Table of Contents
As filed with the Securities and Exchange Commission on
September 23, 2010December 9, 2013
Registration No.
333-167963
333-
SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 3 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Spherix Incorporated
SPHERIX INCORPORATED(Exact name of registrant as specified in its charter)
Delaware |
8734 | 8733
|
| 52-0849320 |
(State or other jurisdiction of incorporation or organization) | | (Primary Standard Industrial Classification Code Number) | | (I.R.S. employer |
of incorporation or organization)
| | Classification Number)
| | identification number)
Employer Identification No.) |
6430 Rockledge
7927 Jones Branch Drive, Suite
503, Bethesda, Maryland 20817(301) 897-2540
3125
Tysons Corner, VA 22102
(703) 992-9260
(Address, including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Claire L. Kruger
Anthony Hayes
Chief Executive Officer and Chief Operating Officer
Spherix Incorporated
6430 Rockledge
7927 Jones Branch Drive, Suite
503Bethesda, Maryland 20817
(301) 897-2540
(301) 897-2567 (Fax)
3125
Tysons Corner, VA 22102
(703) 992-9260
(Name, address including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Tara Guarneri-Ferrara Sichenzia Ross Friedman Ference LLP 61 Broadway, 32nd Floor New York, NY 10006 Telephone: (212) 930-9700 Facsimile: (212) 930-9725 | James E. Baker, Jr. Baxter, Baker, Sidle, Conn & Jones, P.A. 120 E. Baltimore Street, Suite 2100 Baltimore, MD 21202 Telephone: (410) 385-8122 Facsimile: (410) 230-3801 |
With a copy to:James E. Baker, Jr.
Baxter, Baker, Sidle, Conn & Jones, P.A.
120 E. Baltimore Street, Suite 2100
Baltimore, Maryland 21202
Telephone: (410) 385-8122
Facsimile: (410) 230-3801
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.
x[X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large“large accelerated filer”, “accelerated filer” “accelerated filer” and “smaller“smaller reporting company”company” in Rule 12b-2 of the Exchange Act:
Act. (Check one):Large accelerated filer o [ ] | | Accelerated filer o [ ] | | Non-accelerated filer o[ ] (do not check if smaller reporting company)
| | Smaller reporting company x |
| | | | (Do not check if a
| | |
| | | | smaller reporting company)
| | [X] |
Calculation of Registration Fee
| | | | | |
Title of Each Class
of Securities to be
Registered(1) | | Proposed
Maximum
Aggregate
Offering Price(2) (3) | | Amount
of
Registration
Fee(3) | |
Convertible Preferred Stock, $0.01 par value(3) | | | | | |
Common Stock, $.005 par value, underlying Convertible Preferred Stock | | | | | |
Warrants(3) | | | | | |
Common Stock, $.005 par value, underlying Warrants(3) | | | | | |
| | | | | |
Total | | $ | 10,000,000 | | $ | 713 | |
| | | | | | | |
(1)Any securities registered hereunder may be sold separately or together with other securities registered hereunder.
(2)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the shares being registered hereunder include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends, anti-dilution provisions, or similar transactions. No additional registration fee is being paid for these shares.
(3)Previously paid upon registrant’s initial filing on Form S-1 on July 2, 2010.
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to Be Registered | Amount to Be Registered (1) | | Proposed Maximum Offering Price Per Unit | | | Proposed Maximum Aggregate Offering Price | | | Amount of Registration Fee | |
| Common stock, $0.0001 par value per share | 902,055 shares | | $ | 8.63 | (2) | | $ | 7,784,734.65 | (2) | | $ | 1,002.67 | |
Common stock, $0.0001 par value per share (3) | 1,400,560 shares | | $ | 8.63 | (2) | | | 12,086,832.80 | (2) | | | 1,556.78 | |
| Total | 2,302,615 shares | | | | | | | | | | | 2,559.45 | |
| (1) | Pursuant to Rule 416 under the Securities Act of 1933, as amended, this registration statement also covers such additional shares as may hereafter be offered or issued to prevent dilution resulting from stock splits, stock dividends, recapitalizations or certain other capital adjustments. |
(2) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) of the Securities Act of 1933, based on the average of the high and low prices reported on the NASDAQ Stock Market on December 5, 2013. |
| (3) | Represents shares of common stock underlying the Company’s Series Convertible Preferred Stock which will be exchanged for shares of Series D-1 Convertible Preferred Stock on a one for one basis, at which time this will represent shares of Common Stock underlying the Company’s Series D-1 Convertible Preferred Stock. |
The
registrantRegistrant hereby amends this
registration statementRegistration Statement on such date or dates as may be necessary to delay its effective date until the
registrantRegistrant shall file a further amendment
whichthat specifically states that this
registration statementRegistration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933 or until this
registration statementRegistration Statement shall become effective on such date as the
commission,Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed.
These securitiesWe may not
be soldsell these securities until
the registration statement filed with the Securities and Exchange Commission
isdeclares our registration statement effective. This prospectus is not an offer to sell
these securities and
it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED September 23, 2010
Subject to completion, dated December 9, 2013
SPHERIX INCORPORATED
[*] Shares of Series B Convertible Preferred Stock
[*] Warrants to Purchase up to [*]
2,302,615 Shares of Common Stock
[*] Shares of Common Stock Underlying This prospectus relates to the Convertible Preferred Stock and the WarrantsWe are offeringdisposition from time to time of up to [*] shares of our Series B Convertible Preferred Stock, convertible into [*]2,302,615 shares of our common stock, par value $0.005 per share, and warrants to purchase up to [*]including 1,400,560 shares of our common stock issuable upon conversion of outstanding shares of Series D Convertible Preferred Stock, which the Company anticipates exchanging for shares of Series D-1 Convertible Preferred Stock on a one for one basis, prior to purchasers inthe effectiveness of this offering.prospectus. Each share of Series D Convertible Preferred Stock is (and each share of Series D-1 Convertible Preferred Stock will be) convertible preferred stock we sell will be accompanied by a warrant to purchase up to [*]into ten shares of common stock. Subject to certain ownership limitations,stock, which are held by the convertible preferredselling stockholders named in this prospectus. One selling stockholder acquired the common stock is convertible at any time atfrom us in connection with our acquisition of a patent portfolio from the optionselling stockholder on July 24, 2013 and the balance of the holder intoselling stockholders will acquire shares of Series D-1 Convertible Preferred Stock in connection with the exchange of shares of Series D Convertible Preferred Stock held by them. The shares of Series D Convertible Preferred Stock held by such stockholders were originally issued to them in connection with our acquisition of North South Holdings, Inc. (“North South”) in exchange for securities of North South held by them. We are not selling any common stock at a conversion ratio determined by dividing the stated valueunder this prospectus and will not receive any of the convertible preferred stockproceeds from the sale of shares by the selling stockholders. All references in this prospectus to Series D/Series D-1 Preferred Stock shall refer to shares of the Company’s Series D Preferred Stock which will be exchanged for shares of Series D-1 Preferred Stock on a conversion priceone for one basis, prior to effectiveness of $[*] per share.this prospectus.
The warrants are exercisable immediately and on or beforeselling stockholders may sell the fifth year anniversary of their initial exercise date at an exercise price of $[*] per shareshares of common stock. Each sharestock described in this prospectus in a number of convertible preferreddifferent ways and at varying prices. We provide more information about how the selling stockholders may sell their shares of common stock in the section entitled “Plan of Distribution” on page 41. The selling stockholders will bear all commissions and warrantdiscounts, if any, attributable to the sale or disposition of the shares, or interests therein. We will bear all costs, expenses and fees in connection with the registration of the shares. We will not be sold at a negotiated price of $1,000. The convertible preferred stock and warrants are immediately separable and will be issued separately.paying any underwriting discounts or commissions in this offering.
Our common stock is listedtraded on theThe NASDAQ Capital Market under the symbol “SPEX”. The“SPEX.” On December 6, 2013, the last reported sale price of our common stock on the NASDAQ Capital Market on September 21, 2010 was $1.54$8.74 per share. We do not intend to list the convertible preferred stock or the warrants on any securities exchange.
Investing An investment in our securitiescommon stock involves a high degree of risk and purchasers of our securities may lose their entire investment.risk. See “Risk Factors” beginning on page 103 of this prospectus for factors you should consider before buying our securities. You should carefully read this prospectus before you invest in our securities.
|
| Per Share
|
| Maximum Total
|
|
| | | | | |
Offering Price
| | $
| [*]
| | $
| [*]
| |
Placement Agent Fees
| | $
| [*]
| | $
| [*]
| |
Net Offering Proceeds, Before Expenses(1)
| | $
| [*]
| | $
| [*]
| |
(1)We have also agreed to reimburse the placement agent’s expenses up to $45,000.
We have retained Rodman & Renshaw, LLC as our exclusive placement agent to use its reasonable best efforts to solicit offers to purchase our securities in this offering. The placement agent is not purchasing or selling any of the securities in this offering. There is no minimum amount of securities that must be sold as a condition to closing this offering. The offering will endmore information on [*], 2010. We expect that delivery of the securities being offered pursuant to this prospectus will be made to purchasers on or about [*], 2010. We have agreed to indemnify the placement agent against some liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments that the placement agent may be required to make in respect thereof. In consideration for its services, in addition to the cash fees set forth in the table above, we have agreed to issue to the placement agent two-year warrants to purchase up to an aggregate of [*] shares of our common stock at an exercise price of $[*] per share. The placement agent warrants are not covered by this prospectus.
these risks.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined ifpassed upon the adequacy or accuracy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
Rodman & Renshaw
Sole Placement Agent2
PROSPECTUS SUMMARY
Overview
Our activities generally include the acquisition and development of patents through internal or external research and development. In addition, we seek to acquire existing rights to intellectual property through the acquisition of already issued patents and pending patent applications, both in the United States and abroad. We may alone, or in conjunction with others, develop products and processes associated with our intellectual property and license our intellectual property to others seeking to develop products or processes or whose products or processes infringe our intellectual property rights through legal processes. Using our patented technologies, we employ strategies seeking to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We will continue to seek to obtain patents from inventors and patent owners to monetize patent portfolios.
On April 2, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with our wholly-owned subsidiary, Nuta Technology Corp., a Virginia corporation (“Nuta”), North South and the stockholders of North South. On August 30, 2013, we entered into an amendment to the Merger Agreement to amend, among other things, the terms of the information you should consider before buyingmerger consideration. On September 10, 2013, we consummated the merger and North South merged into Nuta, with Nuta continuing as the surviving corporation and owner of North South’s intellectual property, and in accordance with the terms of the Merger Agreement, we issued 1,203,153 shares of our securities. You should readcommon stock and 1,379,685 shares of our Series D Convertible Preferred Stock, each of which is convertible into shares of common stock on a one-for-ten basis, to the entire prospectus carefully, especiallyformer stockholders of North South.
Through our acquisition of North South, we acquired a patent portfolio consisting of 222 U.S. patents in the “Risk Factors” sectionfields of wireless communications, satellite, solar and radio frequency, as well as 2 U.S. patents in pharmaceutical technology. Prior to the Merger, North South acquired and developed patents through internal and/or external research and development and acquired issued U.S. and foreign patents and pending patent applications. We license our patents to companies seeking to develop products and processes that embodied our patented invention or to companies whose products and processes infringed our intellectual property. Prior to our acquisition of North South, North South commenced monetization and commercialization efforts by filing patent infringement litigation against T-Mobile USA on geo-location technology owned by North South, as well as two lawsuits on pharmaceutical distribution, the rights to which we acquired upon consummation of the Merger.
On July 24, 2013, we closed on the acquisition of a group of patents in the mobile communication sector from Rockstar in which we paid to Rockstar certain consideration, including 176,991 shares of common stock, which are being registered pursuant to this prospectus.
We anticipate commencing an exchange with holders of our outstanding shares of Series D Convertible Preferred Stock pursuant to which such holders could exchange shares of Series D Preferred Stock for shares of Series D-1 Convertible Preferred Stock on a one-for-one basis. An aggregate of 725,064 shares of common stock issued to the former stockholders of North South and 1,400,560 shares of common stock underlying 140,056 shares of Series D/D-1 Convertible Preferred Stock issued to our Series D Convertible Preferred Stockholders, are being registered pursuant to this prospectus. The rights of the Series D-1 Convertible Preferred Stock are substantially identical to the rights of the Series D Convertible Preferred Stock except for certain modifications relating to conversion limitations. All references in this prospectus
and our financial statements, related notes and other information incorporated by reference intoto Series D/Series D-1 Preferred Stock shall refer to shares of the Company’s Series D Preferred Stock which will be exchanged for shares of Series D-1 Preferred Stock on a one for one basis, prior to effectiveness of this
prospectus before deciding to invest in our securities.Company Information
prospectus.
We were founded in 1967 and are incorporated in the State of Delaware.Delaware in 1967. Our principal executive offices areoffice is located at 6430 Rockledge7927 Jones Branch Drive, Suite 503, Bethesda, Maryland 20817, and our3125, Tysons Corner, VA, 22102. Our telephone number is (301) 897-2540. Our(703) 992-9260 and our website address is www.spherix.com. The information contained on our website is not a part of, and should not be construed as being incorporated by reference into, this prospectus of this prospectus. We have included our website address
As used in this prospectus, forunless otherwise specified, references to the “Company,” “we,” “our” and “us” refer to Spherix Incorporated and, unless otherwise specified, its direct and indirect subsidiaries.
The Offering
| Common Stock Offered by the Selling Stockholders: | | Up to 2,302,615 shares of common stock, including 1,400,560 shares of common stock issuable upon conversion of outstanding shares of Series D/D-1 Convertible Preferred Stock, each of which is convertible into ten shares of common stock. |
| | |
| Common Stock Outstanding before this Offering: | | 2,619,395 |
| | |
| Common Stock Outstanding after this Offering (Assuming conversion of all shares of Series D/D-1 Convertible Preferred Stock being offered): | | 4,019,955 |
| | |
| Use of Proceeds: | | We will not receive any proceeds from the sale of shares in this offering by the selling stockholders. |
| | |
| NASDAQ Symbol | | SPEX |
| | |
| Risk Factors | | You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 3 of this prospectus before deciding whether or not to invest in shares of our common stock. |
RISK FACTORS
You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained or incorporated by reference
only.into this prospectus, including our financial statements and related notes.
Risks Related to Our Business
We are engagedhave expanded the focus of our business to commercializing, developing and monetizing intellectual property, including through licensing and enforcement. We may not be able to successfully monetize the patents which we acquire and thus may fail to realize all of the anticipated benefits of such acquisition.
There is no assurance that we will be able to successfully commercialize, acquire, develop or monetize the patent portfolios that we acquired from North South and Rockstar. The acquisition of the patents could fail to produce anticipated benefits, or could have other adverse effects that we do not currently foresee. Failure to successfully monetize these patent assets may have a material adverse effect on our business, financial condition and results of operations.
In addition, the acquisition of the patent portfolios is subject to a number of risks, including, but not limited to the following:
| · | There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During that time lag, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial position; and |
| · | The integration of a patent portfolio will be a time consuming and expensive process that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisition. |
Therefore, there is no assurance that the monetization of the patent portfolios we acquire will generate enough revenue to recoup our investment.
Our operating history makes it difficult to evaluate our current business and future prospects.
We have, prior to engaging in two (2) linesthe patent monetization sector, been involved in businesses primarily involving research and development in furtherance of drug and pharmaceutical products and processes, including nutritional supplements and related services. Prior to the acquisition of our patent assets, our business consisted entirely of our biotechnology research and development business and our health sciences technical and regulatory consulting business.unit. We have created two wholly-owned subsidiaries, Biospherics Incorporated,no operating history in executing our additional new business which operatesincludes, among other things, creating, commercializing, prosecuting, licensing, litigating or otherwise monetizing patent assets. Our lack of operating history in this sector makes it difficult to evaluate our biotechnology segment,additional new business model and Spherix Consulting, Inc., which operates our Health Sciences segment. The subsidiaries began operationsfuture prospects.
We will be initially reliant exclusively on January 1, 2009. Spherix now provides management, strategic guidance, business development, marketingthe patent assets we acquired from North South and Rockstar. If we are unable to commercialize, license or otherwise monetize such assets and generate revenue and profit through those assets or by other services to its subsidiaries.Biotechnology Segment
Biospherics is dedicated to development of its proprietary low-caloric sweetener, D-tagatose. Until June 2010, this development was limited to developing D-tagatose as a novel, first-in-class treatment for Type 2 diabetes. The Company recently announced that it will actively seek a pharma partner to continue the diabetes development and that it will also explore D-tagatose as a potential treatment for high triglycerides, a risk factor for heart disease, including atherosclerosis, myocardial infarction and stroke.
Tagatose, a naturally occurring sugar,means, there is a low-calorie, full-bulk sweetener previously approved by the Food and Drug Administration (“FDA”) as a GRAS (Generally Recognized As Safe) food ingredient. It is a true sugarsignificant risk that looks, feels, and tastes like table sugar. During human safety studies supporting food use, we discovered and patented a number of health and medical uses for D-tagatose.
Diabetes Indication
We are currently conducting a Phase 3 trial to determine efficacy of D-tagatose as a treatment for Type 2 diabetes and a Phase 2 Dose Range trial to evaluate the effectiveness of lower doses of D-tagatose in treating Type 2 diabetes. D-tagatose is believed to depress elevations of blood sugar levels in diabetic patients by increasing glycogen synthesis while decreasing glycogen utilization, resulting in an improvement of blood sugar control and modulation of HbA1c. HbA1c is a key indicator that measures glycated hemoglobin in the blood and is a measure of long-term control of blood glucose. Glucose is a sugar molecule that serves as a primary energy storage mechanism and glycogen is a molecule that functions as secondary long-term energy storage in humans. D-tagatose works in part by affecting glycogen levels.
The Company expects to announce final efficacy results of the current Phase 3 trial in September 2010 and expects to complete the Phase 2 Dose Range trial by the end of 2010.
The cost burden of developing drugs specifically for diabetes has increased significantly within the last few years under evolving and more stringent FDA guidelines. A company-commissioned analysis estimates it would take several additional years of clinical trials and could cost as much as several hundred million dollars to achieve a New Drug Application (“NDA”) filing for D-tagatose under current guidelines. our business will fail
. We have determinedrecently acquired a patent portfolio from Rockstar and North South that continued developmentwe plan to commercialize, license or monetize. If our efforts to generate revenue from such assets fail, we will have incurred significant losses and may be unable to acquire additional assets. If this occurs, our business will likely fail.
In connection with our new line of D-tagatose as a treatment for Type 2 diabetes requires the involvement of a pharma partner with the resources needed to fund the rest of the development and to bring it to market. The results from the Phase 3 trial will be pivotal in these negotiations,business, we may commence legal proceedings against certain companies, and we expect such litigation to be time-consuming and costly, which may adversely affect our financial condition and our ability to operate our business.
To license or otherwise monetize our patent assets, which may constitute a significant focus of our activities, we may be required to commence legal proceedings against certain companies, pursuant to which we may allege that such companies infringe on one or more of our patents. Our viability could be highly dependent on the Phase 3 data will showoutcome of this litigation, and there is a robust proofrisk that we may be unable to achieve the results we desire from such litigation, which failure would harm our business to a great degree. In addition, the defendants in this litigation are likely to be much larger than us and have substantially more resources than we do, which could make our litigation efforts more difficult.
We anticipate that these legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of concept demonstrating safetypatents and efficacy for D-tagatose for Type 2 diabetes, potentially making it an attractive candidate for further development by a pharma company. Accordingly,other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against others to enforce or defend our 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 we are actively seeking a strategic relationship with a pharma companyinvolved 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 preclude our ability to derive licensing revenue from the continuedpatents. A negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact our business. Additionally, we anticipate that our legal fees and other expenses will be material and will negatively impact our financial condition and results of operations and may result in our inability to continue our business.
We may seek to internally develop additional new inventions and intellectual property, which would take time and be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.
Part of our additional new business may include the internal development of
D-tagatose as a treatment for Type 2 diabetes.5
Table of Contents
Triglycerides Indication
Secondary endpoints of our diabetes trials include triglyceride measurements. High triglyceride levels are sometimes a symptom of conditions associated with heart disease such as obesity and metabolic syndrome, which is a condition associated with elevated glucose levels as well as excess fat around the waist, high blood pressure, high triglycerides and low HDL cholesterol. Interim results of our Phase 2 Dose Range Study demonstrate a substantial reduction in triglycerides from patients who received 7.5 grams of D-tagatose compared to patients who received 2.5 grams of D-tagatose. Results from Phase 3 will be analyzed to provide corroboration for proof of concept regarding potential impact of D-tagatose on triglycerides.
The program to investigate D-tagatose as a pharmaceutical agent to lower serum triglycerides will begin this year. As per a normal pharmaceutical development plan, initial studies may include appropriate animal models in order to fully explore the mechanism of action on lipid metabolism, including triglycerides as well as LDL and HDL cholesterol. The commercial intent of the triglyceride program is to develop a formulation, dose and dosing regimen appropriate for the lipid market segment and uniquely different from the diabetes market. Thus, Spherix’s intent is to develop a completely new second brand for triglycerides, separate from the diabetes brand. Our goal is to produce a robust proof of concept in a Phase 2 clinical study, and then seek a pharma partner for further development of the triglycerides drug product. We estimateinventions or intellectual property that it will likely take up to three years to complete the studies/trials necessary to attract a pharma partner to complete the development and an additional 2-3 years to complete all necessary studies for an NDA filing.
We expect to incur substantial development costs in our Biospherics segment in the next several years, without substantial corresponding revenue. We intend to finance our development activities through the remaining proceeds received from the 2007 sale of InfoSpherix, the net proceeds of the November 2009 registered direct equity offering, the net proceeds from this offering, and additional funds we will seek to raise throughmonetize. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the salerisk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would heavily rely upon, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally including the following:
| · | patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents; |
| · | we may be subject to interference proceedings; |
| · | we may be subject to opposition proceedings in the U.S. or foreign countries; |
| · | any patents that are issued to us may not provide meaningful protection; |
| · | we may not be able to develop additional proprietary technologies that are patentable; |
| · | other companies may challenge patents issued to us; |
| · | other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; |
| · | other companies may design around technologies we have developed; and |
| · | enforcement of our patents would be complex, uncertain and very expensive. |
We cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional stocknew inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss our business.
Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
New legislation, regulations or court rulings related to enforcing patents could harm our new line of business and operating results.
If Congress, the United States Patent and Trademark Office or courts implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, these changes could negatively affect our new business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the
future.Health Sciences Segment
cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
In
July 2007, we enteredaddition, on September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), was signed into
the Health Sciences business when Claire L. Kruger, CEO and COO, joined us in advance of the anticipated sale of our wholly-owned subsidiary, InfoSpherix Incorporated.law. The
Health Sciences business provides technical and regulatory consulting services to biotechnology and pharmaceutical companies, as well as providing technical support for our own R&D activities.During 2009 and 2008, Health Sciences provided services to 12 and 16 companies, respectively. We generally provide our services on either a fixed-price basis or a “time and expenses” basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. Our engagement agreements typically provide for monthly billing and payment of our invoices within thirty days of receipt.
The projects range from safety analyses of food ingredients to safety analyses of pharmaceutical manufacturing and dispensing equipment. Many clients are large, well-known companies withLeahy-Smith Act includes a number of successful productssignificant changes to United States patent law. These changes include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The U.S. Patent Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act recently became effective. Accordingly, it is too early to tell what, if any, impact the Leahy-Smith Act will have on the market. The proliferation of new products in the food and pharmaceutical areas creates a growing need for such regulatory services.
Revenues are primarily derived from services provided in response to client requests or events that occur without notice, and engagements, generally billed as services are performed, are terminable or subject to postponement or delay at any time by clients. Revenues and operating margins for any particular quarter are generally affected by staffing mix, resource requirements, and timing and size of engagements.
Health Sciences is also monitoring and directing the clinical trials of D-tagatose for Biospherics.
Health Sciences revenue accounted for 99%operation of our total revenue in eachbusiness. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of 2009patent applications and 2008.
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2009 Offering
In November 2009, we completed a registered direct equity financing involving the issuance of 2,760,870 sharesenforcement or defense of our common stock and warrants exercisable for an additional 1,104,348 shares of our common stock. We received approximately $6 million in net proceeds from the offering, after deducting the placement agent’s fees and our offering expenses. As of June 30, 2010, the Company had cash and short-term investments of approximately $4.7 million and expects to expend all of this amount within the next six months.
The Offering
We are offering up to [*] shares of our convertible preferred stock (convertible into [*] shares of our common stock) and warrants to purchase up to an additional [*] shares of our common stock in this offering. Each share of convertible preferred stock will be accompanied by a warrant to purchase up to [*] shares of common stock.
NASDAQ rules generally require stockholder approval for issuance of stock in excess of 20% of outstanding shares. On August 31, 2010, our stockholders provided such approval, subject to certain limitations, including:
·The aggregate number of shares issued in any offerings will not exceed 15,000,000 shares of our common stock (including pursuant to preferred stock, options, warrants, convertible debt or other securities exercisable for a convertible into common stock);
·The total aggregate consideration will not exceed $12 million in cash;
·The maximum discount at which securities will be offered will be equivalent to a discount of 20% below the market price of our common stock at the time of issuance; and
·Such offerings will occur within the three-month period commencing on August 31, 2010.
This offering will be conducted pursuant to the authority granted by our stockholders at the August 31, 2010 annual meeting.
Holders of the convertible preferred stock will be entitled to receive dividends equal (on an “as converted to common stock” basis) to and in the same form as dividends actually paid on shares of common stock, as and if such dividends are paid. We have never declared or paid any cash dividends on our common stock and do not currently anticipate declaring or paying cash dividends on our common stock in the foreseeable future.
There will be [*] shares of our common stock outstanding after the closing of this offering if all of the shares of convertible preferred stock and warrants offered hereunder are sold and are fully converted into shares of common stock.
The number of shares of our common stock to be outstanding is based on 17,150,648 shares of our common stock issued and outstanding as of September 21, 2010.
Summary Financial Data
The following tables set forth our summary consolidated statement of operations data for the fiscal years ended December 31, 2009 and 2008, and for the six-month periods ended June 30, 2010 and 2009, and our summary consolidated balance sheets as of June 30, 2010 and December 31, 2009. Our statement of operations data for the fiscal years ended December 31, 2009 and 2008 and our balance sheet as of December 31, 2009 were derived from our audited consolidated financial statements. Our statement of operations data for the six months ended June 30, 2010 and 2009 and our balance sheet as of June 30, 2010 were derived from unaudited consolidated financial statements,patents, all of which could have a material adverse effect on our business and financial condition.
On February 27, 2013, US Representatives DeFazio and Chaffetz introduced HR845. In general, the bill known as the SHIELD Act (“Saving High-tech Innovators from Egregious Legal Disputes”), seeks to assess legal fee liability to plaintiffs in patent infringement actions for defendants costs. In the event that the bill becomes law, the potential obligation to pay the legal fees of defendants in patent disputes could have a material adverse effect on our business or financial condition.
On June 4, 2013, the Obama Administration issued executive actions and legislative recommendations. The legislative measures recommended by the Obama Administration include requiring patentees and patent applicants to disclose the “Real Party-in-Interest”, giving district courts more discretion to award attorney’s fees to the prevailing party, requiring public filing of demand letters such that they are included elsewhereaccessible to the public, and protecting consumers against liability for a product being used off-the shelf and solely for its intended use.
The executive actions includes ordering the USPTO to make rules to require the disclosure of the Real Party-in-Interest by requiring patent applicants and owners to regularly update ownership information when they are involved in
this prospectus.proceedings before the USPTO (e.g. specifying the “ultimate parent entity”) and requiring the USPTO to train its examiners to better scrutinize functional claims to prevent allowing overly broad claims.
On October 23, 2013, Representative Bob Goodlatte, with bipartisan support, introduced a new set of proposed patent reforms titled the “Innovation Act.” The Innovation Act has a number of proposed major proposed changes. Some of the proposed changes include a heightened pleading requirement for the filing of patent infringement claims. It requires a particularized statement with detailed specificity regarding how each asserted claim term corresponds to the functionality of each accused instrumentality. The Innovation Act also includes a provision that allows prevailing defendants to collect attorney fees from non-plaintiffs who have substantial interest in the asserted patent. Moreover, a patentee who gives a covenant not to sue to a defendant will be deemed a non-prevailing party and, therefore, subject to attorney fees.
The Innovation Act also calls for discovery to be limited until after claim construction. The patent infringement plaintiff must also disclose anyone with a financial interest in either the asserted patent or the patentee and must disclose the ultimate parent entity. When a manufacturer and its customers are sued at the same time, the suit against the customer would be stayed as long as the customer agrees to be bound by the results indicated belowof the case.
It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and elsewhereexpensive, affect the manner in this prospectus are not necessarily indicativewhich we conduct our business and negatively impact our business, prospects, financial condition and results of our future performance. You should read this information together with “Capitalization,” “Management’s Discussion and7operations.
Acquisitions of
Financial Conditionpatent or other intellectual property assets, which are and
Results of Operations,”will be critical to our
consolidated financial statementsbusiness plan, are often time consuming, complex and
related notes included elsewhere in this prospectus.Summary Consolidated Statements of Operations Data
| | | | | | (Unaudited) | |
| | Year Ended December 31, | | Six Months Ended June 30, | |
| | 2009 | | 2008 | | 2010 | | 2009 | |
Revenue | | $ | 1,359,110 | | $ | 1,025,961 | | $ | 659,430 | | $ | 692,911 | |
Operating expense | | | | | | | | | |
Direct costs | | 449,293 | | 397,645 | | 231,899 | | 239,665 | |
Research and development | | 6,830,957 | | 4,004,565 | | 2,856,484 | | 2,695,351 | |
Selling, general and administrative | | 3,265,137 | | 3,135,310 | | 2,280,750 | | 1,408,366 | |
Loss from operations | | (9,186,277 | ) | (6,511,559 | ) | (4,709,703 | ) | (3,650,471 | ) |
Interest income and other expense | | 37,646 | | 340,229 | | 4,216 | | 29,847 | |
Income tax benefit | | — | | 552,803 | | — | | — | |
Loss from continuing operations | | (9,148,631 | ) | (5,618,527 | ) | (4,705,487 | ) | (3,620,624 | ) |
Income from discontinued operations | | — | | 1,482,993 | | — | | — | |
Net loss | | $ | (9,148,631 | ) | $ | (4,135,534 | ) | $ | (4,705,487 | ) | $ | (3,620,624 | ) |
| | | | | | | | | |
Net loss per share, basic and diluted | | | | | | | | | |
Continuing operations | | $ | (0.62 | ) | $ | (0.39 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
Discontinued operations | | $ | — | | $ | 0.10 | | $ | — | | $ | — | |
Net loss per share | | $ | (0.62 | ) | $ | (0.29 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
Weighted average shares outstanding, basic and diluted | | 14,713,473 | | 14,342,953 | | 17,150,648 | | 14,357,162 | |
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Summary Consolidated Balance Sheets Data
| | June 30, 2010 | | December 31, | |
| | (Unaudited) | | 2009 | |
| | | | | |
Cash and cash equivalents | | $ | 4,585,803 | | $ | 9,026,002 | |
Total assets | | $ | 5,351,851 | | $ | 10,155,308 | |
Total liabilities | | $ | 2,750,045 | | $ | 2,883,432 | |
Accumulated deficit | | $ | 30,654,490 | | $ | 25,949,003 | |
Total stockholders’ equity | | $ | 2,601,806 | | $ | 7,271,876 | |
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RISK FACTORS
An investmentcostly to consummate. We may utilize many different transaction structures in our securities involvesacquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a high degree of riskresult, we expect to incur significant operating expenses and shouldwill likely be considered only by those persons whorequired to raise capital during the negotiations even if the acquisition is ultimately not consummated. Even if we are able to affordacquire particular patent assets, there is no guarantee that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a loss of their entire investment. There are important factors that could causeseller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend our actual results, level of activity, performance or achievements to differ materially frominterest in the results, level of activity, performance or achievements expressed or implied by any forward-looking statement. In particular, you should consider the numerous risks outlined below. Those risk factors are not exhaustive.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT
WE MAY NOT BE ABLE TO FIND A STRATEGIC PARTNER FOR OUR DIABETES DRUG CANDIDATE. With the conclusion of the Phase 3 trial, we have scaled back our development of D-tagatose as a treatment for Type 2 diabetespatent assets and, are actively seeking a strategic partner to continue this development. We may not locate such a partner or may not negotiate an appropriate strategic relationship agreement. Ifif we are not successful, our acquisition may be invalid, in which case we will not obtain any benefits fromcould lose part or all of our investment in the substantial investment we have made in these efforts over the past several years.
OUR POTENTIAL TRIGLYCERIDES DRUG IS AT A VERY EARLY STAGE OF DEVELOPMENT. We will be “starting at the beginning” in our development of a triglycerides drug. assets.
We may beginalso identify patent or other intellectual property assets that cost more than we are prepared to spend with animal studiesour own capital resources. We may incur significant costs to organize and then progressnegotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to human studiesbe unprofitable for us. These higher costs could adversely affect our operating results and, trials. We expectif we incur losses, the value of our securities will decline.
In addition, we may acquire patents and technologies that
it could take up to three years to completeare in the
studies/trials necessary to attract a pharma partner to completeearly stages of adoption in the
developmentcommercial, industrial and
an additional 2-3 years to complete all necessary studiesconsumer markets. Demand for
an NDA filing. There can be no assurance that anysome of these
studies/trialstechnologies will
likely be
successful or that we will develop the necessary proof of concept requireduntested and may be subject to
attract a pharma partner.IF WE ARE UNABLE TO COMPLETE OUR TRIGLYCERIDES CLINICAL TRIAL PROGRAMS SUCCESSFULLY, OR IF SUCH CLINICAL TRIALS TAKE LONGER TO COMPLETE THAN WE PROJECT, OUR ABILITY TO EXECUTE OUR CURRENT BUSINESS STRATEGY WILL BE ADVERSELY AFFECTED. Whether or not and how quickly we complete triglycerides clinical trials is dependent in partfluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies we are ableacquire or develop will have value that we can monetize.
In certain acquisitions of patent assets, we may seek to engage clinical trial sites and, thereafter, the rate of enrollment of patients, and the rate we collect, clean, lock and analyze the clinical trial database. Patient enrollment isdefer payment or finance a function of many factors, including the sizeportion of the patient population,acquisition price. This approach may put us at a competitive disadvantage and could result in harm to our business.
We have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer payments or finance a portion of the proximityacquisition price. These types of patients to clinical sites, the eligibility criteria for the study, the existence of competitive clinical trials, and whether existingdebt financing or new drugs are approved for the indication we are studying. Certain clinical trials are designed to continue until a pre-determined number of events have occurred in the patients enrolled. Trials such as this are subject to delays stemming from patient withdrawal and from lower than expected event rates. They may also incur additional costs if enrollment is increased in order to achieve the desired number of events. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs, anddeferred payment arrangements may not be ableas attractive to complete our clinical trialssellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a cost-effective or timely manner.result, we might not compete effectively against other companies in the market for acquiring patent assets, many of whom have greater cash resources than we have. In addition, conducting multi-national studies adds another levelany failure to satisfy our debt repayment obligations may result in adverse consequences to our operating results.
Any failure to maintain or protect our patent assets or other intellectual property rights could significantly impair our return on investment from such assets and harm our brand, our business and our operating results.
Our ability to operate our new line of complexitybusiness and risk. We are subjectcompete in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired patent assets and other intellectual property. To protect our proprietary rights, we will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. No assurances can be given that any of the measures we undertake to events affecting countries outsideprotect and maintain our assets will have any measure of success.
Following the acquisition of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness of those assets by paying maintenance fees and making filings with the United States. Negative States Patent and Trademark Office. We may acquire patent assets, including patent applications, which require us to spend resources to prosecute the applications with the United States Patent and Trademark Office. Further, there is a material risk that patent related claims (such as, for example, infringement claims (and/or inconclusive results from the clinical trials we conductclaims for indemnification resulting therefrom), unenforceability claims, or unanticipated adverse medical eventsinvalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending such claims could cause us to haveincur significant costs and could divert resources away from our other activities.
Despite our efforts to repeatprotect our intellectual property rights, any of the following or terminatesimilar occurrences may reduce the clinical trials. We may also opt to change the delivery method, formulation or dosage, which could affect efficacy results for the drug candidate. Accordingly,value of our intellectual property:
| · | our applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated; |
| · | issued trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing other properties; |
| · | our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or |
| · | our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute. |
Moreover, we may not be able to complete the clinical trials within an acceptable time frame, if at all.Additionally,effectively protect our intellectual property rights in certain foreign countries where we have never filed an NDA or similar application for approvalmay do business in the United States,future or in any country,from which competitors may result in aoperate. If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated, and our business would be harmed.
Weak global economic conditions may cause infringing parties to delay in, or the rejection of, our filing of an NDA or similar application. During the drug development process, regulatory agencies will typically ask questions of drug sponsors. While we endeavor to answer all such questions in a timely fashion, or in the NDA filing, some questions may remain unanswered by the time we file our NDA. Unless the FDA opts not to pursue answers to these questions, submission of an NDA may be delayed or rejected.10
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PRE-CLINICAL TESTING AND CLINICAL DEVELOPMENT ARE LONG, EXPENSIVE AND UNCERTAIN PROCESSES. IF OUR DRUG CANDIDATES DO NOT RECEIVE THE NECESSARY REGULATORY APPROVALS, WE WILL BE UNABLE TO COMMERCIALIZE OUR DRUG CANDIDATES. We have not received, and may never receive, regulatory approval for the commercial sale of any of our drug candidates. We will need to conduct significant additional research and human testing before we can apply for product approval with the FDA or with regulatory authorities of other countries. Pre-clinical testing and clinical development are long, expensive and uncertain processes. Satisfaction of regulatory requirements typically depends on the nature, complexity and novelty of the product. It requires the expenditure of substantial resources. Data obtained from pre-clinical and clinical tests can be interpreted in different ways,entering into licensing agreements, which could delay, limit or prevent regulatory approval. The FDA may pose additional questions or request further clinical substantiation. It may take us many years to complete the testing ofprolong our drug candidateslitigation and failure can occur at any stage of this process. Negative or inconclusive results or medical events during a clinical trial could cause us to delay or terminate our development efforts.
Furthermore, interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be obtained in later studies.
Clinical trials have a high risk of failure. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after achieving what appeared to be promising results in earlier trials. If we experience delays in the testing or approval process or if we need to perform more or larger clinical trials than originally planned,adversely affect our financial resultscondition and the commercial prospects for our drug candidates may be materially impaired. In addition, we have limited experience in conductingoperating results.
Our business plan depends significantly on worldwide economic conditions, and managing the clinical trials necessary to obtain regulatory approval in the United States and abroad. Accordingly,world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business.
If we may encounter unforeseen problems and delays in the approval process. Although we may engage a clinical research organization with experience in conducting regulatory trials, errors in the conduct, monitoring and/or auditing could potentially invalidate the results.OUR PATENT PROTECTION MAY NOT BE SUFFICIENT TO PROTECT US. Our current use patent for D-tagatose as a treatment for Type 2 diabetes expires in 2012. We are exploring the prospects of extendingunable to adequately protect our exclusivity for D-tagatose for up to an additional five years. At present we only have rights for patents pending for triglycerides treatment. There can be no assurance these patents will be issued.
WE DO NOT CURRENTLY HAVE THE RESOURCES TO BECOME A FULL SCALE BIOTECHNOLOGY COMPANY AND WE MAY NOT BE ABLE TO ATTRACT A NECESSARY BUYER/LICENSEE/PARTNER/STRATEGIC PARTNER BEFORE WE EXPEND ALL OF OUR FUNDS. We intend to continue to develop D-tagatose as a viable triglycerides treatment and to continuously seek a sale, license, or partner. Our hope and expectation is that as we proceed with the development, incremental successes may allow us to negotiate a favorable transaction. There can be no assurance, however, that we will have such incremental successes, or even if we achieve them, that we will attract a buyer, licensee or partner. We have limited resources. As of June 30, 2010, the Company had cash and short-term investments of approximately $4.7 million and expects to expend all of this amount within the next six months. We will need to raise additional funds in 2010 to continue operations and will likely require additional capital raises thereafter to fully pursue the triglycerides opportunity andintellectual property, we may not be able to do socompete effectively.
Our ability to compete depends in part upon the strength of our proprietary rights that we will own as a timely fashion.REGULATORY AUTHORITIES MAY NOT APPROVE OUR PRODUCT EVEN IF IT MEETS SAFETY AND EFFICACY ENDPOINTS IN CLINICAL TRIALS. The FDAresult of acquisitions in our technologies, brands and content. We intend to rely on a combination of U.S. and foreign regulatory agencies can delay, limit or deny marketing approval for many reasons, including:
·a product candidatepatents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual property and proprietary rights. The efforts we take to protect our intellectual property and proprietary rights may not be considered safesufficient or effective;
·the manufacturing processes or facilities we have selected may not meet the applicable requirements;effective at stopping unauthorized use of our intellectual property and
·changes in approval policies or adoption of new regulations may require additional work on our part.
Any delay in, or failure to receive or maintain, approval for D-tagatose as a treatment for triglycerides could prevent us from ever generating meaningful revenues.
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D-tagatose proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be approved even if it achieves endpointsavailable or cost-effective in clinical trials. Regulatory agencies, includingevery country in which our services are made available. There may be instances where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage. If we are unable to protect our intellectual property and proprietary rights from unauthorized use, the FDA, or their advisorsvalue of our products may disagree withbe reduced, which could negatively impact our trial design andnew business. Our inability to obtain appropriate protections for our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. Regulatory agenciesintellectual property may also approve a product candidate for fewerallow competitors to enter our markets and produce or more limited indications than requested,sell the same or may grant approval subject to the performance of post-marketing studies.similar products. In addition, regulatory agencies may not approveprotecting our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If any of the labeling claims thatforegoing were to occur, or if we are necessary or desirable forotherwise unable to protect our intellectual property and proprietary rights, our business and financial results could be adversely affected.
Our financial resources are limited and we will need to raise additional capital in the
successful commercialization of D-tagatose.OUR FINANCIAL RESOURCES ARE LIMITED AND WE WILL NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE TO CONTINUE OUR BUSINESS. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING IF NEEDED. As of June 30, 2010, the Company had cash and short-term investments of approximately $4.7 million and expectsfuture to expend all of this amount within the next six months.continue our business.
Our future capital requirements will depend on many factors, including the progress of the clinical trials and commercialization of D-tagatose, as well as general and administrative costs. Over the next 12 months, the Company expects that it will need to expend between $7 million and $13 million to support its development operations. We will need to raise additional funds in 2010 to continue operations and will likely require additional capital raises thereafter to fully pursue the triglycerides opportunity.factors. We cannot ensure that additional funding will be available or, if it is available, that it can be obtained on terms and conditions we will deem acceptable. Any additional funding derived from the sale of equity securities is likely to result in significant dilution to our existing stockholders. These matters involve risks and uncertainties that may prevent us from raising additional capital or may cause the terms upon which we raise additional capital, if additional capital is available, to be less favorable to us than would otherwise be the case.UNSTABLE MARKET CONDITIONS MAY HAVE SERIOUS ADVERSE CONSEQUENCES ON OUR BUSINESS. The recent economic downturn and market instability have made the business climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictable and unstable market conditions, including:
·one or more of our current service providers, manufacturers and other partners may encounter difficulties during challenging economic times, which would directly affect our ability to attain our goals on schedule and on budget;
·demand for our consulting services may decrease resulting in a decrease in revenue;
·our ability to collect on trade receivables may be negatively impacted by slow payments or bad debt;
·our efforts to raise additional capital may be negatively impacted;
·additional funding may not be available or, if it is available, may not be on terms and conditions we deem acceptable;
·any additional funding derived from the sale of equity securities is likely to result in significant dilution to our existing stockholders; and
·failure to secure the necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business strategy, financial performance, and stock price and could require us to delay or abandon the clinical development plans.
IF CLINICAL TRIALS OF D-TAGATOSE ARE PROLONGED, DELAYED OR SUSPENDED, IT MAY TAKE SIGNIFICANTLY LONGER AND COST SUBSTANTIALLY MORE TO OBTAIN APPROVAL FOR OUR DRUG CANDIDATE AND ACHIEVE PROFITABILITY, IF AT ALL. Each delay makes it more likely that we will need additional financing to complete our clinical trials. We cannot predict whether we will encounter additional problems that will cause us or regulatory authorities to delay or suspend the clinical trial, or delay the analysis of data from the trials. Any of the following could delay the clinical development of our drug candidates:
·ongoing discussions with the FDA regarding the scope or design of our trial;
·delays in receiving, or the inability to obtain, required approvals from reviewing entities at clinical sites selected for participation in our trial;
·a lower than anticipated retention rate of patients in the trial;
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·the need to repeat the trial or conduct another trial as a result of inconclusive or negative results or unforeseen complications in testing;
·inadequate supply or deficient quality of materials necessary to conduct our trial;
·serious and unexpected drug-related side effects experienced by participants in our clinical trials;
·the placement by the FDA of a clinical hold on a trial; or
·any restrictions on or post-approval commitments with regard to any regulatory approval we ultimately obtain that render the drug candidate not commercially viable.
WE WILL RELY ON THIRD PARTIES TO CONDUCT PORTIONS OF OUR TRIALS, AND THOSE THIRD PARTIES MAY NOT PERFORM SATISFACTORILY. We will rely on third parties to enroll qualified patients, conduct our trials, provide services in connection with such trials, and coordinate and oversee significant aspects of the trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Accordingly, these third party contractors may not complete activities on schedule, or may not conduct our trials in accordance with regulatory requirements or the trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be required to replace them or we may be required to provide these services with our own personnel. Although we believe there are a number of third party contractors we could engage to continue these activities, replacing a third party contractor may result in a delay or affect the trial. If this were to occur, our efforts to obtain regulatory approvals for and commercialize our drug candidate may be delayed.
OUR CORPORATE COMPLIANCE EFFORTS CANNOT GUARANTEE THAT WE ARE IN COMPLIANCE WITH ALL POTENTIALLY APPLICABLE REGULATIONS. The development, manufacturing, pricing, sales, and reimbursement of drug products are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. We are a relatively small company with only 11 employees. We also have significantly fewer employees than many other companies that have a product candidate in clinical development, and we rely heavily on third parties to conduct many important functions. While we believe that our corporate compliance program is sufficient to ensure compliance with applicable regulation, we cannot assure that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with any of these regulations we could be subject toreach a range of regulatory actions including suspension or termination of clinical trials, the failure to approve our product candidate, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, or other sanctions or litigation.
WE DO NOT HAVE INTERNAL MANUFACTURING CAPABILITIES, AND IF WE FAIL TO DEVELOP AND MAINTAIN SUPPLY RELATIONSHIPS WITH OUTSIDE MANUFACTURERS, WE MAY BE UNABLE TO DEVELOP OR COMMERCIALIZE D-TAGATOSE. Our ability to develop and commercialize D-tagatose will depend in part on our ability to arrange for other parties to manufacture D-tagatose at a competitive cost, in accordance with regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. Ifpoint where we are unable to enter into or maintain commercial-scale manufacturing agreements on acceptable terms, or ifraise needed additional funds to continue as a going concern, we are unablewill be forced to successfully bridge material from a manufacturercease our activities and dissolve the Company. In such an event, we will need to the material initially usedsatisfy various severances, lease termination and other dissolution-related obligations.
We have sustained losses in the
trials, the developmentpast and
commercialization of D-tagatose could be delayed, which would adversely affect our ability to generate revenues and would increase our expenses.FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT MARKETING OF D-TAGATOSE. We intend to have D-tagatose marketed both inside and outside of the United States. In order to market D-tagatosewe may sustain losses in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.
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EVEN IF OUR CLINICAL TRIALS ARE SUCCESSFUL, WE MAY NOT HAVE A COMMERCIALLY VIABLE DRUG OR PRODUCT. We have a number of hurdles to overcome to have a commercially viable drug or product even assuming our clinical trials are successful, including:
·We must secure one or more manufacturers for D-tagatose and we must bridge the materials supplied by the current manufacturer(s) to the previously supplied materials to gain FDA approval.
·We must demonstrate that the product will be accepted in the market place. Even if the clinical trial is successful, the market may not accept the drug formulation or dosing, which would be three times a day in powder form for diabetes treatment.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT D-TAGATOSE, WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES FROM PRODUCT SALES. Even if we obtain regulatory approval for D-tagatose, it may not gain market acceptance among physicians, patients and the medical community for a variety of reasons including:
·timing of market introduction of competitive drugs;
·lower demonstrated clinical safety and efficacy compared to other drugs;
·lack of cost-effectiveness;
·lack of availability of reimbursement from managed care plans and other third-party payors;
·inconvenient administration;
·prevalence and severity of adverse side effects;
·drug interactions with other widely prescribed medications;
·potential advantages of alternative treatment methods;
·safety concerns with similar drugs marketed by others;
·the reluctance of the target population to try new therapies and of physicians to prescribe these therapies; and
·ineffective sales, marketing and distribution support.
If D-tagatose fails to achieve market acceptance, we would not be able to generate significant revenue or achieve profitability.
BIOTECHNOLOGY BUSINESS HAS A SUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS. THE DEFENSE OF ANY PRODUCT LIABILITY CLAIM BROUGHT AGAINST US WILL DIVERT MANAGEMENT TIME AND REQUIRE SIGNIFICANT EXPENSE. We could be exposed to significant potential product liability risks that are inherent in the development, manufacture, sales and marketing of drugs and related products. Our insurance may not, however, provide adequate coverage against potential liabilities. Furthermore, product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us. If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damage awards resulting from a claim brought successfully against us. Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to redirect significant financial and managerial resources to such defense, and adverse publicity is likely to result.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE WILL SUSTAIN LOSSES IN THE FUTURE. We have incurred losses from continuing operations in prior years, including 2009 and 2008.2012. Our net lossesloss from continuing operations before taxes for the yearsyear ended December 31, 2009 and 2008 were $9.12012 was $2.9 million and $6.2out net loss was $3.9 million respectively.and for the year ended December 31, 2012. The Company’s cumulativeaccumulated deficit was $30.7$35.3 million at JuneDecember 31, 2012. Our loss from continuing operations for the nine month period ended September 30, 2010. We expect to incur substantial losses in 20102013 was $9.3 million and thereafter until we find a purchaser/licensee. Thethe Company’s total cash used through the six months ended Juneaccumulated deficit was $49.1 million at September 30, 2010 was $4.4 million.2013. We may not return to profitable operations.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND PERSONNEL. As a small company, our success depends on the services
We face evolving regulation of
key employeescorporate governance and public disclosure that may result in
executiveadditional expenses and
other positions. The loss of the services of one or more of such employees could have a material adverse effect on us.14
continuing uncertainty.
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WE FACE INTENSE COMPETITION BY COMPETITORS. Our competitors in the biotechnology products business are numerous. Many of our competitors have significantly greater financial, marketing and distribution resources than we do. Our competitors may succeed in developing or marketing biotechnology products that are more effective than ours.
WE FACE EVOLVING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE THAT MAY RESULT IN ADDITIONAL EXPENSES AND CONTINUING UNCERTAINTY. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market LLC rules are creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of these costs. For example, compliance with the internal control requirements of Section 404 of the Sarbanes-Oxley Act has to date required the commitment of significant resources to document and test the adequacy of our internal control over financial reporting. While ourOur assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2009,2012, our internal control over financial reporting was not effective, as a result of the reclassification from equity to liability of warrants issued between November 2009 and February 2012. Similarly, we concluded that our internal control over financial reporting was not effective as of September 30, 2013, due to the Company’s lack of segregation of duties, and difficulty in applying complex accounting principles, including fair value of derivatives, options and warrants as well as stock based compensation accounting. We can provide no assurance as to conclusions of management or by our independent registered public accounting firm with respect to the effectiveness of our internal control over financial reporting in the future. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest the resources necessary to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, due to ambiguities related to practice or otherwise, regulatory authorities may initiate legal proceedings against us, which could be costly and time-consuming, and our reputation and business may be harmed.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS THAT WILL CONTINUE TO AFFECT THE PRICE OF OUR STOCK.
If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. We will also rely on trade secrets and contract law to protect some of our proprietary technology. We will enter into confidentiality and invention agreements with our employees and consultants. Nevertheless, these agreements may not be honored and they may not effectively protect our right to our un-patented trade secrets and know-how. Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
Risks Related to Ownership of Our Common Stock.
The price of our common stock has been highly volatile due to several factors that will continue to affect the price of our stock.
Our common stock has traded as low as
$0.25$4.07 and as high as
$4.15$218.00 between January 1,
20092011 and September
21, 2010.30, 2013 (on a split-adjusted basis). Some of the factors leading to this volatility include:
·
| · | relatively small amounts of our stock trading on any given day; |
| · | fluctuations in our operating results; |
| · | announcements of technological innovations or new products that we or our competitors make; |
| · | developments with respect to patents or proprietary rights; and |
| · | recent economic downturn and market instability. |
Our common stock
trading on any given day;·fluctuations in our operating results;
·announcements of technological innovations or new products thatmay be delisted from The NASDAQ Capital Market if we or our competitors make;
·developmentsfail to comply with respect to patents or proprietary rights; and
·recent economic downturn and market instability.
OUR COMMON STOCK WILL BE DELISTED FROM NASDAQ CAPITAL MARKET SYSTEM IF WE FAIL TO COMPLY WITH CONTINUED LISTING STANDARDS.continued listing standards.
Our common stock is currently traded on
theThe NASDAQ Capital Market under the symbol “SPEX.” If we fail to meet any of the continued listing standards of
theThe NASDAQ Capital Market, our common stock could be delisted from
theThe NASDAQ Capital Market. These continued listing standards include specifically enumerated criteria, such as:
·
| · | a $1.00 minimum closing bid price; |
| · | stockholders’ equity of $2.5 million; |
| · | 500,000 shares of publicly-held common stock with a market value of at least $1 million; |
| · | 300 round-lot stockholders; and |
| · | compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority. |
On April 20, 2012, we received a deficiency notice from NASDAQ regarding the bid price of our common stock. Following a 1 for 20 reverse stock split, on October 8, 2012, NASDAQ provided confirmation to us that we have regained compliance with Marketplace Rule 5550(a)(2) since the closing bid price;·shareholders’ equityprice of $2.5 million;
·500,000 shares of publicly-held common stock with a market value of at least $1 million;
·300 round-lot stockholders; and
·compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority.
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Minimum Bid Price Requirement
On July 21, 2008, NASDAQ notified the Company that its common stock failed to maintain a minimum bid price ofhad traded at $1.00 over the previous 30per share or greater for at least ten (10) consecutive business days as required bydays. This is the second time we employed a reversed stock split to avoid NASDAQ Listing Rules. In October 2008,delisting.
On September 25, 2012, we received written notification from NASDAQ
suspended enforcement ofadvising us that the minimum
bid price and market valuenumber of publicly held shares
requirements through January 16, 2009. On December 19, 2008, NASDAQ extended its suspension of
the requirements until April 20, 2009 and on March 24, 2009 NASDAQ again extended the suspension until July 20, 2009.On May 20, 2009, the Company received notification from NASDAQ confirming that it has regained compliance withour common stock had fallen below the minimum bid price requirement for continued listing on NASDAQ under Listing Rule 5550(a)(2). In the letter, NASDAQ stated that this matter is now closed.
Independent Director Requirement
On April 17, 2009, the Company reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission, that Mr. A. Paul Cox, Jr., one of our independent directors, passed away on April 13, 2009. On April 23, 2009, NASDAQ notified the Company that the Company no longer complied with NASDAQ Listing Rule 5605, which requires that a majority of the board of directors be comprised of independent directors.
On May 18, 2009, the Company received notification from NASDAQ confirming that it had regained compliance with the independent director requirement for continued listing on NASDAQ under Listing Rule 5605(b)(1). NASDAQ’s determination was based on the Company’s appointment of Thomas B. Peter to the Company’s Board of Directors as reported in the Company’s Current Report Form 8-K filed on May 14, 2009. In the letter, NASDAQ stated that this matter is now closed.
Minimum Shareholder Equity Requirement
At September 30, 2008, the Company’s stockholders’ equity fell below the $10 million limit500,000 shares required for continued listing on the NASDAQ Global Market. Accordingly, the Company transferred its listing from the NASDAQ Global Market to the NASDAQ Capital Market which haspursuant to NASDAQ Rule 5550(a)(4). As a lower stockholders’ equity limitresult of $2.5 million. At June 30, 2010, the Company’sour November 2012 private placement transaction, we have been advised by NASDAQ that we have regained compliance with this requirement.
On December 31, 2012, our total stockholders’ equity was
$2.6$854,000, and was below the $2.5 million listing standard required by NASDAQ. In March 2013, we exchanged with certain investors the warrants issued in November 2012 for Series C Preferred Stock, effectively increasing total stockholders’ equity in the aggregate by approximately $2.7 million.
In the future, if
If we are delisted then our common stock were to fail to meetwill trade, if at all, only on the minimum bid price requirementover-the-counter market, such as the OTC Bulletin Board securities market, and then only if one or any of the other listing requirements it could be delisted from the NASDAQ Capital Market.more registered broker-dealer makers comply with quotation requirements. In that case, tradingaddition, delisting of our common stock most likely will be conducted in the over-the-counter market (“OTC”) Bulletin Board market, an electronic bulletin board established for unlisted securities. Such delisting could alsodepress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to obtainraise capital on terms acceptable to us, or at all.
We could fail in future financing
for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.WE COULD FAIL IN FINANCING EFFORTS OR BE DELISTED FROMefforts or be delisted from NASDAQ IF WE FAIL TO RECEIVE SHAREHOLDER APPROVAL WHEN NEEDED. if we fail to receive stockholder approval when needed.
We are required under the NASDAQ
Marketplace rules to obtain
shareholderstockholder approval for any issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that is not deemed to be a “public offering” by NASDAQ.
The maximum amount of securities to be offered in this offering exceeds the 20% standard and requires stockholder approval. We have obtained such approval at our August 31, 2010 annual stockholders meeting, but we must complete the offering by November 2010 to use such approval. In addition, fundingFunding of our operations in the future may require issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding, but we might not be successful in obtaining the required
shareholderstockholder approval for such an issuance. If we are unable to obtain financing due to
shareholderstockholder approval difficulties, such failure may have a material adverse effect on our ability to continue operations.
16
Our shares of common stock are thinly traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise desire to liquidate their shares.
Our common stock has been “thinly-traded” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.
Dividends on our common stock are not likely.
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DIVIDENDS ON OUR COMMON STOCK ARE NOT LIKELY. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Investors must look solely to appreciation in the market price of the shares of our common stock to obtain a return on their investment.
BECAUSE OF THE RIGHTS AGREEMENT AND “ANTI-TAKEOVER” PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS, A THIRD PARTY MAY BE DISCOURAGED FROM MAKING A TAKEOVER OFFER THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS. In 2001,
Because of the Rights Agreement and “Anti-Takeover” provisions in our Certificate of Incorporation and Bylaws, a third party may be discouraged from making a takeover offer that could be beneficial to our stockholders.
Effective as of January 24, 2013, we adopted a
new shareholder rights plan. The effect of this rights plan and of certain provisions of our Certificate of Incorporation, By-Laws, and the anti-takeover provisions of the Delaware General Corporation Law, could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, even if the acquisition or the replacements would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.
INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR STOCKHOLDERS’ ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As of June 30, 2010, our Officers and Directors and their affiliates owned approximately 14.9% of the outstanding shares of our common stock. As a result, our Officers and Directors are able to exert considerable influence over the outcome of any matters submitted to a vote of the holders of our common stock, including the election of our Board of Directors. The voting power of these stockholders could prevent or frustrate attempts to effect a transaction that is in the best interests of the other stockholders and could also discourage others from seeking to purchase our common stock, which might depress the price of our common stock.
RISKS RELATING TO THIS OFFERING
WE WILL HAVE IMMEDIATE AND BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS FROM THIS OFFERING. There is no minimum offering amount required as a condition to closing this offering and therefore net proceeds from this offering will be immediately available to us to use at our discretion. We intend to use the net proceeds to further develop our product and for working capital and general corporate purposes. Our judgment may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic, financial, or other information upon which we base our decisions.
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING AND MAY EXPERIENCE ADDITIONAL DILUTION IN THE FUTURE. You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to [*] shares of convertible preferred stock and accompanying warrants to purchase an additional [*] shares of our common stock, and after deducting placement agent commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $[*] per share, or [*]%, at the public offering price, assuming no exercise of the warrants. In addition, in the past, we issued options and warrants to acquire shares of common stock. To the extent these options are ultimately exercised, you will sustain future dilution. We may also acquire or license other technologies or finance strategic alliances by issuing equity, which may result in additional dilution to our stockholders.
THERE IS NO PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED STOCK OR THE WARRANTS BEING OFFERED IN THIS OFFERING. There is no established public trading market for the convertible preferred stock or the warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply for listing the convertible preferred stock or the warrants on any securities exchange. Without an active market, the liquidity of the convertible preferred stock and the warrants will be limited.
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THE OFFERING MAY NOT BE FULLY SUBSCRIBED AND, EVEN IF THE OFFERING IS FULLY SUBSCRIBED, WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY NOT BE ABLE TO CONTINUE TO OPERATE OUR BUSINESS PURSUANT TO OUR BUSINESS PLAN OR WE MAY HAVE TO DISCONTINUE OUROPERATIONS ENTIRELY. The placement agent in this offering will offer the securities on a “best-efforts” basis, meaning that we may raise substantially less than the total maximum offering amounts. No refund will be made available to investors if less than all of the securities are sold. Based on our proposed use of proceeds, we will likely need significant additional financing, which we may seek to raise through, among other things, public and private equity offerings and debt financing. Any equity financing will be dilutive to existing stockholders, and any debt financings will likely involve covenants restricting our business activities. Additional financing may not be available on acceptable terms, or at all.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus
any prospectus supplementcontains forward-looking statements. Such statements include statements regarding our expectations, hopes, beliefs or intentions regarding the future, including but not limited to statements regarding our market, strategy, competition, development plans (including acquisitions and
the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933expansion), financing, revenues, operations, and
Section 21E of the Securities Exchange Act of 1934. Forward looking statements reflect our current viewscompliance with
respect to future events and future forward performance, including in particular statements about our plans, objectives, expectations and prospects. You can identify these statements by forward-looking words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “forecasts,” “projects,” “could,” “may,” “will,” “would,” “hopes,” and similar expressions. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, thoseapplicable laws. Forward-looking statements involve
certain risks and uncertainties, and
risks, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factorsactual results may differ materially from those discussed in any such statement. Factors that could cause
our actual results to differ materially from
the results anticipated by thesuch forward-looking statements
are contained herein under “Risk Factors” and elsewhereinclude the risks described in greater detail in the following paragraphs. All forward-looking statements in this
prospectus. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statements. All written or oral forward-looking statements attributable to usdocument are
expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak onlymade as of the date
hereof, based on
which they are madeinformation available to us as of the date hereof, and we
do not assume
anyno obligation to update
or revise any forward-looking
statements that we make, whether as a resultstatement. Market data used throughout this prospectus is based on published third party reports or the good faith estimates of
new information, future events or otherwise.We have identified somemanagement, which estimates are based upon their review of the important factors that could cause future events to differ from our current expectations hereininternal surveys, independent industry publications and in our most recent Annual Report on Form 10-K filed on March 30, 2010 including, without limitation, under the captions “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which youother publicly available information.
You should review
carefully. Although we have attempted to list comprehensively these important factors, we also wish to caution investors that other factors may prove to be important incarefully the
future in affecting our operating results. New factors emerge from time to time, and it is not possiblesection entitled “Risk Factors” beginning on page 3 of this prospectus for
us to predict alla discussion of these
factors, nor can we assess the impact each factor or combinationand other risks that relate to our business and investing in shares of
factors may have on our
business.18
common stock.
The net proceeds to us from any disposition of the shares covered hereby would be received by the selling stockholders. We will not receive any of the proceeds from any such sale of the securitiescommon stock offered underby this prospectus, after deductingprospectus.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of December 9, 2013, the estimated placement agent’s fees and our estimated offering expenses, will be approximately $[*] million if we sell the maximum amountnumber of convertible preferred stock and warrants offered hereby. Because there is no minimum offering amount required as a condition to closing this offering, we may sell fewer than allstockholders of record of the securities offered hereby, which may significantly reduce the amount of proceeds received by us.We currently intend to use the majority of the net proceeds to fund our operations and to continue the development of D-tagatose for diabetes and triglycerides, as well as for general corporate purposes. At this time we cannot estimate the allocation of the net proceeds of this offering among these anticipated uses. The amounts and timing of the expenditures may vary significantly depending on numerous factors, including the net proceeds to us from the sales of the securities offered under this prospectus and our need for and ability to raise additional capital to advance D-tagatose toward commercialization. We reserve the right to change the use of proceeds as a result of certain contingencies, such as those discussed above and any future opportunities to evaluate, negotiate and complete one or more strategic or partnering transactions. Accordingly, our management will have broad discretion in the application of the net proceeds of this offering. Pending use of the net proceeds, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.
MARKET PRICE OF COMMON STOCK
OurCompany’s common stock trades under the symbol “SPEX”was approximately 687 which does not include stockholders whose shares are held in street or nominee names. The Company’s common stock is traded on the NASDAQ Capital Market. Market under the symbol SPEX. No dividends were paid in 2012 or 2011.
The following table sets forth the high and low closing prices for our common stock, as reported by the NASDAQ Capital Market, for the periods indicated.Period | | High | | Low | |
| | | | | |
2010 | | | | | |
First Quarter | | $ | 1.96 | | $ | 1.10 | |
Second Quarter | | $ | 1.47 | | $ | 1.00 | |
Third Quarter (through September 21, 2010) | | $ | 1.94 | | $ | 1.16 | |
| | | | | |
2009 | | | | | |
First Quarter | | $ | 0.90 | | $ | 0.25 | |
Second Quarter | | $ | 2.67 | | $ | 0.70 | |
Third Quarter | | $ | 2.61 | | $ | 1.10 | |
Fourth Quarter | | $ | 4.15 | | $ | 1.10 | |
| | | | | |
2008 | | | | | |
First Quarter | | $ | 1.30 | | $ | 1.00 | |
Second Quarter | | $ | 1.24 | | $ | 0.65 | |
Third Quarter | | $ | 0.82 | | $ | 0.49 | |
Fourth Quarter | | $ | 0.75 | | $ | 0.20 | |
indicated (all adjusted for the September 2012 reverse stock split).
| Period | | High | | | Low | |
| 2013 | | | | | | |
| First Quarter | | $ | 14.99 | | | $ | 5.51 | |
| Second Quarter | | $ | 11.05 | | | $ | 4.07 | |
| Third Quarter | | $ | 27.86 | | | $ | 4.54 | |
| 2012 | | | | | | |
| First Quarter | | $ | 35.40 | | | $ | 15.60 | |
| Second Quarter | | $ | 22.40 | | | $ | 10.00 | |
| Third Quarter | | $ | 11.98 | | | $ | 7.22 | |
| Fourth Quarter | | $ | 11.76 | | | $ | 5.85 | |
| | | | | | | | | |
| 2011 | | | | | | | | |
| First Quarter | | $ | 218.00 | | | $ | 70.00 | |
| Second Quarter | | $ | 117.20 | | | $ | 45.60 | |
| Third Quarter | | $ | 69.60 | | | $ | 24.60 | |
| Fourth Quarter | | $ | 68.40 | | | $ | 22.60 | |
On September 21, 2010,December 6, 2013, the closing price of our common stock, as reported by the NASDAQ Capital Market, was $1.54.$8.74. As of September 21, 2010,December 9, 2013, we had approximately 800687 holders of record of our common stock.stock, excluding stockholders whose shares are held in street or nominee names. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
Reverse Stock Splits
DIVIDEND POLICYWe have never declared or paid any cash dividends on our commonIn September 2012 and in May 2011, the Company effected reverse stock and do not anticipate declaring or paying any cash dividends on oursplits of its common stock in response to NASDAQ deficiency notices concerning the foreseeable future. We expect to retain all available funds and any future earnings to support operations and fundbid price of the development and growthCompany’s common stock.
On September 21, 2012, the Company effected a reverse stock split of our business. Our boardthe Company’s outstanding common stock at an exchange ratio of directors will determine whether we pay and1-for-20. As a result of the amount of future dividends (including cash dividends), if any.19
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2010:
· on an actual basis;
·on a pro forma basis to give effect to our sale of [*]reverse stock split, every 20 shares of convertible preferredthe Company’s issued and outstanding common stock in this offering, or [*]were combined into one share of common stock. No fractional shares of common stock issuable upon conversionwere issued as a result of the convertible preferredreverse stock lesssplit. Instead, fractional shares that would otherwise result from the placement agent’s fees and our estimated offering expenses, and assumingreverse stock split were purchased by the convertible preferredCompany based on the closing price of the stock does not carry an embedded conversion feature.on September 21, 2012.
You should read this table in conjunction with
On May 6, 2011, the sectionCompany effected a one-for-ten reverse split of this prospectus entitled “Management’s Discussion and Analysisits common stock. The Company implemented the reverse stock split under the authority granted to the Board of Financial Condition and ResultsDirectors by the Company’s stockholders at the annual meeting of Operations” and with our consolidated financial statements andstockholders held on November 17, 2009. The reverse stock split reduced the notes thereto and our unaudited interim condensed consolidated financial statements and the notes thereto, allnumber of which is included elsewhere in this prospectus.20
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| | As of June 30, 2010
(unaudited) | |
| | Actual | | Pro Forma | |
| | | | | |
Preferred stock, $0.01 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2010 | | $ | — | | [*] | |
| | | | | |
Common stock, $0.005 par value; 50,000,000 shares authorized; 17,231,086 shares issued and 17,150,648 outstanding at June 30, 2010; [*] shares issued and outstanding pro forma; | | 86,155 | | [*] | |
| | | | | |
Paid-in capital in excess of par value | | 33,634,927 | | [*] | |
| | | | | |
Treasury stock, 80,438 shares at cost at June 30, 2010 | | (464,786 | ) | [*] | |
| | | | | |
Accumulated deficit | | (30,654,490 | ) | [*] | |
| | | | | |
Total stockholders’ equity | | $ | 2,601,806 | | $ | [*] | |
| | | | | | | |
The outstanding shares information in the table above excludes:
·63,088 shares of common stock issuablefrom 25,624,872 shares to 2,562,488 shares.
Following both reverse stock splits, the Company’s common stock price increased and the Company regained compliance with the NASDAQ minimum bid price rule.
Equity Compensation Plan Information
The following table provides information about the Company’s common stock that may be issued upon the exercise of stock options, issuedwarrants and rights under our equity incentive plan and outstanding as of June 30, 2010, at a weighted average exercise price of $1.61 per share;·661,136 shares of common stock available for future issuance under our equity incentive plan as of June 30, 2010;
·1,104,348 shares of common stock issuable upon the exercise of outstanding warrants issued to the purchasers in the common stock and warrant financing we completed in November, 2009, at an exercise price of $3.25 per share;
·82,826 shares of common stock issuable upon the exercise of outstanding warrants issued to the placement agent in connection with the common stock and warrant financing we completed in November, 2009, at an exercise price of $2.875 per share;
·[*] shares of our common stock issuable upon the exercise of warrants to be issued to the purchasers in this offering, at an exercise price of $[*] per share; and
·[*] shares of our common stock issuable upon the exercise of warrants to be issued to the placement agent in connection with this offering, at an exercise price of $[*] per share.
DILUTION
If you invest in the securities being offered by this prospectus, you will suffer immediate and substantial dilution in the net tangible book value per share of common stock. Our net tangible book value as of June 30, 2010 was approximately $2,596,476, or approximately $0.15 per share of common stock. Net tangible book value per share is determined by dividing our net tangible book value, which consists of our total tangible assets less total liabilities, by the number of shares of our common stock outstanding on that date.
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Dilution in net tangible book value per share represents the difference between the price per share paid by purchasers in this offering and the net tangible book value per share of our common stock immediately after this offering. Without taking into account any other changes in the net tangible book value after June 30, 2010, other than to give effect to our receiptall of the estimated proceeds from the sale of [*] shares of convertible preferred stock and accompanying warrants to purchase [*] shares of our common stock in this offering at an offering price of $1,000, or [*] shares of common stock issuable upon conversion of the convertible preferred stock at an effective acquisition price of $[*], per share of common stock, less the estimated placement agent’s fees and our estimated offering expenses, but before deducting our dividend and related payment obligations, our net tangible book value as of June 30, 2010, after giving effect to the items above, would have been approximately $[*] million, or approximately $[*] per share of common stock. This represents an immediate increase of $[*] in net tangible book value per share to ourCompany’s existing stockholders and an immediate dilution of $[*] per share to purchasers of securities in this offering. The following table illustrates this per share dilution:
Assumed public offering price per share (unaudited) | | | | $ | [*] | |
Net tangible book value per share as of June 30, 2010 (unaudited) | | $ | 0.15 | | | |
Increase in net tangible book value per share attributable to this offering (unaudited) | | $ | [*] | | | |
Pro forma net tangible book value per share as of June 30, 2010, (unaudited) | | | | $ | [*] | |
Dilution in pro forma net tangible book value per share to new Investors in this offering (unaudited) | | | | $ | [*] | |
The above table is based on 17,150,648 shares of our common stock outstanding as of June 30, 2010 (as adjusted [*] shares of common stock to be issued in this offering), and excludes:
·63,088 shares of common stock issuable upon the exercise of stock options issued under our equity incentive plan and outstanding as of June 30, 2010, at a weighted average exercise price of $1.61 per share;
·661,136 shares of common stock available for future issuance under our equity incentive plan as of June 30, 2010;
·1,104,348 shares of common stock issuable upon the exercise of outstanding warrants issued to the purchasers in the common stock and warrant financing we completed in November, 2009, at an exercise price of $3.25 per share;
·82,826 shares of common stock issuable upon the exercise of outstanding warrants issued to the placement agent in connection with the common stock and warrant financing we completed in November, 2009, at an exercise price of $2.875 per share;
·[*] shares of our common stock issuable upon the exercise of warrants to be issued to the purchasers in this offering, at an exercise price of $[*] per share; and
·[*] shares of our common stock issuable upon the exercise of warrants to be issued to the placement agent in connection with this offering, at an exercise price of $[*] per share.
To the extent that any options or warrants are exercised, new options or other equity awards are issued under our equity incentive plan, or we otherwise issue additional shares of common stock in the future, there will be further dilution to new investors.
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Summary Financial Data
The following tables set forth our summary consolidated statement of operations data for the fiscal years ended December 31, 2009 and 2008, and for the six-month periods ended June 30, 2010 and 2009, and our summary consolidated balance sheets as of June 30, 2010 and December 31, 2009. Our statement of operations data for the fiscal years ended December 31, 2009 and 2008 and our balance sheetcompensation plans as of December 31, 2009 were derived from our audited consolidated financial statements. Our statement of operations data for the six months ended June 30, 2010 and 2009 and our balance sheet as of June 30, 2010 were derived from unaudited consolidated financial statements, all of which are included elsewhere in this prospectus.
The results indicated below and elsewhere in this prospectus are not necessarily indicative of our future performance. You should read this information together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and related notes included elsewhere in this prospectus.
232012.
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by security holders | | | 7,163 | 1 | | $ | 22.34 | | | | 2,750 | |
| Equity compensation plans not approved by securities holders | | | 1,399 | 2 | | $ | 97.27 | | | | N/A | |
| Total | | | 8,562 | | | | | | | | 2,750 | |
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Summary Consolidated Statements of Operations Data
| | | | | | (Unaudited) | |
| | Year Ended December 31, | | Six Months Ended June 30, | |
| | 2009 | | 2008 | | 2010 | | 2009 | |
Revenue | | $ | 1,359,110 | | $ | 1,025,961 | | $ | 659,430 | | $ | 692,911 | |
Operating expense | | | | | | | | | |
Direct costs | | 449,293 | | 397,645 | | 231,899 | | 239,665 | |
Research and development | | 6,830,957 | | 4,004,565 | | 2,856,484 | | 2,695,351 | |
Selling, general and administrative | | 3,265,137 | | 3,135,310 | | 2,280,750 | | 1,408,366 | |
Loss from operations | | (9,186,277 | ) | (6,511,559 | ) | (4,709,703 | ) | (3,650,471 | ) |
Interest income and other expense | | 37,646 | | 340,229 | | 4,216 | | 29,847 | |
Income tax benefit | | — | | 552,803 | | — | | — | |
Loss from continuing operations | | (9,148,631 | ) | (5,618,527 | ) | (4,705,487 | ) | (3,620,624 | ) |
Income from discontinued operations | | — | | 1,482,993 | | — | | — | |
Net loss | | $ | (9,148,631 | ) | $ | (4,135,534 | ) | $ | (4,705,487 | ) | $ | (3,620,624 | ) |
| | | | | | | | | |
Net loss per share, basic and diluted | | | | | | | | | |
Continuing operations | | $ | (0.62 | ) | $ | (0.39 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
Discontinued operations | | $ | — | | $ | 0.10 | | $ | — | | $ | — | |
Net loss per share | | $ | (0.62 | ) | $ | (0.29 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
Weighted average shares outstanding, basic and diluted | | 14,713,473 | | 14,342,953 | | 17,150,648 | | 14,357,162 | |
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| 1. | Consists of options to acquire 7,163 shares of our common stock issued to our key employees and directors. |
| 2. | Consists of warrants to purchase 1,399 shares of our common stock issued to our placement agent with respect to the January 2011, October 2011 and February 2012 offerings. |
| 3. | Consists of shares of common stock available for future issuance under our equity incentive plan. |
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Summary Consolidated Balance Sheets Data
| | June 30, 2010 | | December 31, | |
| | (Unaudited) | | 2009 | |
| | | | | |
Cash and cash equivalents | | $ | 4,585,803 | | $ | 9,026,002 | |
Total assets | | $ | 5,351,851 | | $ | 10,155,308 | |
Total liabilities | | $ | 2,750,045 | | $ | 2,883,432 | |
Accumulated deficit | | $ | 30,654,490 | | $ | 25,949,003 | |
Total stockholders’ equity | | $ | 2,601,806 | | $ | 7,271,876 | |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results The following discussion and analysis of Operations —Second Quarter 2010 Comparedour results of operations and financial condition should be read in conjunction with Second Quarter 2009Revenue(i) our unaudited interim condensed consolidated financial statements and Direct Costs
Revenue and direct costsrelated notes for the three and sixnine months ended JuneSeptember 30, 2010 were consistent between2013 and 2012 (ii) audited financial statements for the fiscal years ended December 31, 2012 and 2011 and the notes thereto and (iii) the section entitled “Business”, included elsewhere in this prospectus. Our condensed consolidated financial statements are directlyprepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Overview
We are an intellectual property company that owns patented and unpatented intellectual property.
Through our acquisition of seven patents from Rockstar and acquisition of patents issued to Harris Corporation and CompuFill LLC in connection with our acquisition of North South, we have expanded our activities in wireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality, and cellular.
Using our patented technologies we employ strategies seeking to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We intend to continue to seek to obtain patents from inventors and patent owners to monetize patent portfolios.
Results of Operations
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
During the three months ended September 30, 2013, we incurred a loss from operations of $9,316,768, an increase of $8,683,123 or 1,370%, as compared to $633,645 for the same period in 2012 and net loss from continuing operations of $9,279,983, an increase of $8,705,581 or 1,516%, as compared to $574,402 for the same period in 2012 as a result of stock based compensation expenses (increase of $7,393,855) as a result of the options issued under the 2013 plan, increased professional fees and acquisition related costs incurred in connection with the acquisition of North South (increase of $479,933) as well as an increase in the fair value of the warrant liability and amortization expenses related to the patents acquired by the Company.
During the three months ended September 30, 2013, we generated $1,837 of revenue from certain licensing and product sales. In the three months ended September 30, 2012, we generated $16,710 in revenue.
During the three months ended September 30, 2013, we incurred $9,318,605 in operating expenses. These costs relate to the amortization of the patents as well as research and development costs, stock based compensation expenses, professional fees and other selling, general and administrative expenses including acquisition costs related to the acquisition of North South. The increase in operating expenses of $8,668,250 from 2012 or 1,333% for the same period in 2012 when we had $650,355 in operating expenses consists of increases in research and development costs, professional fees and other selling, general and administrative expenses.
During the three months ended September 30, 2013, we recorded interest income of $202 and had a fair value adjustment of $36,583 on the warrant liability, compared to $830 and $58,413 for the same period in 2012. Fair value adjustments for warrant liabilities is the result of the change in the carrying amount of the warrant liability caused by changes in the fair value as determined using a Black-Scholes option valuation method. The change from the beginning of the year was the result of an increase in the Company’s Health Sciences segment.stock price during the three months ended September 30, 2013. The decrease in the Company’s stock price led to the result in the same three month period ended September 30, 2012.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
During the nine months ended September 30, 2013, we incurred a loss from operations of $11,173,934, an increase of $8,807,454 or 372%, as compared to $2,366,480 for the same period in 2012 and net loss from continuing operations of $13,783,660, an increase of $12,160,559 or 749%, as compared to $1,623,101 for the same period in 2012 a result of stock based compensation expenses (increase of $7,362,135), increased professional fees incurred in connection with the acquisition of North South (increase of $680,638) and the result of the fair value adjustments on the warrants due to price fluctuations of our common stock.
During the nine months ended September 30, 2013, we generated $7,811 of revenue from certain licensing and product sales. In the nine months ended September 30, 2012, we generated $16,710 in revenue.
During the nine months ended September 30, 2013, we incurred $11,181,745 in operating expenses. These costs relate to the amortization of the patents as well as research and development costs, stock based compensation expenses, professional fees and other selling, general and administrative expenses including acquisition costs related to the merger with North South. The increase in operating expenses of $8,798,555 from 2012 or 369% for the same period in 2012 when we had $2,383,190 in operating expenses consists of increases in research and development costs, professional fees and other selling, general and administrative expenses.
During the nine months ended September 30, 2013, we recorded interest income of $739 and had a fair value adjustment of ($2,610,465) on the warrant liability, compared to $2,774 and $740,605 for the same period in 2012. Fair value adjustments for warrant liabilities is the result of the change in the carrying amount of the warrant liability caused by changes in the fair value as determined using a Black-Scholes option valuation method. The change from the beginning of the year was the result of an increase in the Company’s stock price during the nine months ended September 30, 2013. The decrease in the Company’s stock price led to the opposite result in the same nine month period ended September 30, 2012.
Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended December 31, 2011
Revenue
Revenue in 2012 is primarily related to royalty fees from an oil detection agreement. No substantial revenue is expected from the Biospherics segment until the Company is successful in selling or licensing its technology.
Research and development (“R&D”) expenditures relate solely to the Biospherics segment and consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, and other expenses related to our efforts to develop D-tagatoseSPX106T for future commercialization.use in lowering triglyceride and cholesterol levels. We expense our research and development costs as they are incurred.The clinical trials in the use of D-tagatose for the treatment of Type 2 diabetes have been the primary focus of the Biospherics segment. The R&D expenditures for 2010 and 2009 consisted of both the Phase 3 clinical trial and a related Phase 2 Dose Range study. The increase inCompany does not intend to incur any material R&D costs for its Biospherics unit in 2013 or thereafter and currently is seeking buyers to acquire the three months period ended June 30, 2010 over the same periodBiospherics inventory and business in 2009 of $411,000 (36%) are relatedwhole or in part or to concluding procedures for the Phase 3 trial.
joint venture or license such business. The Dose Range trialCompany believes it is unlikely that a buyer may be identified and the efficacy portion of the Phase 3 trial will likely be completed in the second half of 2010. As we have determined that it would take several additional years of clinical trials and could cost as much as several hundred million dollars to seek and obtain FDA approval for D-tagatose as a diabetes drug,result may liquidate or dispose of its inventory of Tagatose for which material storage fees are being incurred. The Company may be required to incur costs for disposal and cessation of this segment.
The decrease in R & D costs in 2012 of $919,000 from 2011 reflects the safety portioncompletion of the Phase 3 trial has been terminated. WeSPX106T preclinical studies. No further studies are actively seeking a pharma partner to continue the development of D-tagatose as a treatment for Type 2 diabetes.presently planned.
Selling, General and Administrative
Our selling, general and administrative (S,G&A) expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and other corporate expenses, including facilities-related expenses. S,G&A expenses for the three and six months ended June 30, 2010 increased $541,000 (83%) and $832,000 (59%) over those of the prior year. The increase in S,G&A costs between 2010 and 2009 is primarily related to the expansion of the Company’s commercialization efforts of D-tagatose as a treatment for Type 2 diabetes and high-triglycerides.
Interest
Interest revenue in 2010 and 2009 was primarily derived from interest earned on the net proceeds of the sale of the InfoSpherix subsidiary in August 2007 and from the net proceeds of our November 2009 equity offering. Interest income for the six months ended June 30, 2010 decreased by $26,000 with the decrease in funds available for investing and the lower rates of return available in the market compared to the same period in 2009.
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Results of Operations—2009 Compared with 2008
Revenue and Direct Costs
Revenue and direct contract costs are primarily related to our Health Sciences business, which started in July 2007 and has experienced a steady growth in business with new clients representing 52% of the growth between 2009 and 2008. Revenue increased $333,000 (32%) between years and direct costs increased $51,000 (12%). The consulting business generally provides services on either a fixed-price basis or a “time and expenses” basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. Engagement agreements typically provide for monthly billing and payment within thirty (30) days of receipt, and permit clients to terminate engagements at any time.
No substantial revenue is expected from the Biospherics segment until we are successful in selling or licensing its technology.
Research and Development
Research and development expenditures relate solely to the Biospherics segment and consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, and other expenses related to our efforts to commercialize D-tagatose. We expense our research and development costs as they are incurred.
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The clinical trials in the use of D-tagatose for the treatment of Type 2 diabetes have been the primary focus of the Biospherics segment. The R&D expenditures for 2009 and 2008 consisted of both the Phase 3 clinical trial and a related Phase 2 Dose Range study. The $2.8 million (71%) increase between years is related to the expansion of the Phase 3 trial to India and the related increase in the number of subjects participating in the trials.
In June 2009, we received the first batch of FDA current Good Manufacturing Practice (“cGMP”) D-tagatose, U.S. Pharmacopeia (“USP”) grade. This and subsequent batches are being used in the ongoing clinical trials.
In December 2009, we entered into a Manufacturing Support and Supply Agreement with Inalco S.p.A of Italy. Under the agreement we committed to the purchase of 25 metric tons of D-tagatose. The entire purchase commitment of $1,100,000 was realized as an expense in 2009. Of this amount $500,000 was paid in 2009, with the remaining balance payable in 2010. An additional $300,000 of D-tagatose, separate from the above Manufacturing Support and Supply Agreement, was also purchased in 2009 from Inalco.
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and other corporate expenses, including facilities-related expenses. S,G&A expenses were consistent between years. Severance/retention expense for the continuing staff is being recognized evenly over the required performance period from the date of each agreement, with $40,000 recognized in 2012 and the remaining$475,000 to be recognized during the first half of 2013. No severance expenses were incurred in 2011.
Other Income from Change in Fair Value of Warrants
Other Income from change in fair value of warrants is the result of decreases in the carrying amount of the warrant liability caused by changes in the fair value as determined using a Black-Scholes option valuation method. The $129,000 (4%)difference between the other income from change in fair value of warrants realized in 2011 compared to 2012 is the result of a more pronounced change in the Company’s stock price for the year ending 2011.
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 a 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. The increase in selling, general and administrative costs between 2009 and 2008years is primarilydirectly related to the expansion of our commercialization efforts of D-tagatose as a treatment for Type 2 diabetes. These plans includechange in the formation of regional Advisory Boards, with the first one held in October 2009.Company’s stock price between years.
Interest income in 20092012 and 20082011 was primarily derived from interest earned on the net proceeds of our equity offerings.
Other Income
In October 2010, the Company was awarded two one-time grants from the U.S. Government under the Patient Protection and Affordable Care Act. The awards were for 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 grants were recognized in 2012.
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.
Income Tax Expense
The 2011 income tax expense was directly related to the above mentioned U.S. government grants in the Other Income discussion. No tax expense was incurred in 2012.
Discontinued Operations
The operations of Spherix Consulting, Inc. have been retroactively adjusted as discontinued operations as a result of the December 3, 2012 sale noted above. 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 | ) |
Sales Backlog
None.
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:
• 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, license 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 working capital was $1.1 million, $4.0 million and $4.6 million at September 30, 2013, December 31, 2012, and December 31, 2011 respectively and, cash on hand was $2.5 million $4.5 million and $4.9 million, respectively. Upon closing of the Merger on September 10, 2013, the North South cash balance (approximately $2.7 million) became available for the operations of the Company. Management believes that this cash on hand will be sufficient to sustain operations for the next twelve months, including payment of severances aggregating $475,000 which have been paid in the first half of 2013.
The Company used the proceeds from the sale of the InfoSpherix subsidiary$500,000 promissory note to North South to fund certain expenses incurred in August 2007 and from the net proceeds of our November 2009 equity offering. Interest income between years decreased $310,000connection with the decreaseNorth South Merger.
The Company in
funds availableNovember 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
investing and the lower rates of return available in the market.Income Tax
The 2008 income tax expense is relatedgross proceeds to the $2 million gain on sale in November 2008.
Discontinued Operations
On August 15, 2007, we completedCompany 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 Preferred Stock was $6.25 for $925,000 of such investment. The proceeds of the sale of InfoSpherixthe common stock and Series F Convertible Preferred Stock will be used to further the operations of the Company.
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 $17 million ($15 million at closing and $2 million following a 15-month escrow period), pursuantpatent infringement or case the Company to the Stock Purchase Agreement dated June 25, 2007. The $2 million escrow balance was recordedincur additional costs as a gainstrategy. If such efforts are successful, they may have an impact on salethe value of the discontinued segment when it was realizedpatents 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 November 2008. The sale was conducted to allow us to focus substantially allwhole or in part, or the costs of our effortsthe 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 Biospherics.Theits 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 discontinued InfoSpherix segment, includingpatents. The Company’s failure to monetize its patent assets or the costsoccurrence 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 sellexecute its business plan, it could become necessary for the segment, are as follows: | | 2008 | |
Interest income | | $ | 70,000 | |
Gain on sale of segment | | 2,000,000 | |
Income from discontinued operations before taxes | | $ | 2,070,000 | |
Sales Backlog
Our backlog as of December 31, 2009 and 2008 (consisting solely of backlog from the Health Sciences business) was approximately $770,000 and $1.2 million, respectively. We bill for our consulting services primarily on a time and expense basis and these amounts represent estimated contract values. Further, our consulting
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contracts are generally terminableCompany to reduce expenses, curtail its operation or subject to postponementexplore various alternative business opportunities or delay at any time by clients. As a result, backlog at any particular time is not a reliable indicator of revenues for any future periods.
possibly suspend or discontinue its business activities.
Critical Accounting Estimates
The preparation ofaccompanying 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 thecertain reported amounts of assets and liabilities and the disclosuredisclosures of the contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses forduring the period reported. Estimates are based upon historical experienceperiod. The Company’s significant estimates and various other assumptions that are believed to be reasonable underinclude the circumstances. These estimates are evaluated periodicallyrecoverability and formuseful lives of long-lived assets, stock-based compensation, valuation of warrants, the basis for making judgments regarding the carrying valuesvaluation of assets acquired and liabilitiescommon and preferred stock issued in the acquisition of North South and the reported amount of revenue and expenses. Actual results may differ substantially from these estimates.Ourvaluation allowance related to the Company’s deferred tax assets.
Spherix’s critical accounting policies are those
we believeit believes are the most important in determining
ourits financial condition and results, and require significant subjective judgment by management as a result of inherent uncertainties. A summary of
ourthe Company’s significant accounting policies is set out in the notes to the consolidated financial statements. Such policies are discussed below.
Accounting for Taxes and Valuation Allowances
We currently have significant deferred tax assets, resulting from net operating loss carry forwards. These deferred tax assets may reduce taxable income in future periods. Based on ourthe Company’s losses and ourits accumulated deficit, we havethe Company has provided a full valuation allowance against the net deferred tax asset. Cumulative losses weigh heavily in the overall assessment of valuation allowances.
We expect to continue to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained, or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable.
Accounting for warrants
The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assessed the classification of its common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability classification. The warrants are reported on the consolidated balance sheet as a liability at fair value using the Black-Scholes valuation method. Changes in the estimated fair value of the warrants result in the recognition of other income or expense.
Stock-based Compensation
We account 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.
Our model includes a zero dividend yield assumption, as we have not historically paid nor do we anticipate paying dividends on our common stock. Our 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. Our 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.
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.
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.
New Accounting Pronouncements
In June 2009, the
The Financial Accounting Standards Board (“FASB”) establishedhas 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 Accounting Standards Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. This guidanceForce). 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 endingwithin those years, beginning after SeptemberDecember 15, 2009.2013.
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.
BUSINESS
General
We
adopted this guidanceare an intellectual property company that owns patented and unpatented intellectual property. We were formed in 1967 as a scientific research company and for
the period ended September 30, 2009, with no effect onmuch of our
consolidated resultshistory pursued drug development including through Phase III clinical studies which were discontinued in 2012. Through our acquisition of
operationsseven patents from Rockstar and
financial condition for the three and nine months ended September 30, 2009.In October 2009, the FASBacquisition of several hundred patents issued ASC Update No. 2009-13, which amends the Revenue Recognition topic of the Codification. This update provides amendments to the criteria in Subtopic 605-25 of the Codification for separating consideration in multiple-deliverable arrangements. AsHarris Corporation as a result of those amendments, multiple-deliverable arrangements will be separatedour acquisition of North South, we have expanded our activities in more circumstances than underwireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality, and cellular.
Our activities generally include the acquisition and development of patents through internal or external research and development. In addition, we seek to acquire existing U.S. GAAP. The amendments establish a selling price hierarchy for determiningrights to intellectual property through the selling priceacquisition of a deliverablealready issued patents and will replace the term fair valuepending patent applications, both in the revenue allocation guidanceUnited States and abroad. We may alone, or in conjunction with selling price others, develop products and processes associated with our intellectual property and license our intellectual property to clarify thatothers seeking to develop products or processes or whose products or processes infringe our intellectual property rights through legal processes. Using our patented technologies, we employ strategies seeking to permit us to derive value from licensing, commercialization, settlement and litigation from our patents. We will continue to seek to obtain patents from inventors and patent owners to monetize patent portfolios.
On April 2, 2013, we entered into the allocationMerger Agreement with Nuta, our wholly-owned subsidiary, North South and the stockholders of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminateNorth South. On August 30, 2013, we entered into an amendment to the residual method of allocation and require that arrangement consideration be allocated atMerger Agreement to amend, among other things, the inceptionterms of the arrangement to all deliverables usingmerger consideration. On September 10, 2013, we consummated the relative selling price methodmerger and will require that a vendor determine its best estimateNorth South merged into Nuta, with Nuta continuing as the surviving corporation and owner of selling price in a manner thatNorth South’s intellectual property. In accordance with the terms of the Merger Agreement, we issued 1,203,153 shares of our common stock and 1,379,685 shares of our Series D Convertible Preferred Stock, which is consistent with that used to determine the price to sell the deliverableconvertible into shares of common stock on a stand-alone basis. These amendments will be effective prospectively for revenue arrangements entered into one-for-ten basis, to the former stockholders of North South.
Through our acquisition of North South, we own a patent portfolio consisting of 222 U.S. patents in the fields of wireless communications, satellite, solar and radio frequency, as well as 2 U.S. patents in pharmaceutical technology. Prior to the Merger, North South acquired and developed patents through internal and/or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our results of operations and financial position.29
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Liquidity and Capital Resources — June 30, 2010
As of June 30, 2010, the Company had cash and short-term investments of approximately $4.7 million and expects to expend all of this amount within the next six months. Our working capital was $3.0 million as of June 30, 2010, compared to working capital of $7.7 million as of December 31, 2009. We have incurred substantial development costs in our efforts to explore whether D-tagatose is an effective treatment for Type 2 diabetes. We have financed our development activities through the remaining proceeds received from the 2007 sale of InfoSpherix and the November 2009 stock placement. Over the next 12 months, the Company expects that it will need to expend between $7 million and $13 million to support its development operations.
The Company recently announced that it is actively seeking a pharma partner to continue the diabetes development and that it will also explore D-tagatose as a potential treatment for high triglycerides. Accordingly, the Company has terminated the safety portion of its Phase 3 diabetes clinical trial and expects to shift itsexternal research and development focusand acquired issued U.S. and foreign patents and pending patent applications. We license our patents to D-tagatosecompanies seeking to develop products and processes that embodied our patented invention or to companies whose products and processes infringed our intellectual property. Prior to our acquisition of North South, North South commenced monetization and commercialization efforts by filing patent infringement litigation against T-Mobile USA on geo-location technology owned by North South, as well as two lawsuits on pharmaceutical distribution, the rights to which we acquired upon consummation of the Merger.
On July 24, 2013, we closed on the acquisition of a treatmentgroup of patents in the mobile communication sector from Rockstar in which we paid to Rockstar certain consideration, including 176,991 shares of common stock, which are being registered pursuant to this prospectus.
We anticipate commencing an exchange with holders of our outstanding shares of Series D Convertible Preferred Stock pursuant to which such holders could exchange shares of Series D Preferred Stock for
triglycerides.We will need to raise additional funds in 2010 to continue operations and will likely require additional capital raises thereafter to fully pursue the triglycerides opportunity.
Fundraising will likely require the issuanceshares of additional Company equity securities andSeries D-1 Convertible Preferred Stock on a purchaserone-for-one basis. An aggregate of such securities will likely insist that such securities be registered securities.
In November 2009, we obtained net proceeds725,064 shares of approximately $6 million in a registered direct primary offering. The common stock issued into the offeringformer stockholders of North South and the1,400,560 shares of common stock which may be issued upon exercise of warrants issued in the offering have been registered under a Form S-3 registration statement declared effective by the Securities and Exchange Commission (“SEC”) in October 2009.
Pursuant to SEC rules, the Company may not be in a position to issue additionalunderlying 140,056 shares of its common stock in anotherSeries D/D-1 Convertible Preferred Stock issued to our Series D Convertible Preferred Stockholders, are being registered direct primary offering under a Form S-3 registration statement until mid-November 2010. On July 2, 2010,pursuant to this prospectus. The rights of the Company filed a Form S-1 registration statement withSeries D-1 Convertible Preferred Stock are substantially identical to the SEC to beginrights of the process of raising additional capital.
Further, NASDAQ rules require stockholder approvalSeries D Convertible Preferred Stock except for certain stock issuances constituting 20% or moremodifications relating to conversion limitations. All references in this prospectus to Series D/Series D-1 Preferred Stock shall refer to shares of athe Company’s issued and outstanding stock.
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Liquidity and Capital Resources — December 31, 2009
Our working capital was $7.7 million as of December 31, 2009.
We will need to raise additional funds in 2010 to continue our operations. Any such fundraising will likely require the issuance of additional Company equity securities and a purchaser of such securities will likely insist that such securities be registered securities.
We cannot be assured that weSeries D Preferred Stock which will be ableexchanged for shares of Series D-1 Preferred Stock on a one for one basis, prior to attract purchaserseffectiveness of securities to raise the additional funds.
BUSINESS
General
We were organized as a Delaware corporation in 1967. Our principal segments are Biospherics, our biotechnology research and development business, and Health Sciences, a technical and regulatory consulting business. The Health Sciences segment was created in July 2007 when Claire L. Kruger, CEO and COO, joined us in advance of the anticipated sale of our wholly-owned subsidiary, InfoSpherix Incorporated. InfoSpherix was our information services segment and was sold on August 15, 2007 in a move to allow us to devote our resources to the activities of the Biospherics segment.
We have created two wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., for our two operating segments. Our Health Sciences contracts are now in the name of Spherix Consulting, Inc. and our patents and other assets and operations have been transferred into the name of Biospherics Incorporated. The subsidiaries began operations on January 1, 2009. We provide management, strategic guidance, business development, marketing and other services to our subsidiaries.
this prospectus
Our principal executive offices are located at
6430 Rockledge7927 Jones Branch Drive, Suite
503, Bethesda, Maryland 20817,3125, Tysons Corner, Virginia 22102, and our telephone number is
(301) 897-2540.31
(703) 992-9260.Table of Contents
Our common stock trades on the NASDAQ Capital Market system under the symbol SPEX.
Our principal Internet address is www.spherix.com. We make available free of charge on www.spherix.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Biospherics
Biospherics is dedicated
Industry Overview And Market Opportunity
Under U.S. law an inventor or patent owner has the right to
developmentexclude others from making, selling or using their patented invention. Unfortunately, in the majority of
D-tagatose. Until June 2010, this development was limitedcases, infringers are generally unwilling, at least initially, to
developing D-tagatosenegotiate or pay reasonable royalties for their unauthorized use of third-party patents and will typically fight any allegations of patent infringement. Inventors and/or patent holders, without sufficient legal, financial and/or expert technical resources to bring and continue the pursuit of legal action, may lack credibility in dealing with potential licensees and as a
novel, first-in-class treatment for Type 2 diabetes. The Company recently announced that it will actively seekresult, are often ignored. As a
pharma partnerresult of the reluctance of patent infringers to
continue the diabetes developmentnegotiate and
that it will also explore D-tagatose asultimately take a
potential treatment for high triglycerides, a risk factor for atherosclerosis, myocardial infarction, and stroke.Tagatose, a naturally occurring sugar, is a low-calorie, full-bulk sweetener previously approved by the Food and Drug Administration (“FDA”) as a GRAS (Generally Recognized As Safe) food ingredient. It is a true sugar that looks, feels, and tastes like table sugar. During human safety studies supporting food use, we discovered and patented a number of health and medical uses for D-tagatose. We hold the patents for use of D-tagatose as a treatment for Type 2 diabetes and thepatent license for the pending PCT (Patent Cooperation Treaty) patents for D-tagatose in new formulations as a treatment for high blood triglycerides. The use patents for D-tagatose as a treatment for Type 2 diabetes expire in 2012, not including extensions. If approved for use as a drug byof third-party patented technologies, patent licensing and enforcement often begins with the FDA as a treatment for Type 2 diabetes,filing of patent enforcement litigation. However, the majority of patent infringement contentions settle out of court based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed.
Due to the relative infancy of the IP monetization industry, we believe
we will be eligible for a five-year New Chemical Entity (“NCE”) exclusivity period following FDA approval. Similar legislation in Europe could provide seven yearsthat the absolute size of
our market
exclusivity in the European Union, if approved by the European Medicines Agency (EMA). If patents are awarded for the drugs for treatment of hypertriglyceridemia, twenty years of market exclusivity would be obtained in the USA. Exclusivity in other countries could also be obtained by filing individual applications in countries covered by the PCT.Diabetes Indication
opportunity is very significant but difficult to quantify.
Our Business Model
We are currently conducting a Phase 3 trial to determine efficacy of D-tagatose as a treatment for Type 2 diabetes and a Phase 2 Dose Range trial to evaluate the effectiveness of lower doses of D-tagatose in treating Type 2 diabetes. D-tagatose is believed to depress elevations of blood sugar levels in diabetic patients by increasing glycogen synthesis while decreasing glycogen utilization, resulting in an improvement of blood sugar control and modulation of HbA1c. HbA1c is a key indicatorpatent commercialization company that measures glycated hemoglobin in the blood and is a measure of long-term control of blood glucose. Glucose is a sugar molecule that serves as a primary energy storage mechanism and glycogen is a molecule that functions as secondary long-term energy storage in humans.We have obtained a blinded interim analysis in the Phase 3 trial, which does not affect the statistical power of the trial, as well as an unblinded interim analysis of the Phase 2 trial.
Results of the blinded interim data analysis of the Phase 3 trial demonstrate a significant reduction in variability of HbA1c levels, the primary endpoint of the trial. The results suggest the study is powered sufficiently and the planned sample size may be adequate to detect a statistically significant reduction of HbA1c as low as 0.5 percentage point change. The observed data to-date indicate the change in variability of HbA1c from baseline is favorable, and suggest that the current sample size gives the study sufficient power to achieve the statistical significance.
In addition, preliminary datarealizes revenue from the Phase 2 Dose Range study demonstrates reductionsmonetization of HbA1c levels at doses lower than those used in the current Phase 3 trial. The doses being tested are: 2.5, 5.0, and 7.5 g, which are administered orally with meals, three times daily. After 6 months on drug, patients in the 7.5 g group experienced
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an average reduction of 0.3% in HbA1c over those of the 2.5 g group. Over the same period, the 5.0 g group averaged a reduction in HbA1c of 0.05% over thoseIP. Such monetization includes, but is not limited to, acquiring IP from the 2.5 g group. D-tagatose appears to begin showing an effect on HbA1c within the range of doses selected for this minimum-dose study. The ongoing Phase 3 efficacy study is being conducted at a 15 g dose, three times a day.
Over the course of the Dose Range study, D-tagatose also changed the average serum triglycerides of the patients by -59 mg/dl by the end of the first month on therapy, a decrease from baseline at visit 2 (month 2) that remained at -41 mg/dl by the end of the 6 months of the trial. D-tagatose also changed serum LDL by an average -13 mg/dl by the end of the first month on therapy, while serum HDL was essentially unchanged (+0.9 mg/dl). The LDL:HDL ratio was improved for two of the three dose groups by an average of 0.3.
The Company expects to announce efficacy results of the Phase 3 trial in September 2010 and anticipates completion of the Phase 2 Dose Range trial by the end of 2010.
Notwithstanding the favorable interim results and our expectation that the final results of our clinical trials will also be favorable, the cost burden of developing drugs specifically for diabetes has increased significantly within the last few years under evolving and more stringent FDA guidelines. A company-commissioned analysis estimates it would take several additional years of clinical trials and could cost as much as several hundred million dollars to achieve a New Drug Application (“NDA”) filing for D-tagatose under current FDA guidelines. European regulatory requirements are significantly lower and we believe Europe represents a better opportunity for development, especially given the longer exclusivity period granted to a new chemical entity. We have determined that continued development of D-tagatose as a treatment for Type 2 diabetes requires the involvement of a pharma partner with the resources needed to fund the rest of the development and to bring it to market. The results from the Phase 3 trial will be pivotal in these negotiations, and we expect that the Phase 3 data will show a robust proof of concept demonstrating safety and efficacy for D-tagatose for Type 2 diabetes, potentially making it an attractive candidate for further development by a pharma company. Accordingly, we are actively seeking a strategic relationship with a pharma company for the continued development of D-tagatose as a treatment for Type 2 diabetes.
Triglycerides Indication
Secondary endpoints of our diabetes trials include triglyceride measurements. High triglyceride levels are sometimes a symptom of conditions associated with heart disease such as obesity and metabolic syndrome, which is a condition associated with elevated glucose levels as well as excess fat around the waist, high blood pressure, high triglycerides and low HDL cholesterol. Interim results of our Phase 2 Dose Range Study demonstrate a substantial reduction in triglycerides from patients who received 7.5 grams of D-tagatose compared to patients who received 2.5 grams of D-tagatose. Results from Phase 3 will be analyzed to provide corroboration for proof of concept regarding potential impact of D-tagatose on triglycerides.
The program to investigate D-tagatose as a pharmaceutical agent to lower serum triglycerides will begin this year. As per a normal pharmaceutical development plan, initial studies may include appropriate animal modelspatent holders in order to fully exploremaximize the mechanism of action on lipid metabolism, including triglycerides as well as LDL and HDL cholesterol. The commercial intentvalue of the triglyceride programpatent holdings by conducting and managing a licensing campaign. We generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that we own, or that we manage for others.
We continually work to enhance our portfolio of intellectual property through acquisition and strategic partnerships. Our mission is to developpartner with inventors, or other entities, who own undervalued intellectual property. We then work with the inventors or other entities to commercialize the IP. Currently, we own over 230 patents.
Our Products And Services
We acquire IP from patent holders in order to maximize the value of their patent holdings by conducting and managing a formulation, doselicensing campaign. Some patent holders tend to have limited internal resources and/or expertise to effectively address the unauthorized use of their patented technologies or they simply make the strategic business decision to outsource their intellectual property licensing. They can include individual inventors, large corporations, universities, research laboratories and dosing regimen appropriatehospitals. Typically, we, or an operating subsidiary, acquires a patent portfolio in exchange for the lipid market segment and uniquely differenta combination of an upfront cash payment, a percentage of our operating subsidiary's net recoveries from the diabetes market. Thus, Spherix’s intent is to develop a completely new, second brand for triglycerides, separate from the diabetes brand. Our goal is to produce a robust proof of concept in a Phase 2 clinical study,licensing and then seek a pharma partner for further developmentenforcement of the triglycerides drug product. We estimate that it will likely take up to three years to completeportfolio, or a combination of the studies/trials necessary to attract a pharma partner to complete the development and an additional 2-3 years to complete all necessary studies for an NDA filing.two.
Competition
We expect to incur substantial development costsencounter significant competition from others seeking to acquire interests in our Biospherics segmentintellectual property assets and monetize such assets. This includes an increase in the next several years, without substantial corresponding revenue. We intendnumber of competitors seeking to finance our development activities throughacquire the remaining proceeds received from the 2007 sale of InfoSpherix, the net proceeds of the November 2009 registered direct equity33
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offering, the net proceeds from this offering,same or similar patents and additional fundstechnologies that we willmay seek to raise through the saleacquire. Most of additional stockour competitors have much longer operating histories, and significantly greater financial and human resources, than we do. Entities such as Vringo, Inc. (NYSE MKT: VRNG), VirnetX Holding Corp (NYSE MKT: VHC), Acacia Research Corporation (NASDAQ: ACTG), RPX Corporation (NASDAQ: RPXC), and others presently market themselves as being in the future.
Manufacturing
We do not ownbusiness of creating, acquiring, licensing or operate our own manufacturing facilities. We first acquired D-tagatose for use in the trials from Arla Foods Ingredients amba (“Arla”), our previous food and beverage use licensee. However, Arla has discontinued manufacture of D-tagatose. In 2009, our Biospherics subsidiary signed a Supply Agreement with Inalco, S.p.A., a manufacturer capable of providing us with batches of pharmaceutical grade D-tagatose for submission to the Drug Master File (“DMF”) in support of the planned NDA submission. We are now using both Inalco and Arla D-tagatose in the Phase 2 and 3 trials.
Food and Beverage Use
D-Tagatose has been approved for use as a sweetener in foods and beverages in the United States since 2001. D-Tagatose is 92% as sweet as sucrose, but with only 38% of the calories. In 1997, and through a subsequent amendment, the world-wide right to sell D-tagatose for food and beverage uses, and the right to manufacture D-tagatose for all uses, was licensed to Arla (formerly MD Foods Ingredients amba, “MDFI”) of Denmark. Arla has not been successful in generating any substantial market for D-tagatose, Arla has ceased manufacturing D-tagatose, and we have received no meaningful royalties from Arla under the license agreement.
Biospherics revenue from miscellaneous royalties accounted for 1% of our total revenue from continuing operations in 2009.
In June 2009, we terminated the 1996 license agreement pursuant to which we granted Arla Foods Ingredients Amba (“Arla”) the food and beverage rights to D-tagatose. Per the termination agreement, we and Arla have fully released one another from all obligations.
Health Sciences
In July 2007, we entered into the Health Sciences business when Claire L. Kruger, CEO and COO, joined us in advance of the anticipated sale of our wholly-owned subsidiary, InfoSpherix Incorporated. The Health Sciences business provides technical and regulatory consulting services to biotechnology and pharmaceutical companies, as well as providing technical support for our R&D activities.
During 2009 and 2008, Health Sciences provided services to 12 and 16 companies, respectively. We generally provide our services on either a fixed-price basis or a “time and expenses” basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. Our engagement agreements typically provide for monthly billing and payment of our invoices within thirty days of receipt.
The projects range from safety analyses of food ingredients to safety analyses of pharmaceutical manufacturing and dispensing equipment. Many clients are large, well-known companies with a number of successful products on the market. The proliferation of new products in the food and pharmaceutical areas creates a growing need for such regulatory services.
Revenues are primarily derived from services provided in response to client requests or events that occur without notice, and engagements, generally billed as services are performed, are terminable or subject to postponement or delay at any time by clients. Revenues and operating margins for any particular quarter are generally affected by staffing mix, resource requirements, and timing and size of engagements.
Health Sciences is also monitoring and directing the Phase 3 clinical trial of D-tagatose for Biospherics.
Health Sciences revenue accounted for 99% of our total revenue in each of 2009 and 2008.
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Government Contracts
None.
Market Concentration
During each of 2009 and 2008, 99% of our revenue was generated from the Health Sciences business. Revenue from five customers accounted for 19%, 16%, 14%, 12% and 11% in 2009, and three customers accounted for 38%, 14% and 14% of our revenue in 2008. No other single customer accounted for 10 percent or more of consolidated revenue. The loss of any of these customers could have a material effect on us if not replaced.
Patents
We have established a worldwide patent position for D-tagatose. These patents are detailed in the following table:
Patent No.
|
| Patent Title
|
| Issue
Date
|
| Expiration
Date
|
Canada 2,077,257
| | Process for Manufacturing D-Tagatose
| | 2/19/02
| | 1/7/11
|
Finland 106861
| | Process for Manufacturing D-Tagatose
| | 4/30/01
| | 1/7/11
|
Japan 3,120,403
| | Process for Manufacturing D-Tagatose
| | 10/20/00
| | 1/7/11
|
Korea 190671
| | Process for Manufacturing D-Tagatose
| | 1/21/99
| | 1/7/11
|
EPO 0 518 874
| | Process for Manufacturing D-Tagatose
| | 5/15/96
| | 1/7/11
|
U.S. 5,447,917
| | D-Tagatose as Anti-Hyperglycemic Agent (1)
| | 9/5/95
| | 9/5/12
|
U.S, 5,356,879
| | D-Tagatose as Anti-Hyperglycemic Agent (1)
| | 10/18/94
| | 2/14/12
|
Canada 1,321,730
| | D-Tagatose as a Low-Calorie Carbohydrate Sweetener and Bulking Agent
| | 8/31/93
| | 8/31/10
|
(1)Patents pertaining to use of D-tagatose as treatment for Diabetes
The following patents are pending:
Title
|
| Filing Date
|
| Status
|
D-Tagatose-Based Compositions And Methods For Preventing And Treating Atherosclerosis, Metabolic Syndrome And Symptoms Thereof
| | November 4, 2009
| | Pending*
|
D-Tagatose And Biguanide Compositions And Methods
| | April 1, 2010
| | Pending
|
*Licensed from the University of Kentucky Research Foundation
If approved for use as a drug by the FDA as a treatment for Type 2 diabetes, we believe that those patents related to the use of D-tagatose as an anti-diabetes treatment may be eligible for a five-year New Chemical Entity (“NCE”) exclusivity period following FDA approval. Similar legislation in Europe could provide seven years of market exclusivity in the European Union, if approved by the European Medicines Agency (EMA).
With respect to all of our inventions, we have received numerous patents, including foreign issues. In addition to our patent position, we rely on the common law protection of such information as trade secrets and on confidentiality agreements to protectleveraging the value of theseintellectual property assets.
Trademarks
We have trademarked eachexpect others to enter the market as the true value of “Spherix”intellectual property is increasingly recognized and “Biospherics.”
35validated. In addition, competitors may seek to acquire the same or similar patents and technologies that we may seek to acquire, making it more difficult for us to realize the value of its assets.
Table of ContentsSales Backlog
Our backlog as of December 31, 2009 We also compete with venture capital firms, strategic corporate buyers and 2008 from the Health Sciences business was approximately $770,000various industry leaders for technology acquisitions and $1.2 million, respectively. We bill for our consulting services primarily on a time and expense basis and these amounts represent estimated contract values. Further, our consulting contracts are generally terminable or subject to postponement or delay at any time by clients. As a result, backlog at any particular time is not a reliable indicator of revenues for any future periods.
Competition
Biospherics
Competitors of Biospherics are numerous and include, among others, major pharmaceutical, chemical, consumer, and biotechnology companies; specialized firms; universities and other research institutions. Our competitors may succeed in developing technologies and products that are more effective than any that are being developed by us, and that could render our technology and potential products obsolete and noncompetitive.licensing opportunities. Many of these competitors may have substantially greatermore financial and technicalhuman resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
Other companies may develop competing technologies that offer better or less expensive alternatives to our patented technologies that we may acquire and/or out-license. Many potential competitors may have significantly greater resources than we do. Technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or uneconomical.
Intellectual Property and productionPatent Rights
Our intellectual property is primarily comprised of trade secrets, patented know-how, issued and marketing capabilities than us. If approved, our major competitor aspending patents, copyrights and technological innovation.
We have a monotherapyportfolio comprised of 229 U.S. patents, 2 foreign patents and 5 open applications in the treatmentwireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality, and cellular. We also own patents related to artificial sweetener and prescription refill technology.
Most of Type 2 diabetes will be Metformin, which generated almost 50 million prescriptions inour patents are publicly accessible on the Internet website of the U.S. market in 2009. In the triglyceride market, the main categoriesPatent and Trademark Office at www.uspto.gov.
The lives of
pharmaceutical agents include: fenofibrates (Tricor®, gemfibrozil, generics) with global sales of $2.2 billion; niacin-based agents (with sales of $1 billion globally)our patent rights have a wide duration. Certain patents have already expired and the
Omega-2 oil products (Lovasa®/GSK) with prescription sales approaching $1 billion globally.Health Sciences
Competitorslatest patents do not expire until 2026.
Patent Enforcement Litigation
We may often be required to engage in litigation to enforce our patents and patent rights. We are, or may become a party to ongoing patent enforcement related litigation, alleging infringement by third parties of
Health Sciences are numerous, including some that are much larger companies with greater resources. The segment’s success in winning and retaining clients is heavily dependent oncertain of the
efforts and reputation of its CEO. We believe the barriers to entry in particular areas of our consulting expertise are low.patented technologies owned or controlled by us.
Research and Development
Biospherics expenditures
We have not expended funds for research and development were approximately $6.2 millioncosts since inception.
Employees
As of December 9, 2013, we had 2 full-time employee and
$4.0 million in 2009 and 2008, respectively. These expenditures were incurred in the ongoing efforts to commercialize D-tagatose.In December 2009, we entered into a Manufacturing Support and Supply Agreement with Inalco S.p.A of Italy. Under the agreement we committed to the purchase of 25 metric tons of D-tagatose. The entire purchase commitment of $1,100,000 was booked as an expense in 2009. Of this amount $500,000 was paid in 2009, with the remaining balance payable in 2010. An additional $300,000 of D-tagatose, separate from the above Manufacturing Support and Supply Agreement, was also purchased in 2009 from Inalco.
Governmental Regulation
Our business activities are subject to a variety of Federal and state compliance, licensing, and certification requirements. Products such as D-tagatose may not be commercially marketed as a drug without prior approval from the FDA and comparable agencies in foreign countries. In the United States, the process for obtaining FDA approval typically includes pre-clinical studies, the filing of an Investigational New Drug application, or IND, human clinical trials and filing and approval of a New Drug Application, or NDA. The FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA.
The results of the trials and other information are then submitted to the FDA in the form of an NDA for review and potential approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information in a complete response letter, or deny the approval if it determines that the NDA does not provide an adequate basis for approval. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional testing. If and when those conditions have been met to the FDA’s satisfaction, the FDA will
36
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typically issue an approval letter, which authorizes commercial marketing of the product with specific prescribing information for specific indications. Any approval required from the FDA might not be obtained on a timely basis, if at all.
Among the conditions for NDA approval is the requirement that the manufacturing operations conform on an ongoing basis with current Good Manufacturing Practices, or cGMP. A successful inspection of the manufacturing facility by the FDA is a prerequisite for final approval. Following approval of the NDA, the third-party manufacturer(s) remain subject to periodic inspections by the FDA.no part-time employees. We also face similar inspections coordinated by the EMA by inspectors from particular European Union member countries that conduct inspections on behalf of the European Union and from other foreign regulatory authorities. Any determination by the FDA or other regulatory authorities of manufacturing or other deficiencies could materially adversely affectbelieve our business.
In general, regulatory requirements and approval processes in European Union (EU) countries are similar in principle to those in the United States and can be at least as costly and uncertain. The European Union has established a unified centralized filing and approval system administered by the Committee for Medicinal Products for Human Use designed to reduce the administrative burden of processing applications for pharmaceutical products derived from new technologies. In addition to obtaining regulatory approval of products, it is generally necessary to obtain regulatory approval of the facility in which the product will be manufactured.
However U.S. and EU requirements differ dramatically for antidiabetic medications. In the U.S. the FDA guidance requires 2/3 more subjectsemployee relations to be studied thangood.
Property
The Company’s offices are located in the EU,Tysons Corner, Virginia and also markedly increases the duration of the studies both for efficacy and safety. In addition, the FDA requirements for evaluating the cardiovascular risks associated with type 2 anti-diabetic medications markedly increases the study populations while also studying patients with relatively advance diabetes, some degree of renal impairment and at higher risk of cardiovascular events.Requirements for the development of drugs to lower triglycerides have not changed and are similar in both the U.S. and EU. The development program is considerably simpler than with type 2 antidiabetic medications with a smaller number of subjects to be studied and clinical studies of substantially shorter duration to demonstrate efficacy and safety of the drugs.
We are required to comply with the Sarbanes-Oxley Act of 2002, including the provisions of Section 404 on the assessment of internal controls as modified for non-accelerated filers. Starting with its year ended 2007, we performed an annual evaluation of the effectiveness of our internal control over financial reporting and reports on management’s assessment of the adequacy of those controls in our annual report on Form 10-K.
The increase in accounting related regulations over the years, particularly those governing public companies, has had the effect of increasing our cost for external accounting services, from 0.3% of revenue in 1997 ($40,000) to 18% in 2009 ($240,000).
Environment
Compliance with current federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and in the opinion of management will not have, a material effect on our financial position, results of operations, capital expenditures, cash flows or competitive position.
Employees
We employ 11 individuals on a full- or part-time basis. Of this total, 10 are full-time employees. Our employees are not currently unionized, and management believes that our relations with such employees are harmonious.
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PROPERTY
Our office is located in Bethesda, Maryland, where we leaseit leases 837 and 5,000 square feet of office space under a leaseleases that expiresexpire on August 31, 2014 and March 31, 2013. We also leased 5,000 square feet of research lab2018, respectively. The Company’s monthly lease payment for the Virginia rental is $1,883.25 per month and warehouse space$13,402.62 per month for Biosphericsthe Maryland rental. The Company’s subsidiary, Nuta Technology Corp., is located in Annapolis, Maryland under a lease that expired June 30, 2009.the Tysons Corner, Virginia office. The capacity of the Tysons Corner and Bethesda facility isfacilities are adequate for ourthe Company’s current needs.
The Company also leases office space in New York, NY on a month-to-month basis at a monthly rate of $6,000.
Legal Proceedings
In the ordinary course of business, we actively pursue legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technology. Other than ordinary routine litigation incidental to the business and other than as set forth below, we know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered beneficial shareholder are an adverse party or has a material interest adverse to us.
Spherix Incorporated v. Elizabethean Court Associates III Limited Partnership
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 lawsuit, Spherix Incorporated v. Elizabethean Court Associates III Limited Partnership ("Elizabethean"), Case No., 377142 is currently in discovery, and the parties are following the court imposed scheduling order, however, Elizabethean has filed a Motion for Summary Judgment which the Company has opposed.
LegalLink, Inc. v. Spherix Incorporated
On October 7, 2013, the Company received notice of a complaint filed in the Circuit Court of Montgomery County, Maryland, Case No.: 382667-V, 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 the time to file a responsive pleading has not yet occurred.
The following table sets forth information concerning the Spherixour Management and Board of Directors.
| | | | | | Director |
Name | | Age | | Position | | Since |
Douglas T. Brown | | 56 | | Director | | 2004 |
Claire L. Kruger | | 51 | | Director, and Chief Executive Officer | | 2007 |
Gilbert V. Levin | | 86 | | Director, and Chairman Emeritus | | 1967 |
Robert A. Lodder, Jr. | | 51 | | Director, and President | | 2005 |
Aris Melissaratos | | 66 | | Director | | 2008 |
Thomas B. Peter | | 57 | | Director | | 2009 |
Robert J. Vander Zanden | | 64 | | Director, and Chairman of the Board | | 2004 |
| | | | | | | Director | |
| Name | | Age | | Position | | Since | |
| Robert J. Vander Zanden | | 67 | | Chairman of the Board | | | 2004 | |
| Anthony Hayes | | 45 | | Chief Executive Officer and Director | | | 2013 | |
| Michael Pollack | | 47 | | Interim Chief Financial Officer | | | 2013 | |
| Douglas T. Brown | | 59 | | Director | | | 2004 | |
| Edward M. Karr | | 43 | | Director | | | 2012 | |
| Harvey J. Kesner | | 56 | | Director | | | 2012 | |
| Alexander Poltorak | | 56 | | Director | | | 2013 | |
Dr. Robert J. Vander Zanden
Dr. Robert J. Vander Zanden, Board member since 2004, having served as a Vice President of R&D with Kraft Foods International, brings a long and distinguished career in applied technology, product commercialization, and business knowledge of the food science industry to us. Dr. Vander Zanden holds a Ph.D. in Food Science and an M.S. in Inorganic Chemistry from Kansas State University, and a B.S. in Chemistry from the University of Wisconsin – Platteville, where he was named a Distinguished Alumnus in 2002. In his 30-year career, he has been with ITT Continental Baking Company as a Product Development Scientist; with Ralston Purina’s Protein Technology Division as Manager Dietary Foods R&D; with Keebler as Group Director, Product and Process Development (with responsibility for all corporate R&D and quality); with Group Gamesa, a Frito-Lay Company, as Vice President, Technology; and with Nabisco as Vice President of R&D for their International Division. With the acquisition of Nabisco by Kraft Foods, he became the Vice President of R&D for Kraft’s Latin American Division. Dr. Vander Zanden retired from Kraft Foods in 2004. He currently holds the title of Adjunct Professor and Lecturer in the Department of Food, Nutrition and Packaging Sciences at Clemson University, where he also is a member of their Industry Advisory Board. His focus on achieving product and process innovation through training, team building and creating positive working environments has resulted in his being recognized with many awards for product and packaging innovation. Dr. Vander Zanden is not now, nor has he been for the past five years, a director of a public, for-profit company other than us. Mr. Vander Zanden executive experience provides him with valuable business expertise which the Board believes qualifies him to serve as a director of the Company.
Anthony Hayes
Mr. Anthony Hayes, a director and Chief Executive Officer since 2013, has served as the Chief Executive Officer of North South since March 2013 and, since June 2013, has served as a consultant to the Company. Mr. Hayes was the fund manager of JaNSOME IP Management LLC and JaNSOME Patent Fund LP from August 2012 to August 2013, both of which he co-founded. Mr. Hayes was the founder and Managing Member of Atwater Partners of Texas LLC from March 2010 to August 2012 and a partner at Nelson Mullins Riley & Scarborough LLP from May 1999 to March 2010. Mr. Hayes received his Juris Doctorate from Tulane University School of Law and his B.A. in Economics from Mary Washington College. Mr. Hayes was chosen to be a director of the Company based on his expansive knowledge of, and experience in, the patent monetization sector.
Mr. Michael Pollack
Michael Pollack, 47, has been a partner of KBL LLP, a certified public accounting and business advisory services firm, since 2005 and has over twenty years of experience in public accounting and consulting to over 100 publicly traded and 250 private companies. Mr. Pollack graduated from the University of Maryland with a Bachelors of Arts in Economics. Mr. Pollack is a member of the American Institute of Certified Public Accountants, as well as licensed to practice in New Jersey and New York. Mr. Pollack has never served as a director of a publicly traded company.
Douglas T. Brown
Mr. Douglas T. Brown, a Board Member since 2004, brings to the Board a broad understanding of
the financial
statements, financial markets, and other business aspects. He is currently Senior Vice President and Manager of the Corporate Banking Government Contracting Group for PNC Bank N.A., Washington, DC. Mr. Brown has been with PNC and its predecessor bank, Riggs Bank, since 2001 and previously worked for Bank of America, N.A. and its predecessor banks for 16 years as a Loan Officer, as well as a manager of Loan Officers in the Mid-Atlantic region. Subsequent to 1990, the majority of Mr. Brown’s customers are companies that provided services to the Federal Government and State governments. Mr. Brown holds a B.A. degree in Political Science from American University and a graduate degree from The Stonier Graduate School of Banking at the University of Delaware. He is not now, nor has he been for the past five years, a director of a public, for-profit company other than us.
Dr. Claire L. Kruger, elected Mr. Brown’s executive corporate finance experience provides him with valuable expertise which the Board believes qualifies him to our Board of Directors in August 2007, and also elected Chief Executive Officer and Director of Health Sciences at that time, brings vast scientific and regulatory guidance expertise to the Board. Dr. Kruger received her Ph.D. in Toxicology from Albany Medical College, and her B.S. in Biology from Clarkson College. With more than 20 years of consulting experience, her primary areas of expertise are in foods, consumer products and pharmaceuticals, where she provides scientific, regulatory, and strategic support to clients in both the U.S. and international regulatory arenas. Dr. Kruger has conducted toxicity evaluations of foods and food contaminants,serve as well as health risk assessments and exposure assessments of drugs, cosmetics, and pesticides. Her clients include food, drug, and dietary supplement manufacturers, agricultural producers, biotechnology companies, trade associations, and law firms. In her role as a consultant, Dr. Kruger has been involved in the safety evaluation of a variety of consumer products, providing oversight of product compliance with current and emerging scientific and regulatory guidance. She is not now, nor has she been for the past five years, a director of a public, for-profit company other than us.
Dr. Gilbert V. Levin founded Spherix Incorporated in 1967 and served us in a variety of capacities from incorporation until his retirement in August 2008. In addition to his senior management experience, Dr. Levin brings to the Board the perspective of a major Company stockholder. He is currently Adjunct Professor in the Beyond Center of the College of Liberal Sciences, Arizona State University, and is an Honorary Professor at Cardiff University, Wales, UK. Dr. Levin previously served in the public health departments of Maryland, California, and the District of Columbia and, subsequently, as a research scientist and corporate official. Among his inventions are low-caloric sweeteners; biological nutrient removal (BNR) for municipal wastewater, rapid detection and identification of microorganisms; and the Labeled Release life detection experiment that landed on Mars in 1976 aboard NASA’s Viking Mission. He holds a Bachelor’s, Master’s, and a Ph.D., all from The Johns Hopkins University, where he also served on its Board of Trustees and presently serves on its National Advisory Council for
38
Edward M. Karr
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the Whiting School of Engineering. He is not now, nor has he been for the past five years, a director of a public, for-profit company other than us.
Dr. Robert A. Lodder,Mr. Edward M. Karr, a Board member since 2005, and elected President in August 2007, brings his immeasurable scientific expertise toNovember 2012, is the Board. He served as a Professor of Pharmaceutical Sciences at the College of Pharmacy, University of Kentucky Medical Center, and holds joint appointments in the Department of Electrical and Computer Engineering and the Division of Analytical Chemistry of the Department of Chemistry at Kentucky. Dr. Lodder received his B.S. degree cum laude in Natural Science in 1981, and his M.S. in Chemistry in 1983 from Xavier University, Cincinnati, Ohio. He received his Ph.D. in Analytical Chemistry in 1988 from Indiana University. He was a founder of InfraReDx, Inc.RAMPartners SA, an investment management and investment banking firm based in 1998Geneva, Switzerland. Since 2005, RAMPartners has helped raise more than $200 million for small capitalization companies in fields such as natural resources, high technology, health care, and Prescient Medical, Inc.clean energy. RAMPartners is a member of Global Alliance Partners (GAP), a network organization of internationally minded financial partners focusing on the capital midmarket. Prior to founding RAMPartners, Mr. Karr managed a private Swiss asset management, investment banking, and trading firm based in 2004. Neither of these companies are public, and they do not engage in business with Spherix. He is not now, nor has he beenGeneva for six years. At the past five years, a director of a public, for-profit company other than us.
Mr. Aris Melissaratos, elected to our Board of Directors in February 2008, brings to the Board his immense business development and management experience. He currently serves as Senior Advisor to the President of The Johns Hopkins University with responsibilities for technology transfer, corporate partnerships, and enterprise development. From 2003 to 2007, he served as Secretary of Business and Economic Development for the State of Maryland, driving the state’s unemployment figures to an impressive 3.6% and positioning Maryland for leadership in the emerging “knowledge economy.” He worked for Westinghouse Electric Corporation for 32 years, culminating as the corporation’s Chief Technology Officer and Vice President for Science and Technology, responsible for running Westinghouse’s research and development functions. He also served as the Chief Operations Officer for the company’s Defense Electronics Group, wherefirm, he was responsible for managing 16,000 employees (9,000 engineers)all of the capital market transactions, investment, and $3.2 billion dollarsmarketing activities. In 2004, Futures Magazine named Mr. Karr as one of sales. After Westinghouse,the world’s Top Traders. He is a past contributor to CNBC and has been quoted in numerous financial publications. Mr. Karr’s extensive capital markets experience provides him with valuable expertise which the Board believes qualifies him to serve as a director of the Company.
Harvey J. Kesner
Mr. Harvey J. Kesner, a Board member since November 2012, and from February 2013 through September 2013 served as interim Chief Executive Officer. Mr. Kesner is a practicing attorney in New York, New York where he becameconcentrates his practice on corporate finance and securities law. Mr. Kesner graduated from the State University of New York, Binghamton, New York with a B.S. in Management Science, and holds a J.D. and M.B.A., Finance, from the American University, Washington, D.C. Mr. Kesner was Executive Vice President and General Counsel of Thermo ElectronAmerican Banknote Corporation until 1990 and CEOa director of its Coleman Research CorporationZvue, Inc. Mr. Kesner has served as a director of WPCS International Incorporated (NASDAQ: WPCS), a design-build engineering company that focuses on the implementation requirements of communications infrastructure, since September 2013. Mr. Kesner was appointed as a director of the Company based on his broad knowledge of public companies and Thermo Information Solutions subsidiaries.corporate finance.
Alexander Poltorak
Mr. Poltorak, a Board member since October 2013, has been the Chairman and Chief Executive Officer of General Patent Corp., an intellectual property management firm focusing on IP strategy and valuation, patent licensing, enforcement and brokerage since 1989 and the Managing Director of IP Holdings LLC, an affiliate of General Patent Corp, since 2000. Prior to founding General Patent Corp., Mr. Poltorak served as the President and Chief Executive Officer of Rapitech Systems, Inc., a publicly-traded computer technology company, was an Assistant Professor of Physics at Touro College and Assistant Professor of Biomathematics at Cornell University Medical College. He formed Armel Scientifics, LLC, which invested in over 30 start-up companies in Life Sciences and Advanced Technology. He holds a B.E.S. in electrical engineering from The Johns Hopkins University, a Masterserved as an Adjunct Professor of Science in engineering management from George Washington University, and has completed the program for Management DevelopmentLaw at the HarvardGlobe Institute for Technology and was a guest-lecturer on Intellectual Property Law and Economics at the Columbia University School of Business.Engineering and Columbia Business School. Mr. Poltorak served on the advisory board of Patent Strategy & Management. He completedis the course workFounder and President of non-for-profit American Innovators for a Ph.D. in International Politics at the Catholic University of America but did not complete the dissertation. Mr. Melissaratos currently serves as a memberPatent Reform (AIPR). He was US Co-chair of the Board of Directors of Avatech Solutions, Inc. in Owings Mills, Maryland, a software and technology firm; and as a membersubcommittee on Information Exchange of the Advisory BoardUS-USSR Trade and Economic Counsel. Mr. Poltorak was chosen to be a director of Stronghold Advisors, a middle-market advisory firmthe Company based on his expansive knowledge of, and experience in, the Mid-Atlantic region,management of intellectual property, particularly patents.
Directorships
Except as otherwise reported above, none of our directors held directorships in
Columbia, Maryland. Neither of theseother reporting companies
engage in business with us.Mr. Thomas B. Peter, elected to our Board of Directors in May 2009, brings his vast pharmaceutical and clinical trial expertise to the Board. He has spent his entire 33-year career in the pharmaceutical industry. Most recently, he served as a Regional Vice President for GlaxoSmithKline (GSK). Prior to that, Mr. Peter had significant experience dealing with managed care organizations, serving as Director of National Accounts Salesregistered investment companies at GSK, and before that position, worked as a Group Marketing Director. Mr. Peter is a biology major graduate of Gettysburg College and a Master’s graduate of St. Joseph’s University in Philadelphia. He is not now, nor has he been forany time during the past five years,years.
Family Relationships
There are no family relationships among our directors and executive officers. There is no arrangement or understanding between or among our executive officers and directors pursuant to which any director or officer was or is to be selected as a director
of a public, for-profit company other than us.Dr. Robert J. Vander Zanden, Board member since 2004, having served as a Vice President of R&D with Kraft Foods International, brings a long and distinguished careeror officer.
Involvement in applied technology, product commercialization, and businessCertain Legal Proceedings
To our knowledge,
of the food science industry to us. Dr. Vander Zanden holds a Ph.D. in Food Science and an M.S. in Inorganic Chemistry from Kansas State University, and a B.S. in Chemistry from the University of Wisconsin — Platteville, where he was named a Distinguished Alumnus in 2002. In his 30-year career, he has been with ITT Continental Baking Company as a Product Development Scientist; with Ralston Purina’s Protein Technology Division as Manager Dietary Foods R&D; with Keebler as Group Director, Product and Process Development (with responsibility for all corporate R&D and quality); with Grupo Gamesa, a Frito-Lay Company, as Vice President, Technology; and with Nabisco as Vice President of R&D for their International Division. With the acquisition of Nabisco by Kraft Foods, he became the Vice President of R&D for Kraft’s Latin American Division. Dr. Vander Zanden retired from Kraft Foods in 2004. He currently holds the title of Adjunct Professor and Lecturer in the Department of Food Science and Human Nutrition at Clemson University, where he also is a member of their Industry Advisory Board. His focus on achieving product and process innovation through training, team building and creating positive working environments has resulted in his being recognized with many awards for product and39
Table of Contents
packaging innovation. Dr. Vander Zanden is not now, nor has he been forduring the past fiveten years, a director of a public, for-profit company other than us.
Board Composition
Currently, the size of our board of directors is set at seven. Eachnone of our directors, serves a one-year term and is elected at each year’s annual meeting of stockholders. Our board of directorsexecutive officers, promoters, control persons, or nominees has determined that a majority of its members, Messrs. Brown, Melissaratos, Peter and Vander Zanden,been:
| · | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| · | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| · | found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law. |
| · | the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| · | the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
There are
“independent” under the rulesno material proceedings to which any director, officer, or affiliate of the
NASDAQ Capital Market.MeetingsCompany is a party adverse to the Company or has a material interest adverse to the Company.
Board Responsibilities and
Meeting AttendanceDuring 2009, our boardStructure
The Board oversees, counsels, and directs management in the long-term interest of directors met nine (9) times,Company and its stockholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the audit committeeoverall performance of our board of directors met six (6) timesCompany. The Board is not, however, involved in the operating details on a day-to-day basis.
Board Committees and Charters
The following table identifies the
compensation committee of our board of directors met two (2) times. During 2009, each member of our board of directors nominated for re-election attended 75% or more of the aggregate of (i) the total number of meeting of our board of directors held during the period of such member’s serviceindependent and
(ii) the total number of meetings of committees on which such member served, during the period of such member’s service. We encourage all directors to attend our annual stockholders meetings. All directors (except Dr. Gilbert V. Levin) attended our 2009 annual meeting of stockholders.Auditnon-independent current Board and Committee
members:
| Name | | Independent | | | Audit | | | Compensation | | | Nominating | |
| Robert Vander Zanden | | | [X] | | | | [X] | | | | [X] | | | | [X] | |
| Douglas T. Brown | | | [X] | | | | [X] | | | | [X] | | | | [X] | |
| Edward M. Karr | | | [X] | | | | [X] | | | | [X] | | | | [X] | |
| Harvey J. Kesner | | | | | | | | | | | | | | | [X] | |
| Anthony Hayes | | | | | | | | | | | | | | | | |
| Alexander Poltorak | | | [X] | | | | | | | | | | | | | |
The Audit Committee members are Mr. Brown, Chair; Mr.
Melissaratos,Karr, and Dr. Vander Zanden.
Mr. Kesner served as a member of the Audit Committee until February 27, 2013 when he was appointed interim Chief Executive Officer of the Company. The Committee has authority to review
ourthe financial records
of the Company, deal with
ourits independent auditors, recommend to the Board policies with respect to financial reporting, and investigate all aspects of
ourthe Company’s business. The Audit Committee Charter is available on
ourthe Company’s website at www.spherix.com. Each member of the Audit Committee satisfies the independence requirements and other established criteria of
the NASDAQ and the
Securities and Exchange Commission.SEC. The Board of Directors
believeshas determined that
while the members of its Audit Committee have substantial financialMr. Brown and
management experience and are fully qualified to carry out the functions of the Audit Committee, none of its members meetsMr. Karr meet the requirements of an audit committee financial expert as defined in the
Securities and Exchange CommissionSEC rules.
Compensation Committee
The Compensation
& Benefits Committee oversees
ourthe Company’s executive compensation and recommends various incentives for key employees to encourage and reward increased corporate financial performance, productivity and innovation. Its members are Mr.
Melissaratos, Chair;Karr, Chair, Mr.
PeterBrown and Dr. Vander Zanden.
There were two (2) meetings during this time period. The Compensation Committee Charter is available on
ourthe Company’s website at www.spherix.com.
Executive Committee
The Executive Committee may act on behalf of the Board of Directors on matters requiring action in the interim between meetings of the full Board. Its members are Dr. Vander Zanden, Chair; Dr. Kruger and Dr. Lodder.
Nominating Committee
The Nominating Committee recommends to the Board, for adoption by the Board, the proposed Board for election by the stockholders. Its members are Mr.
Peter, Chair;Karr, Chair, Mr. Brown,
Mr. Kesner, and
Mr. Melissaratos.Dr.Vander Zanden. The Nominating Committee Charter is available on
ourthe Company’s website at www.spherix.com. The Nominating Committee does not have any formal minimum qualifications for
Directordirector candidates. The Nominating Committee identifies candidates by first evaluating current members of the Board who are willing to continue in service. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Nominating Committee then identifies the desired skills and experience of a new candidate(s).
Director Independence
TableOur Board of ContentsDirectors has determined that a majority of the Board consists of members who are currently “independent” as that term is defined under current listing standards of NASDAQ. The Board of Directors considers Messrs. Karr, Vander Zanden, Brown and Poltorak to be “independent” as defined by the applicable rules of The NASDAQ Stock Market LLC.
The Company has adopted a worldwide Code of Ethics, which is available on ourthe Company’s website at www.spherix.com.Executive Officers
The executive officers are elected annually by the Board of Directors and are listed in the following table.
Name
|
| Age
|
| Position
|
Robert L. Clayton
| | 46
| | CFO and Treasurer
|
Claire L. Kruger
| | 51
| | Chief Executive Officer and Chief Operating Officer
|
Robert A. Lodder
| | 51
| | President
|
Drs. Kruger and Lodder’s professional experience are discussed above.
Mr. Robert L. Clayton was elected to the Office of CFO in August 2007, and was elected Director of Finance and Treasurer in May 2005. Mr. Clayton previously served as Controller. Prior to joining us, he was a Senior Auditor for the public accounting firm Rubino & McGeehin Chartered. Mr. Clayton holds a B.S. in business and management from the University of Maryland and a C.P.A. from the District of Columbia. He is not now, nor has he been for the past five years, a director of a public, for-profit company other than us.
www.spherix.com.
EXECUTIVE
AND DIRECTOR COMPENSATION
We strive to pay our named executive officers at or near the median paid by comparable companies. In 2007, the Compensation Committee hired an outside company, Equilar, Inc., to compare the total compensation of our executives to the total compensation of fourteen (14) companies identified by Equilar, Inc. to be peer companies to us. The Equilar Report on Executive Compensation showed that our executives are not compensated at the same level as colleagues in peer companies. Based upon our fiscal health, however, it was determined by the Compensation Committee that in 2008 and 2009 no special efforts should be made to bring executive total compensation to equivalent levels of those in peer companies. The Compensation Committee recommended to the Board the salary adjustments for our executive officers. In 2010, the Board approved annual salaries for Dr. Kruger, Dr. Lodder and Mr. Clayton of $270,000, $220,000 and $200,000, respectively.
The following Summary of Compensation table sets forth the compensation paid by usthe Company during the two years ended December 31, 2009,2011 and December 31, 2012, to all executive officersExecutive Officers earning in excess of $100,000 during any year.such years.
Summary of Compensation
| | | | | | | | | | | | | | Change in | | | | | |
| | | | | | | | | | | | | | Pension Value | | | | | |
| | | | | | | | | | | | | | and Non- | | | | | |
| | | | | | | | | | | | Non-Equity | | Qualified | | | | | |
| | | | | | | | Stock | | Option | | Incentive Plan | | Deferred | | | | | |
Name and | | | | | | Bonus | | Award | | Award | | Compensation | | Compensation | | All Other | | | |
Principal Position | | Year | | Salary ($) | | ($) | | ($)(1) | | ($)(2) | | ($)(3) | | Earnings ($) | | Compensation ($) | | Total ($) | |
C. Kruger | | 2009 | | 190,000 | | — | | 10,850 | | — | | 95,000 | | — | | — | | 295,850 | |
CEO and COO | | 2008 | | 186,667 | | — | | 18,600 | | — | | 76,000 | | — | | — | | 281,267 | |
| | | | | | | | | | | | | | | | | | | |
R. Lodder | | 2009 | | 170,000 | | — | | — | | — | | 59,500 | | — | | — | | 229,500 | |
President | | 2008 | | 166,667 | | — | | 22,500 | | — | | 68,000 | | — | | — | | 257,167 | |
| | | | | | | | | | | | | | | | | | | |
R. Clayton | | 2009 | | 228,031 | | — | | — | | 940 | | — | | — | | — | | 228,971 | |
CFO and Treasurer | | 2008 | | 224,625 | | — | | — | | 940 | | — | | — | | — | | 225,565 | |
| Name and Principal Position | Year | | Salary ($) | | | Bonus ($) | | | Stock Award ($) | | | Option Award ($) (1) | | | Non-Equity Incentive Plan Compensation ($) (2) | | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | | | All Other Compen- sation ($) (3) | | | Total ($) | |
C. Kruger (3) Former CEO and COO | 2012 | | | 262,573 | | | | - | | | | - | | | | 3,919 | | | | 143,222 | | | | - | | | | 286,443 | | | | 696,157 | |
| 2011 | | | 278,100 | | | | - | | | | - | | | | 531 | | | | 139,050 | | | | - | | | | - | | | | 417,681 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
R. Lodder Principal Executive Officer and President (4) | 2012 | | | 233,398 | | | | - | | | | - | | | | 2,138 | | | | 93,359 | | | | - | | | | - | | | | 328,895 | |
| 2011 | | | 226,600 | | | | - | | | | - | | | | 273 | | | | 90,640 | | | | - | | | | - | | | | 317,513 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
R. Clayton CFO, Treasurer and Corporate Secretary (5) | 2012 | | | 212,180 | | | | - | | | | - | | | | 2,138 | | | | 74,263 | | | | - | | | | - | | | | 288,581 | |
| 2011 | | | 206,000 | | | | - | | | | - | | | | 273 | | | | 72,100 | | | | - | | | | - | | | | 278,373 | |
(1)On August 1, 2007, C. Kruger was granted 30,000 shares in restricted stock with a market price on the date of grant of $1.86. The restricted stock vested in equal amounts of 10,000 shares on August 1, 2007, August 1, 2008 and August 1, 2009. On August 16, 2007, R. Lodder was granted 15,000 shares in restricted stock
41
| (1) | On November 15, 2011, C. Kruger, R. Lodder and R. Clayton were granted stock options for 500, 250, and 250 shares, respectively. On February 17, 2006, R. Clayton was granted stock options for 100 shares. Information regarding forfeiture and assumptions made in the valuation are disclosed in Note 10 of the consolidated financial statements included herein. |
| (2) | Awards pursuant to the Spherix Incorporated Incentive Compensation Plan. |
(3) (4) (5) | Dr. Kruger resigned her position from the Company on December 3, 2012, following the sale of the Spherix Consulting subsidiary. Under the terms of Dr. Kruger’s Severance Agreement, the Company paid Dr. Kruger $286,443 in December 2012. Mr. Lodder resigned as President of the Company in February 2013. Mr. Clayton resigned as Chief Financial Officer, Treasurer and Corporate Secretary in March 2013 |
Table of Contents
with a market price of the date of grant of $2.00. The restricted stock vested in equal amounts of 7,500 shares on March 1, 2008 and September 1, 2008.
(2)On February 17, 2006, R. Clayton was granted stock options for 2,000 shares, respectively. Information regarding forfeiture and assumptions made in the valuation are disclosed in Note 7.
(3)Awards pursuant to the May 12, 2005 Spherix Incorporated Incentive Compensation Plan.
Outstanding Equity Awards at Fiscal Year-End
| | Option Awards | | Stock Awards | |
| | | | | | | | | | Number | | Market | |
| | Number of | | Number of | | | | | | of Shares | | Value of | |
| | Securities | | Securities | | | | | | or Units | | Shares or | |
| | Underlying | | Underlying | | | | | | of Stock | | Units of | |
| | Unexercised | | Unexercised | | Option | | Option | | that have | | Stock that | |
| | Options (#) | | Options (#) | | Exercise | | Expiration | | not Vested | | have not | |
Name | | Exercisable | | Unexercisable | | Price ($) | | Date | | (#) | | Vested ($) | |
C. Kruger | | — | | — | | — | | — | | — | | — | |
R. Lodder | | — | | — | | — | | — | | — | | — | |
R. Clayton | | 1,000 | | 500 | (1) | $ | 2.20 | | 2/15/2011 | | — | | — | |
| | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards | |
| | | | | | | | | | | | | Number | | | Market | |
| | | Number of | | | Number of | | | | | | | of Shares | | | Value of | |
| | | Securities | | | Securities | | | | | | | or Units | | | Shares or | |
| | | Underlying | | | Underlying | | | | | | | of Stock | | | Units of | |
| | | Unexercised | | | Unexercised | | | Option | | Option | | that have | | | Stock that | |
| | | Options (#) | | | Options (#) | | | Exercise | | Expiration | | not Vested | | | have not | |
| Name | | Exercisable | | | Unexercisable | | | Price ($) | | Date | | | (#) | | | Vested ($) | |
| R. Lodder | | | 63 | | | | 187 | | | $ | 40.00 | | 11/14/2016 | | | 1,000 | | | | 6,830 | |
| R. Clayton | | | 63 | | | | 187 | | | $ | 40.00 | | 11/14/2016 | | | 1,000 | | | | 6,830 | |
-26-
(1)Vested on 2/16/2010.
Potential Payment
Uponupon Termination or Change in Control
We have agreed to pay our officers one year salary and health and welfare (COBRA) benefits upon termination by us or following a change of control. Under the December 12, 2012 Retention Agreement with Mr. Clayton and an extension letter dated March 29, 2013, Mr. Clayton agreed to remain as CFO of the Company through June 30, 2013 and the Company agreed to pay Mr. Clayton a severance of $212,180 as required by the terms of his prior employment agreement. Pursuant to a Retention Agreement with Mr. Lodder, Mr. Lodder agreed to remain as principal executive officer through June 30, 2013 and the Company agreed to pay Mr. Lodder a severance of $233,398 as required by the terms of his prior employment agreement. All of the retention payments were made on or before June 30, 2013.
Unless otherwise agreed by the Board of Directors, the named executive officersother staff members would be entitled to severance upon termination of employment pursuant to ourthe Company’s severance policy. The policy provides:
Completed Service Years |
| Severance Pay |
> 1 year | | 10 days |
1 but less than 2 years | | 15 days |
2 but less than 3 years | | 20 days |
3 but less than 4 years | | 25 days |
4 or more years | | 30 days |
The following table summarizes the compensation paid to non-employee directors during the year ended December 31, 2009.Name | | Fees Earned
Paid in Cash ($) | | Stock Awards ($) | | All Other
Compensation ($) | | Total
($) | |
Douglas T. Brown | | 22,900 | | 10,000 | | — | | 32,900 | |
A. Paul Cox | | 4,900 | | — | | — | | 4,900 | |
Gilbert V. Levin | | — | | — | | | * | | * |
Aris Melissaratos | | 21,300 | | 10,000 | | — | | 31,300 | |
Thomas B. Peter | | 10,300 | | — | | — | | 10,300 | |
Robert J. Vander Zanden | | 23,500 | | 10,000 | | — | | 33,500 | |
422012.
| Name | | Fees Earned Paid in Cash ($) | | | Options ($) | | | All Other Compensation ($) | | | Total ($) | |
| Douglas T. Brown | | $ | 22,000 | | | $ | 8,084 | | | $ | - | | | $ | 30,084 | |
| Edward M. Karr | | | 3,600 | | | | 6,980 | | | | - | | | | 10,580 | |
Harvey J. Kesner (2) | | | 3,600 | | | | 6,980 | | | | - | | | | 10,580 | |
Aris Melissaratos (1) | | | 22,000 | | | | 8,084 | | | | 10,500 | | | | 40,584 | |
Thomas B. Peter (1) | | | 17,300 | | | | 8,084 | | | | 3,500 | | | | 28,884 | |
| Robert J. Vander Zanden | | | 32,900 | | | | 8,084 | | | | - | | | | 40,984 | |
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*
(1) | Under employment agreements with Dr. Gilbert V. LevinAris Melissaratos and Mrs. M. Karen Levin, our founders, we have 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 followingThomas B. Peter resigned their retirements on August 14, 2008 and January 4, 2006, respectively. At December 31, 2009, our liability for both Dr. and Mrs. Levin was estimated to be $480,000 for the lifetime payments and $240,000 for funding the long-term lifetime healthcare and health insurance policies based on actuarially determined amounts. The non-current portion of these amounts is reported on the accompanying balance sheetpositions as deferred compensation. During 2009 and 2008, we paid Dr. and Mrs. Levin a combined total of $135,000 and $123,000 in post-retirement benefits. In addition, Dr. Levin also received $87,000 in salaries during 2008. Dr. Levin continues to serve as a memberDirectors of the BoardCompany on November 30, 2012.
|
| (2) | On February 29, 2013, Mr. Kesner was elected as interim Chief Executive Officer of Directors.the Company. |
Non-employee directors receive the following annual compensation for service as a member of the
Board:Annual Retainer | | $ | 5,000 | | To be paid in cash at May Board Meeting annually. |
Stock Options | | $ | 10,000 | | Number of shares to be calculated by dividing $10,000 by the closing stock price the day of the May Board Meeting. Option will vest immediately and be exercisable for a period of five (5) years. |
Board Meeting Fees | | $ | 2,500 | | To be paid for all in-person Board Meetings. Members must be present to be paid. |
Committee Meeting Fees | | $ | 800 | | To be paid for all in-person Committee Meetings. Members must be present to be paid. |
Teleconference Fees | | $ | 300 | | To be paid for all teleconferences called by either the Chairman of the Board, the President, or by the Chairman of the relevant Committee. Members must be on-line to be paid. |
Additional Retainer | | $ | 1,000 | | To be paid to the Chairman of the Audit Committee. |
Board for the fiscal year ended December 31, 2012:
| Annual Retainer | $5,000 | To be paid in cash at May Board Meeting annually. |
| Stock Options | $10,000 | To be calculated by dividing $10,000 by the closing stock price the day the Stock Options are awarded; and at the May Board Meeting annually thereafter. The Options will vest in full on the day of award and will be exercisable for a period of five (5) years. |
| Board Meeting Fees | $2,500 | To be paid for all in-person Board Meetings. Members must be present to be paid. |
| Committee Meeting Fees | $800 | To be paid for all in-person Committee Meetings. Members must be present to be paid. |
| Teleconference Fees | $300 | To be paid for all teleconferences called by either the Chairman of the Board, the President, or by the Chairman of the relevant Committee. Members must be on-line to be paid. |
| Additional Retainer | $5,000 | To be paid to the Chairman of the Board upon election annually. |
| Additional Retainer | $1,000 | To be paid to the Chairman of the Audit Committee at May Board Meeting annually. |
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during the fiscal year ended December 31, 2012 were Mr. Karr, Chair; Mr. Brown, and Dr. Vander Zanden. None of our members of the Compensation Committee during the fiscal year ended December 31, 2012 served as an officer or employee of the Company, was formerly an officer of the Company, or had any relationship requiring disclosure required by Item 404 of Regulation S-K.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The current Board of Directors consists of Mr. Douglas T. Brown, Mr. Edward M. Karr, Mr. Harvey J. Kesner, Mr. Anthony Hayes, Dr. Robert J. Vander Zanden and Mr. Alexander Poltorak. The Board of Directors has determined that Dr. Robert J. Vander Zanden, Mr. Douglas T. Brown, Mr. Edward M. Karr and Mr. Alexander Poltorak are independent directors within the meaning of the applicable NASDAQ rules. The Company’s Audit, Compensation, and Nominating Committees consist solely of independent directors.
On September 10, 2013, the Company entered into an employment agreement with Mr. Hayes pursuant to which Mr. Hayes shall serve as the Chief Executive Officer of the Company for a period of two years, subject to renewal. In consideration for his employment, the Company paid Mr. Hayes a signing bonus of $100,000, a base salary of $350,000 per annum and Mr. Hayes will be entitled to receive an annual bonus in an amount equal to up to 100% of his base salary if the Company meets or exceeds certain criteria adopted by the Company’s compensation committee. In the event Mr. Hayes’ employment is terminated, other than for “Cause,” as defined in Mr. Hayes’ employment agreement or by Mr. Hayes without “Good Reason,” as defined in Mr. Hayes’ employment agreement, Mr. Hayes will be entitled to receive severance benefits equal to twelve months of his base salary, continued coverage under the Company’s benefit plans for a period of twelve months and payment of his pro-rated earned annual bonus.
On September 10, 2013, we closed the transactions contemplated by the Merger Agreement dated April 2, 2013, by and among the Company, Nuta, North South and certain shareholders of North South. North South was merged with and into Nuta, with Nuta as the surviving corporation and holder of the assets of the North South (“Merger”). As a result of the Merger, holders of the outstanding shares of North South’s outstanding Common Stock received an aggregate of 1,203,153 shares of the Company’s Common Stock and holders of North South’s outstanding Series A Preferred Stock and Series B Preferred Stock received an aggregate of 1,379,685 shares of the Company’s Series D Preferred Stock, each of which is convertible into 10 shares of Common Stock. Under the Merger Agreement, as amended on August 30, 2013, of the consideration paid, 555,072 shares of Common Stock and 94,493 shares of Series D Preferred Stock shall be paid into escrow for a period of one year to cover certain indemnification obligations.
On July 24, 2013, the Company closed on the acquisition of a group of patents in the mobile communication sector (the “Purchased Patents”) from Rockstar. In consideration for the Purchased Patents, the Company 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 the Company’s 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. 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.
In February 2013, the Company entered into a Retention Agreement with its former President, Dr. Robert A. Lodder, which provides that (i) Dr. 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 Dr. 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.
At the end of December, 2012, the Company entered into a Consulting Agreement with an entity wholly-owned by Mr. Kesner, a director 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. On May 31, 2013, 110,000 shares were transferred by the entity to U.S. Commonwealth Life A.I. at the fair market value of the shares of the Common Stock on May 31, 2013.
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. Mr. Kesner’s law firm billed the Company approximately $474,000 for the nine months ended September 30, 2013.
On November 30, 2012, but effective as of December 3, 2012, 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.
We have not adopted written policies and procedures specifically for related person transactions. Our Board of Directors is responsible to approve all related party transactions.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the number of shares of our Common Stock owned beneficially ownedas of December 9, 2013 by all executive(i) each person (including any group) known to us to own more than 5% of any class of our voting securities, (ii) each of our officers and directors, and (iii) our officers and directors as a group as of December 31, 2009. Except for Dr. Levingroup. Unless otherwise indicated, it is our understanding and his wife, no person is known by usbelief that the stockholders listed possess sole voting and investment power with respect to own beneficially morethe shares shown.
Title of Class | | Name of Beneficial Owner | | Amount and Nature of Ownership (1) | | | Percent Of Class (2) | |
| Principal Stockholders | | | | | | |
| Common | | Iroquois Master Fund Ltd. (3) 641 Lexington Avenue 26th Floor New York, NY 10022 | | | 272,033 | (3) | | | 9.99 | % |
| Common | | Rockstar Consortium US LP (4) 7160 North Dallas Parkway, Suite No. 250 Plano, TX 75024 | | | 176,991 | (4) | | | 6.8 | % |
| Common | | Barry Honig 555 South Federal Highway, #450 Boca Raton, FL 33432 | | | 278,060 | (5) | | | 9.99 | % |
| Common | | Hudson Bay IP Opportunities Master Fund LP (6) 777 Third Avenue 30th Floor New York, NY 10017 | | | 261,680 | | | | 9.99 | % |
| Common | | All Principal Stockholders as a Group | | | 988,764 | | | | 36.77 | % |
| Executive Officers and Directors | | | | | | | | |
| Common | | Robert J. Vander Zanden | | | 76,302 | (7) | | | 2.91 | % |
| Common | | Anthony Hayes | | | 85,581 | (8) | | | 3.27 | % |
| Common | | Douglas T. Brown | | | 76,159 | (9) | | | 2.90 | % |
| Common | | Edward M. Karr | | | 76,013 | (10) | | | 2.90 | % |
| Common | | Harvey J. Kesner | | | 214,615 | (11) | | | 8.19 | % |
| Common | | Alexander Poltorak | | | 1,214 | (12) | | | * | |
Common | | All Executive Officers and Directors as a Group (six persons) | | | 529,884 | | | | 20.17 | % |
* Less than
5%1% of the outstanding
Common Stock. The ownershipshares of
Dr. Levin is detailed below.Title of Class | | Name of Beneficial Owner | | Amount and Nature of
Ownership | | Percent Of
Class | |
Common | | Douglas T. Brown | | 46,318 | (2) | * | |
Common | | Robert L. Clayton | | 1,500 | (2) | * | |
Common | | Claire L. Kruger | | 30,000 | (2) | * | |
Common | | Gilbert V. Levin | | 2,419,307 | (1) (2) | 14.1% | |
Common | | Robert A. Lodder, Jr. | | 27,852 | (2) | * | |
Common | | Aris Melissaratos | | 16,281 | (2) | * | |
Common | | Thomas B. Peter | | 6,666 | (2) | * | |
Common | | Robert J. Vander Zanden | | 37,318 | (2) | * | |
Common | | All Executive Officers and Directors as a Group | | 2,585,242 | (2) | 15.1% | |
*
(1) | | Less than 1%Under Rule 13d-3 of the outstandingExchange Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares: (i) voting power, which includes the power to vote or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares of our Common Stock.
|
(1)
| | Includes sharesmay be deemed to be beneficially owned by M. Karen Levin.
|
(2)
| | Included inmore than one person (if, for example, persons share the numberpower to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by D.T. Brown, R.L. Clayton, C.L. Kruger, G.V. Levin, R.A. Lodder, A. Melissaratos, T.B. Peter, R.J. Vander Zandensuch person (and only such person) by reason of these acquisition rights.
|
| (2) | Calculated based on 2,619,395 shares of common stock outstanding as of December 9, 2013 and Alltakes into account the beneficial ownership limitations governing the Series D-1 Convertible Preferred Stock. |
| (3) | Represents (i) 167,274 shares of common stock; (ii) 6,759 shares of common stock issuable upon exercise of warrants and (iii) 98,000 shares of common stock issuable upon conversion of 9,800 shares of Series D/D-1 Convertible Preferred Stock. Excludes 1,966,610 shares of common stock issuable upon conversion of 196,661 shares of Series D/D-1 Convertible Preferred Stock. The holder of Series D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. Iroquois Capital Management LLC (“Iroquois Capital”) is the investment manager of Iroquois Master Fund Ltd. (“IMF”). Consequently, Iroquois Capital has voting control and investment discretion over securities held by IMF. As managing members of Iroquois Capital, Joshua Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital in its capacity as investment manager to IMF. As a result of the foregoing, Mr. Silverman and Mr. Abbe may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange of 1934, as amended) of these securities held by IMF. Notwithstanding the foregoing, Mr. Silverman and Mr. Abbe disclaim such beneficial ownership. |
| (4) | John Veschi is the Chief Executive OfficersOfficer of Rockstar Consortium LLC, general partner of Rockstar Consortium US LP and Directors as a Group are 7,500, 1,500, 0, 0, 5,000, 0, 0, 7,500in such capacity holds voting and 21,500dispositive power over the shares respectively,held by Rockstar Consortium US LP. |
| (5) | Represents (i) 44,127 shares of common stock owned by Barry Honig; (ii) 65,933 shares of common stock owned by GRQ Consultants Inc. Roth 401K ("GRQ Roth 401K"), over which Barry Honig holds voting and dispositive power; and (iii) 168,000 shares of common stock issuable upon exercise of 16,800 shares of Series D/D-1 Preferred Stock held by Barry Honig. Excludes 3,567,530 shares of common stock issuable upon conversion of 356,753 shares of Series D/D-1 Convertible Preferred Stock held by Barry Honig; 364,970 shares of common stock issuable upon conversion of 36,497 shares of Series D/D-1 Convertible Preferred Stock held by GRQ Roth 401K; 69,240 shares of common stock issuable upon conversion of 6,924 shares of Series D/D-1 Convertible Preferred Stock held by GRQ Consultants Inc. 401K over which Barry Honig holds voting and dispositive power; 69,240 shares of common stock issuable upon conversion of 6,924 shares of Series D/D-1 Convertible Preferred Stock held by GRQ Consultants Inc. Defined Benefit Plan, over which Barry Honig holds voting and dispositive power and 78,125 shares of common stock issuable upon conversion of 78,125 shares of Series F-1 Preferred Stock held by Barry Honig. The holder of Series D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such persons havethat the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion. |
| (6) | Represents 261,680 shares of common stock. Excludes (i) 5,338,630 shares of common stock issuable up on conversion of 533,863 shares of Series D/D-1 Preferred Stock, (ii) one share common stock issuable upon conversion of one share of Series C Preferred Stock and (iii) 78,125 shares of common stock issuable upon conversion of 78,125 shares of Series F-1 Preferred Stock. The Series C Preferred Stock may not be converted and the holder may not receive shares of the Company’s common stock such that the number of shares of common stock held by them and their affiliates after such conversion exceeds 4.99% of the then issued and outstanding shares of common stock. The restriction described above may be waived, in whole or in part, upon sixty-one (61) days prior notice from the holder to the Company. The holder of Series D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The foregoing restriction may be waived, in whole or in part, upon sixty-one (61) days prior notice from the holder to the Company. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion. Hudson Bay Capital Management LP, the investment manager of Hudson Bay IP Opportunities Master Fund L.P. (“Hudson Bay”), has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Sander Gerber disclaims beneficial ownership over these securities. |
| (7) | Includes 76,302 shares of Common Stock such person has a right to acquire within 60 days pursuant to stock options. |
| (8) | Includes 62,500 shares of Common Stock such a person has a right to acquire within 60 days pursuant to stock options. |
| (9) | Includes 76,159 shares of common stock such person has a right to acquire within 60 days pursuant to stock options. |
| (10) | Includes 76,013 shares of common stock such person has a right to acquire within 60 days pursuant to stock options. |
| (11) | Includes options to purchase 188,513 shares of common stock exercisable within 60 days and 26,102 shares of restricted common stock owned indirectly by Paradox Capital Partners LLC ("Paradox"). Mr. Kesner is the sole manager and member of Paradox and in such capacity has voting and dispositive power over shares held by Paradox. |
| (12) | Includes 1,214 shares of common stock such person has a right to acquire with 60 days pursuant to stock options. |
Table of Contents
As of December 31, 2009, Dr. Levin, 3170 S. Ocean Boulevard, #602S, Palm Beach, FL 33480, beneficially owned in the aggregate 2,419,307 shares of Common Stock (14.1% of the 17,150,648 outstanding shares). As principal stockholders, Dr. Levin and his wife are considered control persons with respect to us.
All directors and executive officers as a group, beneficial owners of 2,585,242 shares of Common Stock, owned 15.1% of the 17,150,648 outstanding shares. With the exception of Cede & Co., the holder of record for certain brokerage firms and banks, except as disclosed above, no other person is known by us to own beneficially more than 5% of our outstanding Common Stock.
In February 2001,common stock.
Effective January 24, 2013, the Board of Directors adopted theCompany and Equity Stock Transfer, LLC, as Rights Agent, entered into a Rights Agreement (the “Agreement”). The Agreementwhich provides each Stockholderstockholder of record a dividend distribution of one “right” for each outstanding share of Common Stock.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,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.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, 2010.2017, subject to further extension. Each right entitles a Stockholderstockholder to acquire, at a stated purchase price of $7.46 per one one-hundredth of a preferred share, subject to adjustments, 1/100 of a share of our preferred stock, which carries voting and dividend rights similar to one share of our Common Stock.common stock. Alternatively, a right holder may elect to purchase for the stated price an equivalent number of shares of our Common Stockcommon 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 Stockcommon stock available under the second option. The purchase price of the preferred stock fractional amount is subject to adjustment for certain events as described in the Agreement. At the discretion of a majority of the Board of Directors and within a specified time period, we may redeem all of the rights at a price of $0.001 per right. The Board may also amend any provisions of the Agreement prior to exercise.44
The Rockstar Transaction
On July 24, 2013, we closed on the acquisition of a group of patents in the mobile communication sector (the “Purchased Patents”) from Rockstar. In consideration for the Purchased Patents, we paid certain consideration to Rockstar, including 176,991 shares of our common stock which are subject to a lock-up agreement, subject to certain leak-out provisions, which shall expire on the earlier of (i) six months from issuance 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. 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 us.
The North South Transaction
In connection with Dr. Gilbert V. Levinour acquisition of North South on September 10, 2013, we issued 1,203,153 shares of our common stock and Mrs. M. Karen Levin,1,379,685 shares of our founders, we have agreedSeries D Convertible Preferred Stock, which is convertible into shares of common stock on a one-for-ten basis, to provide Dr.the former shareholders of North South. The Company anticipates the commencement of an exchange with holders of Series D Convertible Preferred Stock pursuant to which such holders could exchange such shares for shares of our Series D-1 Convertible Preferred Stock on a one-for-one basis. An aggregate of 725,063 shares of common stock issued to the former stockholders of North South and Mrs. Levin each1,400,560 shares of common stock underlying 140,056 shares of Series D Convertible Preferred Stock which will be exchanged for an equal number of shares of Series D-1 Convertible Preferred Stock are being registered pursuant to this prospectus. The rights of the Series D-1 Convertible Preferred Stock are substantially identical to the rights of the Series D Convertible Preferred Stock except for certain modifications relating to conversion limitations
Selling Stockholders Table
The following table sets forth information with lifetime payments of $12,500 each quarterrespect to fund long-term lifetime healthcare and health insurance policies following their retirements on August 14, 2008 and January 4, 2006, respectively. At December 31, 2009, our liability for both Dr. and Mrs. Levin was estimatedcommon stock known to us to be $480,000 forbeneficially owned by the lifetime paymentsselling stockholders as of December 9, 2013. The selling stockholders, to our knowledge, have not had a material relationship with us during the three years immediately preceding the consummation of the acquisition.
| | | | | Common | | |
| | | Beneficial Ownership of | | Stock | | Beneficial Ownership |
| | | Common Stock Prior | | Saleable | | of Common Stock |
| | | to the Offering (1) | | Pursuant | | After the Offering (1) |
| | | Number of | | Percent of | | to This | | Number of | | Percent of |
| Name and Address of Selling Stockholder | | Shares | | Class (2) | | Prospectus | | Shares | | Class (2) |
Hudson Bay IP Opportunities Master Fund, LP (3) | | | | | | | | | | | |
Iroquois Master Fund Ltd. (5) | | | | | | | | | | | |
GRQ Consultants, Inc. Roth 401K FBO Barry Honig (7) | | | | | | | | | | | |
| | | | | | | | | | | |
Rockstar Consortium US LP (11) | | | | | | | | | | | |
Alpha Capital Anstalt (12) | | | | | | | | | | | |
Robert S. Colman Trust UDT 3/13/85 (13) | | | | | | | | | | | |
| | | | | | | | | | | |
Sandor Capital Master Fund (14) | | | | | | | | | | | |
Cranshire Capital Master Fund Ltd (15) | | | | | | | | | | | |
Empery Asset Master, Ltd (16) | | | | | | | | | | | |
Stockwire Research Group (17) | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
American European Insurance Company (19) | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
* represents less than 1%
(1) Assumes that all of the shares held by the selling stockholder covered by this prospectus are sold and $240,000 for fundingthat the long-term lifetime healthcare and health insurance policiesselling stockholder acquires no additional shares of common stock before the completion of this offering. However, as the selling stockholder can offer all, some, or none of its common stock, no definitive estimate can be given as to the number of shares that the selling stockholder will ultimately offer or sell under this prospectus.
(2) Calculated based on actuarially2,619,395 shares of common stock outstanding as of December 9, 2013 and takes into account the beneficial ownership limitations governing the Series D-1 Convertible Preferred Stock.
(3) Represents 261,680 shares of common stock. Excludes (i) 5,338,630 shares of common stock issuable up on conversion of 533,863 shares of Series D/D-1 Preferred Stock, (ii) one share common stock issuable upon conversion of one share of Series C Preferred Stock and (iii) 78,125 shares of common stock issuable upon conversion of 78,125 shares of Series F-1 Preferred Stock. The Series C Preferred Stock may not be converted and the holder may not receive shares of the Company’s common stock such that the number of shares of common stock held by them and their affiliates after such conversion exceeds 4.99% of the then issued and outstanding shares of common stock. The restriction described above may be waived, in whole or in part, upon sixty-one (61) days prior notice from the holder to the Company. The holder of Series D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The foregoing restriction may be waived, in whole or in part, upon sixty-one (61) days prior notice from the holder to the Company. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion.
Hudson Bay Capital Management LP, the investment manager of Hudson Bay IP Opportunities Master Fund L.P. (“Hudson Bay”), has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Sander Gerber disclaims beneficial ownership over these securities.
(4) The number of shares being offered by Hudson Bay includes 261,680 shares of common stock and 382,010 shares of common stock underlying 38,201 shares of Series D/D-1 Preferred Stock.
(5) Represents (i) 167,274 shares of common stock; (ii) 6,759 shares of common stock issuable upon exercise of warrants and (iii) 98,000 shares of common stock issuable upon conversion of 9,800 shares of Series D/D-1 Convertible Preferred Stock. Excludes 1,966,610 shares of common stock issuable upon conversion of 196,661 shares of Series D/D-1 Convertible Preferred Stock. The holder of Series D/D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock.
Iroquois Capital Management LLC (“Iroquois Capital”) is the investment manager of Iroquois Master Fund Ltd. (“IMF”). Consequently, Iroquois Capital has voting control and investment discretion over securities held by IMF. As managing members of Iroquois Capital, Joshua Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital in its capacity as investment manager to IMF. As a result of the foregoing, Mr. Silverman and Mr. Abbe may be deemed to have beneficial ownership (as determined amounts. The non-current portionunder Section 13(d) of the Securities Exchange of 1934, as amended) of these amountssecurities held by IMF. Notwithstanding the foregoing, Mr. Silverman and Mr. Abbe disclaim such beneficial ownership.
(6) The number of shares being offered by IMF includes 118,830 shares of common stock and 297,170 shares of common stock issuable upon conversion of 29,717 shares of Series D/D-1 Preferred Stock.
(7) Barry Honig is reported on the accompanying balance sheet as deferred compensation. During 2009trustee of GRQ Consultants, Inc. Roth 401K FBO Barry Honig (“GRQ Roth 401K”) and 2008, we paid Dr.in such positions is deemed to hold voting and Mrs. Levin a combined totaldispositive power over securities of $135,000the Company held by such entities
(8) Represents (i) 44,127 shares of common stock owned by Barry Honig; (ii) 65,933 shares of common stock owned by GRQ Roth 401K; and $123,00 in post-retirement benefits. In addition, Dr. Levin also received $87,000 in salary during 2008. Dr. Levin continues(iii) 168,000 shares of common stock issuable upon exercise of 16,800 shares of Series D/D-1 Preferred Stock held by Barry Honig. Excludes 3,567,530 shares of common stock issuable upon conversion of 356,753 shares of Series D/D-1 Convertible Preferred Stock held by Barry Honig; 364,970 shares of common stock issuable upon conversion of 36,497 shares of Series D/D-1 Convertible Preferred Stock held by GRO Roth 401K; 69,240 shares of common stock issuable upon conversion of 6,924 shares of Series D/D-1 Convertible Preferred Stock held by GRQ Consultants Inc. 401K over which Barry Honig holds voting and dispositive power; 69,240 shares of common stock issuable upon conversion of 6,924 shares of Series D/D-1 Convertible Preferred Stock held by GRQ Consultants Inc. Defined Benefit Plan, over which Barry Honig holds voting and dispositive power and 78,125 shares of common stock issuable upon conversion of 78,125 shares of Series F-1 Preferred Stock held by Barry Honig. The holder of Series D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to serve as athe issuance of shares of common stock upon such conversion.
(9) The number of shares being offered by GRQ Roth 401K includes 65,928 shares of common stock and 267,580 shares of common stock issuable upon conversion of 26,758 shares of Series D/D-1 Preferred Stock.
(10) The number of shares being offered by Barry Honig includes 44,127 shares of common stock and 289,370 shares of common stock issuable upon conversion of 28,937 shares of Series D/D-1 Preferred Stock.
(11) Rockstar Consortium LLC is the General Partner of Rockstar Consortium US LP. John Veschi is the Chief Executive Officer of Rockstar Consortium US LP and may be deemed to hold voting and dispositive power over securities of the Company held by Rockstar Consortium US LP. Mr. Veschi disclaims beneficial ownership over any securities of the Company held by Rockstar Consortium US LP.
(12) Represents (i)133,326 shares of common stock and (ii) 142,500 shares of common stock issuable upon conversion of 14,250 shares of Series D/D-1 Convertible Preferred Stock. Excludes 64,500 shares of common stock issuable upon conversion of 6,450 shares of Series D-1 Preferred Stock and 100,000 shares of common stock issuable upon conversion of 100,000 shares of Series F-1 Preferred Stock. The holder of Series D-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion. Konrad Ackermann may be deemed to hold voting and dispositive power over securities of the Company held by Alpha Capital Anstalt.
(13) Robert S. Colman may be deemed to hold voting and dispositive power over securities of the Company held by Robert S. Colman Trust UDT 3/13/85.
(14) Represents (1) 39,007 shares of common stock, (ii) 112,500 shares of common stock issuable upon conversion of 11,250 shares of Series D/D-1 Convertible Preferred Stock and (iii) 48,000 shares of common stock convertible from 48,000 shares of Series F-1 Preferred Stock. The holder of Series D/D-1 Convertible Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of the then issued and outstanding shares of common stock. The holder of Series F-1 Preferred Stock may not receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion exceeds 9.99% of then issued and outstanding common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion. John S. Lemak may be deemed to hold voting and dispositive power over securities of the Company held by Sandor Capital Master Fund.
(15) Represents 29,313 shares of common stock and 6,113 shares of common stock issuable upon exercise of warrants. Cranshire Capital Advisors, LLC (“CCA”) is the investment manager of Cranshire Capital Master Fund, Ltd. (“Cranshire Master Fund”) and has voting control and investment discretion over securities held by Cranshire Master Fund. Mitchell P. Kopin (“Mr. Kopin”), the president, the sole member and the sole member of the Board of
Directors.Managers of CCA, has voting control over CCA. As a result, each of Mr. Kopin and CCA may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held by Cranshire Master Fund.
(16) Empery Asset Management LP, the authorized agent of Empery Asset Master, Ltd (“EAM”), has discretionary authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. Empery Asset Management LP, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares.
(17) Adrian James is the President of Stockwire Research Group and in such capacity holds voting and dispositive power over securities of the Company held by such entity.
(18) John Lemak is the manager of JSL Kids Partners and in such capacity holds voting and dispositive power over securities of the Company held by such entity.
(19) Nachum Stein is the President of American European Insurance Company and in such capacity holds voting and dispositive power over securities of the Company held by such entity. Mr. Nachum’s individual ownership includes 9,693 shares of common stock held by American European Insurance Company.
DESCRIPTION OF CAPITAL STOCK
The following is a description of our capitalcommon stock and preferred stock, summarizes the material terms and provisions of the common stock and preferred stock and is not complete. For the complete terms of our common stock and preferred stock, please refer to our certificate of incorporation, as amended, which may be further amended from time to time, any certificates of designation for our preferred stock, and our amended and restated bylaws, and other agreements.as amended from time to time. The following is only a summary and is qualified by applicable law and byDelaware General Corporation Law may also affect the provisionsterms of our certificate of incorporation, bylaws and other agreements, copies of which are available as set forth under the caption “Where You Can Find More Information.”General
Under our certificate of incorporation, we have 52,000,000 shares ofthese securities.
Our authorized capital stock
consists of
which 50,000,000
shares have been classified as common stock, $0.005 par value per share, and 2,000,000 shares have been classified as preferred stock, $0.01 par value per share. As of June 30, 2010, there were 17,150,648 shares of common stock,
outstanding$0.0001 par value, and
no outstanding5,000,000 shares of preferred
stock.stock, $0.0001 par value. The authorized and unissued shares of common stock and the authorized and undesignated shares of preferred stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. If the approval of our stockholders is not so required, our board of directors may determine not to seek stockholder approval.
Subject to the rights of the preferred stock, holders of common stock are entitled to receive such dividends as are declared by our board of directors out of funds legally available for the payment of dividends. We presently intend to retain any earnings to fund the development of our business. Accordingly, we do not anticipate paying any dividends on our common stock for the foreseeable future. Any future determination as to declaration and payment of dividends will be made at the discretion of our board of directors.
In the event of the liquidation, dissolution, or winding up of
Spherix,the Company, each outstanding share of our common stock will be entitled to share equally in any of our assets remaining after payment of or provision for our debts
and other
liabilities and payments to our preferred stockholders.liabilities.
Holders of common stock are entitled to one vote per share on matters to be voted upon by stockholders. There is no cumulative voting for the election of directors, which means that the holders of shares entitled to exercise more than fifty percent (50%) of the voting rights in the election of directors are able to elect all of the directors.
Holders of common stock have no preemptive rights to subscribe for or to purchase any additional shares of common stock or other obligations convertible into shares of common stock which we may issue after the date of this prospectus.
All of the outstanding shares of common stock are fully paid and non-assessable. Holders of our common stock are not liable for further calls or assessments.
The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
This prospectus also relates to preferred stock purchase rights attached to our common stock. References in this prospectus to common stock shall be deemed to include the preferred stock purchase rights attached hereto.
45
Our certificate of incorporation authorizes
2,000,0005,000,000 shares of preferred stock. Our board of directors is authorized, without further stockholder action, to establish various series of such preferred stock from time to time and to determine the rights, preferences and privileges of any unissued series including, among other matters, any dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms, the number of shares constituting any such series, and the description thereof and to issue any such shares. Although there is no current intent to do so, our board of directors may, without stockholder approval, issue shares of an additional class or series of preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of the common
stock or the convertible preferred stock.
As of the date of this prospectus, there were no shares of preferred stock designated or outstanding. In connection with our adoption of the stockholder rights plan described below, our board of directors designated 500,000 shares of our preferred stock as Series A Junior Participating Preferred Stock.
One of the effects of the preferred stock may be to enable the board of directors to render more difficult or to discourage an attempt to obtain control of
Spherixthe Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of the management.
In 2001,
Series A Preferred Stock
Our board of directors has designated 500,000 shares of our preferred stock as Series A Participating Preferred Stock (“Series A Preferred Stock”).
On January 1, 2013, we adopted a stockholder rights plan in which rights to purchase shares of Series A
Junior Participating Preferred Stock
(“Series A Preferred Stock”) were distributed as a dividend at the rate of one right for each share of common
stock held as of the close of business on March 1, 2001.stock. The rights are designed to guard against partial tender offers and other abusive and coercive tactics that might be used in an attempt to gain control of Spherix or to deprive our stockholders of their interest in the long-term value of Spherix. These rights seek to achieve these goals by forcing a potential acquirer to negotiate with our board of directors (or go to court to try to force the Board of Directors to redeem the rights), because only the Board of Directors can redeem the rights and allow the potential acquirer to acquire our shares without suffering very significant dilution. However, these rights also could deter or prevent transactions that stockholders deem to be in their interests, and could reduce the price that investors or an acquirer might be willing to pay in the future for shares of our common stock.
Each right entitles the registered holder to purchase one one-hundredth of a share (a “Unit”) of our Series A Preferred
Stock at a price of $16.00 per Unit, subject to adjustment.Stock. Each Unit of Series A Preferred Stock will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event of liquidation, the holders of the Units of Series A Preferred Stock will be entitled to an aggregate payment of 100 times the payment made per share of common stock. Each Unit of Series A Preferred Stock will have 100 votes, voting together with the common stock. Finally, in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Unit of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary anti-dilution provisions.
The rights will be exercisable only if a person or group acquires ten percent (10%) or more of our common stock (subject to certain exceptions stated in the plan) or announces a tender offer the consummation of which would result in ownership by a person or group of ten percent (10%) or more of our common stock. Our board of directors may redeem the rights at a price of $.001 per right. The rights will expire at the close of business on December 31,
20102017 unless the expiration date is extended or unless the rights are earlier redeemed or exchanged by
Spherix.the Company.
Series B Convertible Preferred Stock
The convertible preferred stock we are
In connection with an offering
will be issued pursuant to a securities purchase agreement between each of the investors and us. We urge you to review the form of securities,
purchase agreement and certificate of designation authorizing the convertible preferred stock, which
will be filed as exhibits to the registration statement of which this prospectus formswe closed in October 2010, we created a
part, for a complete description of the terms and conditions applicable to the convertible preferred stock. The following brief summary of the material terms and provisions of the convertible preferred stock is subject to, and qualified in its entirety by, the certificate of designation authorizing the convertible preferred stock. This prospectus also relates to the offering of the shares of our common stock upon the conversion of the convertible preferred stock issued to the investors in this offering.We are authorized to issue [*]Series B Convertible Preferred Stock. All shares of Series B Convertible Preferred Stock par value $0.01 perissued in the offering have been converted to common stock except for one (1) outstanding share pursuant to the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock we will file with the Secretary of State of the State of Delaware. This certificate of designation will
46
Stock.
Table of Contents
be authorized by our board of directors without approval by our stockholders pursuant to the authority vested in the board of directors under our certificate of incorporation.
The Series B Convertible Preferred Stock
will beis convertible at the option of the holder at any time into shares of our common stock at a conversion ratio determined by dividing the stated value of the convertible preferred stock, or $1,000, by a
conversationconversion price of
$[*]$250 per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends,
combinationscombination of shares and similar recapitalization transactions. The conversion price may also be subject to adjustment if we issue rights, options or warrants to all holders of our common stock entitling them to subscribe for or purchase shares of our common stock at a price per share less than the daily volume weighted average price of our common stock, if we distribute evidences of our indebtedness or assets or rights or warrants to subscribe for or purchase any security to all holders of our common stock, or if we consummate a fundamental corporate transaction such as a merger or consolidation, sale or other disposition of all or substantially all of our assets, or an exchange or tender offer accepted by the holders of 50% or more of our outstanding common stock. Subject to limited exceptions, a holder of shares of Series B Convertible Preferred Stock will not have the right to convert any portion of its Series B Convertible Preferred Stock if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion.
The Series B Convertible Preferred Stock is entitled to receive dividends (on an “as converted to common stock” basis) to and in the same form as dividends actually paid on shares of our common stock.
Except as required by law, holders of our Series B Convertible Preferred Stock are generally not entitled to voting rights, exceptrights.
Series C Convertible Preferred Stock
On March 6, 2013, the Company and certain investors that participated in the affirmative voteNovember 2012 private placement transaction, 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 our 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 holdersholder. The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of 67%Delaware of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock.
The exchanged 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, each of which is 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 our common stock on February 28, 2013 of $12.6439 as reported by Bloomberg. We have 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. As of December 9, 2013, one share of Series C Convertible Preferred Stock was outstanding.
Series D Convertible Preferred Stock
On April 2, 2013, we entered into the Merger Agreement with Nuta, North South and the shareholders of North South, as amended on August 30, 2013. On September 10, 2013, we consummated the Merger. At the closing of the Merger, an aggregate of 500 issued and outstanding shares of North South’s common stock were converted into the right to receive an aggregate of 1,203,153 shares of common stock and 500 shares of North South’s Series A Preferred Stock and 128 shares of North South’s Series B Preferred Stock issued and outstanding were converted into the right to receive an aggregate of 1,379,685 shares of our newly designated Series D Convertible Preferred Stock.
Each share of Series D Preferred Stock has a stated value of $0.0001 per share and is convertible preferred stock is required to take certain actions that may adversely affectinto ten (10) shares of common stock. Upon the rights or preferences of the holders of convertible preferred stock, including authorizing any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation, dissolution or winding up of our company senior to, or otherwise pari passu with, thebusiness, each holder of Series B ConvertibleD Preferred Stock shall be entitled to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the Stated Value or (ii) the amount the holder would receive as a holder of the Company’s common stock on an “as converted” basis. Each holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to our stockholders and increasingshall be entitled to such number of votes equal to the number of authorizedshares of common stock such shares of Series B ConvertibleD Preferred Stock. In addition, withoutare convertible into at such time, taking into account the prior written consentbeneficial ownership limitations set forth in the governing Certificate of Designation and the Conversion Limit limitations described below. At no time may shares of Series D Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of our issued and outstanding common stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding common stock on 61 days’ written notice to us. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock dividends, splits and fundamental transactions.
Additionally, subject to the beneficial ownership limitations described above, holders of Series D Preferred Stock may not convert such shares in excess of the “Conversion Limit”. The “Conversion Limit” is defined as that number of shares of common stock as shall equal 15% (the “Volume Percentage”) of the greater of (i) the trading volume of our common stock on such conversion date or (ii) the average trading volume of our common stock for ten trading days immediately prior to such conversion date. If our common stock trades at a price of at least 67%$12.00 per share on the conversion date, then the Volume Percentage for purposes of the Series B Convertible Preferred Stock, we may not amend our certificate of incorporation or bylaws in any manner that materially and adversely affects any rights offoregoing calculation shall equal 20%. Notwithstanding the foregoing, holders of the Series BD Preferred Stock may convert such shares without regard to the aforementioned conversion limit if our common stock trades at a minimum price of $15.00 per share on the conversion date.
Series D-1 Convertible Preferred Stock
Our Series D-1 Convertible Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into ten (10) shares of common stock. Upon the liquidation, dissolution or repaywinding up of our business, each holder of Series D-1 Preferred Stock shall be entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or reacquire(ii) the amount the holder would receive as a holder of the Company’s common stock on an “as converted” basis. Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to our stockholders and shall be entitled to such number of votes equal to the number of shares of common stock such shares of Series D-1 Preferred are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation. At no time may shares of Series D-1 Preferred Stock be converted if such conversion would cause the holder to hold in excess of 9.99% of our issued and outstanding common stock. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock dividends, splits and fundamental transactions. The Company anticipates commencing an exchange with holders of Series D Convertible Preferred Stock pursuant to which the holders of our outstanding shares of Series D Preferred Stock acquired in the Merger could exchange such shares for shares of our Series D-1 Preferred Stock on a one-for-one basis.
Series E Convertible Preferred Stock
Our Series E Preferred Stock was established on June 25, 2013. Each share of Series E Preferred Stock is convertible, at the option of the holder at any time, into one (1) share of 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 Preferred Stock to the extent that, as a result of such conversion, the holder will beneficially own more than a de minimis number4.99% (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 or securitiescalculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series E Preferred Stock. All outstanding shares of our Series E Preferred Stock were held by North South and retired in full on September 30, 2013.
Series F Convertible Preferred Stock
Our Series F Preferred Stock was established on November 1, 2013. Each share of Series F Preferred Stock is convertible, at the option of the holder at any time, into or exercisable forone (1) share of 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. Each share of Series F Preferred Stock is entitled to one vote per share (subject to beneficial ownership limitation) and shall vote together with holders of our common stock.The securities purchase agreement pursuant to whichWe are prohibited from effecting the conversion of the Series B ConvertibleF Preferred Stock to the extent that, as a result of such conversion, the holder will bebeneficially own more than 9.99% in the aggregate of the issued prohibits us from issuing anyand outstanding shares of our common stock or any equity or debt securities convertible into our common stock for a periodcalculated immediately after giving effect to the issuance of 90 days after the closing of this offering.
We do not intend to list our Series B Convertible Preferred Stock on any securities exchange or automated quotation system.
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Options
As of June 30, 2010, there were options held by our employees and others to purchase an aggregate of 63,088 shares of common stock exercisableupon the conversion of the Series F Preferred Stock. On November 6, 2013, we issued an aggregate of 304,250 shares of Series F Preferred Stock in a private placement. In November 2013, we conducted an exchange of our outstanding Series F Preferred Stock for shares of Series F-1 Preferred Stock (as described below). As of the date of this prospectus, no shares of Series F Preferred Stock were outstanding.
Series F-1 Convertible Preferred Stock
Our Series F-1 Convertible Preferred Stock (“Series F-1 Preferred Stock”) was established on November 22, 2013. On November 26, 2013, the Company and holders of Series F Preferred Stock entered into separate Amendment and Exchange Agreements pursuant to which the holders of Series F Preferred Stock exchanged shares of Series F Preferred Stock for shares of our Series F-1 Preferred Stock on a one-for-one basis. On November 26, 2013, an aggregate of 304,250 shares of Series F-1 were issued in exchange for 304,250 shares of Series F Preferred Stock. As of December 9, 2013, 304,250 shares of Series F-1 Preferred Stock were outstanding.
Each share of Series F-1 Preferred Stock is convertible, at the option of the holder at any time, into one (1) share of common stock and has a weighted average exercise pricestated value of $1.61 per share. We currently have 661,136 options/restricted$0.0001. Such conversion ratio is subject to adjustment in the case of stock available for grant under our equity incentive plan.The $[*]splits, stock dividends, combination of shares and similar recapitalization transactions. Each share of Series F-1 Preferred Stock is entitled to 91% of one vote per share exercise price(subject to beneficial ownership limitation) and shall vote together with holders of our common Stock. We are prohibited from effecting the conversion of the warrants may be paidSeries F-1 Preferred Stock to the extent that, as a result of such conversion, the holder will beneficially own more than 9.99% in cash or inthe aggregate of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock.
stock upon the conversion of the Series F-1 Preferred Stock.
Options
As of December 9, 2013, 2,006,714 options were issued under our 2013 Equity Incentive Plan and 6,663 options were issued under our previously adopted 1997 Plan.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equity Stock Transfer, with an address at 110 Greene Street, Suite 403, New York, NY 10012.
Listing
Our common stock is listed on the NASDAQ Capital Market under the symbol “SPEX”. We have not applied to list our common stock on any other exchange or quotation system.
Limitations on Directors’ Liability
Our certificate of incorporation and bylaws contain provisions indemnifying our directors and officers to the fullest extent permitted by Delaware law.
In addition, as permitted by Delaware law, our certificate of incorporation provides that no director will be liable to us or our stockholders for monetary damages for breach of the director’s fiduciary duty as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of the director’s fiduciary duty as a director, except that a director will be personally liable for:
| · | any breach of his or her duty of loyalty to us or our stockholders; |
| · | acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law; |
| · | the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or |
| · | any transaction from which the director derived an improper personal benefit. |
·
any breach of his or her duty of loyalty to us or our stockholders;·acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law;
·the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or
·any transaction from which the director derived an improper personal benefit.
This provision does not affect a director’s liability under the federal securities laws.
To the extent that our directors, officers and controlling persons are indemnified under the provisions contained in our certificate of incorporation or Delaware law against liabilities arising under the Securities Act of 1933, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
Provisions of Our Certificate of Incorporation and Delaware Law that May Have an Anti-Takeover Effect
Certain provisions set forth in our certificate of incorporation and Delaware law, which are summarized below, may have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in the stockholder’s best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.
Delaware Takeover Statute
Section 203 of the Delaware General Corporation Law (“DGCL”) prohibits a Delaware corporation that is a public company from engaging in any “business combination” (as defined below) with any “interested stockholder” (defined generally as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with such entity or person) for a person of three years following the date that such stockholder became an interested stockholder, unless:
| · | before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
| · | on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
·before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;·upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
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·on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder.
Section 203 of the Delaware General Corporation Law defines “business combination” to include:
·any merger or consolidation involving the corporation and the interested stockholder;
·
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; |
| · | subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| · | any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
| · | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
| · | Disclosure of SEC Position on Indemnification for Securities Act Liabilities |
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.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell, transfer, or otherwise dispose of any or all of its shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
The selling stockholders may use any one or more of the
assetsfollowing methods when disposing of
the corporation involving the interested stockholder;·subject to certain exceptions, any transaction that results in the issuanceshares or transfer by the corporation of any stock of the corporationinterests therein:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| ● | 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; |
| ● | 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 proceeds to the
interested stockholder;·any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
·the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
Undesignated Preferred Stock
Our certificate of incorporation contains provisions that permit our board of directors to issue, without any further vote or action by ourselling stockholders up to 2,000,000 shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares constituting the series and the designation of the series,from any voting powers of the shares of the series, and any preferences and relative, participating, optional and other special rights and any qualifications, limitations or restrictions, of the shares of such series. Our board could authorize the issuance of shares of preferred stock that could have the effect of delaying, deferring or preventing a transaction or change in control that might involve a premium price for shares of our common stock or otherwise be in their interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, LLC, whose address is 59 Maiden Lane, Plaza Level, New York, NY 10038.
Listing
Our common stock is listed on the NASDAQ Capital Market under the symbol “SPEX”. We have not applied to list our common stock on any other exchange or quotation system.
DESCRIPTION OF WARRANTS
The warrants we are offering will be issued pursuant to a securities purchase agreement between each of the investors and us. We urge you to review the form of securities purchase agreement and warrant, which will be filed as exhibits to the registration statement of which this prospectus forms a part, for a complete description of the terms and conditions applicable to the warrants. The following brief summary of the material terms and provisions of the warrants is subject to, and qualified in its entirety by, the form of warrant. This prospectus also relates to the offering of the shares of our common stock upon the exercise, if any, of the warrants issued to the investors in this offering. The warrants we are issuing to the placement agent in this offering to purchase shares of our common stock are not covered by this prospectus.
The warrants will have an exercise price of $[*] per share of our common stock and will be exercisable at the option of the holder immediately after issuance through and including the date that is the fifth year anniversary of the initial exercise date. Subject to limited exceptions, a warrant holder will not have the right to exercise any portion of the warrant if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after the exercise.
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The exercise price of the warrants, and in some cases the number of shares issuable upon exercise of the warrants, will be subject to adjustment in the event of stock splits, stock dividends, combinations and similar events affecting our common stock. The exercise price may also be subject to adjustment if we issue rights, options or warrants to all holders of our common stock entitling them to subscribe for or purchase share of our common stock at a price per share less than the daily volume weighted average price of our common stock or if we distribute evidences of our indebtedness or assets or rights or warrants to subscribe for or purchase any security to all holders of our common stock. In addition, in the event we consummate a fundamental corporate transaction such as a merger or consolidation with or into another person or other reorganization event in which our common stock is converted or exchanged for securities, cash or other property, or we sell, lease, license or otherwise dispose of all or substantially all of our assets or we or another person acquires 50% or more of our outstanding common stock, then following such event, the holders of the warrants will be entitled to receive, for each share that would have been issuable upon exercise of the warrants immediately prior to such fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of ours, if we are the surviving corporation, and any additional consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which the warrant is exercisable immediately prior to such fundamental transaction. Further, if we are acquired by a company that does not have its common stock traded on a national securities exchange, the warrant holders will have the right to have us (or our successor corporation) repurchase the warrants at their fair market value. Any successor to us or surviving entity shall assume our obligations under the warrants.
The warrant holders must surrender payment in cash of the aggregate exercise price of the shares being acquired upon exercise of the warrants. If, however, we are unable to offer and sell the shares underlying these warrants pursuant to this prospectus due to the ineffectiveness of the registration statement of which this prospectus is a part, then the warrants may only be exercised on a “net” or “cashless” basis. No fractional shares of common stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.
The warrants do not entitle the holders thereof to any voting rights, dividends or other rights as a stockholder of ours prior to the exercise of the warrants.
We do not intend to list the warrants on any securities exchange or automated quotation system.
PLAN OF DISTRIBUTION
We have entered into an engagement letter agreement, dated August 12, 2010, with Rodman & Renshaw, LLC pursuant to which, subject to the terms and conditions set forth in the agreement, Rodman & Renshaw, LLC has agreed to act as our exclusive placement agent in connection with this offering. The placement agent is not purchasing or selling any securities being offered by this prospectus, nor is it required to arrange for the purchase or sale of any specific number or dollar amount of the securities, but has agreed to use its reasonable best efforts to arrange for the sale of all of the securities in this offering. We will enter into a securities purchase agreement directly with investors in this offering.
There is no requirement that any minimum amount of securities or dollar amount of securities be sold in this offering and there can be no assurance that we will sell all or any of the securities being offered.
NASDAQ rules generally require stockholder approval for issuance of stock in excess of 20% of outstanding shares. On August 31, 2010, our stockholders provided such approval, subject to certain limitations, including:
·The aggregate number of shares issued in any offerings will not exceed 15,000,000 shares of our common stock (including pursuant to preferred stock, options, warrants, convertible debt or other securities exercisable for a convertible into common stock);
·The total aggregate consideration will not exceed $12 million in cash;
·The maximum discount at which securities will be offered will be equivalent to a discount of 20% below the market price of our common stock at the time of issuance; and
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·Such offerings will occur within the three-month period commencing on August 31, 2010.
This offering will be conducted pursuant to the authority granted by our stockholders at the August 31, 2010 annual meeting.
Our agreement with the placement agent and the securities purchase agreement between us and each of the investors in this offering provide that the obligations of the placement agent and the investors are subject to certain conditions precedent, including, among other things, the absence of any material change in our business and delivery of a customary written legal opinion.
We currently anticipate that the closing of this offering will take place on or about [*], 2010. On the scheduled closing date, the following will occur:
·we will receive funds in the amount of the aggregate purchase price of the securities being sold by us, less the amount of the fees we are paying to the placement agent;
·the placement agent will receive the placement agent fee, reimbursement of certain expenses and compensation warrants to purchase shares of our common stock in accordance with the terms of the engagement letter agreement; and
· we will deliver, or cause to be delivered, the shares of convertible preferred stock and the warrants being sold.
We have agreed to pay the placement agent a cash fee equal to 6% of the gross proceeds of the sale of the securities in this offering and to reimburse the placement agent for its expenses, up to a maximum of 1.5% of the gross proceeds of the sale of the securities in this offering, but in no event more than $45,000. We have also agreed to grant compensation warrants to the placement agent to purchase up to that number of our shares of common stock equal to 3% of the number of shares of common stock underlying the common stock soldoffered by us in this offering, or up to an aggregate of [*] shares. The compensation warrantsit will be substantially on the same terms as the warrants offered hereby, except that they will have an exercise price of $[*] per share and will be exercisable through and including the date that is the second year anniversary of the effective date of the registration statement of which this prospectus forms a part, and will comply with Financial Industry Regulatory Authority, or FINRA, Rule 5110(g) in that for a period of six months after the effective date of the registration statement of which this prospectus forms a part, neither the compensation warrants nor any shares issuable upon exercise of the compensation warrants shall be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person, except the transfer of any security:
· by operation of law or by reason of reorganization of us;
·to any Financial Industry Regulatory Authority (“FINRA”) member firm participating in this offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction described above for the remainder of the timer period;
·if the aggregate amount of our securities held by the placement agent or related persons does not exceed 1% of the securities being offered;
·that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or
·the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction set forth above for the remainder of the time period.
The following table shows the per preferred share and total fees we will pay to the placement agent in connection with the sale of the units
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offered pursuant to this prospectus, assuming the purchase of all of the units being offered hereby. Because there is no minimum offering amount required as a condition to closing in this offering, the actual total offering fees, if any, are not presently determinable and may be substantially less than the maximum amount set forth below.
Per preferred share placement agent fees
| | $
| [*]
| |
Maximum offering total
| | $
| [*]
| |
We estimate that the total expenses of the offering by us, excluding the placement agent’s fees, will be approximately $[*].
The purchase price per preferred share, the effective acquisition price of the common stock underlyingless discounts or commissions, if any. The selling stockholders reserves the convertible preferred stock, the dividendright to accept and, other payments due the convertible preferred stock and the exercise price of the warrants were determined based on discussionstogether with the placement agent.
We have agreedits agents from time to indemnify the placement agent and its respective affiliates against certain liabilities, including liabilities relatingtime, to and arising out of its activities under the engagement letter agreement. We have also agreed to contribute to payments the placement agent may be required to makereject, in respect of such liabilities.
We have agreed that we will not issue, enter intowhole or in part, any agreement to issue or announce the issuance or proposed issuance of any shares of our common stock, or securities that would entitle the holder thereof to acquire shares of our common stock, for a period of 90 days from the closing date of this offering without the prior written consent of purchasers holding at least two-thirds in interest of the convertible preferred stock (on an as converted basis) then outstanding.
A copy of the engagement letter agreement with the placement agent, the form of securities purchase agreement to be entered into with the investors in this offering and the form of common stock purchase warrant have beento be made directly or through agents. We would not receive any of the proceeds from any such sale.
The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 promulgated under the Securities Act, provided that it meets the criteria and conform to the requirements of that rule.
The selling stockholders and any broker-dealers or agents that participate in the sale of the common stock may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. The selling stockholders are subject to the prospectus delivery requirements of the Securities Act.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be filed as exhibits to the registration statement of which this prospectus forms a part.The placement agent has informedpassed upon for us that it will not engage in over-allotment, stabilizing transactions or syndicate covering transactions in connection with this offering.
The transfer agent for our common stock is American Stock Transfer & Trust Company. We will act as transfer agent for the convertible preferred stock and warrants being offered hereby.
Our common stock is traded on the NASDAQ Capital Market under the symbol “SPEX”. The convertible preferred stock and the warrants being offered hereby are not expected to be eligible for trading on any market.
LEGAL MATTERS
by Baxter, Baker, Sidle, Conn & Jones, P.A. of Baltimore, Maryland, our counsel in connection with the offering, has issued an opinion about the validity of the securities being offered.
EXPERTS
EXPERTSThe audited financial statements as of and schedulesfor the years ended December 31, 2012 and 2011, included in this prospectus and elsewhere in the registration statement have been so incorporated by referenceincluded in reliance upon the report of Grant Thornton LLP, independent registered public accountants,accounting firm, upon the authority of said firm as experts in accounting and auditing in giving said reports.
report.
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
We 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 our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock that the selling stockholders are offering in this prospectus.
We file annual, quarterly and current reports, proxy statements and other documentsinformation with the Securities and Exchange Commission.SEC. You may read, without charge, and copy any documentthe documents we file at the SEC’s public reference roomrooms in Washington, D.C. at 100 F Street, NE, Room 1580, Washington, D.C. 20549.DC 20549, or in New York, New York and Chicago, Illinois. You shouldcan request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for morefurther information on the public reference room. Therooms. Our SEC maintains an internet sitefilings are also available to the public at no cost from the SEC’s website at http://www.sec.gov where certain information regarding issuers (including Spherix) may be found.52www.sec.gov.
Index to Financial Statements Page
Audited Financial Statements for the Years ended December 31, 2012 and 2011
|
| Page | |
For the Quarter Ended June 30, 2010
| |
| |
Consolidated Statement of Operations for the three-month and six-month periods ended June 30, 2010 and 2009 (Unaudited)
| 54
|
| |
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
| 55
|
| |
Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009 (Unaudited)
| 56
|
| |
Notes to the Consolidated Financial Statements (Unaudited)
| 57
|
| |
For the Year Ended December 31, 2009
| |
| |
Report of Independent Registered Public Accounting Firm | 62
| | F-2 | |
| |
Consolidated Statements of Operations for the years ended December 31, 20092012 and 2008 2011 | 63
| | F-3 | |
| |
Consolidated Balance Sheets as offor the years ended December 31, 20092012 and 2008 2011 | 64
| | F-4 | |
| |
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 20092012 and 2008 2011 | 65
| | F-5 | |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 20092012 and 2008 2011 | 66
| | F-6 | |
| |
Notes to Consolidated Financial Statements | 67
| | F-7 | |
53
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 | |
TableREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
ContentsDirectors and Stockholders
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
(Unaudited)
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| | | | | | | | | |
Revenue | | $ | 327,139 | | $ | 332,241 | | $ | 659,430 | | $ | 692,911 | |
| | | | | | | | | |
Operating expense | | | | | | | | | |
Direct costs | | (112,270 | ) | (109,123 | ) | (231,899 | ) | (239,665 | ) |
Research and development expense | | (1,544,605 | ) | (1,133,962 | ) | (2,856,484 | ) | (2,695,351 | ) |
Selling, general and administrative expense | | (1,230,103 | ) | (649,096 | ) | (2,280,750 | ) | (1,408,366 | ) |
Total operating expense | | (2,886,978 | ) | (1,892,181 | ) | (5,369,133 | ) | (4,343,382 | ) |
| | | | | | | | | |
Loss from operations | | (2,559,839 | ) | (1,559,940 | ) | (4,709,703 | ) | (3,650,471 | ) |
Interest income | | 2,228 | | 5,400 | | 4,216 | | 29,847 | |
Loss before taxes | | (2,557,611 | ) | (1,554,540 | ) | (4,705,487 | ) | (3,620,624 | ) |
| | | | | | | | | |
Income tax expense | | — | | — | | — | | — | |
| | | | | | | | | |
Net loss | | $ | (2,557,611 | ) | $ | (1,554,540 | ) | $ | (4,705,487 | ) | $ | (3,620,624 | ) |
| | | | | | | | | |
Net loss per share, basic | | $ | (0.15 | ) | $ | (0.11 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
Net loss per share, diluted | | $ | (0.15 | ) | $ | (0.11 | ) | $ | (0.27 | ) | $ | (0.25 | ) |
| | | | | | | | | |
Weighted average shares outstanding, basic | | 17,150,648 | | 14,357,162 | | 17,150,648 | | 14,357,162 | |
Weighted average shares outstanding, diluted | | 17,150,648 | | 14,357,162 | | 17,150,648 | | 14,357,162 | |
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.
54
Table of Contents
Consolidated Balance Sheets
| | June 30, 2010
(Unaudited) | | December 31,
2009 | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | $ | 4,585,803 | | $ | 9,026,002 | |
Short-term investments, held to maturity | | 125,000 | | 375,003 | |
Trade accounts receivable, net | | 286,102 | | 274,153 | |
Other receivables | | 28,886 | | 948 | |
Prepaid expenses and other assets | | 95,141 | | 209,255 | |
Total current assets | | 5,120,932 | | 9,885,361 | |
| | | | | |
Property and equipment, net | | 189,964 | | 225,958 | |
Patents, net of accumulated amortization of $41,622 and $38,588 | | 5,330 | | 8,364 | |
Deposit | | 35,625 | | 35,625 | |
Total assets | | $ | 5,351,851 | | $ | 10,155,308 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | |
Accounts payable and accrued expenses | | $ | 1,651,338 | | $ | 1,714,140 | |
Accrued salaries and benefits | | 396,896 | | 388,665 | |
Deferred revenue | | 65,932 | | 90,915 | |
Total current liabilities | | 2,114,166 | | 2,193,720 | |
| | | | | |
Deferred compensation | | 540,000 | | 580,000 | |
Deferred rent | | 95,879 | | 109,712 | |
Total liabilities | | 2,750,045 | | 2,883,432 | |
| | | | | |
Commitments and contingencies | | — | | — | |
| | | | | |
Stockholders’ equity | | | | | |
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued and outstanding | | — | | — | |
Common stock, $0.005 par value, 50,000,000 shares authorized; 17,231,086 issued, and 17,150,648 shares outstanding at June 30, 2010 and December 31, 2009 | | 86,155 | | 86,155 | |
Paid-in capital in excess of par value | | 33,634,927 | | 33,599,510 | |
Treasury stock, 80,438 shares, at cost at June 30, 2010 and December 31, 2009 | | (464,786 | ) | (464,786 | ) |
Accumulated deficit | | (30,654,490 | ) | (25,949,003 | ) |
Total stockholders’ equity | | 2,601,806 | | 7,271,876 | |
Total liabilities and stockholders’ equity | | $ | 5,351,851 | | $ | 10,155,308 | |
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.
55
Consolidated Statements of
Cash Flows(Unaudited)
| | Six Months Ended June 30, | |
| | 2010 | | 2009 | |
Cash flows from operating activities | | | | | |
Net loss | | $ | (4,705,487 | ) | $ | (3,620,624 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation and amortization | | 39,028 | | 45,349 | |
Loss on disposal of assets | | — | | 5,599 | |
Bad debt expense | | 40,000 | | — | |
Stock-based compensation | | 35,417 | | 15,880 | |
Changes in assets and liabilities: | | | | | |
Accounts receivable | | (51,949 | ) | (58,014 | ) |
Other receivables | | (27,938 | ) | 31,081 | |
Prepaid expenses and other assets | | 114,114 | | 107,992 | |
Accounts payable and accrued expenses | | (54,571 | ) | 197,584 | |
Deferred rent | | (13,833 | ) | (14,292 | ) |
Deferred compensation | | (40,000 | ) | (75,000 | ) |
Deferred revenue | | (24,983 | ) | 56,969 | |
Net cash used in operating activities | | (4,690,202 | ) | (3,307,476 | ) |
| | | | | |
Cash flow from investing activities | | | | | |
Proceeds from the maturity of short-term investments | | 250,003 | | 295,088 | |
Proceeds from the sale of fixed assets | | — | | 500 | |
Net cash provided by investing activities | | 250,003 | | 295,588 | |
| | | | | |
Net decrease in cash and cash equivalents | | (4,440,199 | ) | (3,011,888 | ) |
Cash and cash equivalents, beginning of period | | 9,026,002 | | 9,404,843 | |
Cash and cash equivalents, end of period | | $ | 4,585,803 | | $ | 6,392,955 | |
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.
56
Spherix Incorporated
Consolidated Statements of
ContentsCash 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.
Notes to
the Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
The accompanying 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 financial position as of June 30, 2010, the results of its operations for the three-month and six-month periods ended June 30, 2010 and 2009, and its cash flows for the six-month periods ended June 30, 2010 and 2009. 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, 2009.
The Company
operatespreviously operated via two principal segments, Biospherics,
our biotechnology research and development business, and Health
Sciences. Biospherics seeks to develop proprietary products for commercial application.Sciences, a technical and regulatory consulting business. The Health Sciences
providesbusiness provided technical and regulatory consulting services to biotechnology and pharmaceutical companies, as well as providing technical support for the
Biospherics segment.Company’s own R&D activities. The Company has createdgenerally 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 now in the name of Spherix Consulting, Inc. and the Company’s patents are in the name of Biospherics Incorporated. The subsidiaries began operations on January 1, 2009. Spherix nowIncorporated provides management, strategic guidance, business development, marketing and other services to its subsidiaries.2.Liquidity and Capital Resources
As The operations of June 30, 2010,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 had cash and short-term investments of approximately $4.7 million and expects to expend all of this amount withinbut are presented as assets held for sale in the next six months. Our working capital was $3.0 million as of June 30, 2010, compared to working capital of $7.7 million as ofconsolidated balance sheet at December 31, 2009. We have incurred substantial development costs in our efforts2012 as they relate to explore whether D-tagatose is an effective treatment for Type 2 diabetes. We have financed our development activities through the remaining proceeds received from the 2007 sale of InfoSpherix and the November 2009 stock placement. Over the next 12 months,discounted operations.
On May 6, 2011, the Company expects that it will need to expend between $7 million and $9 million to support its development operations.The Company recently announced that it is actively seekingeffected a pharma partner to continue the diabetes development and that it will also explore D-tagatose as a potential treatment for high triglycerides. Accordingly, the Company has terminated the safety portion of its Phase 3 diabetes clinical trial and expects to shift its research and development focus to D-tagatose as a treatment for triglycerides.
We will need to raise additional funds in 2010 to continue operations and will likely require additional capital raises thereafter to fully pursue the triglycerides opportunity.
Fundraising will likely require the issuance of additional Company equity securities and a purchaser of such securities will likely insist that such securities be registered securities.
57
Table of Contents
In November 2009, we obtained net proceeds of approximately $6 million in a registered direct primary offering. The common stock issued in the offering and the common stock which may be issued upon exercise of warrants issued in the offering have been registered under a Form S-3 registration statement declared effective by the Securities and Exchange Commission (“SEC”) in October 2009.
Pursuant to SEC rules, the Company may not be in a position to issue additional sharesone-for-ten reverse split of its common stock. The Company implemented the reverse stock in another registered direct primary offeringsplit under a Form S-3 registration statement until mid-November 2010. 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 July 2, 2010,September 21, 2012, the Company filedeffected a Form S-1 registration statement withone-for-twenty reverse split of its common stock. The Company implemented the SECreverse stock split under the authority granted to begin the processBoard of raising additional capital.Further, NASDAQ rules require stockholder approval for certainDirectors by the Company's stockholders at the annual meeting of stockholders held on August 14, 2012. The reverse stock issuances constituting 20% or moresplit reduced the number of a Company’s issuedoutstanding shares of Common Stock from 4,159,777 shares to 207,806 shares. All per share amounts and outstanding stock.
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
Company cannot be assured that it will be able to attract a purchaserconsolidated financial statements include the accounts of
securities to raise the additional funds it will likely requireSpherix Incorporated and Biospherics Incorporated. All intercompany balances and transactions have been eliminated in
2010; that the Company will be able to obtain any required stockholder approval; or that the Company will be able to have a Form S-1 registration statement declared effective to complete such an offering.3.Concentrations of Credit Risk
The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At June 30, 2010, the Company’s cash and cash equivalents in excess of the FDIC limits were $4.4 million. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks.
4.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.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.
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.
5.New Accounting Pronouncements
In October 2009,
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months 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 Financial Accounting Standards Board (FASB) issued ASC Update No. 2009-13, which amendsFederal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December 31, 2012, the Revenue Recognition topicCompany’s interest bearing deposits in excess of the Codification. This update provides amendmentsFDIC 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 criteria in Subtopic 605-25straight-line method and typically over the following estimated useful lives of the Codification for separating considerationrelated 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 multiple-deliverable arrangements. Asthe 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 indicate 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 those amendments, multiple-deliverable arrangements will be separatedthis 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 more circumstances than under existing U.S. GAAP. stockholders’ equity.
Common Stock Purchase Warrants
The amendments establishCompany accounts for the issuance of Common Stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a selling price hierarchychoice 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 related to the restatement for determining the selling priceaccounting 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 control 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
deliverable 58
component of stockholders’ equity.
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
Contentsan arrangement exists, services have been rendered, the contract price is fixed or determinable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation ofcollectability 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, on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Wecontracts are currently evaluating the impact the adoption of this update might have on our results of operations and financial position.
OtherAccounting Standard Updates issuedrecorded during the six months ended June 30, 2010period when first determined.
Research and Development Costs
Research and development costs are not applicablecharged to the Companyoperations as incurred.
Selling, General and are not anticipated to have an effect on the Company’s financial position or results of operations.6.Administrative ExpenseShort-term Investments
The Company’s short-term investmentsselling, general and administrative expenses consist primarily of investmentsexecutive 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 debt securities held to maturity, which mature in one year or less, and are valued at amortized cost, which approximates fair value.7.Fair Value Measurements
The Company has elected not to apply the fair value option to measure any of the financial assets and liabilities on its balance sheet not already valued at fair value under other accounting pronouncements. These other financial assets and liabilities are primarily short-term investments, accounts receivable, and accounts payable, which are reported at historical value. Warrants
The fair value of these financial assetswarrants is measured each quarter and liabilities approximates theirthe change in fair value becausebetween periods is recognized as other income or expense in the respective periods.
Loss on Issuance of
their short duration.Warrants
8.Net Loss Per ShareBasic netThe loss per common share has been computed by dividing net loss byon issuance of warrants reflects the weighted-average numberdifference in the fair market value of common shares outstanding during the year. Diluted net loss per common share has been computed by dividing net loss bywarrants as determined using the weighted-average number of common shares outstanding without an assumed increase in common shares outstanding forBlack-Scholes option valuation method and the proceeds received. The proceeds received from Warrants issued with other instruments (such as common stock equivalents, as all common stock equivalentsor preferred stock) are antidilutive becausedetermined based upon the fair value of liability classified warrants with the loss position. At June 30,residual allocated to the other instruments.
Other Income
Other income consists of two grants from the U.S. Government awarded in October 2010 12,188in support of the Company’s 63,088 outstanding optionsdiabetes and 1,187,174 outstanding warrants were considered common stock equivalents as the exercise prices of these options were all below the average market price of the Company’s common stock for the period. At December 31, 2009, none of the Company’s 40,500 outstanding options or 1,187,174 warrants were considered common stock equivalents as the exercise prices were all above the average market price of the Company’s common stock for the period.9.Accounting for Stock-Based Compensation
For the three- and six-months ended June 30, 2010,triglyceride research. As a result, in 2011 the Company recognized $28,772$51,000 in other income and $30,417a related tax expense of $14,000. No grant awards were recognized in stock-based compensation expense relating to 35,088 and 28,000 stock options awarded in May 2010 and February 2006, compared to $3,000 and $7,000 for the three- and six-months
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ended June 30, 2009, respectively. As of June 30, 2010, there were no unvested options to purchase common stock under the plans.
For the three- and six-months ended June 30, 2010, the Company recognized $3,000 and $5,000 in stock-based compensation expense relating to 11,900 and 30,000 shares in restricted stock the Company granted in August 2009 and 2007, compared to $5,000 and $9,000 for the three- and six-months ended June 30, 2009, respectively.
A summary of option activity under the Company’s stock option plan for the six months ended June 30, 2010, is presented below:
Options | | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value | |
Outstanding at beginning of year | | 40,500 | | $ | 2.57 | | | | | |
Granted | | 35,088 | | $ | 1.14 | | | | | |
Exercised | | — | | | | | | | |
Expired or forfeited | | 12,500 | | $ | 3.41 | | | | | |
Outstanding at June 30, 2010 | | 63,088 | | $ | 1.61 | | 3.0 | | $ | 7,368 | |
| | | | | | | | | |
Exercisable at June 30, 2010 | | 63,088 | | $ | 1.61 | | 3.0 | | $ | 7,368 | |
10.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.
11.Information by Business SegmentOperating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates via two principal segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary products for commercial application. Health Sciences provides technical and regulatory consulting services to biotechnology and pharmaceutical companies, as well as aiding the Biospherics segment.
Financial information by business segment for the three and six months ended June 30, 2010 and 2009 is summarized below:
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| | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | | 2010 | | 2009 | | 2010 | | 2009 | |
Revenue | | Biospherics | | $ | — | | $ | — | | $ | — | | $ | — | |
| | Health Sciences | | 327,000 | | 332,000 | | 659,000 | | 693,000 | |
| | Total revenue | | $ | 327,000 | | $ | 332,000 | | $ | 659,000 | | $ | 693,000 | |
| | | | | | | | | | | |
Operating (Loss) Income | | Biospherics | | $ | (1,900,000 | ) | $ | (1,202,000 | ) | $ | (3,474,000 | ) | $ | (2,828,000 | ) |
and Loss Before | | Health Sciences | | 54,000 | | 186,000 | | 155,000 | | 349,000 | |
Income Taxes | | General | | (714,000 | ) | (544,000 | ) | (1,390,000 | ) | (1,172,000 | ) |
| | Total operating loss | | (2,560,000 | ) | (1,560,000 | ) | (4,709,000 | ) | (3,651,000 | ) |
| | Interest income | | 2,000 | | 5,000 | | 4,000 | | 30,000 | |
| | Loss from operations before income taxes | | $ | (2,558,000 | ) | $ | (1,555,000 | ) | $ | (4,705,000 | ) | $ | (3,621,000 | ) |
| | | | June 30, | | Dec 31, | | | | | |
| | | | 2010 | | 2009 | | | | | |
Identifiable Assets | | Biospherics | | $ | 5,000 | | $ | 8,000 | | | | | |
| | Health Sciences | | 314,000 | | 274,000 | | | | | |
| | General corporate assets | | 5,033,000 | | 9,873,000 | | | | | |
| | Total assets | | $ | 5,352,000 | | $ | 10,155,000 | | | | | |
12.Subsequent Events
The Company evaluated all events or transactions after June 30, 2010 through the date the financial statements were issued. During this period, the Company did not have any significant subsequent events.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Spherix Incorporated
We have audited the accompanying consolidated balance sheets of Spherix Incorporated (a Delaware corporation) and subsidiaries as of December 31, 2009 and 2008, 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, 2009.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 financial statements referred to above present fairly, in all material respects, the financial position of Spherix Incorporated as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company incurred a net loss of $9,148,631 during the year ended December 31, 2009, and, as of that date, the Company had $9,026,002 in cash, and used $7,832,625 in cash for operations for the year ended December 31, 2009. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Baltimore, MD
March 30, 2010
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Spherix Incorporated
Consolidated Statements of Operations
For the years ended December 31, 2009 and 2008
| | 2009 | | 2008 | |
| | | | | |
Revenue | | $ | 1,359,110 | | $ | 1,025,961 | |
| | | | | |
Operating expense | | | | | |
Direct costs | | 449,293 | | 397,645 | |
Research and development expense | | 6,830,957 | | 4,004,565 | |
Selling, general and administrative expense | | 3,265,137 | | 3,135,310 | |
| | | | | |
Total operating expense | | 10,545,387 | | 7,537,520 | |
| | | | | |
Loss from operations | | (9,186,277 | ) | (6,511,559 | ) |
| | | | | |
Interest income | | 37,646 | | 348,443 | |
Interest expense | | — | | (2,220 | ) |
Other expense | | — | | (5,994 | ) |
| | | | | |
Loss from continuing operations before taxes | | (9,148,631 | ) | (6,171,330 | ) |
Income tax benefit | | — | | 552,803 | |
| | | | | |
Loss from continuing operations | | (9,148,631 | ) | (5,618,527 | ) |
| | | | | |
Discontinued operations | | | | | |
Income from discontinued operations | | — | | 2,070,091 | |
Income tax expense | | — | | (587,098 | ) |
Income from discontinued operations | | — | | 1,482,993 | |
| | | | | |
Net loss | | $ | (9,148,631 | ) | $ | (4,135,534 | ) |
| | | | | |
Net (loss) income per share, basic | | | | | |
Continuing operations | | $ | (0.62 | ) | $ | (0.39 | ) |
Discontinued operations | | $ | — | | $ | 0.10 | |
Net (loss) income per share, basic | | $ | (0.62 | ) | $ | (0.29 | ) |
| | | | | |
Net (loss) income per share, diluted | | | | | |
Continuing operations | | $ | (0.62 | ) | $ | (0.39 | ) |
Discontinued operations | | $ | — | | $ | 0.10 | |
Net (loss) income per share, diluted | | $ | (0.62 | ) | $ | (0.29 | ) |
| | | | | |
Weighted average shares outstanding, basic | | 14,713,473 | | 14,342,953 | |
Weighted average shares outstanding, diluted | | 14,713,473 | | 14,342,953 | |
The accompanying notes to financial statements are an integral part of these financial statements.
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Spherix Incorporated
Consolidated Balance Sheets
As of December 31, 2009 and 2008
| | 2009 | | 2008 | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | $ | 9,026,002 | | $ | 9,404,843 | |
Short-term investments, held to maturity | | 375,003 | | 1,894,434 | |
Trade accounts receivable | | 274,153 | | 281,342 | |
Other receivables | | 948 | | 37,223 | |
Prepaid expenses and other assets | | 209,255 | | 282,971 | |
Total current assets | | 9,885,361 | | 11,900,813 | |
| | | | | |
Property and equipment, net | | 225,958 | | 310,365 | |
Patents, net of accumulated amortization of $38,588 and $110,599 | | 8,364 | | 14,433 | |
Deposit | | 35,625 | | 35,625 | |
Total assets | | $ | 10,155,308 | | $ | 12,261,236 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | |
Accounts payable and accrued expenses | | $ | 1,714,140 | | $ | 710,881 | |
Accrued salaries and benefits | | 388,665 | | 304,756 | |
Deferred revenue | | 90,915 | | 39,347 | |
Total current liabilities | | 2,193,720 | | 1,054,984 | |
| | | | | |
Deferred compensation | | 580,000 | | 660,000 | |
Deferred rent | | 109,712 | | 136,736 | |
Total liabilities | | 2,883,432 | | 1,851,720 | |
| | | | | |
Commitments and contingencies | | — | | — | |
| | | | | |
Stockholders’ equity | | | | | |
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued and outstanding | | — | | — | |
Common stock, $0.005 par value, 50,000,000 shares authorized; 17,231,086 and 14,437,600 issued, 17,150,648 and 14,357,162 outstanding at December 31, 2009 and 2008, respectively | | 86,155 | | 72,188 | |
Paid-in capital in excess of par value | | 33,599,510 | | 27,602,486 | |
Treasury stock, 80,438 shares, at cost at December 31, 2009 and 2008, respectively | | (464,786 | ) | (464,786 | ) |
Accumulated deficit | | (25,949,003 | ) | (16,800,372 | ) |
Total stockholders’ equity | | 7,271,876 | | 10,409,516 | |
Total liabilities and stockholders’ equity | | $ | 10,155,308 | | $ | 12,261,236 | |
The accompanying notes to financial statements are an integral part of these financial statements.
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Spherix Incorporated
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2009 and 2008
| | | | | | Paid-in | | | | | | Retained
Earnings | | | |
| | Common Stock | | Capital in | | Treasury Stock | | (Accumulated | | Stockholders’ | |
| | Shares | | Amount | | Excess of Par | | Shares | | Amount | | Deficit) | | Equity | |
| | | | | | | | | | | | | | | |
Balance, January 1, 2008 | | 14,399,140 | | $ | 71,996 | | $ | 27,508,418 | | 80,438 | | $ | (464,786 | ) | $ | (12,664,838 | ) | $ | 14,450,790 | |
| | | | | | | | | | | | | | | |
Stock-based compensation | | 38,460 | | 192 | | 94,068 | | — | | — | | — | | 94,260 | |
Net loss | | — | | — | | — | | — | | — | | (4,135,534 | ) | (4,135,534 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | 14,437,600 | | $ | 72,188 | | $ | 27,602,486 | | 80,438 | | $ | (464,786 | ) | $ | (16,800,372 | ) | $ | 10,409,516 | |
| | | | | | | | | | | | | | | |
Issuance of common stock | | | | | | | | | | | | | | | |
Sale of common stock - registery direct, net | | 2,760,870 | | 13,804 | | 6,336,196 | | — | | — | | — | | 6,350,000 | |
Cost of stock issuance | | — | | — | | (416,347 | ) | — | | — | | — | | (416,347 | ) |
Stock-based compensation | | 32,616 | | 163 | | 77,175 | | — | | — | | — | | 77,338 | |
Net loss | | — | | — | | — | | — | | — | | (9,148,631 | ) | (9,148,631 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | 17,231,086 | | $ | 86,155 | | $ | 33,599,510 | | 80,438 | | $ | (464,786 | ) | $ | (25,949,003 | ) | $ | 7,271,876 | |
The accompanying notes to financial statements are an integral part of these financial statements.
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Spherix Incorporated
Consolidated Statements of Cash Flows
For the years ended December 31, 2009 and 2008
| | 2009 | | 2008 | |
Cash flows from operating activities | | | | | |
Net loss | | $ | (9,148,631 | ) | $ | (4,135,534 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Income from discontinued operations | | — | | (1,482,993 | ) |
Income tax benefit | | — | | (552,803 | ) |
Depreciation and amortization | | 84,377 | | 85,718 | |
Loss (gain) on sale of fixed assets | | 5,399 | | (14,701 | ) |
Patent write-off | | — | | 9,860 | |
Stock-based compensation | | 77,338 | | 94,260 | |
Changes in assets and liabilities: | | | | | |
Receivables | | 43,464 | | (112,755 | ) |
Prepaid expenses and other assets | | 73,716 | | 89,271 | |
Accounts payable and accrued expenses | | 1,087,168 | | (410,670 | ) |
Deferred rent | | (27,024 | ) | (19,795 | ) |
Deferred compensation | | (80,000 | ) | 51,000 | |
Deferred revenue | | 51,568 | | 24,182 | |
Net cash used in activities of continuing operations | | (7,832,625 | ) | (6,374,960 | ) |
Net cash used in activities of discontinued operations | | — | | (34,295 | ) |
Net cash used in operating activities | | (7,832,625 | ) | (6,409,255 | ) |
| | | | | |
Cash flows from investing activities | | | | | |
Proceeds from the sale of subsidiary | | — | | 2,070,091 | |
Purchase of short-term investments | | — | | (1,894,434 | ) |
Proceeds from the sale of short-term investments | | 1,519,431 | | — | |
Purchase of property and equipment | | — | | (183,403 | ) |
Proceeds from the sales of fixed assets | | 700 | | 15,187 | |
Net cash provided by investing activities of continuing operations | | 1,520,131 | | 7,441 | |
Net cash used in investing activities of discontinued operations | | — | | — | |
Net cash provided by investing activities | | 1,520,131 | | 7,441 | |
| | | | | |
Cash flows from financing activities | | | | | |
Net change in book overdraft | | — | | (33,302 | ) |
Proceeds from issuance of common stock, net | | 5,933,653 | | — | |
Net cash provided by (used in) financial activities of continuing operations | | 5,933,653 | | (33,302 | ) |
Net cash used in financing activities of discontinued operations | | — | | — | |
Net cash provided by (used in) financing activities | | 5,933,653 | | (33,302 | ) |
| | | | | |
Net decrease in cash and cash equivalents | | (378,841 | ) | (6,435,116 | ) |
Cash and cash equivalents, beginning of year | | 9,404,843 | | 15,839,959 | |
| | | | | |
Cash and cash equivalents, end of year | | $ | 9,026,002 | | $ | 9,404,843 | |
| | | | | |
Supplemental cash flow information | | | | | |
Interest paid | | $ | — | | $ | 2,220 | |
The accompanying notes to financial statements are an integral part of these financial statements.
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Spherix Incorporated
Notes to Consolidated Financial Statements
1.Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
The Company’s principal segments are Biospherics, our biotechnology research and development business, and Health Sciences, a technical and regulatory consulting business. The Health Sciences segment was created in July 2007 when Claire L. Kruger, CEO and COO, joined the Company in advance of the anticipated sale of the Company’s wholly-owned subsidiary, InfoSpherix Incorporated. The Health Sciences business provides 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 provides its 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. InfoSpherix was the Company’s information services segment and was sold on August 15, 2007 in a move to allow the Company to devote its resources to the activities of the Biospherics segment.
The Company has created two wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., for its two operating segments. The Company’s Health Sciences contracts are now in the name of Spherix Consulting, Inc. and the Company’s patents and other assets and operations have been transferred into the name of Biospherics Incorporated. The subsidiaries began operations on January 1, 2009. Spherix now provides management, strategic guidance, business development, marketing and other services to its subsidiaries.
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in Note 2, the Company incurred a net loss of $9.1 million for the period ended December 31, 2009, and as of December 31, 2009, had $9 million in cash and investments to fund operations, but anticipates expending between $9 million and $11 million of cash flows from operations during 2010. In the absence of the Company being able to raise additional funds, this factor raises substantial doubt as to the Company’s ability to continue as a going concern. The Company is currently pursuing opportunities to raise additional capital to support ongoing operations; however, the Company can provide no assurance that it will be able to secure these funds. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if the Company is unable to continue as a going concern.
The consolidated financial statements include the accounts of Spherix Incorporated, Biospherics Incorporated and Spherix Consulting, Inc. (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
On August 15, 2007, the Company sold InfoSpherix. Accordingly, the final payment received in 2008 from the sale of InfoSpherix is reported in the accompanying financial statements as discontinued operations in the Consolidated Statement of Operations.
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. 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. Significant estimates include amortization and depreciation. Accordingly, actual results could differ from those estimates and assumptions.
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Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents. At December 31, 2009, the Company had approximately $8.9 million invested in funds with a maturity of three months or less, which are included as cash and cash equivalents. The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2009, the Company’s cash and cash equivalent in excess of the FDIC limits was $8.7 million. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Short-term Investments
The Company’s short-term investments consist of investments in debt securities, which mature in one year or less, and are valued at amortized cost, which approximates fair value.
Concentrations
During 2009 and 2008, revenue from five and three Health Sciences clients accounted for 72% and 66% of the Company’s total revenue, respectively.
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 lesser 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 Statement of Operations.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicate 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 undiscounted future cash flows. No such impairment was noted.
Patent Costs
Legal costs incurred in connection with patent applications and costs of acquiring patents are capitalized when incurred. When patents are granted, costs are amortized over a term representing the lesser of the life of the patent or the projected sales period of the product or process.
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
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costs incurred. Revenue for fixed-price contracts is recognized as deliverables or milestones are completed. Losses, if any, on contracts are recorded during the period when first determined.
Direct Costs
The Company’s direct costs consist primarily of labor costs.
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.
Research and Development Costs
Research and development costs are charged to operations as incurred. Included in the 2009 research and development costs is $1.4 million in losses related to purchases of D-tagatose used for trial purposes.
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, 20092012 and 2008,2011, the Company had no unrecognized income tax benefits and recognized no interest or penalties on income tax liabilities.
Discontinued OperationsoperationsOn August 15, 2007, the Company completed the sale
The operations of InfoSpherix for $17 million ($15 million at closing and $2 million followingSpherix Consulting, Inc. have been retroactively adjusted as discontinued operations as a 15-month escrow period), pursuant to the Stock Purchase Agreement dated June 25, 2007. The $15 million sale proceeds were reported as gain on saleresult of the discontinuedDecember 3, 2012 sale. The Spherix Consulting segment in 2007. The $2 million escrow balance was recorded as a gain on salegenerated nearly all of the discontinued segmentCompany’s revenue and realizedprovided 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
November 2008. The sale was conducted to allow Spherix to focus substantially all of its efforts on Biospherics, with the principal focusthree levels, based on the
commercialization of D-tagatose.The results of operationsmarkets in which the assets and liabilities are traded and the reliability of the discontinued InfoSpherix segment, including the costsassumptions used to sell the segment, are as follows:
| | 2008 | |
Interest revenue | | $ | 70,000 | |
Gain on sale of segment | | 2,000,000 | |
Income from discontinued operations before taxes | | $ | 2,070,000 | |
Fair Value Information
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
includeconsist only of cash
receivables, and
accounts payable reported in the Consolidated Balance Sheet,cash equivalents approximate their carrying value given their short maturities.
69
The following table summarizes the activity of Level 3 inputs measured on a recurring basis 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 | |
The Company applies 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
vestingrequisite service period based 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
pricing modelvaluation method to value stock options. For
each of the years ended December 31,
20092012 and
2008,2011, the Company recognized
$13,000$56,000 and $36,000, respectively, in stock based compensation expense relating to
59,000the 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
and $64,000 and $81,000 respectively, related to the issuance of restricted stock (see Note
8,10, “Stockholders’ Equity”).
Net
Loss(Loss) Income Per Share
Basic net
loss(loss) income per common share has been computed by dividing net
loss(loss) income by the weighted-average number of common shares outstanding during the year. Diluted net
lossincome per common share has been computed by dividing net
lossincome by the weighted-average number of common shares outstanding
withoutplus an assumed increase in common shares outstanding for common stock
equivalents, as common stock equivalents are antidilutive.equivalents. At December 31,
2009, none2012, the exercise price of 1,151 of the Company’s
40,5007,163 outstanding options
or 1,104,348and 483,657 of the Company’s 550,664 warrants
were considered common stock equivalents as the exercise prices were all abovewas below the average market price of the Company’s common stock for the
period, however these were excluded from the dilutive calculation as their inclusion would have been anti-dilutive. At December 31, 2011, the exercise price of 293shares 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 2009, the Financial Accounting Standards Board (FASB) established2011, the FASB Accounting Standards Codification (Codification)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 income 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 sourceCompany has no items which would be included in comprehensive income other than net income (loss). The new standard also requires presentation of authoritative U.S. generally accepted accounting principles (GAAP) recognized byadjustments 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 to be applied to nongovernmental entities and rules and interpretive releases ofdeferred the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently,for amendments to the FASB will not issue new standards inpresentation of reclassifications of items out of accumulated other comprehensive income, while still requiring entities to adopt the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. This guidance is effective for interim periods ending after September 15, 2009.other requirements. We adopted the new standard on January 1, 2012. The adoption of this guidance for the period ended September 30, 2009, withstandard had no effectimpact on our consolidated resultsfinancial statements. In February of operations and financial condition for the three and nine months ended September 30, 2009.In December 2007,2013, the FASB revisedissued a new accounting standard to improve the authoritative guidance for business combinations, which establishes principlestransparency of reporting reclassifications out of accumulated other comprehensive income by requiring entities to present in one place information about significant amounts reclassified and, requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. The guidance establishes principles stipulating how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured under a method established by the guidance referredsome cases, to as the acquisition method. The guidance also expands the disclosure requirementsprovide cross-references to related footnotes.
We are required to the nature and financial impact of business combinations. We adoptedadopt this guidancestandard as of January 1, 2009 and the beginning of 2013. We do not expect this adoption did not have an impact on our financial position, results of operations or cash flows.In December 2007, the FASB revised the authoritative guidance for consolidation, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. It also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary. We adopted this guidance as of January 1, 2009 and the adoption did not have an impact on our financial position, results of operations or cash flows.
In June 2008, the FASB revised the authoritative guidance for earnings per share, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class
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method. In contrast, the right to receive dividends or dividend equivalents that the holder will forfeit if the award does not vest, does not constitute a participation right and such an award does not meet the definition of a participating security in its current form (that is, prior to the requisite service having been rendered for the award). We adopted this guidance as of January 1, 2009 and the adoption did not have an impact on our financial position, results of operations or cash flows.
In April 2009, the FASB revised the authoritative guidance for financial instruments. The guidance requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This guidance is effective for interim periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and the adoption did not have a material impact on our financial position, results of operations or cash flows.
statements.
In April 2009,May 2011, the FASB revised the authoritative guidance for fair value measurements and disclosuresissued a new accounting standard which was an amendment to provide additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed forachieve common fair value measurement purposes.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 for interim periods ending after June 15, 2009. and adopted by the Company during 2012.
2. Liquidity
We adopted this guidancecontinue 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 period ending June 30, 2009. The adoptionforeseeable future.
Until such time as we earn revenue from our pharmaceutical development business or from a new business venture, we intend to finance our activities through:
| · | 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
guidance did not have an impactcash on
our financial position, results ofhand will be sufficient to sustain operations
or cash flows.In April 2009, the FASB revised the authoritative guidance for investments in debt and equity securities to provide guidance in determining whether impairments in debt securities are other-than-temporary, and modifies the presentation and disclosures surrounding such instruments. This guidance is effective for interim periods ending after June 15, 2009. We adopted the provisions of this guidance for the period ending June 30, 2009. The adoptionnext twelve months.
In early December 2012, we sold the stock of
this guidance had no material impact on our
financial position, results of operations or cash flows.In May 2009, the FASB revised the authoritative guidancesubsidiary Spherix Consulting, Inc. for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.nominal consideration. This guidance is effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance for the period ended June 30, 2009, andsale allows the Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.
In October 2009, the FASB issued ASC Update No. 2009-13, which amends the Revenue Recognition topicto minimize its administrative and other costs pending completion of the Codification. This update provides amendments to the criteria in Subtopic 605-25Company’s review of the Codification for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our results of operations and financial position.
In October 2009, the FASB issued ASC Update No. 2009-14, which amends the Software topic of the Codification. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the Codification. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments
strategic alternatives.
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also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our results of operations and financial position.
2.Liquidity
The Company’s working capital was $7.7 million as of December 31, 2009. Over the next 12 months, the Company expects that it will need to expend between $9 million and $11 million to complete the Phase 2 and Phase 3 trials and to fund its increased market development and commercialization activities. The total cost of completing the trials is difficult to determine and can be affected by any number of factors including, but not limited to, the time to complete the trials.
The Company will need to raise additional funds in 2010 to continue its operations. Any such fundraising will likely require the issuance of additional Company equity securities and a purchaser of such securities will likely insist that such securities be registered securities.
In November 2009,2012, the Company obtained net proceeds of approximately $6$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 primary offering. Theoffering of common stock and warrants. Both the common stock issued in the offering and the underlying common stock which may be issued upon exercise offor the warrants issued in the offering have beenwere previously registered under a Form S-3 shelf registration statement declared effective by the Securities and Exchange Commission (“SEC”)SEC in October 2009.Pursuant
We believe our current capital is inadequate to SEC rules,pursue business opportunities, which we may desire to pursue in the Companyfuture 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 not be in a positionrequired to issue additional shares of its common stock in another registered direct primary offering under a Form S-3 registration statement until mid-November 2010. Thus, if the Company wishes to conduct another registered direct primary offering before mid-November, 2010, it will likely have do so in whole or in part under a Form S-1 registration statement.Further, NASDAQ rules require stockholder approval for any certain stock issuances constituting 20% or more of a Company’s issued and outstanding stock.
raise capital at prices that are below our current market capitalization value.
The Company cannot be assured that it will be able to attract a purchaser ofan investor in our securities toor raise the additional funds it will likely require in 2010;the future; that the Company will be able to obtain any required stockholder approval; or that the Company will be able to havesuccessfully complete additional offerings or sales of its securities. If we reach a Form S-1 registration statement declared effectivepoint where we are unable to complete such an offering.3.Fair Value Measurement
Theraise 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 elected notsufficient cash balances to applycontinue as a going concern for the fair value option to measure anynext 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 assetscondition and, liabilities on its balance sheetin general, collateral is not already valued at fair value under other accounting pronouncements. These other financial assets and liabilities are primarily short-term investments, accounts receivable, accounts payable and debt, which are reported at historical value. The fair value of these financial assets and liabilities approximate their fair value because of their short duration.4.Allowance for Doubtful Accounts
required. Management regularly reviews accounts receivable for uncollectible and potentially uncollectible accounts, and when necessary establishes an allowance for doubtful accounts. AnBalances that are outstanding after management has used reasonable collection efforts are written-off through a charge to the allowance for doubtful accounts from continuing operations was not deemed necessary atand a credit to accounts receivable.
At December 31,
20092012 and
2008.5.2011, 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 | | $ | - | |
4. Property and Equipment
During 2008, the Company relocated its headquarters to a smaller facility. The decrease in office furniture and equipment and the decrease in leasehold improvements are a direct result of this move.
The components of property and equipment as of December 31, at cost are:
72
| | | 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 | |
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| | 2009 | | 2008 | |
Computers | | $ | 14,000 | | $ | 14,000 | |
Office furniture and equipment | | 109,000 | | 187,000 | |
Leasehold improvements | | 229,000 | | 283,000 | |
Total cost | | 352,000 | | 484,000 | |
Accumulated depreciation and amortization | | (126,000 | ) | (174,000 | ) |
Property and equipment, net | | $ | 226,000 | | $ | 310,000 | |
The Company’s depreciation expense for the years ended December 31, 20092012 and 20082011 was $78,000$64,000 and $78,000,$66,000, respectively. In 2008, lease incentives under the Bethesda facility lease provided $150,000 in leasehold improvements, which is recognized on a straight line basis over the life of the lease.
6.
5. Patents and Intangible Assets
The Company’s amortization expense for the years ended December 31,
20092012 and
20082011 was
$6,000$0 and
$8,000,$2,000 on patents with an original value of $53,000, of which $2,000 and $51,000 expired in 2012 and 2011, respectively.
The Company’s future amortization based on its patents and intangible assets at December 31, 2009 is as follows:Year | | Amortization
Expense | |
2010 | | $ | 7,000 | |
2011 | | 7,000 | |
Total | | $ | 14,000 | |
7.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31:
| | 2009 | | 2008 | |
| | | | | |
Accounts payable | | $ | 961,000 | | $ | 524,000 | |
Purchase commitment | | 600,000 | | 0 | |
Deferred Compensation | | 140,000 | | 113,000 | |
Accrued expenses | | 13,000 | | 74,000 | |
| | $ | 1,714,000 | | $ | 711,000 | |
| | | 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 OfferingsRegistered Direct
On November 16, 2009,7, 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 2,760,87053,241 shares of its common stock and warrants to purchase up to an additional 1,104,34810,648 shares of its common stock to such investors for gross proceeds of approximately $6.3$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 0.400.2 of a share of common stock. The purchase price per unit was $ 2.30.$21.60. Subject to certain ownership limitations, the warrants are exercisable at any time on orcommencing six (6) months after the initial issue date and on or prior to November 16, 2014,August 7, 2017, but not thereafter, at an exercise price of $ 3.25. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The warrants are classified as equity instruments and are accounted for in additional-paid-in capital.On November 6, 2009, in connection with the closing of our registered direct offering of convertible preferred stock and warrants to purchase common stock, the Company issued to Rodman & Renshaw, LLC, as partial consideration for its services as placement agent, warrants to purchase up to 82,826 shares of our common stock at an exercise price of $2.875$28.00 per share. The warrants are exercisable at the option of the holder at any time beginning on November 16, 2009 through and including November 16, 2011. These warrants were offered and sold
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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.
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 $6$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.
Restricted StockIn August 2009 and 2008,connection with the closing of our February 2012 offering, the Company issued 26,664to 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 value of the warrants at the date of grant was $19,000. The warrants are exercisable at the option of the holder at any time beginning six (6) months after the closing through and 38,460including 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 agreement with certain investors to sell an aggregate of 26,628 shares respectively,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 Securities and Exchange Commission 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 $59.00 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 with aunder the Company’s 2012 Equity Compensation Plan. The total fair value of $40,000 in each year to its independent Board Members,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 as compensation expense at the time of issue.in 2012. The fair value of the above 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 August 2007,late 2012, the Company granted 30,000 and 15,000 shares in restricted stock as part ofadopted the employment agreements for the Company’s Chief Executive Officer and President. The fair value of the stock was $55,800 and $30,000, which was recognized as compensation expense over the respective vesting periods of two and one years.Stock Option Plan
The Company has an Employees’ Stock Option2012 Equity Incentive Plan (the “Plan”) which permits issuance of both Incentive Stock Options (ISO)incentive stock options, non-qualified stock options and Non-Qualified Stock Options, wherebyrestricted stock. The Plan replaced a prior incentive stock plan. During 2012 and 2011, the Company granted 5,487 and 2,250 options may be granted to officers, Directors and other key employees to purchase up to 1,000,000 shares of common stock in amounts determined by the Compensation Committee of theCompany’s Board of Directors through December 31, 2010. During 2009 and 2008, no stock options were grantedofficers under the Plan. At December 31, 2009, 857,700 options were available for grant under the Plan.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.
Activity for the two years ended At December 31, 2009, for all option grants is shown below:
| | 2009
Shares | | 2009
Weighted
Average
Exercise
Price | | 2008
Shares | | 2008
Weighted
Average
Exercise
Price | |
Outstanding at beginning of year | | 40,500 | | $ | 2.57 | | 216,800 | | $ | 7.36 | |
Granted | | — | | $ | — | | — | | $ | — | |
Exercised | | — | | $ | — | | — | | $ | — | |
Expired or forfeited | | — | | $ | — | | (176,300 | ) | $ | 8.46 | |
Outstanding at end of year | | 40,500 | | $ | 2.57 | | 40,500 | | $ | 2.57 | |
| | | | | | | | | |
Options exercisable at end of year | | 39,750 | | | | 39,000 | | | |
Weighted-average fair value of options granted during the year | | $ | — | | | | $ | — | | | |
| | | | | | | | | |
Price range of options | | | | | | | | | |
Outstanding | | $ | 2.20-$3.41 | | | | $ | 2.20-$3.41 | | | |
Exercised | | $ | — | | | | $ | — | | | |
Expired or forfeited | | $ | — | | | | $ | 6.35-$8.67 | | | |
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2012, there were 6,789 options under the previous plan that were fully vested. The following table summarizes information with respect tototal unrecognized stock options outstandingcompensation expense at December 31, 2009:
Range of
Exercise Price | | Number of
Options
Outstanding
at 12/31/09 | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Life | |
$ | 2.20 | | 28,000 | | $ | 2.20 | | 1.1 | |
$ | 3.41 | | 12,500 | | $ | 3.41 | | 0.1 | |
| | 40,500 | | | | | |
The following table summarizes information with respect to stock options exercisable at December 31, 2009:
Year of Option
Expiration | | Number of
Options | | Weighted
Average
Exercise Price | | Price Range | |
2010 | | 12,500 | | $ | 3.41 | | $ | 3.41 | |
2011 | | 27,250 | | $ | 2.20 | | $ | 2.20 | |
All Years | | 39,750 | | | | | |
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 SFAS 123RASC 718 for stock options granted in 2006. No2012 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 were grantedoutstanding 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 or 2008.
|
| 2006
|
|
Risk-free interest rate
| | 4.59
| %
|
Expected life (years)
| | 4
| |
Volatility
| | 140.9
| %
|
Dividend yield
| | 0
| %
|
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.
9. 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.
Income tax from continuing operations for 20092012 and 20082011 was as follows: | | 2009 | | 2008 | |
U.S. Federal income tax benefit | | $ | — | | $ | 465,000 | |
State and local income tax benefit | | $ | — | | $ | 88,000 | |
Total income tax benefit | | $ | — | | $ | 553,000 | |
| | 2009 | | 2008 | |
Current income tax benefit | | $ | — | | $ | 553,000 | |
Deferred income tax expense | | $ | — | | $ | — | |
Total income tax benefit | | $ | — | | $ | 553,000 | |
| | | 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, 20092012 and 20082011 are as follows:75
| | | 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 | | $ | - | | | $ | - | |
Table of Contents | | 2009 | | 2008 | |
Property and equipment | | $ | (48,000 | ) | $ | (70,000 | ) |
Deferred rent | | 43,000 | | 54,000 | |
Accrued vacation | | 28,000 | | 19,000 | |
Tax credit | | 82,000 | | 82,000 | |
Deferred compensation | | 282,000 | | 305,000 | |
Net operating loss carryforward | | 10,941,000 | | 8,001,000 | |
Accrued bonus | | 103,000 | | — | |
Stock based compensation | | 31,000 | | 27,000 | |
Inventory adjustments | | 434,000 | | | |
Other | | 1,000 | | 1,000 | |
| | 11,897,000 | | 8,419,000 | |
Valuation allowance | | (11,897,000 | ) | (8,419,000 | ) |
Deferred tax asset | | $ | — | | $ | — | |
At December 31, 20092012 and 2008,2011, the Company had netgross operating loss carryforwards for U.S. federal income tax purposes of approximately $27.4$41.4 million and $18.7$37.9 million, respectively, which will begin to expire in 2019. At December 31, 20092012 and 2008,2011, the Company had netgross operating loss carryforwards for state income tax purposes of approximately $37.3$51.6 million and $30.5$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 asset.
assets.
Utilization of the net operating loss carryforwards and credit
maycould 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
expensesbenefits and taxes computed at the statutory Federal rate of 34 percent for
20092012 and
20082011 are as follows:
| | 2009 | | 2008 | |
U.S. Federal income tax benefit at the statutory rate of 34% | | $ | 3,110,000 | | $ | 2,432,000 | |
Effect of permanent differences | | $ | (7,000 | ) | $ | (25,000 | ) |
State income taxes benefit (expense), net of federal tax benefit | | 494,000 | | (39,000 | ) |
Other | | (119,000 | ) | 112,000 | |
Change in valuation allowance | | (3,478,000 | ) | (1,928,000 | ) |
Income tax benefit | | $ | — | | $ | 552,000 | |
| | | 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.
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,
20092012 and
2008,2011, the Company had no material unrecognized income tax benefits and recognized no interest or penalties on income tax liabilities.
Table of Contents
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 2005,2008, except for pre-2005pre-2008 tax returns that generated net operating loss carry forwards that could be adjusted on audit. During 2009, an IRS audit of tax year 2006 was completed and no adjustments were proposed. Currently, no federal or state and local income tax returns are under examination by the respective taxing authorities.
10.
12. Commitments and Contingencies
Government Contracts
Following the sale of InfoSpherix, the Company is no longer engaged in the performance of government contracts.
During 2009, the Company entered into a purchase commitment with a supplier of the Company’s D-TagatoseD-tagatose product. The agreement committed the Company to purchase 25 metric tons of D-Tagatose. The Company utilizesutilized the D-TagatoseD-tagatose as a part of the Phase 2 and Phase 3 trial of the Food and Drug Administration (“FDA”) study.trials. This phase iswas 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 during the yearin 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.
The Company has commitments under an operating lease through
20132018 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,
2009,2012, under the non-cancelable lease are as follows:
Year Ending December 31, | | Operating
Lease | |
| | | |
2010 | | 150,000 | |
2011 | | 155,000 | |
2012 | | 159,000 | |
2013 | | 40,000 | |
| | $ | 504,000 | |
| | | | |
| 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. In 2008, lease incentives under the Bethesda facility lease provided for $150,000 of leasehold improvements. The Company incurred net operating lease rental expenses of approximately $165,000$155,000 and $244,000$129,000 for the years 20092012 and 2008,2011, respectively.
Related Party Transactions
Employment, Deferred Compensation, At the end of December, 2012, the Company entered into a Consulting Agreement with an entity wholly-owned by Mr. Kesner, a director and Consulting Agreementsinterim Chief Executive Officer of the Company, pursuant to which the entity was issued 120,000 shares of common stock in exchange for Principal Stockholdersits 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 has 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 December 31, 2009,January 1, 2011, the Company’s liability for both Dr. and Mrs. Levin was estimated to be $480,000$450,000 for the lifetime payments and $240,000$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 iswas reported on the accompanying balance sheet as deferred compensation.compensation at January 1, 2011. During77
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2009 and 2008, 2011, the Company paid Dr. and Mrs. Levin a combined total of $135,000 and $123,000$24,000 in post-retirement benefits.
Dr.benefits under the above agreements.
In January 2011, the Company entered into a Letter Agreement with Gilbert V. Levin and Mrs.M. Karen Levin havepursuant to which the Company agreed to servemake 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 consultants toa member of the Board of Directors of the Company on an as-needed basis, at a specified daily rate. No consulting payments were made to the Levins during 2009 or 2008.11.January 13, 2011.
13. Employee Benefit Plans
Effective January 1, 1990, the Company established the
The Spherix Incorporated 401(k) Retirement
Plan. The 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
2½%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
$15,000$31,000 and
$9,000$23,000 in
2009each of the years 2012 and
2008,2011, respectively.
12.The Plan was terminated in December 2012.
14. Information by Business Segment
Operating segments are components As a result of an enterprise about which separate financial information is available that is evaluated regularly by the chiefsale of the Spherix Consulting subsidiary, the Company now has only one operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s principal segments are Biospherics, our biotechnology research and development business, and Health Sciences, a technical and regulatory consulting business.Financial information by business segment, for the years ended December 31, 2009 and 2008 is summarized below:
78Biospherics.
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| | | | Year Ended December 31, | |
| | | | 2009 | | 2008 | |
Revenues | | Health Sciences Consulting | | $ | 1,350,000 | | $ | 1,012,000 | |
| Biospherics | | 9,000 | | 14,000 | |
| Total revenues | | $ | 1,359,000 | | $ | 1,026,000 | |
| | | | | | | |
Operating Income (Loss) and Loss Before Income Taxes | | Health Sciences Consulting | | $ | 691,000 | | $ | 433,000 | |
| Biospherics | | (7,523,000 | ) | (4,164,000 | ) |
| General and administration | | (2,354,000 | ) | (2,780,000 | ) |
| Total operating loss | | (9,186,000 | ) | (6,511,000 | ) |
| Interest income | | 37,000 | | 348,000 | |
| Interest expense | | — | | (2,000 | ) |
| Other expense | | — | | (6,000 | ) |
| Loss from continuing operations before income taxes | | $ | (9,149,000 | ) | $ | (6,171,000 | ) |
| | | | | | | |
Identifiable Assets | | Health Sciences Consulting | | $ | 274,000 | | $ | 296,000 | |
| Biospherics | | 8,000 | | 21,000 | |
| General corporate assets | | 9,873,000 | | 11,944,000 | |
| Total assets | | $ | 10,155,000 | | $ | 12,261,000 | |
| | | | | | | |
Capital Expenditures | | Health Sciences Consulting | | $ | — | | $ | — | |
| Biospherics | | — | | — | |
| General corporate assets | | — | | 333,000 | |
| Total capital expenditures | | $ | — | | $ | 333,000 | |
| | | | | | | |
Depreciation and Amortization | | Health Sciences Consulting | | $ | — | | $ | — | |
| Biospherics | | 6,000 | | 5,000 | |
| General corporate assets | | 78,000 | | 81,000 | |
| Total depreciation and amortization | | $ | 84,000 | | $ | 86,000 | |
Operating income (loss) from continuing operations consists of revenue less operating expenses. In computing operating loss, interest expense and income taxes were not considered. The operating income for the Health Sciences segment was 51% and 43% of that segment’s revenue for 2009 and 2008.
Biospherics is concentrating all of its efforts on the Phase 3 clinical trial of its most promising product, D-tagatose as a treatment for hypertriglyceridemia and for Type 2 diabetes in humans. This product is in the development stage and will require substantial additional investment to bring to market.
Identifiable assets by business segment are those assets used in the Company’s operations in each segment, such as accounts receivable, inventories, fixed assets, and patent costs. Corporate assets are principally cash and certain other assets not related to a particular segment’s operations.
13.
The Company evaluated all events or transactions after December 31, 20092012 through the date the financial statements were issued. During this period,
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 didcreated 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 SUBSIDIARIES CONDENSED 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 SUBSIDIARIES CONDENSED 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:
| · | 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, license 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 subsequent events.risks.
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
SPHERIX INCORPORATEDCost 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 | |
*] SHARES 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.CONVERTIBLE PREFERRED STOCK
[*] WARRANTS
PART IIThe 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.
INFORMATION NOT REQUIRED IN PROSPECTUSReclassifications
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.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 expensesrespects.
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 | | | – | |
| | | – | |
| Deferred | | | | |
| Federal | | | (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 rate | | | (34)% | |
| State income tax rate, net of federal benefit | | | (5) | |
| Less: valuation allowance | | | 39 | |
| Provision for income taxes | | | – % | |
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) COMMITMENTS 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.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 amounts shownSEC Registration Fee, are estimates except the Securitiesestimated:
| 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
Exchange Commission registration fee.Securities and Exchange Commission registration fee | | $ | 713 | |
Legal fees and expenses | | 50,000 | |
Accountants fees and expenses | | 17,500 | |
Miscellaneous | | 10,000 | |
Total | | $ | 78,213 | |
Officers.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.Section 145 of the Delaware General Corporation Law provides as follows:
A Delaware corporation may indemnify any person who was or is a party or who is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the factState of Delaware provides, in general, that such person is or was a director, officer, employee or agent of such corporation or is or was serving atincorporated under the requestlaws of the corporationState of Delaware, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to be the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the person’s conduct was illegal.
A Delaware corporationwe 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 suitproceeding (other than a derivative action by or in the right of the corporationcorporation) 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 partnership, joint venture, trustand, with respect to any criminal action or other enterprise. The indemnityproceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Delaware corporation may includeindemnify 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 thesuch person acted in good faith and in a manner thesuch person reasonably believed to be in or not opposed to the best interestinterests of the corporation, except that no indemnification will be made in respect toof any claim, issue or matter as to which such person shallwill have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery of the State of Delaware or theany other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case,determines such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Courtexpenses.
Our certificate of
Chancery or such other court shall deem proper.Our Certificate of Incorporation providesincorporation and bylaws provide that Spherix Incorporated shallwe will indemnify itsour directors, officers, directors, employees and agents and other persons to the fullest extent authorized orand in the manner permitted by the Delawareprovisions of the General Corporation Law.
We maintainLaw of the State of Delaware, 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 officers’will not adversely affect any limitation on the liability insurance for the benefitof any of our directors or officers existing as of the time of such repeal or modification.
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 Law of the State of Delaware would permit indemnification.
Item 15. Recent Sales of Unregistered Securities.
Fiscal Year Ending December 31, 2013
On November 26, 2013, we entered into separate Amendment and certainExchange Agreements with the holders of our officers.Referenceoutstanding shares of Series F Preferred Stock pursuant to which such holders agreed to return their shares of Series F Preferred Stock to us for cancellation 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 madeentitled to Item 17(d) for91% of one vote per share (subject to beneficial ownership limitations described below) and shall vote together with holders of our undertakings with respectcommon 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 indemnification for liabilities arisingadjustment 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 conversion of the Series F-1 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 permitted by Section 1021933, as amended, 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 48,438 shares of common stock to five accredited investors for gross proceeds of $2,235,000. 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. Each share of Series F Preferred Stock is entitled to one vote per share (subject to beneficial ownership limitation) and shall vote together with holders of our common stock. We are prohibited from effecting the conversion of the
Delaware General Corporation Law,Series F Preferred Stock to the
Company has adopted provisions in its certificate of incorporationextent that,
limit or eliminate the personal liability of its directors for a breach of theirII-1
Table of Contents
fiduciary duty of care as a director. The dutyresult of care generally requires that, when acting on behalfsuch conversion, the holder will beneficially own more than 9.99% in the aggregate of the Company, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liableissued and outstanding shares of our common stock calculated immediately after giving effect to the Company or its stockholders for monetary damages or breachissuance of fiduciary duty as a director, except for liability for:
·any breachshares of common stock upon the conversion of the director’s duty of loyaltySeries F Preferred Stock.
The securities referenced above were sold and issued to
the Company or its stockholders;·any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
·any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or
·any transaction from which the director derived an improper personal benefit.
Insofar“accredited investors,” as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnificationterm is against public policy as expresseddefined 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 therefore, unenforceable.ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Duringconvertible, at the three-yearoption 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 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 proceedingof 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 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 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 the filing of this registration statement, we have issued securities in the transactions described below without registration under the Securities Act.grant was $19,000. These securitieswarrants were offered and sold by us in reliance upon exemptions from the registration statement requirements provided by Section 4(2) of the Securities Act or Regulation D under the Securities Actof 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 2009,21, 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 registered directJanuary 2011 offering, of corporate stock and warrants to purchase common stock, wethe Company issued to Rodman & Renshaw, LLC, as additionalpartial consideration for its services as placement agent, warrants with a term of two years to purchase up to 82,826640 shares of the Company’sour common stock at an exercise price of $2.875$162.50 per share. The estimated fair value of the warrants are exercisable at the optiondate 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 holder at any time beginning on November 16, 2009, throughSecurities Act of 1933, as amended, as transactions by an issuer not involving a public offering. These warrants have now expired.
Item 16. Exhibits and
including November 16, 2011.Financial Statement Schedules
ITEM 16. EXHIBITS a) ExhibitsA list of exhibits
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| 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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| Certificates of Amendment of the Company (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 well as the Company’s Information Statement filed November 26, 2012 and the Company Current Report on Form 8-K filed December 17, 2012, all as filed with the SEC) |
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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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| 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* |
| |
| Consent of Baxter, Baker, Sidle, Conn & Jones, P.A. (included in Exhibit 5.1)** |
| |
| |
| |
| Power of Attorney (included on signature page of this Form S-1)* |
| |
| |
| |
| XBRL Taxonomy Extension Schema Document * |
| |
| XBRL Taxonomy Extension Calculation Linkbase * |
| |
| XBRL Taxonomy Extension Definition Linkbase * |
| |
| XBRL Taxonomy Extension Labels Linkbase * |
| |
| XBRL Taxonomy Extension Presentation Linkbase * |
*Filed herewith.
**To be filed
herewith is contained in the exhibit index that immediately precedes such exhibits and is incorporated herein by
reference.ITEMamendment.
Item 17.
UNDERTAKINGSA. Undertakings
The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a
post- effectivepost-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities 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 offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
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| (i) | To include any prospectus required by Section 10(a)(3) of the Securities 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 percent 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. |
Table of Contents
(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;
(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 the securities offered therein, and the offering of
suchthe 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
whichthat remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the
undersigned registrant under the Securities Act
of 1933 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:
(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.
B.
| (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 of 1933, 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 of 1933 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.
C. The undersigned registrant hereby undertakes that:
(1)
For purposesthe purpose of determining any liability under the Securities Act the information omitted from the form ofto any purchaser, each prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1)as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or (4) or 497(h) under the Securities Actother than prospectuses filed in reliance on Rule 430A (§ 230.430A of this chapter), shall be deemed to be part of this Registration Statementand included in the registration statement as of the timedate it was declared effective.(2) For purposes of determining any liability under the Securities Act, each post-effective amendmentis first used after effectiveness. Provided, however, that containsno statement made in a form of prospectus shall be deemed to be a new registration statement relatingor 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 securities offered therein, andregistration statement or prospectus that was part of the offeringregistration statement or made in any such document immediately prior to such date of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3first use.
In accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has
duly causedreasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and authorized this
Registration Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
Bethesda, Maryland,the City of Tysons Corner, State of Virginia, on
September 23, 2010.December 9, 2013. | SPHERIX INCORPORATED | |
|
| | |
| By: | /s/ Claire L. Kruger Anthony Hayes | |
| | Anthony Hayes | |
| | Claire L. Kruger
|
| | Director and Chief Executive Officer (Principal Executive Officer) | |
| | And
| |
| By: | /s/ Michael Pollack | |
| | Michael Pollack Interim Chief OperatingFinancial 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, this Registration Statement has been signed by the following persons in the capacities and on the
date indicated.dates stated.*
/s/ Anthony Hayes | | Chief Executive Officer and Director | | September 23, 2010
December 9, 2013 |
Anthony Hayes | | (Principal Executive Officer ) | | |
| | | | |
| /s/ Michael Pollack | | Interim Chief Financial Officer | | December 9, 2013 |
| Michael Pollack | | (Interim Principal Financial and Accounting Officer) | | |
| /s/ Douglas T. Brown | | Director | | December 9, 2013 |
| Douglas T. Brown | | | | |
| | | | |
| | | | |
| /s/ Edward M. Karr | | Director | | December 9, 2013 |
| Edward M. Karr | | | | |
| | | | |
| /s/ Harvey J. Kesner | | Director | | December 9, 2013 |
| Harvey J. Kesner | | | | |
| | | | |
/s/ Robert L. ClaytonJ. Vander Zanden | | CFO, Treasurer and
| | September 23, 2010
|
Robert L. Clayton
| | Principal Accounting Officer
| | |
| | | | |
/s/ Claire L. Kruger
| | Chief Executive Officer
| | September 23, 2010
|
Claire L. Kruger
| | and Chief Operating Officer
| | |
| | | | |
*
| | Director
| | September 23, 2010
|
Gilbert V. Levin
| | | | |
| | | | |
*
| | Director and President
| | September 23, 2010
|
Robert A. Lodder, Jr.
| | | | |
| | | | |
*
| | Director
| | September 23, 2010
|
Aris Melissaratos
| | | | |
| | | | |
*
| | Chairman of the Board | | September 23, 2010
December 9, 2013 |
Robert J. Vander Zanden | | | | |
*
| | Director
| | September 23, 2010
|
Thomas B. Peter
| | | | |
* By:
| /s/ Claire L. Kruger
| |
| /s/ Alexander Poltorak | Claire L. Kruger, Attorney-in-Fact
| |
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Table of Contents
SPHERIX INCORPORATED
INDEX TO EXHIBITS
EXHIBIT
Director |
| DESCRIPTION
December 9, 2013 |
| Alexander Poltorak | | |
3.1
| | 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 Commission)
|
3.2
| | Articles of Amendment of the Company (incorporated by reference to the Company’s Proxy Statement for its May 1996, May 2000, and May 2001 annual meetings, as filed with the Commission)
|
3.3
| | Amended and Restated By-Laws of Spherix Incorporated (incorporated by reference to Form 8-K dated November 23, 2009)
|
3.4
| | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Form S-1 Amendment # 1 filed September 3, 2010)
|
5.1
| | Opinion of Baxter, Baker, Sidle, Conn & Jones, P.A.(1)
|
10.1
| | Summary of Annual Compensation of Members of the Board of Directors of Spherix Incorporated (incorporated by reference to Form 8-K dated February 28, 2008)
|
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
| | Amended 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
| | 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)
|
10.5
| | Amended 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)
|
10.6
| | 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)
|
10.7
| | 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)
|
10.8
| | Employment Agreement dated as of August 31, 2009, by and between Ram Nimmagudda and the Company (incorporated by reference to Form 8-K filed September 3, 2009)
|
10.9
| | Letter Agreement dated as of July 2, 2008, by and between Gilbert V. Levin, M. Karen Levin and the Company (incorporated by reference to Form 8-K filed July 8, 2008)
|
10.10
| | Restated Consulting Agreement dated as of November 29, 2005, by and between M. Karen Levin and the Company (incorporated by reference to Form 8-K filed December 1, 2005)
|
10.11
| | Restated Consulting Agreement dated as of March 23, 2004, by and between Gilbert V. Levin and the Company (incorporated by reference to Form 10-K filed March 30, 2004)
|
10.12
| | 1997 Stock Option Plan (incorporated by reference from the Company’s Proxy Statements for its May 1998, May 2001 and May 2005 annual meetings, as filed with the Commission)
|
10.13
| | 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)
|
10.14
| | Stock Purchase Agreement by and among the Company, InfoSpherix and Active dated as of June 25, 2007 (incorporated by reference from the Company’s Schedule 14A as filed with the Securities and Exchange Commission on July 16, 2007)
|
10.15
| | Lease termination agreement dated August 1, 2007, between Indian Creek Investors, LLC and the Company (incorporated by reference to Form 10-Q dated September 30, 2007)
|
10.16
| | Lease agreement dated October 4, 2007, between Elizabeth Court Associates III Limited Partnership and the Company (incorporated by reference to Form 10-Q dated September 30, 2007)
|
10.17.
| | Securities Purchase Agreement dated November 16, 2009, between the Company and certain investors (incorporated by reference to Form 8-K dated November 18, 2009)
|
10.18
| | Manufacturing Support And Supply Agreement dated December 15, 2009, between the Company and Inalco S.p.A (incorporated by reference to Form 8-K filed December 18, 2009)
|
10.19
| | Engagement letter agreement dated August 12, 2010 by and between Spherix Incorporated and Rodman & Renshaw, LLC (incorporated by reference to Form S-1 Amendment # 1 filed September 3, 2010)
|
10.20
| | Form of Securities Purchase Agreement dated [*], 2010 between the Company and certain investors (incorporated by reference to Form S-1 Amendment # 1 filed September 3, 2010)
|
10.21
| | Form of Warrant (incorporated by reference to Form S-1 Amendment # 1 filed September 3, 2010)
|
21.1
| | List of Subsidiaries
|
23.1
| | Consent of Baxter, Baker, Sidle, Conn & Jones, P.A. (will be filed by amendment)
|
23.2
| | Consent of Grant Thornton LLP, Independent Auditors
|
24.1
| | Power of Attorney (including on signature page of this registration statement)
|
(1) Filed herewith
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