, March 15, 2017, June 12, 2017, June 20, 2017 and July 3, 2017.
Any information in any of the Company’s 2,425 outstanding options and 27,427 shares of the Company’s 55,391 warrants was below the average market price of the Company’s common stock for the period.
| Diluted earnings per share Calculation | | December 31, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Net (loss) income | | $ | (3,857,024 | ) | | $ | 19,585 | |
| Less other income from change in fair value of warrants assumed exercised | | | -- | | | | (730,862 | ) |
| Adjusted net loss | | $ | (3,857,024 | ) | | $ | (711,277 | ) |
| | | | | | | | | |
| Diluted shares outstanding | | | | | | | | |
| Weighted average shares outstanding, | | | 273,567 | | | | 131,285 | |
| Shares assumed exercised | | | -- | | | | 7,061 | |
| Diluted shares outstanding | | | 273,567 | | | | 138,346 | |
| | | | | | | | | |
| Net loss per share, diluted | | $ | (14.10 | ) | | $ | (5.14 | ) |
New Accounting Pronouncements
In June 2011, the FASB issued a new accounting standard on the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive incomeforegoing documents will automatically be deemed to be modified or in two separate but consecutive statements. The new standard was effective for fiscal years beginning after December 15, 2011 with retrospective application. The adoption of the new standard had no impact on the Company’s financial statements as the Company has no items which would be included in comprehensive income other than net income (loss). The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB deferred the effective date for amendmentssuperseded to the presentation of reclassifications of items out of accumulated other comprehensive income, while still requiring entities to adopt the other requirements. We adopted the new standard on January 1, 2012. The adoption ofextent that information in this standard had no impact on our consolidated financial statements. In February of 2013, the FASB issued a new accounting standard to improve the transparency of reporting reclassifications out of accumulated other comprehensive income by requiring entities to present in one place information about significant amounts reclassified and, in some cases, to provide cross-references to related footnotes. We are required to adopt this standard as of the beginning of 2013. We do not expect this adoption to have a material impact on our financial statements.
In May 2011, the FASB issued a new accounting standard which was an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The standard requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. This authoritative guidance is to be applied prospectively. The standard was effective and adopted by the Company during 2012.
2. Liquidity
We continue to incur ongoing administrative and other expenses, including public company expenses, without any corresponding revenue. If we re-commence our pharmaceutical development efforts, we will begin to incur substantial development costs and will not likely receive any revenue for the foreseeable future.
Untilprospectus modifies or replaces such time as we earn revenue from our pharmaceutical development business or from a new business venture, we intend to finance our activities through:
information.· | the remaining proceeds of our equity offerings; and |
· | additional funds we will seek to raise through the sale of additional securities in the future. |
Working capital was $4.0 million and $4.6 million at December 31, 2012 and December 31, 2011, and cash on hand was $4.5 million and $4.9 million, respectively. Management believes that this cash on hand will be sufficient to sustain operations for the next twelve months.
In early December 2012, we sold the stock of our subsidiary Spherix Consulting, Inc. for nominal consideration. This sale allows the Company to minimize its administrative and other costs pending completion of the Company’s review of its strategic alternatives.
In November 2012, the Company obtained net proceeds of approximately $2.3 million in a private placement of common stock and warrants. The Company sold an aggregate of 483,657 shares of common stock at a price of $5.324 per share along with warrants to purchase an additional 483,657 shares of common stock at an exercise price of $6.53 per share. The warrants are exercisable for a period of five years. The Company has agreed to register the common stock sold in the offering and the common stock issuable upon exercise of the warrants. Failure on the part of the Company to satisfy certain registration deadlines may subject the Company to payment of certain monetary penalties. The investors have agreed to temporarily waive their right to cause the Company to register these shares. The investors have the right to participate for 100% of any future debt or equity offerings of the Company during the two years following the Closing.
In early 2013, nearly all of the warrants issued in November 2012 were exchanged for shares of Series C Convertible Preferred Stock.
In February 2012, the Company obtained net proceeds of approximately $1.1 million in a registered direct offering of common stock and warrants. Both the common stock issued in the offering and the underlying common stock for the warrants issued in the offering were previously registered under a Form S-3 shelf registration statement declared effective by the SEC in October 2009.
We believe our current capital is inadequate to pursue business opportunities, which we may desire to pursue in the future and as a result we anticipate we will need to raise additional funds from time to time, which could take the form of debt, equity, convertible securities or a combination of the above. We may be required to raise capital at prices that are below our current market capitalization value.
The Company cannot be assured that it will be able to attract an investor in our securities or raise the additional funds it will likely require in the future; that the Company will be able to obtain any required stockholder approval; or that the Company will be able to successfully complete additional offerings or sales of its securities. If we reach a point where we are unable to raise needed additional funds to continue our business activities, we will be forced to cease our business activities in which case the Company could also be required to terminate its operations and dissolve. However, we believe that the Company presently has sufficient cash balances to continue as a going concern for the next 12 months based upon its reduced requirements for salaries and other expenses following the disposition of the consulting segment and the reduced activity of its research and development program.
3. Accounts Receivable
Credit is extended to customers based on an evaluation of a customer’s financial condition and, in general, collateral is not required. Management regularly reviews accounts receivable for uncollectible and potentially uncollectible accounts, and when necessary establishes an allowance for doubtful accounts. Balances that are outstanding after management has used reasonable collection efforts are written-off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.
At December 31, 2012 and 2011, the allowance for doubtful accounts was $0 and $8,000, respectively.
Balance, January 1, 2011 | | $ | - | |
Provision for doubtful accounts | | | 8,000 | |
Balance December 31, 2011 | | | 8,000 | |
Bad debt recovery | | | (8,000 | ) |
Balance December 31, 2012 | | $ | -74 | |
Shares of Common Stock
PRELIMINARY PROSPECTUS
Laidlaw & Company (UK) Ltd.
, 2017
4. Property and Equipment
The components of property and equipment as of December 31, at cost are:
| | | 2012 | | | 2011 | |
| Computers | | $ | 9,000 | | | $ | 7,000 | |
| Office furniture and equipment | | | 94,000 | | | | 94,000 | |
| Leasehold improvements | | | 229,000 | | | | 229,000 | |
| Total cost | | | 332,000 | | | | 330,000 | |
| Accumulated depreciation and amortization | | | (308,000 | ) | | | (245,000 | ) |
| Property and equipment, net | | $ | 24,000 | | | $ | 85,000 | |
The Company’s depreciation expense for the years ended December 31, 2012 and 2011 was $64,000 and $66,000, respectively.
5. Patents and Intangible Assets
The Company’s amortization expense for the years ended December 31, 2012 and 2011 was $0 and $2,000 on patents with an original value of $53,000, of which $2,000 and $51,000 expired in 2012 and 2011, respectively.
6. Accounts Payable and Accrued Expenses
Accounts payable and accruedPART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We estimate that expenses consisted of the following at December 31:
| | | 2012 | | | 2011 | |
| | | | | | | |
| Accounts payable | | $ | 210,000 | | | $ | 106,000 | |
| Accrued expenses | | | 218,000 | | | | 164,000 | |
| | | $ | 428,000 | | | $ | 270,000 | |
7. Accrued Salaries and Benefits
Accrued salaries and benefits consisted of the following at December 31:
| | | 2012 | | | 2011 | |
| | | | | | | |
| Accrued Payroll | | $ | 21,000 | | | $ | 29,000 | |
| Accrued annual bonuses | | | 173,000 | | | | 176,000 | |
| Accrued severance | | | 40,000 | | | | - | |
| Accrued vacation | | | 42,000 | | | | 38,000 | |
| Other | | | 4,000 | | | | - | |
| | | $ | 280,000 | | | $ | 243,000 | |
8. Warrant Liability
At December 31, 2012 and 2011, the Company had approximately $3.1 million and $0.9 million of warrant liabilities, respectively, and recognized $1.2 million and $3.7 million in other income from changes in fair value of warrants, respectively.
| | | Warrant | | | Exercise | | | Estimated fair value | | | Change in estimated fair value | |
| Date | | Shares | | | Price | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| 11/16/2009 | | | 5,522 | | | $ | 650.00 | | | $ | - | | | $ | 41,000 | | | $ | (40,000 | ) | | $ | (524,000 | ) |
| | | 414 | | | $ | 575.00 | | | | - | | | | - | | | | - | | | | (1,000 | ) |
| 10/7/2010 | | | 10,500 | | | $ | 300.00 | | | | 3,000 | | | | 157,000 | | | | (154,000 | ) | | | (1,069,000 | ) |
| 10/7/2010 | | | 630 | | | $ | 312.50 | | | | - | | | | - | | | | - | | | | (50,000 | ) |
| 1/19/2011 | | | 10,673 | | | $ | 160.00 | | | | 7,000 | | | | 184,000 | | | | (177,000 | ) | | | (1,277,000 | ) |
| 1/19/2011 | | | 640 | | | $ | 162.50 | | | | - | | | | 1,000 | | | | (1,000 | ) | | | (65,000 | ) |
| 10/25/2011 | | | 26,628 | | | $ | 44.80 | | | | 106,000 | | | | 528,000 | | | | (422,000 | ) | | | (709,000 | ) |
| | | 799 | | | $ | 59.13 | | | | - | | | | 6,000 | | | | (6,000 | ) | | | (22,000 | ) |
| 2/2/2012 | | | 10,648 | | | $ | 28.00 | | | | 49,000 | | | | - | | | | (144,000 | ) | | | - | |
| 2/2/2012 | | | 1,597 | | | $ | 27.00 | | | | - | | | | - | | | | (21,000 | ) | | | - | |
| 11/8/2012 | | | 483,657 | | | $ | 6.53 | | | | 2,960,000 | | | | - | | | | (237,000 | ) | | | - | |
| | | | | | | | | | | | 3,125,000 | | | $ | 917,000 | | | $ | (1,202,000 | ) | | $ | (3,717,000 | ) |
The Company used the following assumptions in the Black-Scholes calculation used to measure the fair value of warrants at December 31, 2011 and 2012 (as retroactively adjusted for the 2012 and 2011 reverse stock splits).
| As of December 31, 2011 | | | | | | | | | | | | | | | | | | |
| Grant Date | | 11/16/09 | | | 10/07/10 | | | 01/19/11 | | | 10/25/11 | | | | | | | |
| Shares | | | 5,522 | | | | 10,500 | | | | 10,673 | | | | 26,628 | | | | | | | |
| Stock price | | $ | 23.40 | | | $ | 23.40 | | | $ | 23.40 | | | $ | 23.40 | | | | | | | |
| Exercise price | | $ | 650.00 | | | $ | 300.00 | | | $ | 160.00 | | | $ | 44.80 | | | | | | | |
| Expected terms (yrs) | | | 2.9 | | | | 3.8 | | | | 4.1 | | | | 4.8 | | | | | | | |
| Risk-free interest rate | | | 0.36 | % | | | 0.60 | % | | | 0.60 | % | | | 0.83 | % | | | | | | |
| Estimated volatility | | | 144.55 | % | | | 156.71 | % | | | 156.71 | % | | | 143.85 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | 11/16/09 | | | 10/07/10 | | | 01/19/11 | | | 10/25/11 | | | 02/02/12 | | | 11/08/12 | |
| Shares | | | 5,522 | | | | 10,500 | | | | 10,673 | | | | 26,628 | | | | 10,648 | | | | 483,657 | |
| Stock price | | $ | 6.83 | | | $ | 6.83 | | | $ | 6.83 | | | $ | 6.83 | | | $ | 6.83 | | | $ | 6.83 | |
| Exercise price | | $ | 650.00 | | | $ | 300.00 | | | $ | 160.00 | | | $ | 44.80 | | | $ | 28.00 | | | $ | 6.53 | |
| Expected terms (yrs) | | | 1.9 | | | | 2.8 | | | | 3.1 | | | | 3.8 | | | | 4.1 | | | | 4.9 | |
| Risk-free interest rate | | | 0.25 | % | | | 0.36 | % | | | 0.36 | % | | | 0.54 | % | | | 0.54 | % | | | 0.72 | % |
| Estimated volatility | | | 110.99 | % | | | 101.94 | % | | | 101.94 | % | | | 133.28 | % | | | 133.28 | % | | | 146.03 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of the date of issuance for warrants issued in 2011 and 2012 | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | 01/19/11 | | | 10/25/11 | | | 02/02/12 | | | 11/08/12 | | | | | | | | | |
| Shares | | | 10,673 | | | | 26,628 | | | | 10,648 | | | | 483,657 | | | | | | | | | |
| Stock price | | $ | 155.00 | | | $ | 51.40 | | | $ | 20.60 | | | $ | 7.31 | | | | | | | | | |
| Exercise price | | $ | 160.00 | | | $ | 44.80 | | | $ | 28.00 | | | $ | 6.53 | | | | | | | | | |
| Expected terms (yrs) | | | 5 | | | | 5 | | | | 5 | | | | 5 | | | | | | | | | |
| Risk-free interest rate | | | 1.95 | % | | | 1.01 | % | | | 0.71 | % | | | 0.65 | % | | | | | | | | |
| Estimated volatility | | | 138.7 | % | | | 144.6 | % | | | 144.7 | % | | | 146.0 | % | | | | | | | | |
9. Stockholders’ Equity
Equity Offerings
On November 7, 2012, the Company obtained net proceeds of approximately $2.3 million in a private placement of common stock and warrants. The Company sold an aggregate of 483,657 shares of common stock at a price of $5.324 per share along with warrants to purchase an additional 483,657 shares of common stock at an exercise price of $6.53 per share. Subject to certain ownership limitations, the warrants are exercisable for a period of five years. The common stock and warrants were issued in a private placement of securities exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The warrants are classified as a liability and the common stock is classified as permanent equity. The investors shall have the right to participate for 100% of any future debt or equity offerings of the Company during the two years following the Closing. Certain of these warrants were exchanged for shares of Series C Convertible Preferred Stock in early 2013.
On February 2, 2012, the Company entered into a securities purchase agreement with certain investors to sell an aggregate of 53,241 shares of its common stock and warrants to purchase up to an additional 10,648 shares of its common stock to such investors for gross proceeds of approximately $1.15 million. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 0.2 of a share of common stock. The purchase price per unit was $21.60. Subject to certain ownership limitations, the warrants are exercisable at any time commencing six (6) months after the initial issue date and on or prior to August 7, 2017, but not thereafter, at an exercise price of $28.00 per share. The net proceeds to the Company from the registered direct offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the offering, were approximately $1.1 million. The common stock issued in the February 2012 offering and the common stock that may be issued pursuant to the exercise of the warrants have been registered pursuant to a Form S-3 registration statement (File No. 333-161531), which became effective on October 1, 2009. The warrants are classified as a liability and the common stock is classified as permanent equity.
In connection with the closing of our February 2012 offering,distribution described in this registration statement (other than brokerage commissions, discounts or other expenses relating to the Company issued to Rodman & Renshaw, LLC, as partial consideration for its services as placement agent, warrants to purchase up to 1,597 shares of our common stock at an exercise price of $27.00 per share. The estimated fair valuesale of the warrants at the date of grant was $19,000. The warrants are exercisable at the optionshares in this offering) will be as set forth below. We will pay all of the holder at any time beginning six (6) months after the closing through and including February 6, 2014. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. These warrants are classified as a liability.
In October 2011, the Company entered into a securities purchase agreementexpenses with certain investors to sell an aggregate of 26,628 shares of its common stock and warrants to purchase up to an additional 26,628 shares of its common stock to such investors for gross proceeds of approximately $1.25 million. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase one share of common stock. The purchase price per unit was $47.40. Subject to certain ownership limitations, the warrants are exercisable for a five-year period at an exercise price of $44.80 per share. The net proceedsrespect to the Company fromdistribution, and such amounts, with the offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exerciseexception of the warrants issued in the offering, were approximately $1.1 million. The common stock issued in the October 2011 offering and the common stock that may be issued pursuant to the exercise of the warrants were registered with the Securities and Exchange Commission pursuant to a(“SEC”) registration statement on Form S-3 (File No. 333-177748), which became effective on November 21, 2011. The warrantsfee and FINRA fee, are classified as a liability and the common stock is classified as permanent equity.
In connection with the closing of the October 2011 offering, the Company issued to Rodman & Renshaw, LLC warrants with a term of two years to purchase 799 shares of our common stock (at an exercise price of $59.00 per share). The estimated fair value of the warrants at the date of grant was $25,000. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. These warrants are classified as a liability.
On January 19, 2011, the Company entered into a securities purchase agreement with certain investors to sell an aggregate of 21,345 shares of its common stock and warrants to purchase up to an additional 10,673 shares of its common stock to such investors for gross proceeds of approximately $2.77 million. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 0.50 of a share of common stock. The purchase price per unit was $130.00. Subject to certain ownership limitations, the warrants are exercisable for a five-year period at an exercise price of $160.00 per share. The net proceeds to the Company from the registered direct offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the offering, were approximately $2.6 million. The common stock issued in the January 2011 offering and the common stock that may be issued pursuant to the exercise of the warrants have been registered pursuant to a Form S-3 registration statement (File No. 333-161531), which became effective on October 1, 2009. The warrants are classified as a liability and the common stock is classified as permanent equity.
In connection with the closing of our January 2011 offering, the Company issued to Rodman & Renshaw, LLC, as partial consideration for its services as placement agent, warrants with a term of two years to purchase up to 640 shares of our common stock at an exercise price of $163 per share. The estimated fair value of the warrants at the date of grant was $42,000. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. These warrants are classified as a liability.
Restricted Stock
On December 28, 2012, the Company issued 120,000 shares of restricted stock under the Company’s 2012 Equity Compensation Plan. The total fair value of the issuances of the stock was approximately $816,000, which will be recognized as performance targets are obtained. On December 31, 2012, the Company issued 2,250 shares of restricted stock under the Company’s 2012 Equity Compensation Plan. The total fair value of the issuances of the stock was approximately $15,000, which will be recognized as expense over an eighteen month vesting period. No expense was recognized in 2012. The fair value of the stock awards was based on the closing market price of the Company's common stock on the date of the grant.
Stock Option Plan
In late 2012, the Company adopted the 2012 Equity Incentive Plan (the “Plan”) which permits issuance of incentive stock options, non-qualified stock options and restricted stock. The Plan replaced a prior incentive stock plan. During 2012 and 2011, the Company granted 5,487 and 2,250 options to the Company’s Board of Directors and officers under the previous plan. Options issued to employees typically vest over a four-year period and options issued to non-employee directors vested immediately upon being granted. At December 31, 2012, there were 6,789 options under the previous plan that were fully vested. The total unrecognized stock compensation expense at December 31, 2012 is approximately $12,000, which will be recognized over 2.9 years.
The Company used the following assumptions in the Black-Scholes calculation used to measure the fair value of stock-based compensation in accordance with ASC 718 for stock options granted in 2012 and 2011.
| | | | 11-16-2012 | | | | 8-14-2012 | | | | 5-15-2012 | | | | 11-15-2011 | |
| Risk-free interest rate | | | 0.62 | % | | | 0.75 | % | | | 0.74 | % | | | 0.93 | % |
| Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
| Expected life (years) | | | 5 | | | | 5 | | | | 5 | | | | 5 | |
| Volatility | | | 91.3 | % | | | 111.8 | % | | | 122.7 | % | | | 130.0 | % |
Activity for the two years ended December 31, 2012, for all option grants is shown below:
| | | 2012 | | | 2011 | |
| | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value | | | Shares | | | Weighted Average Exercise Price | |
| Outstanding at beginning of year | | | 2,426 | | | $ | 53.60 | | | | | | | | | | 316 | | | $ | 322.00 | |
| Granted | | | 5,487 | | | $ | 10.93 | | | | | | | | | | 2,250 | | | $ | 40.00 | |
| Exercised | | | - | | | $ | - | | | | | | | | | | - | | | $ | - | |
| Expired or forfeited | | | (750 | ) | | $ | 40.00 | | | | | | | | | | (140 | ) | | $ | 440.00 | |
| Outstanding at end of year | | | 7,163 | | | $ | 22.34 | | | | 4.4 | | | $ | - | | | | 2,426 | | | $ | 53.60 | |
| Exercisable at end of year | | | 6,788 | | | $ | 21.36 | | | | 4.5 | | | $ | - | | | | 1,176 | | | | | |
| Weighted-average fair value of | | | | | | | | | | | | | | | | | | | | | | | | |
| options granted during the year | | $ | 8.44 | | | | | | | | | | | | | | | $ | 34.20 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Price range of options | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding | | $ | 9.80-$228.00 | | | | | | | | | | | | | | | $ | 40.00-$228.00 | | | | |
| Exercised | | $ | - | | | | | | | | | | | | | | | $ | - | | | | | |
| Expired or forfeited | | $ | 40.00 | | | | | | | | | | | | | | | $ | 440.00 | | | | | |
The following table summarizes information with respect to stock options outstanding at December 31, 2012:
| | | | Options Outstanding | | | Options Exercisable | |
| Range of Exercise Price | | | Number of Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | | Number of Options | | | Weighted Average Exercise Price | |
| $ | 9.80-$15.20 | | | | 5,488 | | | $ | 10.93 | | | | 4.7 | | | | 5,488 | | | $ | 10.93 | |
| $ | 40.00 | | | | 1,500 | | | $ | 40.00 | | | | 3.9 | | | | 1,125 | | | $ | 40.00 | |
| $ | 228.00 | | | | 175 | | | $ | 228.00 | | | | 2.4 | | | | 175 | | | $ | 228.00 | |
| | | | | | 7,163 | | | | | | | | | | | | 6,788 | | | | | |
10. Gain on Settlement of Obligations
On January 14, 2011, Biospherics Incorporated, a wholly-owned subsidiary of the Company, filed a Complaint For Injunction Relief And Damages in The United States District Court For The District Of Maryland against Inalco S.p.A. (the “Complaint”). The Complaint alleged that Inalco had breached the 2009 Manufacturing Support and Supply Agreement as Inalco (i) refused to supply D-tagatose previously paid for by Biospherics, (ii) refused to provide a promised bank guarantee, and (iii) shut-down its D-tagatose production facilities. On March 16, 2011, both parties signed a settlement agreement whereby Inalco agreed to supply Spherix with 8.5 metric tons of D-tagatose, which has been received by Spherix, and both parties have agreed to release each other from any other obligations under the previous agreement. As a result, the Company recognized a gain of $600,000 in March 2011 on the release from its purchase obligation.
In January 2011, the Company entered into a Letter Agreement with Gilbert V. Levin and M. Karen Levin pursuant to which the Company agreed to make a one-time lump sum payment of $450,000 to the Levins in full satisfaction of the Company’s obligation to make a series of continuing payments to the Levins relating to their prior employment by the Company. Per the terms of the agreement, Gilbert V. Levin resigned as a member of the Board of Directors of the Company on January 13, 2011. The Company’s estimated liability to the Levins at December 31, 2010, and prior to the above agreement was approximately $695,000. The $450,000 lump sum payment was made on January 31, 2011, and the Company recognized the $245,000 difference as a gain on settlement of obligations in January 2011.
11. Income Taxes
Income tax from continuing operations for 2012 and 2011 was as follows:
| | | 2012 | | | 2011 | |
| U.S. Federal income tax expense | | $ | - | | | $ | (13,000 | ) |
| State and local income tax expense | | $ | - | | | $ | (1,000 | ) |
| Total income tax expense | | $ | - | | | $ | (14,000 | ) |
| | | | | | | | | |
| | | | 2012 | | | | 2011 | |
| Current income tax expense | | $ | - | | | $ | (14,000 | ) |
| Deferred income tax expense | | $ | - | | | $ | - | |
| Total income tax expense | | $ | - | | | $ | (14,000 | ) |
The deferred tax assets as of December 31, 2011 have been restated to reflect the deferred tax assets for continuing operations only. The tax effects of significant temporary differences representing deferred tax assets as of December 31, 2012 and 2011 are as follows:
| | | 2012 | | | 2011 | |
| Deferred tax assets | | | | | | |
| Deferred rent | | $ | 17,000 | | | $ | 19,000 | |
| Accrued vacation | | | 16,000 | | | | 15,000 | |
| Tax credit/grants | | | 82,000 | | | | 82,000 | |
| Deferred compensation | | | 16,000 | | | | - | |
| Net operating loss carryforward | | | 16,852,000 | | | | 15,467,000 | |
| Accrued bonus | | | 68,000 | | | | 68,000 | |
| Stock based compensation | | | 45,000 | | | | 25,000 | |
| Accrued expenses | | | 38,000 | | | | 38,000 | |
| Property and equipment | | | 19,000 | | | | - | |
| Warrants | | | 3,683,000 | | | | 2,813,000 | |
| Warrants - issuance costs | | | 553,000 | | | | 211,000 | |
| Other | | | 1,000 | | | | 5,000 | |
| Total deferred tax asset | | | 20,837,000 | | | | 18,532,000 | |
| | | | | | | | | |
| Deferred tax liabilities | | | | | | | | |
| Property and equipment | | | - | | | | (3,000 | ) |
| Change in accounting method - accrued bonus | | | - | | | | (20,000 | ) |
| | | | - | | | | (23,000 | ) |
| | | | | | | | | |
| Valuation allowance | | | (20,837,000 | ) | | | (18,509,000 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | - | | | $ | - | |
At December 31, 2012 and 2011, the Company had gross operating loss carryforwards for U.S. federal income tax purposes of approximately $41.4 million and $37.9 million, respectively, which will begin to expire in 2019. At December 31, 2012 and 2011, the Company had gross operating loss carryforwards for state income tax purposes of approximately $51.6 million and $48.6 million, respectively, which will begin to expire in 2018. Based on the Company’s historical losses and its accumulated deficit, the Company has provided a full valuation allowance against the net deferred tax assets.
Utilization of the net operating loss carryforwards and credit could be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change and could result in a reduction in the total net operating losses and research credits available.
Reconciliation between actual tax benefits and taxes computed at the statutory Federal rate of 34 percent for 2012 and 2011 are as follows:
| | | 2012 | | | 2011 | |
| U.S. Federal income tax benefit at the statutory rate of 34% | | $ | 982,000 | | | $ | (142,000 | ) |
| Effect of permanent differences | | | 4,000 | | | | (9,000 | ) |
| Effect of permanent differences - Government Grant | | | - | | | | 4,000 | |
| Effect of permanent differences - Warrants | | | 114,000 | | | | 1,184,000 | |
| State income taxes benefit, net of federal tax benefit | | | 99,000 | | | | 251,000 | |
| Other | | | (1,000 | ) | | | (78,000 | ) |
| Change in valuation allowance | | | (1,198,000 | ) | | | (1,224,000 | ) |
| Income tax expense | | $ | - | | | $ | (14,000 | ) |
During 2010, the Company’s subsidiary, Biospherics Incorporated, received notice from the IRS that it had been awarded two grants under IRC Section 48D of the Internal Revenue Code’s “Qualifying Therapeutic Discovery Project.” The amount received pursuant to the QTDP Grant was $0.3 million of which $0.1 million related to the income tax benefit associated with the realization or “monetization” of prior-period tax attributes for which the Company had previously established a valuation allowance.
Tax Uncertainties
The Company recognizes a tax benefit associated with an uncertain tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax benefit as the largest amount that it judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Company has not recognized any such adjustments. At December 31, 2012 and 2011, the Company had no material unrecognized income tax benefits and recognized no interest or penalties on income tax liabilities.
The Company is subject to U.S. federal income tax and state and local income tax in multiple jurisdictions. The statute of limitations for the consolidated U.S. federal income tax return is closed for all tax years up to and including 2008, except for pre-2008 tax returns that generated net operating loss carry forwards that could be adjusted on audit. Currently, no federal or state and local income tax returns are under examination by the respective taxing authorities.
12. Commitments and Contingencies
Purchase Commitments
During 2009, the Company entered into a purchase commitment with a supplier of the Company’s D-tagatose product. The agreement committed the Company to purchase 25 metric tons of D-Tagatose. The Company utilized the D-tagatose as a part of the Phase 2 and Phase 3 trials. This phase was necessary for the Company to be able to commercialize the product and as the products were not going to be available for sale, the Company wrote off the entire product value into Research and Development Costs. The amounts written off in 2009 from the agreement were $1.1 million. Of this amount $500,000 was paid in 2009 and the remaining balance of $600,000 was included in the Company’s accounts payable and accrued expenses at December 31, 2010. On March 16, 2011, both parties signed an agreement whereby Inalco agreed to supply Spherix with 8.5 metric tons of D-tagatose for amounts previously paid for and both parties agreed to release each other from any other obligations under the previous agreement. As a result, Spherix recognized a gain of $600,000 in 2011 on the release from its purchase obligation.
Leases
The Company has commitments under an operating lease through 2018 relating to its administrative office in Bethesda, Maryland. In March 2012, the Company entered into an amendment to its office building lease, which extends the term of the lease five years. The lease as amended will expire on March 31, 2018. Commencing on April 1, 2012, the base annual rent shall be $152,500, with an increase of 3% annually. In addition, the Company subsequently entered into a new lease agreement in February 2013 for office space in Tysons Corner, Virginia (see subsequent event footnote 16).
Future minimum rental payments required as of December 31, 2012, under the non-cancelable lease are as follows:
| Year Ending December 31, | | Operating Lease | |
| | | | |
| 2013 | | $ | 156,000 | |
| 2014 | | | 161,000 | |
| 2015 | | | 165,000 | |
| 2016 | | | 170,000 | |
| 2017 | | | 176,000 | |
| 2018 | | | 44,000 | |
| | | $ | 872,000 | |
The Company’s building lease contains step rent provisions, capital improvement funding, or other tenant allowances. Minimum rental payments including allowances on this lease are recognized on a straight-line basis over the term of the lease. The Company incurred net operating lease rental expenses of approximately $155,000 and $129,000 for the years 2012 and 2011, respectively.
Related Party Transactions
At the end of December, 2012, the Company entered into a Consulting Agreement with an entity wholly-owned by Mr. Kesner, a director and interim Chief Executive Officer of the Company, pursuant to which the entity was issued 120,000 shares of common stock in exchange for its services. The shares will vest if prior to December 31, 2017, the Company: (i) closes an acquisition either approved by the stockholders or in excess of $25 million; (ii) closes a private or public financing of at least $7.5 million; (iii) sells all or substantially all of its assets; or (iv) otherwise suffers a change in control. In such an event, the affiliate shall also be entitled to a one-time payment of $250,000.
Mr. Kesner’s law firm has provided legal services to the company in late 2012 and invoiced the Company approximately $40,000 for these services and is included in accrued expenses at December 31, 2012.
On November 30, 2012, but effective as of December 3, 2013, Dr. Claire L. Kruger resigned as the Chief Executive Officer/Chief Operating Officer of the Company. In connection with Dr. Kruger’s departure, the Company paid Dr. Kruger her 2012 bonus of $143,000 and a severance of $286,000, both of which were paid during 2012. For the other departing employees the Company agreed to pay a total of $82,000 in 2012 bonuses and approximately $211,000 in severances, which were also paid during 2012.
On December 12, 2012 the Company entered into a Retention Agreement with Mr. Clayton which provides that (i) Mr. Clayton will remain as CFO of the Company through March 31, 2013 and (ii) the Company will pay Mr. Clayton a severance of $212,180 as required by the terms of his prior employment agreement.
Under employment agreements with Dr. Gilbert V. Levin and Mrs. M. Karen Levin, the Company’s founders, the Company agreed to provide Dr. and Mrs. Levin each with lifetime payments of $12,500 each quarter and to fund long-term lifetime healthcare and health insurance policies following their retirements from the Company on August 14, 2008 and January 4, 2006, respectively. At January 1, 2011, the Company’s liability for both Dr. and Mrs. Levin was estimated to be $450,000 for the lifetime payments and $245,000 for funding the long-term lifetime healthcare and health insurance policies based on actuarially determined amounts. The non-current portion of these amounts was reported on the accompanying balance sheet as deferred compensation at January 1, 2011. During 2011, the Company paid Dr. and Mrs. Levin a combined total of $24,000 in post-retirement benefits under the above agreements.
In January 2011, the Company entered into a Letter Agreement with Gilbert V. Levin and M. Karen Levin pursuant to which the Company agreed to make a one-time lump sum payment of $450,000 to the Levins in full satisfaction of the Company’s obligation to make a series of continuing payments to the Levins relating to their prior employment by the Company. The Company’s estimated liability to the Levins at January 1, 2011, and prior to the above agreement, was approximately $695,000. The $450,000 lump sum payment was made on January 31, 2011, and the Company recognized a gain of $245,000 in 2011. Per the terms of the agreement, Gilbert V. Levin resigned as a member of the Board of Directors of the Company on January 13, 2011.
13. Employee Benefit Plans
The Spherix Incorporated 401(k) Retirement Plan (the “Plan”) is a discretionary defined contribution plan and covers substantially all employees who have attained the age of 21, have completed one year of service, and have worked a minimum of 1,000 hours in the past Plan or anniversary year.
Under provisions of the Plan, the Company, for any plan year, has contributed an amount equal to 50% of the participant’s contribution or 2.5 of the participant’s eligible compensation, whichever is less. The Company may, at its own discretion, make additional matching contributions to participants. Company contributions, net of forfeitures, amounted to $31,000 and $23,000 in each of the years 2012 and 2011, respectively.
The Plan was terminated in December 2012.
14. Information by Business Segment
As a result of the sale of the Spherix Consulting subsidiary, the Company now has only one operating segment, Biospherics.
15. Subsequent Events
The Company evaluated all events or transactions after December 31, 2012 through the date the financial statements were issued.
Appointment of Interim Chief Executive Officer
On February 27, 2013, Harvey J. Kesner, age 55, was appointed interim Chief Executive Officer of Spherix Incorporated (the “Company”). Mr. Kesner currently serves as a member of the Board of Directors of the Company.
Nuta Technology Corp.
In early 2013 the Company created a new wholly-owned subsidiary, Nuta Technology Corp. (“Nuta”), organized under the laws of the state of Virginia with its principal offices in Tysons Corner, Virginia.
Office Lease Agreement
In February 2013, the Company entered into a Lease Agreement to lease 837 square feet of office space in Tysons Corner, Virginia. The lease runs from March 1, 2013 through August 31, 2014.
Letter of Intent
On February 15, 2013, our wholly-owned subsidiary Nuta, entered into a Letter of Intent (the “LOI”) with North South Holdings, Inc. (“North South”), the owner of patents and licenses covering various aspects of wireless communications. Pursuant to the LOI, at closing, Nuta would acquire 100% of the issued and outstanding capital stock of North South in consideration for the issuance of capital stock of the Company equal to 12,000,000 shares of the Company’s common stock. Pursuant to the LOI, Nuta will be capitalized with a minimum of $2,000,000 cash at closing and will have engaged management familiar with commercialization of intellectual property assets.
The LOI has certain binding and non-binding obligations, including the acquisition consideration which is not subject to adjustment. However, the transaction is subject to various conditions to closing, including satisfactory completion of due diligence, approval of the Company’s shareholders and definitive documentation. Upon completion Nuta may seek to engage in commercialization activities related to the inventions that are the subject of the patents acquired, although there can be no assurance that such efforts would be successful.
There can be no assurance that the transactions contemplated by the LOI will be consummated.
Warrant Exchange Agreement
On March 6, 2013, the Company, and certain investors that participated in the November 2012 private placement transaction (“Investors”), entered into separate Warrant Exchange Agreements pursuant to which the Investors exchanged common stock purchase warrants acquired in the private placement transaction for shares of the Company’s Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock is convertible into one (1) share of Common Stock at the option of the holder, subject to certain limitations on conversions that would result in the Investors acquiring more than 4.99%/9.99% of the outstanding voting stock of the Company. The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of Delaware of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Certificate of Designation”).
Warrants were issued in November 2012 and were convertible for an aggregate of 483,657 shares of Common Stock. The Warrants were exercisable through November 7, 2017 at an exercise price of $6.53 per share.
Pursuant to the Warrant Exchange Agreements, the Investors received in exchange for their warrants an aggregate of 229,337 shares of the Series C Convertible Preferred Stock, convertible into one share of Common Stock for each share of Series C Convertible Preferred Stock. The number of shares of common stock underlying the Series C Convertible Preferred stock is the same number as would have been-issued upon a “cashless exercise” of the exchanged Warrants under the terms of the Warrants based on the one-day volume weighted average price of the Company’s Common Stock on February 28, 2013, which was $12.6439 per share, as reported by Bloomberg. The Company has agreed to register the shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock on the same basis as the shares of Common Stock issued in the November 2012 private placement transaction. Currently the Company is not obligated to file any registration statement for the Common Stock, or shares of Common Stock underlying the Warrants, until requested by a majority of the Investors.
Rights Agreement
Effective January 1, 2013, the Company and Equity Stock Transfer, LLC, as Rights Agent, entered into a Rights Agreement which continues through December 31, 2017. The Rights Agreement provides each Stockholder of record a dividend distribution of one “right” for each outstanding share of Common Stock. Rights become exercisable at the earlier of ten days following: (1) a public announcement that an acquirer has purchased or has the right to acquire 10% or more of our Common Stock, or (2) the commencement of a tender offer which would result in an offeror beneficially owning 10% or more of our outstanding Common Stock. All rights held by an acquirer or offeror expire on the announced acquisition date, and all rights expire at the close of business on December 31, 2017, subject to further extension. Each right entitles a Stockholder to acquire, at a stated purchase price, 1/100 of a share of our preferred stock, which carries voting and dividend rights similar to one share of our Common Stock. Alternatively, a right holder may elect to purchase for the stated price an equivalent number of shares of our Common Stock at a price per share equal to one-half of the average market price for a specified period. In lieu of the stated purchase price, a right holder may elect to acquire one-half of the Common Stock available under the second option. The purchase price of the preferred stock fractional amount is subject to adjustment for certain events as described in the Agreement. At the discretion of a majority of the Board and within a specified time period, we may redeem all of the rights at a price of $0.001 per right. The Board may also amend any provisions of the Agreement prior to exercise.
Retention Agreement
In January 2013, the Company entered into a Retention Agreement with Mr. Lodder which provides that (i) Mr. Lodder will remain with the Company as an executive officer through June 30, 2013 and receive compensation at the rate previously provided to him and (ii) the Company will pay Mr. Lodder a severance of $233,398 as had been provided under the terms of his Employment Agreement, which was terminated under the terms of his Retention Agreement.
SPHERIX INCORPORATED AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30, 2013 | | | December 31, 2012 | |
| ASSETS | | (Unaudited) | | | | |
| Current assets | | | | | | |
| Cash | | $ | 2,541,743 | | | $ | 4,498,237 | |
| Other receivables | | | - | | | | 3,425 | |
| Prepaid expneses and other assets | | | 51,074 | | | | 100,474 | |
| Assets of segment held for sale | | | - | | | | 104,265 | |
| Total current assets | | | 2,592,817 | | | | 4,706,401 | |
| | | | | | | | | |
| Other assets | | | | | | | | |
Property and equipment, net of accumulated depreciation of $332,395 and $308,386 | | | - | | | | 24,009 | |
Patent portfolio, net of accumulated amortization of $133,785 and $0 | | | 4,967,911 | | | | - | |
| Deposit | | | 29,505 | | | | 25,625 | |
| Goodwill | | | 1,711,883 | | | | - | |
| Total assets | | $ | 9,302,116 | | | $ | 4,756,035 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 486,136 | | | $ | 425,774 | |
| Accrued salaries and benefits | | | 48,505 | | | | 280,263 | |
| Accrued patent costs | | | 1,000,000 | | | | - | |
| Liabilities of segment held for sale | | | 2,551 | | | | 25,040 | |
| Total current liabilities | | | 1,537,192 | | | | 731,077 | |
| | | | | | | | | |
| Deferred rent | | | 45,008 | | | | 45,081 | |
| Warrant liabilities | | | 39,923 | | | | 3,125,393 | |
| | | | | | | | | |
| Total liabilities | | | 1,622,123 | | | | 3,901,551 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | |
| | | | | | | | | |
| Stockholders' equity | | | | | | | | |
| Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized; |
Series A: No shares issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $1,000 per share | | | - | | | | - | |
Series B: 1 share issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $1,000 per share | | | - | | | | - | |
Series C: 1 and no shares issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $0.0001 per share | | | - | | | | - | |
Series D: 1,379,685 and no shares issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $0.0001 per share | | | 138 | | | | - | |
Series E: No shares issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $0.0001 per share | | | - | | | | - | |
Series F: No shares issued and outstanding, at September 30, 2013 and December 31, 2012; liquidation preference $0.0001 per share | | | - | | | | - | |
Common stock, $0.0001 par value, 50,000,000 shares authorized; 2,430,305 and 814,114 shares issued at September 30, 2013 and December 31, 2012, respectively; 2,429,904 and 813,713 shares outstanding at September 30, 2013 and December 31, 2012, respectively | | | 244 | | | | 82 | |
| Additional paid in capital | | | 57,239,275 | | | | 36,630,406 | |
Treasury stock at cost, 401 shares at September 30, 2013 and December 31, 2012, respectively | | | (464,786 | ) | | | (464,786 | ) |
| Accumulated deficit | | | (49,094,878 | ) | | | (35,311,218 | ) |
| | | | | | | | | |
| Total stockholders' equity | | | 7,679,993 | | | | 854,484 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 9,302,116 | | | $ | 4,756,035 | |
See accompanying notes to condensed consolidated financial statements
SPHERIX INCORPORATED AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | For the Three Months Ended September 30, 2013 (Unaudited) | | For the Three Months Ended September 30, 2012 (Unaudited) | | For the Nine Months Ended September 30, 2013 (Unaudited) | | For the Nine Months Ended September 30, 2012 (Unaudited) | |
| Revenues | $ | 1,837 | | $ | 16,710 | | $ | 7,811 | | $ | 16,710 | |
| | | | | | | | | | | | | | | |
| Operating costs and expenses | | | | | | | | | | | | |
| | Amortization of patents | | 133,785 | | | - | | | 133,785 | | | - | |
| | Compensation and compensation related expenses (including stock based compensation) | 6,392,503 | | | 89,959 | | | 7,129,025 | | | 492,456 | |
| | Research and development expenses | 9,648 | | | 107,817 | | | 9,648 | | | 617,469 | |
| | Professional fees | | 2,139,977 | | | 316,671 | | | 2,867,945 | | | 848,498 | |
| | Rent | | 60,433 | | | 42,905 | | | 132,475 | | | 121,630 | |
| | Depreciation expense | | 2,519 | | | 16,993 | | | 24,009 | | | 50,936 | |
| | Other selling, general and administrative expenses | | 579,740 | | | 76,010 | | | 884,858 | | | 252,201 | |
| | | | | | | | | | | | | | | |
| | | Total operating expenses | | 9,318,605 | | | 650,355 | | | 11,181,745 | | | 2,383,190 | |
| | | | | | | | | | | | | | | |
| | | Operating loss | | (9,316,768) | | | (633,645) | | | (11,173,934) | | | (2,366,480) | |
| | | | | | | | | | | | | | | |
| Interest income | | 202 | | | 830 | | | 739 | | | 2,774 | |
| Fair value adjustments for warrant liabilities | | 36,583 | | | 58,413 | | | (2,610,465) | | | 740,605 | |
| | | | | | | | | | | | | | | |
| Loss from continuing operations before taxes | (9,279,983) | | | (574,402) | | | (13,783,660) | | | (1,623,101) | |
| | Income tax expense | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | |
| Loss from continuing operations | | (9,279,983) | | | (574,402) | | | (13,783,660) | | | (1,623,101) | |
| | | | | | | | | | | | | | | |
| Discontinued operations | | | | | | | | | | | | |
| | Loss from discontinued operations before tax | - | | | (133,148) | | | - | | | (323,423) | |
| | Income tax expense | | - | | | - | | | - | | | - | |
| Loss from discontinued operations | | - | | | (133,148) | | | - | | | (323,423) | |
| | | | | | | | | | | | | | | |
| Net loss | $ | (9,279,983) | | $ | (707,550) | | $ | (13,783,660) | | $ | (1,946,524) | |
| | | | | | | | | | | | | | | |
| Net loss per share, basic and diluted | | | | | | | | | | |
| | Continuing operations | $ | (6.93) | | $ | (2.76) | | $ | (14.43) | | $ | (8.09) | |
| | Discontinued operations | $ | - | | $ | (0.64) | | $ | - | | $ | (1.61) | |
| | | | | | | | | | | | | | | |
| Net loss per share, basic and diluted | $ | (6.93) | | $ | (3.40) | | $ | (14.43) | | $ | (9.70) | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, basic and diluted | | 1,339,300 | | | 207,806 | | | 955,292 | | | 200,547 | |
See accompanying notes to condensed consolidated financial statements
SPHERIX INCORPORATED AND SUBSIDIARIES
| | For the Nine Months Ended | For the Nine Months Ended |
| | September 30, 2013 | | September 30, 2012 | |
| | (Unaudited) | (Unaudited) |
| Cash flows from operating activities | | | | |
| Net loss | | $ | (13,783,660 | ) | | $ | (1,946,524 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities |
| Provision for doubtful accounts | | | - | | | | (8,174 | ) |
| Depreciation | | | 24,009 | | | | 50,936 | |
| Fair value adjustments for warrant liabilities | | | 2,610,465 | | | | (740,605 | ) |
| Stock based compensation | | | 7,402,485 | | | | 40,350 | |
| Amortization of patent portfolio | | | 133,785 | | | | - | |
| Changes in operating assets and liabilities: | |
| Prepaid expenses and other assets | | | 60,023 | | | | 316,041 | |
| Accounts receivable | | | - | | | | 103,746 | |
| Other receivables | | | 3,425 | | | | - | |
| Accounts payable, accrued expenses and accrued salaries and benefits | | | (171,396 | ) | | | (151,994 | ) |
| Deferred payables | | | (73 | ) | | | 5,206 | |
| | | | | | | | | |
| Net cash used in continuing operations | | | (3,720,937 | ) | | | (2,331,018 | ) |
| Net cash provided by discontinued operations | | | 81,776 | | | | 17,636 | |
| Net cash used in operating activities | | | (3,639,161 | ) | | | (2,313,382 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | |
| Cash acquired in acquisition of North South | | | 2,684,363 | | | | - | |
| Purchase of property and equipment | | | - | | | | (1,599 | ) |
| Purchase of patent portfolio | | | (2,001,696 | ) | | | - | |
| | | | | | | | | |
| Net cash provided by (used in) investing activities | | | 682,667 | | | | (1,599 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | |
| Proceeds from issuance of note payable | | | 500,000 | | | | - | |
| Proceeds received from issuance of preferred stock | | | 500,000 | | | | 1,055,353 | |
| Reverse stock split fractional share payment | | | - | | | | (1,685 | ) |
| | | | | | | | | |
| Net cash provided by financing activiites | | | 1,000,000 | | | | 1,053,668 | |
| | | | | | | | | |
| Net decrease in cash | | | (1,956,494 | ) | | | (1,261,313 | ) |
| Cash at beginning of period | | | 4,498,237 | | | | 4,911,350 | |
| Cash at end of period | | $ | 2,541,743 | | | $ | 3,650,037 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information |
| Interest paid | | $ | - | | | $ | - | |
| Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | | |
| Supplemental disclosure of non cash activity | |
| Issuance of Convertible Preferred Stock - Series C in connection with exchange of warrants | | $ | 5,695,935 | | | $ | - | |
| Conversion of Convertible Preferred Stock - Series C into common stock | | $ | 23 | | | $ | - | |
| Issuance of common stock in connection with cashless exercise of warrants | | $ | 1 | | | $ | - | |
| Issuance of common stock in connection with acquisition of patent portfolio | | $ | 1,000,000 | | | $ | - | |
| Accrued patent costs | | $ | 1,000,000 | | | $ | - | |
| | | | | | | | | |
| Acquisition of North South Holdings: | | | | |
| Prepaid expenses | | $ | (14,503 | ) | | $ | - | |
| Patent portfolio | | | (1,100,000 | ) | | | - | |
| Goodwill | | | (1,711,883 | ) | | | - | |
| Common and preferred stock issued | | | 5,510,749 | | | | - | |
| Cash acquired in acquisition of North South | | $ | 2,684,363 | | | $ | - | |
See accompanying notes to condensed consolidated financial statementsNotes to the Condensed Consolidated Financial Statements(Unaudited)
1. Business, Merger and Basis of Presentation
Business and Merger
Until the sale of Spherix Consulting, Inc. in December 2012, the Company’s principal segments of Spherix Incorporated (the “Company”) have been Biospherics, the biotechnology research and development business, and Spherix Consulting, the technical and regulatory consulting business. On December 3, 2012, the Company sold all of the stock of Spherix Consulting, Inc. Accordingly, the operations of Spherix Consulting, Inc. are reported in the accompanying condensed consolidated financial statements as discontinued operations. We were 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 discontinued in 2012. The Company has shifted its focus during 2013 and is now an intellectual property company that owns patented and unpatented intellectual property.
On December 27, 2012, the Company formed a new wholly-owned subsidiary, Nuta Technology Corp., (“Nuta”), which is incorporated in the state of Virginia. On April 2, 2013, the Company entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement") with its wholly owned subsidiary, Nuta, North South Holdings, Inc., a Delaware corporation ("North South"), the owner or assignee of certain patents, licenses and applications (the “North South Intellectual Property”), and the shareholders of North South (the "North South Shareholders"). On September 10, 2013 the transaction contemplated under the Merger Agreement was completed (the “Merger”). At closing, North South merged with and into Nuta with Nuta as the surviving corporation. Nuta will continue its operations in the State of Virginia as the record owner of the North South’s intellectual property. Pursuant to the terms and conditions of the Merger, at the closing of the Merger, all of North South’s 5,213 issued and outstanding shares of common stock were converted into an aggregate of 1,203,153 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and all of North South’s 491 issued and outstanding shares of Series A Preferred Stock and 107 issued and outstanding shares of Series B Preferred Stock were converted into an aggregate of 1,379,685 shares of the Company's Series D Convertible Preferred Stock, par value $0.0001 per share, which is convertible into shares of the Company’s common stock on a one-for-ten basis (collectively with the 1,203,153 common shares of the Company, the “Merger Consideration”).
The closing of the Merger was subject to customary closing conditions, including the receipt of a fairness opinion that the Merger Consideration is fair to stockholders and the Company from a financial point of view, based on, among other things, the North South Intellectual Property assets, and the approval of the Company’s shareholders holding a majority of the outstanding voting capital stock of the Company as of the record date (July 10, 2013) to issue the Merger Consideration pursuant to NASDAQ listing standards.
On July 24, 2013, the Company purchased a group of patents in the mobile communication sector (the “Purchased Patents”) from Rockstar Consortium US LP, a Delaware limited partnership (“Rockstar”) at a contractual price of $4,000,000. In consideration for the Purchased Patents, the Company paid an aggregate $3,000,000 in consideration to Rockstar, which consisted of a $2,000,000 cash payment and 176,991 shares of common stock accepted by the seller in settlement of the $1,000,000 remaining balance of the Company’s common stock (176,991 shares at $5.65 per share). The Shares are subject to a lock-up agreement, subject to certain leak-out provisions, which shall expire on the earlier of (i) six months from the issuance of the shares or (ii) the date that the Company’s Common Stock achieves a trading volume of at least 50,000 shares per day and a closing price of at least $15 per share for a period of five consecutive days. The Company has filed a registration statement covering the resale of the shares issued to Rockstar with the Securities and Exchange Commission (the “SEC”) on September 5, 2013. On the anniversary of one year and one day after the Company files its first complaint against a defendant with any one or more of the patents acquired in this transaction, the Company shall deliver $1,000,000 to Rockstar. The initial complaint was filed on August 30, 2013, and at that time the additional $1,000,000 was accrued and included in patent portfolio on the condensed consolidated balance sheet.
Rockstar will also be entitled to receive a percentage of future profits after recovery of patent monetization costs and an initial priority return on investment to the Company.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company are unaudited and do not include all of the information and disclosures generally required for annual financial statements. In the opinion of management, the statements contain all material adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s consolidated financial position as of September 30, 2013, the consolidated results of its operations for the three-and nine-month periods ended September 30, 2013 and 2012, and the consolidated results of its cash flows for the nine-month periods ended September 30, 2013 and 2012. This report should be read in conjunction with the Company’s Annual Report on Form 10-K, which does contain the complete information and disclosure, for the year ended December 31, 2012.
The accompanying condensed consolidated financial statements include the accounts of Spherix Incorporated and its wholly-owned subsidiaries, Biospherics Incorporated and Nuta Technology Corp. Prior to the Merger with Nuta, North South formed two Delaware limited liability corporations on July 26, 2013, Guidance IP, LLC (“Guidance”) and Directional IP, LLC. (“Directional”). All significant intercompany balances and transactions have been eliminated in consolidation.
2. Liquidity and Capital Resources
The Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding revenue.
The Company intends to finance its activities through:
estimates.· | managing current cash and cash equivalents on hand from our past equity offerings, |
· | seeking additional funds raised through the sale of additional securities in the future, |
· | increasing revenue from the monetization of its patent portfolios, licenseLegal fees and new business ventures. |
The Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer term business plan. The Company’s working capital amounted to $1,055,625 and $3,975,324 at September 30, 2013 and December 31, 2012, respectively and, cash on hand amounted to $2,541,743 and $4,498,237, respectively. Upon closing of the Merger on September 10, 2013, the North South cash balance (approximately $2,684,363) became available for the operations of the Company.
The Company in November of 2013 sold an aggregate of 304,250 shares of its newly designated Series F Preferred Stock and 48,438 shares of common stock to five accredited investors for gross proceeds to the Company of $2,235,000 pursuant to subscription agreements. The effective purchase price per share of Common Stock and 156,250 of the Series F Preferred Stock was $6.40 for $1,310,000 of such investment and 148,000 shares of Series F Convertible Preferred Stock will be used to further the operations of the Company (Series F Convertile Preferred Stock - see Note 8, Subsequent Events).
Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. The Company may be forced to litigate against others to enforce or defend its intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which the Company is involved may allege defenses and/or file counterclaims or initiate inter parties reviews in an effort to avoid or limit liability and damages for patent infringement or cause the Company to incur additional costs as a strategy. If such efforts are successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents. The patents could be declared invalid by a court or the US Patent and Trademark Office, in whole or in part, or the costs of the Company can increase.
As a result, a negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact the Company’s business. Additionally, the Company anticipates that legal fees which are not included in contingency fee arrangements, experts and other expenses will be material and could have an adverse effect on its financial condition and results of operations if its efforts to monetize these patents are unsuccessful.
In addition, the costs of enforcing the Company’s patent rights may exceed its recoveries from such enforcement activities. Accordingly, in order for the Company to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues, including any profit sharing arrangements with inventors or prior owners of the patents. The Company’s failure to monetize its patent assets or the occurrence of unforeseen circumstances that could have a negative impact on the Company’s liquidity could significantly harm its business.
Should the Company be unsuccessful in its efforts to execute its business plan, it could become necessary for the Company to reduce expenses, curtail its operation or explore various alternative business opportunities or possibly suspend or discontinue its business activities.
3. Summary of Significant Accounting Policies
Use of Estimates
The accompanying condensed 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, valuation of warrants, the valuation of assets acquired and common and preferred stock issued in the acquisition of North South 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. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At September 30, 2013, the Company’s cash and cash equivalents in excess of the FDIC limits were $1,932,739. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks.
Accounts Receivable
Credit is extended to customers based on an evaluation of a customer’s financial condition and, in general, collateral is not required. Management regularly reviews accounts receivable for uncollectible and potentially uncollectible accounts, and when necessary establishes an allowance for doubtful accounts. Balances that are outstanding after management has used reasonable collection efforts are written-off through a reduction in the allowance for doubtful accounts and a credit to accounts receivable.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
Revenue Recognition
The Company currently derives its revenues from past production payments. Past production payment revenues are royalty payments for the use of the Company’s intellectual property and where payments are made as part of a settlement of a patent infringement dispute. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability is reasonably assured. Based on the criteria enumerated in Accounting Standards Codification (“ASC”) 605, the Company records its revenues and costs associated with its patent enforcement activities gross on the consolidated statement of operations.
Cost of Revenues
Cost of revenues include the costs and expenses incurred in connection with the Company’s patent enforcement activities, including inventor royalties paid to original patent owners, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third parties and the amortization of patent-related acquisition costs.
Inventor Royalties and Contingent Legal Expenses
Inventor royalties are expensed in the period that the related revenues are recognized. In certain instances, pursuant to the terms of the underlying inventor agreements, costs paid by the Company to acquire patents are recoverable from future net revenues. Patent acquisition costs that are recoverable from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense.
Contingent legal fees are expensed in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Legal fees advanced by contingent law firms that are required to be paid in the event that no license recoveries are obtained are expensed as incurred.
Intangible Assets – Patent Portfolios
Intangible assets include the Company’s patent portfolios with original estimated useful lives ranging from 6 months to 12 years. The Company amortizes the cost of the intangible assets over their estimated useful lives on a straight line basis. Costs incurred to acquire patents, including legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent. As disclosed in Note 1, the Company acquired certain patent portfolios in the third quarter of 2013. The weighted average remaining amortization period of the Company’s patents is approximately 8.5 years. Future amortization of all patents is as follows:
For the Years Ending December 31 | | | Harris Patent Portfolio | | | CompuFill Patent Portfolio | | | Rockstar Patent Portfolio | | | Other Costs | | | Total Amortization | |
| | 2013 | * | | $ | 11,765 | | | $ | 10,294 | | | $ | 247,001 | | | $ | 10,344 | | | $ | 279,404 | |
| | 2014 | | | | 47,059 | | | | 41,176 | | | | 795,348 | | | | 41,376 | | | | 924,959 | |
| | 2015 | | | | 47,059 | | | | 41,176 | | | | 672,310 | | | | 41,376 | | | | 801,921 | |
| | 2016 | | | | 47,059 | | | | 41,176 | | | | 672,310 | | | | 41,376 | | | | 801,921 | |
| | 2017 | | | | 47,059 | | | | 41,176 | | | | 433,918 | | | | 41,376 | | | | 563,529 | |
| Thereafter | | | | 196,077 | | | | 171,571 | | | | 1,056,112 | | | | 172,417 | | | | 1,596,177 | |
| Total | | | $ | 396,078 | | | $ | 346,569 | | | $ | 3,876,999 | | | $ | 348,265 | | | $ | 4,967,911 | |
* Represents three months remaining for 2013
Amortization of the intangible assets for the three and nine months ended September 30, 2013 was $133,785. There was no amortization prior to July 24, 2013 as the first assets were placed into service on July 24, 2013.
Impairment of Long-lived Assets
The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The Company has not identified any such impairment losses.
Reclassifications
The Company has reclassified certain amounts from its previously reported consolidated financial statements for comparative purposes to conform to the fiscal 2013 presentation. These reclassifications had no impact on the Company’s previously reported consolidated operations or cash flows.
Goodwill
Under ASC No. 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise.
Goodwill impairment is tested at least annually or when factors indicate potential impairment using a two-step process that begins with an estimation of the fair value of each reporting unit. Step 1 is a screen for potential impairment pursuant to which the estimated fair value of each reporting unit is compared to its carrying value.
The Company estimates the fair values of each reporting unit by a combination of (i) estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach) and (ii) a comparative analysis of revenue and margins multiples of public companies in similar markets (the market approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a Step 2 test is required.
Income Taxes
The Company adopted the provisions of ASC 740-10, which prescribes a recognition threshold and measurement process for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of September 30, 2013. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.
Net Loss Per Share
Basic earnings and loss per share are computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. 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 antidilutive.
Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted loss per share at September 30, 2013 and 2012 are as follows:
| | | September 30, 2013 | | | September 30, 2012 | |
| Convertible preferred stock | | | 13,796,852 | | | | 4 | |
| Warrants to purchase common stock | | | 66,062 | | | | 67,637 | |
| Non-vested restricted stock awards | | | 250 | | | | - | |
| Options to purchase common stock | | | 2,012,163 | | | | 2,425 | |
| Total | | | 15,875,327 | | | | 70,066 | |
Stock-based Compensation
The Company accounts for share-based payment awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a four- to ten-year period.
The fair value of stock options granted was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration for all individuals within the grant. The expected volatility assumption is based on the standard deviation of the Company’s underlying stock price’s daily logarithmic returns.
The Company’s model includes a zero dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions.
The periodic expense is then determined based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the options vest.
Segment Reporting
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. As of September 30, 2013 and for the nine months ended September 30, 2013, the Company operates in two segments. The segments are as follows: biotechnology and patent monetization. The Company’s biotechnology segment is minimal in 2013 and represented 100% of the Company in 2012. Since the acquisition of the Rockstar patent portfolio and merger with North South, the Company is primarily a patent monetization company and a majority of the Company’s operations and assets are in the patent monetization segment.
The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized tax benefit , or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.
For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.
4. Acquisition of North South
As disclosed in Note 1, on September 10, 2013, the Company completed its acquisition of North South. The Company acquired North South to expand its patent portfolio and continue its business plan of the monetization of its intellectual property. The Company accounted for its acquisition of North South using the acquisition method of accounting. Accordingly, the results of operations for the three and nine months ended September 30, 2013, include operations of the acquired business since September 10, 2013.
The fair value of the purchase consideration issued to the sellers of North South was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill. Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition of the subsidiary and intangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purposes in the tax jurisdiction of the acquired business.
The purchase price was allocated as follows:
| Purchase Consideration: | | | | |
| Value of common stock and convertible preferred stock issued to sellers | | $ | 5,510,749 | |
| | | | | |
| Tangible assets acquired: | | | | |
| Cash | | | 2,684,363 | |
| Prepaid expenses | | | 14,503 | |
| Net tangible assets acquired | | | 2,698,866 | |
| | | | | |
| Purchase consideration in excess of fair value of net tangible assets | | | 2,811,883 | |
| | | | | |
| Allocated to: | | | | |
| Patent portfolios | | | 1,100,000 | |
| Goodwill | | | 1,711,883 | |
| | | $ | - | |
The purchase price allocation was based, in part, on management’s knowledge of North South’s business and the results of a third party appraisal commissioned by management.
The following table presents the unaudited pro-forma financial results, as if the acquisition of North South had been completed as of January 1, 2012.
| | | For the nine months ended September 30, 2013 | | | For the nine months ended September 30, 2012 | | | For the three months ended September 30, 2013 | | | For the three months ended September 30, 2012 | |
| | | | | | | | | | | | | |
| Revenues | | $ | 101,811 | | | $ | 16,710 | | | $ | 95,837 | | | $ | 16,710 | |
| Net loss | | $ | (14,214,571 | ) | | $ | (1,720,160 | ) | | $ | (9,421,574 | ) | | $ | (606,755 | ) |
| Loss per share- basic and diluted | | $ | (6.84 | ) | | $ | (1.23 | ) | | $ | (4.08 | ) | | $ | (0.43 | ) |
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2012 or to project potential operating results as of any future date or for any future periods.
On August 6, 2013, the Company sold a promissory note in the principal amount of $500,000 to North South Holdings, Inc. pursuant to the terms of a Note Purchase Agreement with gross proceeds to the Company of $500,000. The Note accrues interest at the rate of 0.25% per annum and is due and payable twenty-four months from the date of issuance, subject to acceleration in the event of default and may be prepaid in whole or in part without penalty or premium. The note has been eliminated in consolidation.
5. Stockholders’ Equity
Preferred Stock
The Company has authorized the issuance of 5,000,000 shares of convertible preferred stock and has certificates of designation of five separate series as summarized below as of September 30, 2013.
Preferred Stock | | Number of Shares Issued | | | Par Value | | | Conversion to Common Stock | |
| Series “A" (1) | | | 0 | | | $ | .0001 | | | | N/A | |
| Series “B" (2) | | | 1 | | | $ | .0001 | | | 1:1 | |
| Series “C" (3) | | | 1 | | | $ | .0001 | | | 1:1 | |
| Series “D” (4) | | | 1,379,685 | | | $ | .0001 | | | 10:1 | |
| Series “E” (5) | | | 0 | | | $ | .0001 | | | 1:1 | |
(1) | See Rights Agreement below. |
(2) | 1 share was issued October 12, 2010 and remains issued and outstanding. Liquidation preference is $1,000 per share. |
(3) | See Warrant Exchange Agreement below. |
(4) | The Company on September 10, 2013, issued 1,379,685 shares of Series D convertible preferred stock in exchange for all the Series A and Series B Preferred shares of North South. See Note 1. |
(5) | There were 100,000 shares were issued on June 25, 2013 in consideration for $500,000 to North South pursuant to a private placement. See Series E Convertible Preferred Stock below. The shares were retired on September 30, 2013. |
Warrant Exchange Agreement
On March 6, 2013, the Company, and certain investors that participated in the November 2012 private placement transaction (“Investors”), entered into separate Warrant Exchange Agreements pursuant to which certain of the Investors exchanged common stock purchase warrants acquired in the private placement for shares of the Company’s newly designated Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock is convertible into one (1) share of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at the option of the holder, subject to certain limitations on conversions that would result in the Investors acquiring more than 4.99% (or, if such limitation is waived by the holder upon no less than 61 days prior notice, 9.99%) of the outstanding voting stock of the Company. The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of Delaware of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Certificate of Designation”). The liquidation preference of the Series C Convertible Preferred Stock is $0.0001 per share.
Pursuant to the Warrant Exchange Agreements, certain Investors received in exchange for their warrants an aggregate of 229,337 shares of the Series C Convertible Preferred Stock, each convertible into one share of Common Stock. The number of shares of Common Stock underlying the Series C Convertible Preferred Stock is the same number as would have been-issued upon a “cashless exercise” of the exchanged warrants under the terms of the warrants based on the one-day volume weighted average price of the Company’s Common Stock on February 28, 2013, which was $12.6439 per share, as reported by Bloomberg.
The Company agreed to register the shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock on the same basis as the shares of Common Stock issued in the November 2012 private placement transaction which registration obligation was subsequently waived by a majority of the Investors. As of September 30, 2013, investors converted 229,336 shares of the Series C Convertible Preferred Stock into 229,336 shares of common stock.
Rights Agreement
On January 24, 2013, effective as of January 1, 2013, the Company and Equity Stock Transfer, LLC, as Rights Agent, entered into a Rights Agreement which continues through December 31, 2017. The Rights Agreement provides each Stockholder of record a dividend distribution of one “right” for each outstanding share of Common Stock. Rights become exercisable at the earlier of ten days following: (1) a public announcement that an acquirer has purchased or has the right to acquire 10% or more of our Common Stock, or (2) the commencement of a tender offer which would result in an offeror beneficially owning 10% or more of our outstanding Common Stock.
All rights held by an acquirer or offeror expire on the announced acquisition date, and all rights expire at the close of business on December 31, 2017, subject to further extension. Each right entitles a Stockholder to acquire, for a price of $7.46, 1/100 of a share of our Convertible Series A Preferred Stock, which carries voting and dividend rights similar to one share of our Common Stock. Alternatively, a right holder may elect to purchase for the stated price an equivalent number of shares of our Common Stock at a price per share equal to one-half of the average market price for a specified period. In lieu of the stated purchase price, a right holder may elect to acquire one-half of the Common Stock available under the second option.
The purchase price of the preferred stock fractional amount is subject to adjustment for certain events as described in the Agreement. At the discretion of a majority of the Board and within a specified time period, we may redeem all of the rights at a price of $0.001 per right. The Board may also amend any provisions of the Agreement prior to exercise.
Series E Convertible Preferred Stock
On June 25, 2013, the Company sold 100,000 shares of its newly designated Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to North South for a purchase price of $5.00 per share with gross proceeds to the Company of $500,000 pursuant to a subscription agreement. These securities were sold pursuant to an exemption from registration under Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of the securities laws. Each share of Series E Preferred Stock is convertible, at the option of the holder at any time, into one (1) share of the Company’s Common Stock and has a stated value of $0.0001. Such conversion ratio is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar recapitalization transactions.
North South is prohibited from effecting the conversion of the Series E Preferred Stock to the extent that, as a result of such conversion, the holder will beneficially own more than 4.99% (or, if such limitation is waived by the holder upon no less than 61 days prior notice, 9.99%) in the aggregate of the issued and outstanding shares of the Company’s Common Stock calculated immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series E Preferred Stock. These 100,000 shares of Series E Convertible Preferred Stock were acquired by the Company in connection with the North South Merger, and thereafter retired and were not outstanding as of September 30, 2013.
Common Stock
The Company has 50,000,000 shares authorized as of September 30, 2013 with a par value of $0.0001 per share.
During the nine months ended September 30, 2013, the Company issued the following shares of common stock:
· | 229,336 shares of common stock issued upon conversion of 229,336 shares of Series C Convertible Preferred Stock originally issued in connection with the warrant exchange agreement described above; |
· | 176,991 shares of common stock issued in connection with the acquisition of intellectual property in the Rockstar patent portfolio acquisition (see Note 1); |
· | 6,711 shares of common stock issued upon the cashless exercise of 9,391 warrants; and |
· | 1,203,153 shares of common stock issued in connection with the acquisition of North South. These shares were issued in exchange for the 5,213 shares of common stock of North South. |
The Company’s additional paid in capital increased $20,608,869 in the nine months ended September 30, 2013. Included in this increase is stock based compensation of $7,402,485, increase for the acquisition of North South of $5,510,491, an increase due to the issuance of common shares in the Rockstar patent purchase of $999,982 and an increase due to the conversion of warrants to Series C Convertible Preferred Stock of $5,695,512.
Stock Options
2013 Plan
In April 2013, the Company’s board of directors adopted the Spherix Incorporated 2013 Equity Incentive Plan (the “2013 Plan”), an omnibus equity incentive plan pursuant to which the Company may grant equity and cash and equity-linked awards to certain management, directors, consultants and others. The plan was approved by the Company’s shareholders in August 2013.
The 2013 Plan authorized approximately 15% of our fully-diluted Common Stock at the time approved (not to exceed 2,800,000 shares) be reserved for issuance under the Plan, after giving effect to the shares of our capital stock issuable under the Merger. On April 4, 2013, the Company issued 2,005,500 option shares to executives of the Company and certain outside consultants under the 2013 Plan. The total fair value of the options on the date of grant was approximately $15,865,270 under the Black-Scholes and other lattice models of valuing options.
On April 4, 2013, the Company, with the approval of the board of directors, granted the following stock options to various employees, directors and consultants at a contractual price of $7.08 per share, which was equal to the fair market value of the Company’s common stock on the date that the terms of those awards were agreed to by the Company and optionees.
Awards with service conditions only were granted as follows:
● | 750,000 stock options to our former interim Chief Executive Officer which vest in four equal installments of 187,500 options each on October 4, 2013, April 4, 2014, October 4, 2014 and April 4, 2015, subject to a time based service condition only; |
● | 250,000 stock options to the former Chief Executive Officer of North South, who became the Company’s Chief Executive Officer upon the completion of the acquisition of North South on September 10, 2013, which vest in four equal installments of 62,500 options each on October 4, 2013, April 4, 2014, October 4, 2014 and April 4, 2015, subject to a time based service condition only; |
● | An aggregate of 225,000 options to three directors that fully vested on October 4, 2013, subject to each of these directors’ continued service to the Company through that date; and |
● | An aggregate of 30,500 options to two consultants and one employee that fully vested on August 16, 2013 upon shareholder approval of the plan. |
Awards with combined market and service conditions were granted as follows:
● | 250,000 stock options to our former interim Chief Executive Officer for which (i) the exercisability of the options is subject to the volume weighted average price of the Company’s stock attaining at least $12 per share for at least 30 days during any consecutive 90 day period through December 31, 2014, and (ii) the continued employment/directorship of the interim Chief Executive Officer over a period of time that permits vesting at the rate of 62,500 options each on October 4, 2013, April 4, 2014, October 4, 2014 and April 4, 2015, subject to a time based service condition only; and |
● | 500,000 stock options to the former Chief Executive Officer of North South, who became the Company’s Chief Executive Officer upon the completion of the acquisition of North South on September 10, 2013 for which (i) (i) the exercisability of the options is subject to the volume weighted average price of the Company’s stock attaining at least $12 per share for at least 30 days during any consecutive 90 day period through December 31, 2014, and (ii) achieving performance conditions as follows: |
o | 100,000 options subject to the delivery of a business plan acceptable to the board of directors of the Company by no later than June 30, 2013; |
o | 70,000 options subject to the closing of a financing transaction as set forth in the business plan; |
o | 70,000 options for two successful patent monetizations; |
o | 70,000 options upon the completion of an additional purchase of a patent portfolio; |
o | 70,000 options upon the initiation of litigation upon at least four defendants in infringement cases; |
o | 70,000 options upon the presentation of at least two additional monetization opportunities acceptable to the board of directors; and |
o | 50,000 options for attending at least 20 investor relations meetings. |
The 2013 stock option plan was approved by the Company’s stockholders on August 16, 2013, which resulted in the ratification of the awards approved by the Company’s board of directors on April 4, 2013.
The fair value of the stock options issued with service conditions only was calculated on the date that the final approval by the stockholders was obtained using the Black-Scholes option pricing model with the following assumptions: contractual exercise price $7.08 per share; fair value of the Company’s common stock of $12.80 per share; risk free interest rates ranging from 0.36% to 2.84%; dividend yield of 0%; expected terms ranging from 2 to 10 years; and a volatility rate of 78.9%. The fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the dividend yield is 0%. The expected term was calculated using the plain vanilla method, which is approximately to the term that Management believes represents a good approximation of the period of time that each class of optionee would likely hold these awards until exercising them. The Company obtained the risk free interest rate from publicly available data published by the Federal Reserve. The volatility rate was computed based on a comparison of average volatility rates of similar companies.
Compensation expense recognized for the above noted awards amounted to $4,716,070 for the three and nine month periods ended September 30, 2013. Unamortized compensation cost for these awards amounted to $7,474,200 and will be amortized over a remaining contractual term of 2 years.
The fair value of the stock options issued with combined market and service conditions only was calculated on the date that the final approval by the stockholders was obtained using the same assumptions as the awards that contain service conditions only; however, the fair value was adjusted for the risk associated with attaining the volume weighted average pricing target that must be met in order for the award to become exercisable. The Company determined that the unit fair value of each award amounted to $4.90 based on a 70% probability of attaining the aforementioned price target, which was determined using a Monte Carlo Simulation of the probability of attaining the target.
The aggregate fair value of the 250,000 stock options that features the combined market and service condition amounted to $1,225,000 on the date of grant. The fair value of these awards is being amortized over an explicit service period in which the award vests at the rate of 62,500 options each on October 4, 2013, April 4, 2014, October 4, 2014 and April 4, 2015 as noted above. Compensation expense recognized for this award amounted to $306,250 for the three and nine month periods ended September 30, 2013. Unamortized compensation cost for this award amounts to $918,750 and will be amortized over the remaining explicit service of 2 years.
The aggregate fair value of the 500,000 stock options that features the combined market and performance condition amounted to $2,450,000 on the date of grant. The recipient of these awards attained the required conditions with respect to 240,000 of these options as of the date stockholder approval was obtained. Accordingly, the Company recorded compensation cost in the amount of $1,176,000 for the three and nine month periods ended September 30, 2013. Company Management believes that it is highly probable that the recipient of this grant will attain the conditions necessary to vest 190,000 of the stock options over a derived service period that will end no later than December 31, 2013, and the remaining 70,000 stock options over a derived service period that will end no later than March 31, 2014. Compensation expense relating to these components of the awards amounted to $379,535 for the three and nine month periods ended September 30, 2013. Unamortized compensation cost for these awards amounts to $894,465 and will be amortized over the remaining explicit service of 2 years.
A summary of option activity under the Company’s employee stock option plan for the nine months ended September 30, 2013, is presented below:
| Options | | Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2012 | | | 7,163 | | | $ | 22.34 | | | | 4.4 | | | | |
| Granted | | | 2,005,500 | | | $ | 7.08 | | | | 9.5 | | | | |
| Exercised | | | - | | | $ | - | | | | | | | | |
| Expired or forfeited | | | (500 | ) | | $ | (25.00 | ) | | | | | | | |
| Outstanding at September 30, 2013 | | | 2,012,163 | | | $ | 7.13 | | | | 9.5 | | | $ | 1,724,730 | |
| Options exercisable at September 30, 2013 | | | 36,663 | | | $ | 7.43 | | | | 9.5 | | | $ | 25,800 | |
The Company established the 2014 Equity Incentive Plan on September 27, 2013. This has been submitted for shareholder approval authorizing the issuance of up to 1,400,000 shares of Common Stock as incentive compensation. The Company’s Annual Meeting of Shareholders is presently scheduled for December 10, 2013 at which time the shareholders will be asked to approve this plan.
Restricted Stock Awards
A restricted stock award entitles the recipient to receive shares of unrestricted common stock upon vesting of the award and expiration of the restrictions. The fair value of each restricted stock award is determined upon granting of the shares and the related compensation expense is recognized ratably over the vesting period and charged to the operations as non-cash compensation expense. Shares contained in the unvested portion of restricted stock awards are forfeited upon termination of employment, unless otherwise agreed. The fair value of restricted stock issued under the Plan is determined based on the closing price of the Company’s common stock on the grant date.
A summary of the restricted stock award activity for the nine months ended September 30, 2013 is as follows:
| | | Number of Units | | Weighted Average Grant Date Fair Value |
| Nonvested at January 1, 2013 | | | 122,500 | | $6.83 |
| Granted | | | - | | |
| Vested | | | (120,250) | | ($6.80) |
| Forfeited | | | (2,000) | | ($6.83) |
| Nonvested at September 30, 2013 | | | 250 | | $6.83 |
The Company incurred $822,485 and $0 in compensation expense during the nine months ended September 30, 2013 and 2012, respectively, related to the restricted stock awards previously granted.
At September 30, 2013, unrecognized compensation expense associated with the restricted stock awards was $683, which will be amortized over approximately one-half of a year.
At the end of December 2012, the Company entered into a Consulting Agreement with an entity wholly-owned by Mr. Harvey Kesner, a member of the board of directors and our former Interim Chief Executive Officer, pursuant to which the entity was issued 120,000 shares of common stock in exchange for its services with a grant date value of $816,000.
The shares will vest if prior to December 31, 2017, the Company; (i) closes a Qualified Transaction (as defined within the agreement); (ii) closes a private or public financing of at least $7.5 million; or (iii) otherwise undergoes a change in control. In such an event, the affiliate shall also be entitled to a one-time payment of $250,000. Expense is recognized upon satisfaction of the above contingencies. The consummation of the Merger qualified as a Qualified Transaction and was approved by the shareholders, thereby causing the shares to vest on September 10, 2013.
The following table provides a summary of stock based compensation expense for all awards during the periods presented:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Stock Options with: | | | | | | | | | | | | |
| Service conditions only | | $ | 4,716,070 | | | $ | - | | | $ | 4,718,214 | | | $ | 40,000 | |
| Combined market and service conditions | | | 306,250 | | | | - | | | | 306,250 | | | | - | |
| Combined market and performance conditions | | | 1,555,535 | | | | - | | | | 1,555,535 | | | | - | |
| Restricted stock | | | 816,000 | | | | - | | | | 822,486 | | | | - | |
| | | | | | | | | | | | | | | | | |
| | | $ | 7,393,855 | | | $ | - | | | $ | 7,402,485 | | | $ | 40,000 | |
6. Fair Value Measurement
Fair Value of Financial Assets and Liabilities
Financial liabilities measured at fair value on a recurring basis are summarized below:
| | | Fair value measurements at September 30, 2013 using | | |
| | | September 30, 2013 | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Fair value of warrant liabilities | | $ | 39,923 | | | | – | | | | – | | | $ | 39,923 | |
| | | Fair value measurements at December 31, 2012 using | |
| | | December 31, 2012 | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Fair value of warrant liabilities | | $ | 3,125,393 | | | | – | | | | – | | | $ | 3,125,393 | |
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Principal Accounting Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Principal Accounting Officer.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.
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 “Fair value adjustments for warrant liabilities” in the Company’s condensed consolidated statements of operations.
As of September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
Liabilities resulting from the Warrants issued in connection with the Company’s financing were valued using the Black-Scholes option valuation model and the following assumptions on the following:
| | | September 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| Warrants: | | | | | | |
| Risk-free interest rate | | | 0.04% - 1.42 | % | | | 0.16% - 0.72 | % |
| Expected volatility | | | 55.12%-72.94 | % | | | 91.79% - 146.03 | % |
| Expected life (in years) | | | 0.1-3.3 | | | | 0.8 - 4.9 | |
| Expected dividend yield | | | - | | | | - | |
| Number of warrants | | | 66,062 | | | | 550,664 | |
| Fair value | | $ | 39,923 | | | $ | 3,125,393 | |
The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility in the Black-Scholes model is based on the 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 fair value of these warrant liabilities was $3,125,393 at December 31, 2012. The net change in fair value during the nine months ended September 30, 2013 was $3,085,470, of which $2,610,465 is reported in our condensed consolidated statement of operations as fair value adjustments for warrant liabilities and $5,695,935 as a reclassification of the fair value of the warrant liabilities to stockholders’ equity in connection with the March 2013 exchange of 475,211 Series B Warrants for 229,337 shares of Series C Convertible Preferred Stock (see note 5 “Stockholders’ Equity”). The fair value of the warrant liabilities is re-measured at the end of every reporting period and upon the exercise and/or modification of warrants. The change in fair value is reported in the condensed consolidated statement of operations as fair value adjustments for warrant 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 nine months ended September 30:
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 3,125,393 | | | $ | 916,621 | |
| Issuance of new warrants | | | - | | | | 214,288 | |
| Fair value adjustments for | | | | | | | | |
| warrant liabilities | | | 2,610,465 | | | | (740,605 | ) |
| Reclassification to | | | | | | | | |
| stockholders’ equity | | | (5,695,935 | ) | | | - | |
| Ending balance | | $ | 39,923 | | | $ | 390,304 | |
7. Commitments and Contingencies
Leases
The Company has commitments under an operating lease through March 31, 2018 relating to its administrative office in Bethesda, Maryland. In addition, the Company entered into a lease agreement in February 2013 to lease 837 square feet of office space in Tysons Corner, Virginia. The Virginia lease runs from March 1, 2013 through August 31, 2014.
Future minimum rental payments required as of September 30, 2013, remaining under the non-cancelable leases are as follows:
| | | Operating | |
| Year Ending December 31, | | Leases | |
| | | | |
| 2013 | | $ | 44,819 | |
| 2014 | | | 176,014 | |
| 2015 | | | 165,427 | |
| 2016 | | | 170,390 | |
| 2017 | | | 175,502 | |
| 2018 | | | 44,197 | |
| | | $ | 776,349 | |
The Bethesda, Maryland office lease contains step rent provisions, capital improvement funding, or other tenant allowances. The Tysons Corner, Virginia office lease contains step rent provision. Minimum rental payments including allowances on the leases are recognized on a straight-line basis over the term of the leases. The Company incurred net operating lease rental expenses of approximately $132,475 and $121,630 for the nine months ended September 30, 2013 and 2012, respectively. The Company has commenced a lawsuit against the landlord of the Bethesda, Maryland office claiming that the assignment of the lease to the purchaser of the Spherix Consulting business was permitted under the lease and seeking termination of the lease as a result of the landlord’s failure to consent to such assignment. The Bethesda, Maryland office is currently being offered for sublease at current market rents that are significantly lower than the fixed lease cost of such facility.
Employment Agreement
The Company entered into an employment agreement (“Employment Agreement”) with Anthony Hayes on September 10, 2013, for a period of two years. The Employment Agreement shall automatically be extended for additional one-year terms unless either party gives written notice of non-renewal to the other party no later than six months prior to the expiration of the term.
Pursuant to the Employment Agreement, the Company is obligated to pay a base salary of $350,000 per annum, with bonus potential of 100% of the base salary. In addition, the Company paid a $100,000 signing bonus upon the execution of the Employment Agreement.
Litigation
During September 2013, the Company filed a lawsuit on its cordless handset patents acquired from Rockstar against Uniden Corporation (“Uniden”), for patent infringement in the Northern District of Texas. The patents at issue in the litigation were acquired in the Rockstar portfolio in July 2013, as successor to Nortel Networks (“Nortel”). The lawsuit asserts that from 2007 to present, Uniden’s cordless phones infringed one or more claims of one or more of the Company’s patents. Management is unable to predict an outcome in this matter at this time.
During September, 2013, the Company also filed a lawsuit against VTech Communications, Inc. (“VTech”) in the Northern District of Texas. The patents at issue in the litigation were acquired in the Rockstar portfolio in July 2013, as successor to Nortel. The lawsuit asserts that many cordless telephones manufactured by VTech, dating to 1993 infringed on one or more claims of the Company’s patents. Management is unable to predict an outcome in this matter at this time.
On August 1, 2013, the Company’s subsidiary Guidance filed a complaint against T-Mobile USA, Inc. ("T-Mobile") in the Middle District of Florida. The patents at issue in the litigation were acquired from North South and constitute patents, acquired from Harris Corporation. The lawsuit asserts T-Mobile infringes United States Patent No. 5,719,584 entitled “System and Method for Determining the Geolocation of a Transmitter” in the geolocation of cell phones on the T-Mobile cell phone network.
8. Subsequent Events
The Company evaluated all events or transactions after September 30, 2013 through the date the condensed consolidated financial statements were issued.
On October 7, 2013, the Company received notice of a complaint filed in the Circuit Court of Montgomery County, Maryland in the matter of LegalLink Inc. vs. Spherix Incorporated. LegalLink, Inc., a Merrill Communications Company alleges that the Company failed to honor their contract regarding services provided by LegalLink, Inc. LegalLink, Inc. alleges that the Company owes them $47,309 for services rendered to the Company, that have gone unpaid. The Company’s legal counsel is reviewing this lawsuit and is assessing the likelihood of an unfavorable outcome at this time. As of September 30, 2013, the past due balance of $47,409 has been included in accounts payable and accrued expenses on the condensed consolidated financial statements.
On October 11, 2013, the Company appointed Michael Pollack as its interim Chief Financial Officer. In connection with his appointment, the Company and Mr. Pollack entered into an Indemnification Agreement.
On October 15, 2013, the Board approved the Company’s Amended and Restated Bylaws in order to update the Company’s bylaws in various respects.
On October 15, 2013, the Board approved the amendment and restatement of the Company’s Certificate of Incorporation, as amended, to, among other things, increase the number of authorized shares from 50,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock to 200,000,000 shares and 50,000,000 shares respectively. The amendment and restatement of the Company’s Certificate of Incorporation is being submitted for stockholder approval at the Company’s 2013 Annual Stockholder meeting.
On October 28, 2013, the Board appointed Alexander Poltorak to the Company’s Board of Directors. In connection with his appointment, the Company and Mr. Poltorak entered into an Indemnification Agreement.
On November 6, 2013, the Company sold an aggregate of 304,250 shares of its newly designated Series F Preferred Stock and 48,438 shares of common stock to five accredited investors for gross proceeds to the Company of $2,235,000 pursuant to subscription agreements. The purchase price per share of Common Stock was $6.40 for $1,310,000 of such investment and $6.25 for $925,000 of such investment. No broker was utilized in connection with the sale. In accordance with the requirement of NASDAQ, each share of Series F Preferred Stock shall be entitled to .91 times the vote attributable to the shares of common stock. The Company anticipates correcting the Certificate of Designation; Rights and Preferences of the Series F Preferred Stock shall be entitled to 91% of one vote, subject to the beneficial ownership limitation covering the shares. In connection with the foregoing private placement, the Company agreed to file a “resale” registration statement with the SEC covering all shares of Common Stock and shares of Common Stock underlying the Series F Preferred Stock within 91 days of the final closing date and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. The Company has agreed to use its reasonable best efforts to have the registration statement declared effective within 180 days of the final closing.
The Company is obligated to pay to investors a fee of one (1%) per month in cash for every thirty day period up to a maximum of six (6%) percent, (i) that the registration statement has not been filed after the required filing date, and (ii) following the required date of effectiveness that the registration statement has not been declared effective; provided, however, that the Company shall not be obligated to pay any such liquidated damages if the Company is unable to fulfill its registration obligations as a result of rules, regulations, positions or releases issued or actions taken by the SEC pursuant to its authority with respect to “Rule 415”, provided the Company registers at such time the maximum number of shares of Common Stock permissible upon consultation with the staff of the SEC.
The Company also entered into a Lockup Agreement with certain investors which provides for restrictions on the resale of shares for a period of 180 days from the closing of the Private Placement held by certain investors through December 31, 2014, which in certain circumstances is subject to extension. The Lockup Agreement provides that additional 180 day restrictions shall commence without further action of the Company upon the sale of $15 million or greater gross proceeds of securities and upon a material acquisition.
9. Additional Events Occurring Subsequent to the Date the Condensed Consolidated Financial Statements were Available (Unaudited)
On November 22, 2013, the Company established a series of preferred stock as Series D-1 Convertible Preferred Stock by the filing of a Certificate of Designation of Preferences, Rights and Limitations of Series D-1 Convertible Preferred Stock in the State of Delaware. Each share of Series D-1 Preferred Stock is convertible into ten (10) shares of the Company’s common stock. The Company is prohibited from effecting the conversion of the Series D-1 Convertible Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 9.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series D-1 Convertible Preferred Stock.
On November 26, 2013, the Company entered into an Amendment and Exchange Agreements (each, a “Series F Exchange Agreement”) with the holders of the Company’s outstanding shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock” and each holder, a “Series F Holder”) pursuant to which the Series F Holders agreed to return their shares of Series F Preferred Stock to the Company for cancellation in consideration for which the Company issued such Series F Holder an equal number of shares of Series F-1 Convertible Preferred Stock, $0.0001 par value per share (the “Series F-1 Preferred Stock” and the transaction, the “Series F Exchange”). Each share of Series F-1 Preferred Stock is entitled to 91% of one vote per share (subject to beneficial ownership limitations described below) and shall vote together with holders of the Company’s common stock. Each share of Series F-1 Preferred Stock is convertible into one share of the Company’s common stock and has a stated value of $0.0001. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company is prohibited from effecting the conversion of the Series F-1 Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 9.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series F-1 Preferred Stock. The shares of Series F-1 Preferred Stock are subject to the same registration rights as the Series F Preferred Stock. The Series F-1 Convertible Preferred Stock was established on November 22, 2013 by the filing of a Certificate of Designation of Preferences, Rights and Limitations of Series F-1 Convertible Preferred Stock (“Series F-1 Certificate of Designation”) in the State of Delaware.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of North South Holdings Inc.
We have audited the accompanying balance sheet of North South Holdings Inc. (a company in the development stage) (the “Company”) as of December 31, 2012, and the related statements of operations, changes in stockholders’ equity and cash flows for the period from November 9, 2012 (inception) through December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of North South Holdings, Inc. (a company in the development stage), as of December 31, 2012, and the results of its operations and its cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Marcum LLP
New York, NY
July 11, 2013
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY |
(A COMPANY IN THE DEVELOPMENT STAGE ) |
CONSOLIDATED BALANCE SHEETS |
| | | June 30, | | | | |
| ASSETS | | 2013 | | | December 31, | |
| | | (Unaudited) | | | 2012 | |
| Current assets: | | | | | | |
| | | | | | | |
| Cash | | $ | 1,630,166 | | | $ | 549,047 | |
| Accounts receivable | | | 94,000 | | | | - | |
| Prepaid expenses | | | 29,425 | | | | - | |
| | | | | | | | | |
| Total current assets | | | 1,753,591 | | | | 549,047 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| | | | | | | | | |
| Patent portfolio, net | | | 792,370 | | | | 415,000 | |
| | | | | | | | | |
| Investment in Spherix Corp. | | | 500,000 | | | | - | |
| | | | | | | | | |
| Total other assets | | | 1,292,370 | | | | 415,000 | |
| | | | | | | | | |
| Total assets | | $ | 3,045,961 | | | $ | 964,047 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 24,000 | | | $ | - | |
| Patent settlement and inventor royalty payables | | | 47,648 | | | | - | |
| | | | | | | | | |
| Total current liabilities | | | 71,648 | | | | - | |
| | | | | | | | | |
| Commitments and Contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' Equity: | | | | | | | | |
| | | | | | | | | |
| Preferred stock, par value $ 0.0001 per share; 1,000 shares authorized; Series A Convertible Preferred Stock; 500 shares, issued and outstanding at June 30, 2013 and December 31, 2012 | | | - | | | | - | |
| Series B Convertible Preferred Stock; 128 and no shares, issued and outstanding at June 30, 2013 and December 31, 2012 | | | - | | | | - | |
| | | | | | | | | |
| Common Stock, par value $0.0001 per share; 75,000 shares authorized, 500 shares issued and outstanding at June 30, 2013 and December 31, 2012 | | | - | | | | - | |
| | | | | | | | | |
| Additional paid in capital | | | 3,234,880 | | | | 1,000,000 | |
| | | | | | | | | |
| Deficit accumulated during the development stage | | | (260,567 | ) | | | (35,953 | ) |
| | | | | | | | | |
| Total stockholders' equity | | | 2,974,313 | | | | 964,047 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 3,045,961 | | | $ | 964,047 | |
See the accompanying notes which are an integral part of these consolidated financial statements.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE )
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | For the | | | For the | |
| | | | | | Period from | | | | |
| | | | | | | | | through | |
| | | June 30, 2013 | | | December 31, | | | June 30, 2013 | |
| | | (Unaudited) | | | 2012 | | | (Unaudited) | |
| | | | | | | | | | |
| Revenue | | $ | 94,000 | | | $ | - | | | $ | 94,000 | |
| | | | | | | | | | | | | |
| Operating cost and expenses | | | | | | | | | | | | |
| Cost of revenues | | | | | | | | | | | | |
| Legal settlement and maintenance fees | | | 125,347 | | | | - | | | | 125,347 | |
| Inventor royalty fees | | | 30,208 | | | | - | | | | 30,208 | |
| Amortization of patents | | | 34,514 | | | | - | | | | 34,514 | |
| Director's fees | | | 35,460 | | | | 5,100 | | | | 40,560 | |
| Legal fees | | | 27,743 | | | | 30,853 | | | | 58,596 | |
| Professional fees | | | 55,480 | | | | - | | | | 55,480 | |
| Other fees and expenses | | | 9,862 | | | | - | | | | 9,862 | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 318,614 | | | | 35,953 | | | | 354,567 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (224,614 | ) | | $ | (35,953 | ) | | $ | (260,567 | ) |
See the accompanying notes which are an integral part of these consolidated financial statements.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
| | | Series A Convertible Preferred Stock | | | Series B Convertible Preferred Stock | | | Common Stock | | | | | | Deficit Accumulated | | | | |
| | | | | | | | | | | | | | | | | | | | | Additional Paid | | | During the Development | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | In Capital | | | Stage | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at November 9, 2012 | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of shares to founders in exchange for intial capital contributions (500 shares of common stock at $0.0001 per share and 500 shares of convertible preferred stock at $2,000 per share) | | | 500 | | | | - | | | | - | | | | - | | | | 500 | | | | - | | | | 1,000,000 | | | | - | | | | 1,000,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (35,953 | ) | | | (35,953 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2012 | | | 500 | | | | - | | | | - | | | | - | | | | 500 | | | | - | | | | 1,000,000 | | | | (35,953 | ) | | | 964,047 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Series B convertible preferred stock (unaudited) | | | - | | | | - | | | | 128 | | | | - | | | | - | | | | - | | | | 2,234,880 | | | | - | | | | 2,234,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss (unaudited) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (224,614 | ) | | | (224,614 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2013 (Unaudited) | | | 500 | | | $ | - | | | | 128 | | | $ | - | | | | 500 | | | $ | - | | | $ | 3,234,880 | | | $ | (260,567 | ) | | $ | 2,974,313 | |
See the accompanying notes which are an integral part of these consolidated financial statements.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE )
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | |
| | | | | | | | | November 9, 2012 through | |
| | | | | | December 31, 2012 | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| | | | | | | | | | |
| Net loss | | $ | (224,614 | ) | | $ | (35,953 | ) | | $ | (260,567 | ) |
| | | | | | | | | | | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Amortization | | | 34,514 | | | | - | | | | 34,514 | |
| Changes in assets and liabilities which used cash: | | | | | | | | | | | | |
| Changes in accounts receivable | | | (94,000 | ) | | | - | | | | (94,000 | ) |
| Changes in prepaid expenses | | | (29,425 | ) | | | - | | | | (29,425 | ) |
| Changes in accrued expenses | | | 71,648 | | | | - | | | | 71,648 | |
| | | | | | | | | | | | | |
| Net cash used in operating activities | | | (241,877 | ) | | | (35,953 | ) | | | (277,830 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Purchase of patent portfolios | | | (411,884 | ) | | | (415,000 | ) | | | (826,884 | ) |
| Investment in Spherix Corp. | | | (500,000 | ) | | | - | | | | (500,000 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (911,884 | ) | | | (415,000 | ) | | | (1,326,884 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Issuance of shares to founders in exchange for initial capital contributions | | | - | | | | 1,000,000 | | | | 1,000,000 | |
| Issuance of Series B convertible preferred stock | | | 2,234,880 | | | | - | | | | 2,234,880 | |
| | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 2,234,880 | | | | 1,000,000 | | | | 3,234,880 | |
| | | | | | | | | | | | | |
| Net increase in cash | | | 1,081,119 | | | | 549,047 | | | | 1,630,166 | |
| | | | | | | | | | | | | |
| Cash, beginning of period | | | 549,047 | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Cash, end of period | | $ | 1,630,166 | | | $ | 549,047 | | | $ | 1,630,166 | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
| Income taxes | | $ | - | | | $ | - | | | $ | - | |
See the accompanying notes which are an integral part of these consolidated financial statements.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 1) ORGANIZATION:
North South Holdings Inc. and Subsidiary ("North South" or the “Company”) was incorporated on November 9, 2012 in the state of Delaware. North South was formed to seek business opportunities in which to acquire patents from various entities and monetize the disposal of them through sales, litigation or licensing. The Company issued 500 shares of preferred stock and 500 shares of common stock to its founders in exchange for initial capital contributions of $1,000,000 in cash.
The Company is a "development stage enterprise” as its primary activities since inception have been the development of its business plan, negotiating strategic alliances and other agreements, and raising capital. To date, the Company has generated minimal revenues from its operations. As a development stage enterprise, the Company is subject to all of the risks and uncertainties typically faced by a newly formed business.
The Company’s consolidated financial statements as of June 30, 2013 and for the six months then ended, and for the period from November 9, 2012 (inception) through June 30, 2013 are unaudited and should be read in conjunction with the audited financial statements as of and for the period ended December 31, 2012. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial statements of the Company for such periods.
In April 2013 the Company, its shareholders, Spherix Incorporated, a Delaware corporation ("Spherix"), and Spherix's wholly owned subsidiary, Nuta Technology Corp., a Virginia corporation (“Nuta”) entered into an Agreement and Plan of Merger (the "Amended Merger Agreement") with the Company (the “Merger”). On September 10, 2013 the transaction contemplated under the Amended Merger Agreement was completed. Upon closing of the transaction the Company merged with and into Nuta with Nuta as the surviving corporation. Nuta will continue its operations in the State of Virginia as the record owner of the Company’s intellectual property.
Pursuant to the terms and conditions of the Merger, at the closing of the Merger, all of the Company’s 5,213 issued and outstanding shares of common stock (including the 3,024 shares of common stock that were issued due to the conversion of Series A and Series B Preferred Stock in August 2013) were converted into an aggregate of 1,203,153 shares of Spherix's common stock, par value $0.0001 per share (the “Spherix Common Stock”), and all of the Company’s 491 issued and outstanding shares of Series A Preferred Stock and all of the Company’s 107 issued and outstanding shares of Series B Preferred Stock were converted into an aggregate of 1,379,685 shares of Spherix's Series D Convertible Preferred Stock, par value $0.0001 per share, which is convertible into shares of Spherix Common Stock on a one-for-ten basis (collectively with the 1,203,153 shares of Spherix Common Stock, the “Merger Consideration”).
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 2) LIQUIDITY AND MANAGEMENT’S BUSINESS PLANS:
The Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer term business plan. The Company had cash and working capital of $1,630,166 and $1,681,943, respectively at June 30, 2013 and a net loss for the six months ended June 30, 2013 of $224,614 and a net loss for the period from November 9, 2012 (inception) through December 31, 2012 of $35,953.
The Company believes that it has sufficient liquidity to sustain operations as a stand-alone business through at least July 1, 2014. The Company’s cash and working capital amounts were derived from the proceeds of an initial financing transaction in which it raised aggregate proceeds of $1 million through the issuance of Series A Preferred and common stock to its founding stockholders. During the six months ended June 30, 2013, the Company raised an additional approximate $2.2 million through the issuance of Series B Preferred Stock. Subsequent to June 30, 2013, the Company raised an additional approximate $1.8 million through the issuance of common stock (See Note 10).
As disclosed in Note 4, the Company acquired a portfolio of patents from Harris Corporation in December 2012 and an additional portfolio of patents in April of 2013 effectuated as a transfer of the membership interests of Compufill LLC. In order to license or otherwise monetize the patent assets acquired, the Company may commence legal proceedings against certain parties asserting that such parties infringe on one or more of the Company’s patents. The Company’s viability is highly dependent on the outcome of its business plan and there is a risk that the Company may be unable to achieve the results it desires from any potential litigation or licensing agreement, which failure would harm the Company’s business to a great degree.
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 in an effort to avoid or limit liability and damages for patent infringement. If such defenses or counterclaims are successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents.
As a result, a negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact the Company’s business. Additionally, the Company anticipates that its legal fees and other expenses will be material and could have an adverse effect on its financial condition and results of operations if its efforts to monetize these patents are unsuccessful. In addition, the costs of enforcing the Company’s patent rights may exceed its recoveries from such enforcement activities. Accordingly, in order for the Company to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues. The Company’s failure to monetize its patent assets or the occurrence of unforeseen circumstances that could have a negative impact on the Company’s liquidity could significantly harm its business.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 2) LIQUIDITY AND MANAGEMENT’S BUSINESS PLANS (continued):
Should the Company be unsuccessful in its efforts to execute its business plan, it could become necessary for the Company to reduce expenses, curtail its operation or possibly suspend or discontinue its business activities.
(NOTE 3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. The Company’s significant estimates and assumptions include the recoverability and useful lives of long-lived assets 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.
(B) | Principles of Consolidation |
The consolidated financial statements include the accounts of the Company and its subsidiary CompuFill LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
(C) | Intangible Assets – Patent Portfolios |
Intangible assets are comprised of patents with original estimated useful lives between 8 and 9 years (20 year life of underlying patent, less the approximate 11 to 12 years elapsed since original patent application). The Company amortizes the cost of the intangible assets over their estimated useful lives on a straight line basis. Costs incurred to acquire patents, including legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
(D) Impairment of Long-lived Assets
The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The Company has not identified any such impairment losses.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(E) Cash
The Company places its cash with high quality financial institutions. At times, cash balances maybe in excess of the amounts insured by the Federal Deposit Insurance Corporation.
(F) Income Taxes
The Company adopted the provisions of Accounting Standards Codification (“ASC”) Topic 740-10, which prescribes a recognition threshold and measurement process for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2012. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.
(G) Revenue Recognition
The Company currently derives all its revenues from past production payments. Past production payment revenues are royalty payments for the use of the Company’s intellectual property and when payments are made as part of a settlement of a patent infringement dispute.
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability is reasonably assured. Based on the criteria enumerated in ASC 605, the Company records its revenues and costs associated with its patent enforcement activities gross on the consolidated statement of operations.
(H) Cost of Revenues
Cost of revenues include the costs and expenses incurred in connection with the Company’s patent enforcement activities, including inventor royalties paid to original patent owners, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third parties and the amortization of patent-related acquisition costs.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(I) Inventor Royalties and Contingent Legal Expenses
Inventor royalties are expensed in the period that the related revenues are recognized. In certain instances, pursuant to the terms of the underlying inventor agreements, costs paid by the Company to acquire patents are recoverable from future net revenues. Patent acquisition costs that are recoverable from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense. Any unamortized patent acquisition costs recovered from net revenues are expensed in the period recovered.
Contingent legal fees are expensed in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Legal fees advanced by contingent law firms that are required to be paid in the event that no license recoveries are obtained are expensed as incurred.
(J) Concentrations of Market, Interest Rate and Credit Risk
Concentrations of market, interest rate and credit risk may exist with respect to the Company’s investments in patent portfolios and its other assets and liabilities. Market risk is a potential loss the Company may incur as a result of changes in the fair value of its investment in patent portfolios. Interest rate risk includes the risk associated with changes in prevailing interest rates. Credit risk includes the possibility that a loss may occur from the failure of counterparties to make payments according to the terms of a contract.
(K) Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Generally accepted accounting principles defined a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs for which there is little or no market data, which requires the Company to develop assumptions.
The carrying amounts reported for cash, approximate fair value.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 4) INTANGIBLE ASSETS:
(A)Harris Corporation Patent Purchase
On December 20, 2012, the Company purchased two hundred twenty two (222) patents from Harris Corporation (“Harris”) of Melbourne, Florida. North South paid $320,000 to Harris plus $80,000 of commissions and $15,000 of legal fees. North South also agreed to pay to Harris 5% of the gross amount of any judgment or settlement proceeds received by North South in any action for infringement claims pursued by North South, provided that Harris has complied with all reasonable requests for assistance in connection with such action. Currently, no litigation is pending on these patents. The technology covered by the portfolio includes: Solar, cellular, microwave communications, satellite communication, antenna technology, wifi and radio communication.
On April 15, 2013, the Company completed a purchase of two patents for $350,000 that was effectuated through a transfer of the membership interests of CompuFill LLC (“CompuFill”).
CompuFill was organized as a California limited liability company on January 5, 2011. CompuFill’s activities through the date of this purchase were limited to (i) a purchase of two specific patents from an unrelated party in exchange for a contractually defined share of any future revenues realized upon the monetization of such patents; (ii) the filing of one patent infringement litigation case against six (6) companies to monetize the two patents; (iii) settlement of that litigation case, and (iv) the filing of four (4) additional separate infringement claims in February 2013 that are being pursued by the Company subsequent of this transaction.
Richard Reichert, as the inventor of the patented technology, is entitled to receive 40% of all net profits generated from the Company’s licensing program. Net profits are defined as gross profits, minus attorney’s fees and litigation cost and expenses. In addition, CompuFill had previously retained the law firm of Stevens Love PLLC to handle the patent licensing program. Stevens Love PLLC is compensated on a contingency fee basis that is paid on sliding scale that ranges from 15% to 30% of all revenue generated from the licensing program. Upon acquiring CompuFill, the Company agreed to have Stevens Love continue representing CompuFill at the contingency fee structure already in place.
In May and June 2013, the Company settled two of the four cases outstanding at the date these patents were purchased for gross proceeds of $94,000. Expenses of $30,208 to the inventor (40% of the gross settlement amount less legal expenses) and $17,440 for legal fees in connection with the settlement were incurred by the Company to arrive at a net settlement amount of $46,352.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 4) INTANGIBLE ASSETS (continued):
The weighted-average remaining amortization period of the Company’s patents is approximately 8.5 years. Future amortization of all Patents is as follows:
For the Years Ending December 31 | | | Harris Patent Portfolio | | | CompuFill Patent Portfolio | | | Other Costs | | | Total Amortization | |
| | 2013 | * | | | 23,529 | | | | 20,588 | | | | 4,523 | | | | 48,640 | |
| | 2014 | | | | 47,059 | | | | 41,176 | | | | 9,045 | | | | 97,280 | |
| | 2015 | | | | 47,059 | | | | 41,176 | | | | 9,045 | | | | 97,280 | |
| | 2016 | | | | 47,059 | | | | 41,176 | | | | 9,045 | | | | 97,280 | |
| | 2017 | | | | 47,059 | | | | 41,176 | | | | 9,045 | | | | 97,280 | |
| Thereafter | | | | 164,706 | | | | 156,130 | | | | 33,774 | | | | 354,610 | |
| Total | | | | 376,471 | | | | 341,422 | | | | 74,477 | | | | 792,370 | |
* Represents six months remaining for 2013
Amortization of the intangible assets for the six months ended June 30, 2013 was $34,514. There was no amortization prior to January 1, 2013 as the assets were placed into service on January 1, 2013.
(NOTE 5) INVESTMENT IN SPHERIX INCORPORATED:
On June 25, 2013, the Company purchased 100,000 shares of Series E Convertible Preferred Stock of Spherix Incorporated for a per share price of $5.00, or an aggregate of $500,000, pursuant to a subscription agreement in a private placement. On September 10, 2013, the Company was acquired by Spherix Incorporated (See Note 1).
These securities were sold to pursuant to an exemption from registration under Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of the securities laws. Each share of Series E Preferred Stock is convertible, at the option of the holder at any time, into one (1) share of Spherix Incorporated common stock and has a stated value of $0.0001. Such conversion ratio is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company is prohibited from effecting the conversion of the Series E Preferred Stock to the extent that, as a result of such conversion, the holder will beneficially own more than 4.99%(or, if such limitation is waived by the holder upon no less than 61 days prior notice, 9.99%) in the aggregate of the issued and outstanding shares of Spherix Incorporated’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series E Preferred Stock.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 6) STOCKHOLDERS’ EQUITY:
The Company is authorized to issue 76,000 shares of capital stock, consisting of 75,000 shares of common stock, par value $0.0001 per share, and 1,000 shares of preferred stock, par value $0.0001 per share. Of the 1,000 shares of preferred stock, 500 shares have been designated by the Company as Series A Convertible Preferred Stock and 128 shares have been designated as Series B Convertible Preferred Stock.
In December 2012 the Company issued 500 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”). In connection with the formation of the Company each share of Series A Preferred Stock is convertible into 100 shares of common stock, provided however, that no holder shall have the right to convert any shares of Series A Preferred Stock to the extent that after giving effect to such conversion, the owner of such shares would have acquired beneficial ownership of 9.99% of the company's outstanding common stock immediately after giving effect to such conversion. The beneficial ownership limitations and conversion limits are fully set forth in the Certificate of Designation. The Series B Preferred Stock ranks pari passu with the Series A Preferred Stock and ranks prior and superior to all of the common stock with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The rights of the shares of Series B Preferred Stock are pari passu with the preferences and relative rights of the Series A Preferred Stock. The rights of the shares of common stock are subject to the preferences and relative rights of the Series B Preferred Stock. The holders of the Company’s Series A Preferred Stock are not entitled to vote, except as otherwise required by applicable law, and in such case the holder is entitled to the same number of votes per share of common stock that the holder of these Series A Preferred Stock may convert into at the time of the vote. In the event of a liquidation, dissolution or winding up of the business of the Company, the holder of the Series A Preferred Stock would have pari passu payment and distribution rights over the holders of the Series B Preferred Stock and preferential payment and distribution rights over holders of common stock. The Series A Preferred Stock has an aggregate liquidation preference of the higher of its “stated value” ($2,000) or distributions to common shareholders at December 31, 2012.
In April and May 2013 the Company issued 128 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) for $2,234,880. Each share of Series B Preferred Stock is convertible into 100 shares of common stock, provided however, that no holder shall have the right to convert any shares of Series B Preferred Stock to the extent that after giving effect to such conversion, the owner of such shares would have acquired beneficial ownership of 9.99% of the company's outstanding common stock immediately after giving effect to such conversion. The beneficial ownership limitations and conversion limits are fully set forth in the Certificate of Designation. The Series B Preferred Stock ranks pari passu with the Series A Preferred Stock and ranks prior and superior to all of the common stock with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The rights of the shares of Series B Preferred Stock are pari passu with the preferences and relative rights of the Series A Preferred Stock. The rights of the shares of common stock are subject to the preferences and relative rights of the Series B Preferred Stock.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 6) STOCKHOLDERS’ EQUITY (continued):
The holders of the Company’s Series B Preferred Stock are not entitled to vote, except as otherwise required by applicable law, and in such case the holder is entitled to the same number of votes per share of common stock that the holder of these Series B Preferred Stock may convert into at the time of the vote. In the event of a liquidation, dissolution or winding up of the business of the Company, the holder of the Series B Preferred Stock would have pari passu payment and distribution rights over holders the Series A Preferred Stock and preferential payment and distribution rights over holders of common stock. The Series B Preferred Stock has an aggregate liquidation preference of the higher of its “stated value” ($2,000) or distributions to common shareholders.
(NOTE 7) INCOME TAXES:
Through December 31, 2012, the Company generated U.S. federal and state net operating loss carryovers for tax purposes of approximately $5,600. The net operating loss carryover may be used to reduce taxable income through the year 2032. Section 382 of the Internal Revenue Code imposes certain limitations on the utilization of net operating loss carryovers and other tax attributes after a change in control. If the Company has a change in ownership, such change could significantly limit the possible utilization of such carryovers.
The income tax provision (benefit) consists of the following:
Current | | December 31, 2012 | | |
Federal | | $ | – | |
State | | | – | |
| | | – | |
DeferredPrinting and engraving expenses | | | | |
FederalAccounting fees and expenses | | | (12,224 | ) |
State | | | (1,798 | ) |
| | | (14,022 | ) |
Change in valuation allowance | | | 14,022 | |
Total income tax provision | | $ | – | |
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 7) INCOME TAXES (continued):
A reconciliation of the effective income tax rate and the statutory federal income tax rate for all periods is as follows:
| | | | |
U.S. federal statutory rateSEC expenses | | | (34)% | |
State income tax rate, net of federal benefitFINRA expenses | | | (5) | |
Less: valuation allowanceTravel and road show | | | 39 | |
Provision for income taxesDirectors and officers insurance | | | – % | |
| NASDAQ listing and filing fees | | | | |
| Miscellaneous expenses | | | | |
| Total offering expenses (other than underwriting commissions) | | | | |
*To be completed by amendment.
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established.
Based upon the Company’s history of losses since inception, management believes that it is more likely than not that future benefits of deferred tax assets will not be realized and as a result, as of June 30, 2013, a full valuation allowance has been established. The tax effects of temporary differences that give rise to deferred tax assets are presented below:
| Deferred tax assets: | | | |
| Net operating loss carryforward | | $ | 2,200 | |
| Deferred start-up and organizational expenses | | | 11,822 | |
| Valuation allowance | | | (14,022) | |
| Net deferred tax asset | | $ | – | |
(NOTE 8) COMMITMENTSITEM 14. INDEMNIFICATION OF DIRECTORS AND CONTINGENCIES
:
In November 2012, the Company entered into a letter agreement with the Chairman of the Board, President, Secretary and Treasurer (the “employee”). The employment was “at will” in nature and provided a base salary of $3,000 per month. The employee resigned from the Company subsequent to December 31, 2012 and on May 3, 2013, the Company entered into a letter agreement with its former director to pay a cash bonus of $17,460 on May 3, 2013.
On March 22, 2013, the Company entered into an employment agreement with Anthony Hayes to be the Company’s Chief Executive Officer. This agreement provides for a base salary at an annual rate of $150,000 and shall be automatically renewed for successive six-month periods unless the Company or Anthony Hayes provides the other party thirty-days’ notice. This employment agreement was amended on May 1, 2013, to set the annual rate of base compensation at $1 for the first six months.
On May 1, 2013, the Company entered into a letter agreement with its sole director of the Board of Directors. This agreement provides for a base salary at a monthly rate of $3,000. The Director’s employment shall be “at will”. From time to time this director may perform legal services on behalf of the Company for an agreed upon fee.
(NOTE 9) RELATED PARTY TRANSACTIONS:
A shareholder of the Company, through a separate unrelated entity, provides overhead and occupancy for North South at minimal cost.
NORTH SOUTH HOLDINGS INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND
INFORMATION FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 2013 (Unaudited)
(NOTE 10) SUBSEQUENT EVENTS:
(A) On August 6, 2013, North South purchased a promissory note (the “Note”) in the principal amount of $500,000 from Spherix Incorporation pursuant to the terms of a Note Purchase Agreement. The Note accrues interest due North South at the rate of 0.25% per annum and is due and payable twenty four months from the date of issuance, subject to acceleration in the event of default and may be prepaid in whole or in part without penalty or premium.
(B) In August 2013 the Company issued 1,689 shares of common stock for proceeds net of 10% in commissions of $1,801,060 (at a value of $1,185 per share) to strategic investors in the intellectual property monetization space. This cash will be used to continue the monetization of patents currently owned by North South, as well as seek additional opportunities for growth.
(C) On July 26, 2013, the Company formed Guidance IP LLC, (“Guidance”) and Directional IP LLC. (“Directional”) Delaware limited liability corporations. The Company is the sole member of these limited liability corporations.
(D) On August 1, 2013, Guidance filed a complaint against T-Mobile USA, Inc. for patent infringement. The complaint was filed in the U.S. District Court for the Middle District of Florida, the residential jurisdiction for the corporate headquarters of Harris Corporation, the original patent owner. The lawsuit claims infringement by T-Mobile of United States Patent No. 5,719,584 entitled “System and Method for Determining the Geolocation of a Transmitter” (“584 Patent”). The technology relates to the geolocation of cell phones on the T-Mobile cell phone network. The 584 Patent was acquired along with over 200 patents by the Company from Harris in December 2012.
(E) On August 29, 2013, 9.2579 shares of Series A Preferred Stock and 20.9793 shares of Series B Preferred Stock were converted into 3,024 shares of common stock.
(F)Management has evaluated events that have occurred after the balance sheet date but before the date which the consolidated financial statements are issued.
End of Notes to Financial Statements
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an estimate of the fees and expenses relating to the issuance and distribution of the securities being registered hereby, other than underwriting discounts and commissions, all of which shall be borne by Spherix, Inc. All of such fees and expenses, except for the SEC Registration Fee, are estimated:
| SEC registration fee | | $ | 2,559.45 | |
Transfer agent’s fees and expenses | | | | |
| | | | |
Printing fees and expenses | | | | |
Accounting fees and expenses | | | | |
Miscellaneous fees and expenses | | | | |
| | | | |
| | | | |
* Estimated
Item 14. Indemnification of Directors and Officers.
OFFICERS.Section 145 of the General Corporation Law of the State of DelawareDCGL provides, in general, that a corporation incorporated under the laws of the State of Delaware, as we are, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.
Our amended and restated certificate of incorporation and bylaws provide that we will indemnify our directors, officers, employees and agents to the extent and in the manner permitted by the provisions of the General Corporation Law of the State of Delaware,DCGL, as amended from time to time, subject to any permissible expansion or limitation of such indemnification, as may be set forth in any stockholders’ or directors’ resolution or by contract. Any repeal or modification of these provisions approved by our stockholders will be prospective only and will not adversely affect any limitation on the liability of any of our directors or officers existing as of the time of such repeal or modification.
We have entered into indemnification agreements with all of our executive officers and directors. These agreements provide, subject to limited exceptions and among other things, for the indemnification to the fullest extent permitted or required by Delaware law, provided however, that no director or officer shall be entitled to indemnification in connection with (i) any “claim” (as such term is defined in the agreement) initiated by him or her against the Company or the Company’s directors or officers unless the Company joins or consent to the initiation of such claim, or (ii) the purchase and sale of securities by him or her in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended. Our indemnification agreements also provide for the advancement of expenses (including attorneys’ fees) incurred by the indemnitee in connection with any action, suit, or proceeding (subject to the terms and conditions set forth therein). The indemnification agreements contain certain exclusions, including proceedings initiated by the indemnitee unless the Company has joined in or consented to the initiation of such claim.
We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the General Corporation LawDCGL would permit indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act:
On June 15, 2015, the Company entered into a consulting agreement with a third party for three months of investor relations services. The Company agreed to pay the consultant a monthly fee of $5,000 for three months commencing on June 15, 2015, and granted 45,000 shares of restricted stock valued at $27,000 in the aggregate. The restricted stock awards vest monthly for each of the State of Delaware would permit indemnification.
Item 15. Recent Sales of Unregistered Securities.
Fiscal Year Ending December 31, 2013
three months following the grant date. On November 26, 2013, weJune 10, 2015, the Company entered into separate Amendment and Exchange Agreementsa consulting agreement with the holdersa third party for three months of our outstanding shares of Series F Preferred Stock pursuant to which such holdersinvestor relations services. The Company has agreed to return their sharespay the consultant a monthly fee of Series F Preferred Stock to us for cancellation$10,000, payable in consideration for which we issued such holder an equal number of shares of Series F-1 Preferred Stock. Each share of Series F-1 Preferred Stock is entitled to 91% of one vote per share (subject to beneficial ownership limitations described below) and shall vote together with holders of our common stock. Each share of Series F-1 Preferred Stock is convertible into one share of our common stock and has a stated value of $0.0001. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. We are prohibited from effecting the conversion of the Series F-1 Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 9.99%, in the aggregate, of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversionfor each month of the Series F-1 Preferred Stock.
term. The
securities referencedCompany issued 15,625 and 25,641 shares of common stock to this service provider on June 10, 2015 and July 10, 2015, respectively. Each of the above were sold and issued to “accredited investors,” as such term is definedissuances was made in reliance on exemptions under Section 4(a)(2) under the Securities Act of 1933, as amended, and the Company received no proceeds from these issuances.
On March 26, 2014, Spherix Incorporated (the "Company") sold an aggregate of $4,446,081 of its securities in a private offering made solely to accredited investors (the “Investors”) (the “Offering”) pursuant to Subscription Agreements, dated as of March 26, 2014 (the “Subscription Agreement”). Pursuant to the Offering, Investors purchased (i) 1,185,614shares (the “Shares”) of common stock, par value $0.0001 per share, of the Company (“Common Stock”) and (ii) five year warrants to purchase an aggregate of 592,794 shares of common stock of the Company, at an exercise price of $6.15 per share (the “Warrants”). The Warrants are exercisable on the six month anniversary of the date of issuance by payment to the Company of the exercise price of $6.15 per share, or if a registration statement covering the common stock underlying the Warrants is not then in effect, on a cashless basis. Each Warrant may be callable at $0.01 per Warrant upon the consummation of a Company financing with a per share offering price of at least $8.00 and net proceeds to the Company from such offering of at least $15 million.
The Shares and Warrants described were offered and sold solely to “accredited investors” in reliance on the exemption from registration afforded by Rule 506 of Regulation D and Section 4(a)(2) and Regulation D (Rule 506) underof the Securities ActAct. In connection with the sale of 1933,the securities, the Company relied on the Investors' written representations as amended,to its status as an "accredited investor" as defined in Rule 501(a) of Regulation D. In addition, neither the Company nor anyone acting on its behalf has offered or sold these securities by any form of general solicitation or general advertising.
On April 17, 2014, the Company filed a registration statement with the SEC to register the resale of all shares and corresponding provisions of state securities laws.
On November 6, 2013, we sold an aggregate of 304,250 shares of Series F Preferred Stock and 48,438the shares of common stock
underlying the Warrants issued in the Offering (including the placement agent warrant described below), which registration statement was declared effective on May 16, 2014. The Investors have also been granted certain “piggy back” registration rights. The Company is subject to
five accredited investors for gross proceedscertain penalties in the event that it fails to maintain the effectiveness of
$2,235,000. The purchase price per share of common stock was $6.40 for $1,310,000any registration statement covering the resale of such
investment and $6.25 for $925,000 of such investment. Noshares. Laidlaw & Company (UK) Ltd., a FINRA registered broker was utilizeddealer, acted as placement agent in connection with the sale. Each shareOffering on a best-efforts basis and received a cash fee of Series F Preferred Stock is entitled to one vote per share (subject to beneficial ownership limitation)$444,608, plus a non-accountable expense allowance of $88,922, and shall vote together with holders of our common stock. We are prohibited from effecting the conversion of the Series F Preferred Stock to the extent that, aswas issued a result of such conversion, the holder will beneficially own more than 9.99% in the aggregate of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series F Preferred Stock.
The securities referenced above were sold and issued to “accredited investors,” as such term is defined in the Securities Act and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) and Regulation D (Rule 506) under the Securities Act of 1933, as amended, and corresponding provisions of state securities laws.
On July 24, 2013, we closed on the acquisition of a group of patents in the mobile communication sector from Rockstar. In consideration for the patents, we paid certain consideration to Rockstar, including 176,991 shares of the Company’s common stock. The Shares are subject to a lock-up agreement, subject to certain leak-out provisions, which shall expire on the earlier of (i) six months from the issuance of the shares and (ii) the date that our common stock achieves a trading volume of at least 50,000 shares per day and a closing price of at least $13 per share for a period of five consecutive days.
The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On June 25, 2013, we sold an aggregate of 100,000 shares of Series E Convertible Preferred Stock to an accredited investor for a per share price of $5.00 with gross proceeds to the Company of $500,000. Each share of Series E Convertible Preferred Stock is convertible, at the option of the holder at any time, into one (1) share of our common stock and has a stated value of $0.0001. Such conversion ratio is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar recapitalization transactions. We are prohibited from effecting the conversion of the Series E Convertible Preferred Stock to the extent that, as a result of such conversion, the holder will beneficially own more than 4.99% (or, if such limitation is waived by the holder upon no less than 61 days prior notice, 9.99%) in the aggregate of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series E Preferred Stock.
The securities referenced above were sold and issued to “accredited investors,” as such term is defined in the Securities Act and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act of 1933, as amended, and corresponding provisions of state securities laws.
On March 6, 2013, we entered into separate Warrant Exchange Agreements with certain investors that participated in the November 2012 private placement transaction pursuant to which such investors exchanged common stock purchase warrants acquired in the private placement transaction for shares of our Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock is convertible into one share of common stock at the option of the holder. Each share of Series C Preferred Stock has a stated value of $0.0001 per share and upon the liquidation, dissolution or winding up of the business of the Company, each holder of Series C Preferred Stock shall be entitled to receive, for each share held, a preferential amount in cash equal to the Stated Value. The holder of Series C Preferred Stock may not convert such shares to the extent such conversion would cause the holder to hold in excess of 4.99% of our issued and outstanding common stock, subject to an increase in such limitation to 9.99% upon the written notice by the holder to the Company.
Warrants were issued in November 2012 for an aggregate of 483,657 shares of common stock. The Warrants were exercisable through November 7, 2017 at an exercise price of $6.53 per share.
Pursuant to the Warrant Exchange Agreements, the investors received in exchange for their warrants an aggregate of 229,337 shares of the Series C Convertible Preferred Stock, convertible into one (1) share of common stock. This is the same number of shares of common stock that would have been issued upon a “cashless exercise” of the exchanged warrants, as permitted by the terms of the warrants, based on the one-day volume weighted average price of the Company’s common stock on February 28, 2013 of $12.6439 as reported by Bloomberg.
The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
Fiscal Year Ended December 31, 2012
On November 7, 2012, we sold an aggregate of 483,657 shares of common stock at a price of $5.324 per share along with warrantsfive- year warrant to purchase an additional 483,657 118,561shares of common stock at an exercise price of $6.53 per share. Subject to certain ownership limitations, the warrants are exercisable for a period of five years.
The securities referenced above were sold and issued to “accredited investors,” as such term is defined in the Securities Act and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act of 1933, as amended, and corresponding provisions of state securities laws.
On February 2, 2012, we sold an aggregate of 53,240 shares of its common stock and warrants to purchase up to an additional 10,648 shares of its common stock to certain accredited investors for gross proceeds of approximately $1.15 million. The common stock and warrants were sold in units, with each unit consisting of one$4.67per share of common stock and a warrant to purchase 0.2(the “Placement Agent Warrant”). The Placement Agent Warrant is exercisable beginning on the six month anniversary of a share of common stock. The purchase price per unit was $21.60. Subject to certain ownership limitations, the warrants are exercisable for a five-year period at an exercise price of $28.00 per share. The net proceeds to the Company from the registered direct offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the offering, were approximately $1.1 million. The common stock issued in the February 2012 offering and the common stock that may be issued pursuant to the exercise of the warrants have been registered pursuant to a Form S-3 registration statement (File No. 333-161531), which became effective on October 1, 2009.
In connection with the closing of our February 2012 offering, the Company issued to Rodman & Renshaw, LLC, as partial consideration for its services as placement agent, warrants with a term of two years to purchase up to 1,597 shares of our common stock at an exercise price of $27.00 per share. The estimated fair value of the warrants at the date of grant was $19,000. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering.
Fiscal Year Ended December 31, 2011
In October 2011, the Company entered into a securities purchase agreement with certain investors to sell an aggregate of 26,628 shares of its common stock and warrants to purchase up to an additional 26,628 shares of its common stock to such investors for gross proceeds of approximately $1.25 million. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase one share of common stock. The purchase price per unit was $47.40. Subject to certain ownership limitations, the warrants are exercisable for a five-year period at an exercise price of $44.80 per share. The net proceeds to the Company from the offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the offering, were approximately $1.1 million. The common stock issued in the October 2011 offering and the common stock that may be issued pursuant to the exercise of the warrants were registered with the SEC pursuant to a registration statement on Form S-3 (File No. 333-177748), which became effective on November 21, 2011. The warrants are classified as a liability and the common stock is classified as permanent equity.
In connection with the closing of the October 2011 offering, the Company issued to Rodman & Renshaw, LLC warrants with a term of two years to purchase 799 shares of our common stock (at an exercise price of $59.125 per share). The estimated fair value of the warrants at the date of grant was $25,000. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering.
On January 19, 2011, the Company entered into a securities purchase agreement with certain investors to sell an aggregate of 21,345 shares of its common stock and warrants to purchase up to an additional 10,672 shares of its common stock to such investors for gross proceeds of approximately $2.77 million. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 0.50 of a share of common stock. The purchase price per unit was $130.00. Subject to certain ownership limitations, the warrants are exercisable for a five-year period at an exercise price of $160.00 per share. The net proceeds to the Company from the registered direct offering, after deducting placement agent fees and the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the offering, were approximately $2.6 million. The common stock issued in the January 2011 offering and the common stock that may be issued pursuant to the exercise of the warrants have been registered pursuant to a Form S-3 registration statement (File No. 333-161531), which became effective on October 1, 2009. The warrants are classified as a liability and the common stock is classified as permanent equity.
In connection with the closing of our January 2011 offering, the Company issued to Rodman & Renshaw, LLC, as partial consideration for its services as placement agent, warrants with a term of two years to purchase up to 640 shares of our common stock at an exercise price of $162.50 per share. The estimated fair value of the warrants at the date of grant was $42,000. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. These warrants have now expired.
Item 16. Exhibits and Financial Statement Schedules
a) Exhibits
issuance. | |
| Certificate of Incorporation and Bylaws of the Company (incorporated by reference to the Company’s Annual Proxy Statement for meeting held on May 15, 1992, as filed with the SEC)
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| | 78 | |
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
| Certificates of Amendment of(a)
| Exhibits.The exhibits to the Company (incorporatedregistration statement are listed in the Exhibit Index attached hereto and incorporated by reference to the Company’s Proxy Statement for its May 1996, May 2000, May 2001, November 2011, and August 2012 annual meetings, as wellherein. |
| (b) | Financial Statements.Financial statement schedules have been omitted, as the Company’s Information Statement filed November 26, 2012 andinformation required to be set forth therein is included in the Company Current Report on Form 8-K filed December 17, 2012, all as filed withConsolidated Financial Statements or Notes thereto appearing in the SEC)prospectus made part of this registration statement. |
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| Certificate of Amendment filed November 28, 2011 (incorporated by reference to Form 8-K filed December 15, 2011)
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| 79 | |
| Certificate of Amendment filed September 21, 2012 (incorporated by reference to Form 8-K filed September 21, 2012)
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| Certificate of Amendment filed December 17, 2012 (incorporated by reference to Form 8-K filed December 17, 2012)
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| Amended and Restated Bylaws of Spherix Incorporated (incorporated by reference to Form 8-K filed October 15, 2013)
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| Rights Agreement dated as of February 16, 2001, between Spherix Incorporated and American Stock Transfer and Trust Company (incorporated by reference to Form 8-K filed March 6, 2001)
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| First Amendment to Rights Agreement dated as of December 20, 2010, between Spherix Incorporated and American Stock Transfer and Trust Company (incorporated by reference to Form 8-K filed December 20, 2010)
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| Rights Agreement dated as of January 24, 2013, between Spherix Incorporated and Equity Stock Transfer, LLC (incorporated by reference to Form 8-K filed January 30, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Form 8-K filed October 8, 2010)
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| Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (incorporated by reference to Form 8-K filed on March 7, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (incorporated by reference to Form 8-K filed on April 4, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock (incorporated by reference to Form 8-K filed on June 26, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock (incorporated by reference to Form 8-K filed on November 7, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series F-1 Convertible Preferred Stock (incorporated by reference to Form 8-K filed on November 26, 2013)
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| Certificate of Designation of Preferences, Rights and Limitations of Series D-1 Convertible Preferred Stock (incorporated by reference to Form 8-K filed on November 29, 2013)
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5.1 | Opinion of Baxter, Baker, Sidle, Conn & Jones, P.A.** |
10.1 | | Summary of Annual Compensation of Members of the Board of Directors of Spherix Incorporated (incorporated by reference to Form 8-K filed May 28, 2010) |
10.2 | | Employment Agreement dated as of August 15, 2007, by and between Claire L. Kruger and the Company (incorporated by reference to Form 10-Q dated September 30, 2007) |
10.3 | | Amendment To Employment Agreement dated as of May 25, 2010, by and between Claire L. Kruger and the Company (incorporated by reference to Form 8-K filed May 28, 2010) |
10.4 | | Termination of Employment and General Release Agreement dated as of December 3, 2012, by and between Claire L. Kruger and the Company (incorporated by reference to Form 8-K filed December 17, 2012) |
10.5 | | Benefits Agreement dated as of December 3, 2012, by and between Claire L. Kruger and the Company (incorporated by reference to Form 8-K filed December 17, 2012) |
10.6 | | Employment Agreement dated as of August 16, 2007, by and between Robert A. Lodder and the Company (incorporated by reference to Form 10-Q dated September 30, 2007) |
10.7 | | Amendment To Employment Agreement dated as of May 25, 2010, by and between Robert A. Lodder and the Company (incorporated by reference to Form 8-K filed May 28, 2010) |
10.8 | Retention Agreement with Robert A. Lodder and the Company (incorporated by reference to Form 8-K filed February 7, 2013) |
10.9 | | Employment Agreement dated as of May 25, 2010, by and between Robert L. Clayton and the Company (incorporated by reference to Form 8-K filed May 28, 2010) |
10.10 | | Retention Agreement dated as of December 12, 2012, by and between Robert L. Clayton and the Company (incorporated by reference to Form 8-K filed December 17, 2012) |
10.11 | | Employment Agreement dated as of May 25, 2010, by and between Katherine M. Brailer and the Company (incorporated by reference to Form 8-K filed May 28, 2010) |
10.12 | | Termination of Employment and General Release Agreement dated as of December 3, 2012, by and between Katherine M. Brailer and the Company (incorporated by reference to the Form 10-K filed on March 20, 2013) |
10.13 | | Benefits Agreement dated as of December 3, 2012, by and between Katherine M. Brailer and the Company (incorporated by reference to the Form 10-K filed on March 20, 2013) |
10.14 | | Letter Agreement dated as of January 13, 2011, by and between Gilbert V. Levin, M. Karen Levin and the Company (incorporated by reference to Form 10-K dated March 30, 2011) |
10.15 | | 1997 Stock Option Plan (incorporated by reference from the Company’s Proxy Statements for its May 1998, May 2001, May 2005, November 2011 and August 2012 annual meetings, as filed with the Commission) |
10.16 | | 2012 Equity Incentive Plan (incorporated by reference from the Company’s Information Statement on Form DEF 14c filed November 26, 2012) |
10.17 | | Lease Agreement dated October 4, 2007, between Elizabethean Court Associates III Limited Partnership and the Company (incorporated by reference to Form 10-Q dated September 30, 2007) |
10.18 | | Amendment to Office Building Lease, between Elizabethean Court Associates III Limited Partnership and the Company (incorporated by reference to Form 8-K filed March 23, 2012) |
10.19 | | Settlement Agreement dated March 16, 2011, between the Biospherics Incorporated (a wholly-owned subsidiary of the Company) and Inalco S.p.A (incorporated by reference to Form 8-K filed on March 21, 2011) |
10.20 | | Securities Purchase Agreement dated November 16, 2009, between the Company and certain investors (incorporated by reference to Form 8-K filed November 18, 2009) |
10.21 | | Securities Purchase Agreement dated October 7, 2010, between the Company and certain investors (incorporated by reference to Form 8-K filed October 8, 2010) |
10.22 | | Securities Purchase Agreement dated January 19, 2011, between the Company and certain investors (incorporated by reference to Form 8-K filed January 20, 2011) |
10.23 | | Securities Purchase Agreement dated October 25, 2011, between the Company and certain investors (incorporated by reference to Form 8-K filed October 27, 2011) |
10.24 | | Securities Purchase Agreement dated February 2, 2012, between the Company and certain investors (incorporated by reference to Form 8-K filed February 3, 2012) |
10.25 | | Securities Purchase Agreement dated November 7, 2012, between the Company and certain investors (incorporated by reference to Form 8-K filed November 8, 2012) |
10.26 | | License Agreement dated June 22, 2010 between the University of Kentucky Research Foundation and Biospherics Incorporated (incorporated by reference to Form 10-K filed March 29, 2012) |
10.27 | | Stock Purchase Agreement, dated December 3, 2012, between the Company and ChromaDex, Inc. (incorporated by reference to Form 8-K dated December 6, 2012) |
10.28 | | Consulting Agreement dated December 28, 2012, between the Company and Paradox Capital Partners, LLC. (incorporated by reference to the Form 10-K filed on March 20, 2013) |
10.29 | | Warrant Exchange Agreement dated March 1, 2013 between the Company and certain investors (incorporated by reference to Form 8-K filed March 7, 2013) |
10.30 | | Letter of Intent, dated February 15, 2013, between Nuta Technology Corp. and North South Holdings, Inc. (incorporated by reference to Form 8-K filed February 22, 2013) |
| Waiver of Registration Rights Required (incorporated by reference to the Form 8-K filed on December 21, 2012)
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| Extension Letter dated as of March 29, 2013 between Spherix Incorporated and Robert L. Clayton (incorporated by reference to the Form 8-K filed on April 2, 2013)
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| Agreement and Plan of Merger dated April 2, 2013 (incorporated by reference to the Form 8-K filed on April 4, 2013)
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| Spherix Incorporated 2013 Equity Incentive Plan (incorporated by reference to the Form 8-K filed on April 4, 2013)
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| Form of Subscription Agreement (incorporated by reference to the Form 8-K filed on June 26, 2013)
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| Form of Note Purchase Agreement (incorporated by reference to the Form 8-K filed on August 6, 2013)
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| Form of Note (incorporated by reference to the Form 8-K filed on August 6, 2013)
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| First Amendment to Agreement and Plan of Merger dated August 30, 2013 (incorporated by reference to the Form 8-K filed on September 4, 2013)
|
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| Form of Indemnification Agreement (incorporated by reference to the Form 8-K filed on September 10, 2013)
|
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| Employment Agreement between Spherix Incorporated and Anthony Hayes (incorporated by reference to the Form 8-K filed on September 13, 2013)
|
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| Indemnification Agreement between Spherix Incorporated and Michael Pollack (incorporated by reference to the Form 8-K filed on October 15, 2013)
|
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| Indemnification Agreement between Spherix Incorporated and Alexander Poltorak (incorporated by reference to the Form 8-K filed on October 29, 2013)
|
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| Form of Subscription Agreement (incorporated by reference to the Form 8-K filed on November 7, 2013)
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| Form of Registration Rights Agreement (incorporated by reference to the Form 8-K filed on November 7, 2013)
|
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| Form of Lockup Agreement (incorporated by reference to the Form 8-K filed on November 7, 2013)
|
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| Patent Purchase Agreement between Spherix Incorporated and Rockstar Consortium US LP (redacted) (incorporated by reference to the Form 8-K/A filed on November 19, 2013)
|
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| Form of Series F Exchange Agreement (incorporated by reference to the Form 8-K filed on November 26, 2013)
|
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| Consent of Grant Thornton LLP*
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| Consent of Baxter, Baker, Sidle, Conn & Jones, P.A. (included in Exhibit 5.1)**
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| Power of Attorney (included on signature page of this Form S-1)*
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| XBRL Taxonomy Extension Schema Document *
|
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| XBRL Taxonomy Extension Calculation Linkbase *
|
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| XBRL Taxonomy Extension Definition Linkbase *
|
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| XBRL Taxonomy Extension Labels Linkbase *
|
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| XBRL Taxonomy Extension Presentation Linkbase *
|
*Filed herewith.
**To be filed by amendment.
ItemITEM 17. Undertakings
UNDERTAKINGS.The undersigned registrant hereby undertakes:
(1) To file, during any periodundertakes to provide to the underwriter at the closing specified in which offers or sales are being made, a post-effective amendmentthe underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to this registration statement:
permit prompt delivery to each purchaser. | (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: |
| (i) | To include any prospectus required by Section 10(a)(3) of the Securities Act;Act. |
�� | | |
| (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.statement; |
(2)
provided, however, that paragraphs (1)(i), (ii) and (iii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
| (2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof; |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; |
| (4) | That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of thesuch securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter); |
| | |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| | |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| | |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
For the purpose of determining liability under the Securities ActPursuant to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§ 230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and authorizedduly caused this registration statementRegistration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tysons Corner,New York, State of Virginia,New York, on December 9, 2013.
the 3rdday of July, 2017.| | SPHERIX INCORPORATED | |
| | | |
| | By: | /s/ Anthony Hayes | |
| | | Anthony Hayes | |
| | | Director and Chief Executive Officer,
( Director, Principal Executive Officer)
| |
| | | |
| By: | /s/ Michael Pollack | |
| | Michael Pollack
Interim ChiefAccounting Officer and Principal Financial Officer
(Interim Principal Financial and Accounting Officer)
| |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Anthony Hayes his true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for him/her and in his/her name, place and stead, in any and all capacities to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement, any related Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933 and any or all pre- or post-effective amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent, or any substitute or substitutes for him, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates stated.
indicated./s/ Anthony HayesName | | Chief Executive Officer and DirectorPosition | | December 9, 2013 |
Anthony Hayes | | (Principal Executive Officer ) | | Date |
| | | | | |
/s/ Michael PollackAnthony Hayes | | Interim Chief Executive Officer, Director, Principal Accounting Officer and Principal Financial Officer | | December 9, 2013July 3, 2017 |
Michael Pollack | | (Interim Principal Financial and Accounting Officer) | | |
/s/ Douglas T. Brown | | Director | | December 9, 2013 |
Douglas T. BrownAnthony Hayes | | | | |
| | | | | |
| | | | |
/s/ Edward M. Karr* | | Director and Chairman of the Board | | December 9, 2013 |
Edward M. Karr | | | | July 3, 2017 |
| | | | | |
/s/ Harvey J. Kesner | | Director | | December 9, 2013 |
Harvey J. Kesner | | | | |
| | | | |
/s/ Robert J. Vander Zanden | | Chairman of the Board | | December 9, 2013 |
| Robert J. Vander Zanden | | | | |
| | | | | |
/s/ Alexander Poltorak* | | Director | | December 9, 2013July 3, 2017 |
Alexander Poltorak | | | | |
| Tim S. Ledwick | | | | |
| | | | |
| * | | Director | | July 3, 2017 |
| | | | |
| Eric Weisblum | | | | |
| *By: | /s/ Anthony Hayes | |
| Anthony Hayes | |
| Attorney-in-Fact | |
INDEX TO EXHIBITS
| Exhibit No. | | Description |
| | |
| 1.1† | | Underwriting Agreement |
| | |
| 1.2 | | Placement Agency Agreement, dated July 15, 2015, between Spherix Incorporated and Chardan Capital Markets LLC (incorporated by reference to Form 8-K filed July 17, 2015) |
| | |
| 3.1 | | Amended and Restated Certificate of Incorporation of Spherix Incorporated, dated April 24, 2014 (incorporated by reference to Form 8-K filed April 25, 2014) |
| 3.2 | | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Spherix Incorporated, dated March 2, 2016 (incorporated by reference to Form 8-K filed March 18, 2016) |
| | |
| 3.2 | | Amended and Restated Bylaws of Spherix Incorporated (incorporated by reference to Form 8-K filed October 15, 2013) |
| | |
| 3.3 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Spherix Incorporated, effective March 4, 2016 (incorporated by reference to Form 10-K filed March 29, 2016) |
| | |
| 4.1 | | Specimen Certificate for common stock, par value $0.0001 per share, of Spherix Incorporated (incorporated by reference to Form S-3/A filed April 17, 2014) |
| | |
| 4.2 | | Amended and Restated Rights Agreement, dated June 9, 2017, by and between Spherix Incorporated and Transfer Online Inc. (incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on June 9, 2017) |
| | |
| 4.3 | | Certificate of Designation of Preferences, Rights and Limitations of Series J Convertible Preferred Stock (incorporated by reference to Form 8-K/A filed on June 2, 2014) |
| | |
| 4.4 | | Certificate of Designation of Preferences, Rights and Limitations of Series K Convertible Preferred Stock (incorporated by reference to Form 8-K filed on December 3, 2015) |
| 4.5 | | Form of Warrant (incorporated by reference to Form 8-K filed on March 26, 2014) |
| | |
| 4.6 | | Form of Placement Agent Warrant (incorporated by reference to Form 8-K filed on March 26, 2014) |
| | |
| 4.7 | | Form of Common Stock Purchase Warrant (incorporated by reference to Form 8-K filed July 17, 2015) |
| | |
| 4.8 | | Form of Warrant (incorporated by reference to Form 8-K filed December 3, 2015) |
| | |
| 5.1† | | Opinion of EGS |
| | |
| 10.1 | | 2012 Equity Incentive Plan (incorporated by reference from the Company’s Information Statement on Form DEF 14c filed November 26, 2012) |
| | |
| 10.2 | | Warrant Exchange Agreement dated March 1, 2013 between the Company and certain investors (incorporated by reference to Form 8-K filed March 7, 2013) |
| | |
| 10.3 | | Agreement and Plan of Merger dated April 2, 2013 (incorporated by reference to the Form 8-K filed on April 4, 2013) |
| | |
| 10.4 | | First Amendment to Agreement and Plan of Merger dated August 30, 2013 (incorporated by reference to the Form 8-K filed on September 4, 2013) |
| | |
| 10.5 | | Spherix Incorporated 2013 Equity Incentive Plan (incorporated by reference to the Form 8-K filed on April 4, 2013) |
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| 10.6 | | Spherix Incorporated 2014 Equity Incentive Plan (incorporated by reference from the Company’s Proxy Statement on Form DEF 14A filed December 20, 2013) |
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| 10.7 | | Amendment to Spherix Incorporated 2014 Equity Incentive Plan (incorporated by reference from the Company’s Proxy Statement on Form DEF 14A filed March 28, 2014) |
| 10.8 | | Form of Indemnification Agreement (incorporated by reference to the Form 8-K filed on September 10, 2013) |
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| 10.9 | | Employment Agreement between Spherix Incorporated and Anthony Hayes (incorporated by reference to the Form 8-K filed on September 13, 2013) |
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| 10.10 | | Indemnification Agreement between Spherix Incorporated and Alexander Poltorak (incorporated by reference to the Form 8-K filed on October 29, 2013) |
| | |
| 10.11 | | Indemnification Agreement between Spherix Incorporated and Richard Cohen (incorporated by reference to the Form 8-K filed on January 9, 2014) |
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| 10.12 | | Indemnification Agreement between Spherix Incorporated and Jeffrey Ballabon (incorporated by reference to the Form 8-K filed on June 13, 2014) |
| | |
| 10.13** | | Patent Purchase Agreement between Spherix Incorporated and Rockstar Consortium US LP, including Amendment No. 1 thereto (incorporated by reference to the Form 8-K/A filed on November 19, 2013) |
| | |
| 10.14 | | Form of Series F Exchange Agreement (incorporated by reference to the Form 8-K filed on November 26, 2013) |
| | |
| 10.15 | | Form of Series D Exchange Agreement (incorporated by reference to the Form 8-K filed on December 30, 2013) |
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| 10.16 | | Confidential Patent Purchase Agreement dated December 31, 2013 between Spherix Incorporated and Rockstar Consortium US LP (incorporated by reference to the Form S-1/A filed January 21, 2014) |
| | |
| 10.17 | | Form of Subscription Agreement (incorporated by reference to the Form 8-K filed March 26, 2014) |
| 10.18 | | Form of Registration Rights Agreement (incorporated by reference to the Form 8-K filed March 26, 2014) |
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| 10.19 | | Form of Subscription Agreement (incorporated by reference to the Form 8-K filed on May 29, 2014) |
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| 10.20 | | Letter of Agreement, dated January 6, 2014, between Spherix Incorporated and Chord Advisors, LLC (incorporated by reference to the Form 10-K filed on March 30, 2015) |
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| 10.21 | | Letter of Agreement, dated April 11, 2014, between Spherix Incorporated and Chord Advisors, LLC (incorporated by reference to the Form 10-K filed on March 30, 2015) |
| | |
| 10.22 | | Securities Purchase Agreement, dated July 15, 2015, between Spherix Incorporated and the purchasers party thereto (incorporated by reference to Form 8-K filed July 17, 2015) |
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| 10.23 | | Employment Agreement, dated as of March 14, 2014, between Spherix Incorporated and Frank Reiner (incorporated by reference to Form 10-K filed March 29, 2016) |
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| 10.24 | | Amendment to Employment Agreement, dated as of June 30, 2015, between Spherix Incorporated and Frank Reiner (incorporated by reference to Form 10-K filed March 29, 2016) |
| | |
| 10.25 | | Consulting Services Agreement, dated as of August 10, 2015, between Spherix Incorporated and Howard E. Goldberg d/b/a Forward Vision Associates (incorporated by reference to Form 8-K filed August 19, 2015) |
| | |
| 10.26 | | Settlement and License Agreement, dated October 13, 2015, between Spherix Incorporated and Huawei Technologies Co., Ltd. (incorporated by reference to Form 10-K filed March 29, 2016) |
| | |
| 10.27 | | Patent License Agreement, dated as of November 23, 2015, between Spherix Incorporated and RPX Corporation (incorporated by reference to Form 8-K filed November 30, 2015 |
| | |
| 10.28 | | Securities Purchase Agreement, dated as of December 2, 2015, between Spherix Incorporated and the investors party thereto (incorporated by reference to Form 8-K filed December 3, 2015) |
| 10.29 | | Engagement Agreement, dated September 16, 2015, as amended, between Spherix Incorporated and H.C. Wainwright & Co., LLC (incorporated by reference to Form 8-K filed December 3, 2015) |
| | |
| 10.30 | | Employment Agreement, effective as of April 1, 2016, between Spherix Incorporated and Anthony Hayes (incorporated by reference to Form 8-K filed May 26, 2016) |
| | |
| 10.31 | | Separation Agreement and Release, dated March 10, 2017, between Spherix Incorporated and Frank Reiner (incorporated by reference to Form 8-K filed March 15, 2017) |
| 10.32 | | Patent License Agreement, dated as of May 23, 2016, between Spherix Incorporated and RPX Corporation (incorporated by reference to Form 10-Q filed August 15, 2016) |
| | |
| 10.33 | | Technology Monetization Agreement, dated as of March 11, 2016, and amended as of April 22, 2016, April 27, 2016 and May 22, 2016, between Spherix Incorporated and Equitable IP Corporation (incorporated by reference to Form 8-K filed August 2, 2016) |
| | |
| 10.34 | | Underwriting Agreement, dated as of August 2, 2016, by and among Spherix Incorporated and the underwriters named on Schedule I thereto (incorporated by reference to Form 8-K filed August 3, 2016) |
| | |
| 10.35 | | Assignment and Assumption of Rights Agreement, dated as of June 16, 2016, by and between Spherix Incorporated and Transfer Online, Inc. (incorporated by reference to Form 8-K filed June 21, 2016) |
| | |
| 10.36 | | Securities Purchase Agreement, dated as of June 30, 2017, by and between Spherix Incorporated and Hoth Therapeutics, Inc. (incorporated by reference to Form 8-K filed July 3, 2017) |
| | |
| 10.37 | | Registration Rights Agreement, dated as of June 30, 2017, by and between Spherix Incorporated and Hoth Therapeutics, Inc. (incorporated by reference to Form 8-K filed July 3, 2017) |
| | |
| 10.38 | | Form of Shareholders Agreement, dated as of June 30, 2017(incorporated by reference to Form 8-K filed July 3, 2017) |
| | |
| 21.1 | | List of Subsidiaries (incorporated by reference to 10-K filed on March 31, 2017) |
| | |
| 23.1* | | Consent of Marcum LLP, independent registered public accounting firm |
| | |
| 23.4 | | Power of Attorney (included on signature page) (Incorporated by reference to Registrant’s Registration Statement on Form S-1 filed with the Commission on May 24, 2017) |
* Filed herewith.
** Pursuant to a Confidential Treatment Request under Rule 24b-2 filed with and approved by the SEC, portions of this exhibit have been omitted
†To be filed by amendment.