SPHERIX INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

Forward-Looking Statements

You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All references to "we," "us," "our" and the "Company" refer to Spherix Incorporated, a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise.



Overview


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

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

Since , the Company has received limited funds from its IP monetization. In addition to our patent monetization efforts, since the fourth quarter of 2017, we have been transitioning to a technology development company. These efforts have focused on biotechnology research and blockchain technology research. The Company's biotechnology research development includes investments in: (i) Hoth Therapeutics Inc. ("Hoth"), a development stage biopharmaceutical company focused on unique targeted therapeutics for patients suffering from indications such as atopic dermatitis, also known as eczema, (ii) DatChat, Inc. ("DatChat"), a privately held personal privacy platform focused on encrypted communication, internet security and digital rights management, and (iii) a proposed acquisition of assets of CBM BioPharma, Inc. ("CBM"), a pharmaceutical company focusing on the development of cancer treatments.

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

On , Hoth closing on its initial public offering of 1,250,000 shares of its common stock at an initial offering price to the public of $5.60 per share, which commenced trading on The Nasdaq Capital Market on under the symbol "HOTH". As of the date of this report, the Company and its affiliates own approximately 19% of Hoth.

In , the Company entered into an agreement and plan of merger (the "CBM Merger Agreement") with CBM, pursuant to which all shares of capital stock of CBM would be converted into the right to receive an aggregate of 3,529,411 shares of the Company's common stock with CBM continuing as the surviving corporation in the merger. On , the Company restructured the terms of its proposed merger with CBM and entered into an Asset Purchase Agreement (the "APA") with CBM, whereby the Company purchased certain assets of CBM, including, among other things:

? a License Agreement with Wake Forest University Health Sciences, dated as of

relating to certain technologies in the areas of acute myeloid

leukemia (AML), and acute lymphoblastic leukemia (ALL), which License Agreement

includes the following patent rights:

? U.S. Patent 6,670,341, titled "Compositions and methods for double-targeting

virus infections and targeting cancer cells" issued

? U.S. Patent 7,026,469, titled "Compositions and methods for double-targeting

virus infections and targeting cancer cells" issued




                                       13




? U.S. Patent 7,309,696, titled "Novel phospholipid conjugates double-targeting

HIV" issued

? U.S. Patent 7,638,528, titled "Compositions and methods for targeting cancer

cells" issued

? U.S. Patent 8,138,200, titled "Compositions and methods for double-targeting

virus infections and targeting cancer cells" issued

? a Patent License Agreement with the University of Texas at Austin on behalf of

the Board of Regents of the University of Texas System, dated as of ,

2018, relating to certain technologies in the area of pancreatic cancer

treatment, which Patent License Agreement includes the following patent rights:

? US Patent 61/933,035, titled "Nucleobase Analogue Derivatives and their

applications" filed

? PCT/US2015/013454, titled "Nucleobase analogue derivatives and their

applications" filed

? US App 15/115,393, titled "Nucleobase analogue derivatives and their

applications" filed

? consulting contract with CBM's Chief Scientific Officer, entered into on July

23, 2018, pursuant to which the consultant is paid $50,000 annually

? contracts with five Scientific Advisory Board members, pursuant to which each

member is paid $20,000 annually.

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) an aggregate number of shares of common stock equal to $7,000,000 (the "Stock Consideration") comprised of (A) an aggregate number of shares of common stock equal to 9.9% of the issued and outstanding shares of common stock as of the date that the acquisition closes (the "Closing Date") (the "Common Stock Consideration") based on a per share purchase price of $3.61, subject to adjustment (the "Buyer Common Stock Price"), which ultimately limits CBM's maximum voting control of the Company to 9.9% of the Company's issued and outstanding common stock, and (B) such number of shares of nonvoting Series L Preferred Stock as shall be equal to the Stock Consideration less the value of the shares of common stock comprising the Common Stock Consideration, with each share constituting the Stock Consideration valued at the Buyer Common Stock Price, and (ii) cash consideration in the amount of $1,000,000 (the "Cash Consideration Amount", and together with the Stock Consideration, the "Purchase Consideration"). The Cash Consideration Amount from the Purchase Consideration is held back and becomes payable to CBM upon the consummation by the Company of the first sale by Spherix of common stock, Series L convertible preferred stock or any other equity or equity-linked financing of Spherix to investors in one or more transactions for which Spherix receives aggregate gross proceeds of greater than $2,000,000 (a "Qualified Financing") after the Closing Date. Upon consummation of a Qualified Financing by the Company, the Company will retain the first $2,000,000 of gross proceeds received in connection with such Qualified Financing and CBM will receive 100% of the gross proceeds of such Qualified Financing received by the Company in excess of $2,000,000 as well as the gross proceeds of any subsequent equity financings by the Company until the Cash Consideration Amount is satisfied in full.

Upon the execution of the APA, the Company and CBM agreed to terminate the CBM Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived that certain termination fee due to CBM pursuant to the CBM Merger Agreement.

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

The obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by any relevant governmental authorities or any third parties, and the shareholders of the Company and CBM, (b) the absence of any law being enacted, issued, promulgated, enforced or entered, or any order by any federal or national, state or provincial, municipal or local government, governmental authority, regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality, political subdivision, court, tribunal, official arbitrator or arbitral body in each case whether domestic or foreign (each a "Governmental Authority") which makes the transaction illegal, and (c) no pending action being brought by a third-party non-affiliate to enjoin or restrict the transaction; (d) the Company holding a special meeting of its stockholders to approve, among other things, the issuance of the Stock Consideration; and (e) certain customary closing conditions, including but not limited to the accuracy of certain representations and warranties, the performance in all material respects of each parties' obligations, agreements and covenants under the APA, and no Material Adverse Effect having occurred with respect to either the Company or CBM since the date of the APA. "Material Adverse Effect" means, with respect to CBM, any event, fact, condition, change, circumstance, occurrence or effect, which, either individually or in the aggregate with all other events, facts, conditions, changes, circumstances, occurrences or effects, (a) has had, or would reasonably be expected to have, a material adverse effect on the business, operations, properties, prospects, assets, liabilities, value, condition (financial or otherwise), licenses or results of operations of CBM's business or the Purchased Assets or the Assumed Liabilities or (b) does or would reasonably be expected to materially impair or delay the ability of CBM to perform its obligations under the APA and the ancillary documents or to consummate the transactions contemplated hereby and thereby; provided, however, that a Material Adverse Effect will not include any adverse effect or change resulting from any change, circumstance or effect relating to (A) the economy in general, (B) securities markets, regulatory or political conditions in the United States (including terrorism or the escalation of any war, whether declared or undeclared or other hostilities), (C) changes in applicable laws or generally accepted accounting principles or the application or interpretation thereof or (D) a natural disaster (provided, that in the cases of clauses (A) through (D), CBM's business is not disproportionately affected by such event as compared to other similar companies and businesses in similar industries and geographic regions as CBM's business).



                                       14




The APA may be terminated (i) by mutual written consent of the Company and CBM, (ii) by written notice by the Company or CBM if any of the conditions to Closing are not satisfied or waived by (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warranty, covenant or obligation under the APA), (iii) by written notice by the Company or CBM if a Governmental Authority has issued an order or taken action restraining, enjoining or prohibiting the transactions contemplated by the APA (unless a condition to Closing is due to breach or violation of the Company or CBM of any representation, warrant, covenant or obligation under the APA), (iv) by written notice of the Company if there is has been an incurable material breach by CBM of any of its representations, warranties, covenants or obligations, (v) by written notice of CBM if there is has been an incurable material breach by the Company of any of its representations, warranties, covenants or obligations, (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect on the Company following the date of the APA, or (vii) by written notice by the Company or CBM in the event that Company's stockholders did not approve the issuance of the Stock Consideration at a special meeting of Company . In the event that the APA is terminated on or prior to (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the APA, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the Company's stockholders did not approve the issuance of the Stock Consideration at a duly held special meeting of the Company, the Company will issue to CBM or CBM's designee an aggregate of 250,000 shares of the Company's common stock (the "Buyer Termination Fee") within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

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

On , the Company entered into Amendment No. 1 (the "Amendment") to the APA, pursuant to which the APA was amended to include a termination fee whereby, in the event that the APA is terminated on or prior to (i) by CBM as a result of a material breach by the Company of any of its representations, warranties, covenants or agreements under the APA, which such breach is not cured within 20 days after written notice by CBM to the Company, or (ii) by either the Company or CBM in the event that the issuance of the equity portion of the consideration to be paid to CBM by the Company pursuant to the APA is not approved by the Company's stockholders at a duly held special meeting of the Company, the Company will issue to CBM or CBM's designee an aggregate of 250,000 shares of the Company's Common Stock (the "Buyer Termination Fee") within two business days of termination, it being understood that in no event will CBM be entitled to the Buyer Termination Fee on more than one occasion.

On , the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-4.25 (the "Reverse Stock Split"). The Reverse Stock Split, which was approved by the Company's board of directors under authority granted by the Company's stockholders at the Company's 2019 Annual Meeting of Stockholders held on , was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on . the context otherwise requires, all references in this report to shares of our common stock, including prices per share of our common stock, reflect the Reverse Stock Split.



                                       15




On , the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with a single accredited investor (the "Purchaser") pursuant to which the Company sold 221,000 shares (the "Shares") of Common Stock at a purchase price of $2.60 per share, and pre-funded common stock purchase warrants to purchase up to 86,692 shares of Common Stock (the "Warrants") at a purchase price of $2.5999 per Warrant, which represents the per Share purchase price, less a $0.0001 per share exercise price for each of the Warrants. The Company sold the Shares and Warrants for aggregate gross proceeds of approximately $799,991 which transaction closed on . On , the Company entered into an amendment (the "Amendment") to the Purchase Agreement, pursuant to which the Purchaser surrendered an aggregate of 115,269 Shares to the Company and the Company issued an aggregate of 115,269 Warrants to the Purchaser in order to limit the Purchaser's beneficial ownership in the Company to 4.99%. The Warrants are immediately exercisable for $0.0001 per share until exercised in full, except that a holder will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage upon notice to the Company, but in no event in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice. The Warrants may also be exercisable on a "cashless" basis. The Company received net proceeds of approximately $799,979 from the sale of the Shares and Warrants.



Results of Operations


Three months ended compared to three months ended

During the three months ended and 2018, we incurred a loss from operations of approximately $0.9 million and $1.3 million, respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.3 decrease in amortization of patent portfolio and $0.2 million decrease in compensation and related expenses.

During the three months ended and 2018, other income was approximately $0.2 million and $0.9 million, respectively. The decrease in other income was primarily attributed to a $0.5 million decrease in change in investments recorded at fair value, and partially offset by $0.2 million decrease in change in fair value of warrant liabilities. During the three months ended , we recorded a change in fair value adjustment of $(1.0) million related to our investment in DatChat; offset by a $1.1 million unrealized gain on our investment in Hoth as the closing stock price Hoth increased from $5.15 as of to $5.81 as of .

Six months ended compared to six months ended

During the six months ended and 2018, we incurred a loss from operations of approximately $1.6 million and $2.8 million, respectively. The decrease in net loss in the 2019 period was primarily attributed to $0.7 decrease in amortization of patent portfolio, $0.3 million decrease in compensation and related expenses, $0.1 million decrease in professional fees and $0.1 million decrease in acquisition costs related to the DatChat transaction.

During the six months ended and 2018, other income (expense) was approximately $(0.2) million and $1.0 million, respectively. The decrease of other income (expense) was primarily attributed to a $1.0 million decrease in change in fair value of investments and a $0.4 million decrease in the fair value of warrant liabilities, and partially offset by $0.3 million decrease in other expenses. During the six months ended , we recorded a change in fair value adjustment of $(1.0) million related to our investment in DatChat; offset by an $0.6 million unrealized gain on our investment in Hoth as the closing stock price Hoth increased from $5.60 as of the IPO date to $5.81 as of .

Liquidity and Capital Resources

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

? managing current cash and cash equivalents on hand from our past debt and

equity offerings,

? seeking additional funds raised through the sale of additional securities in

the future,

? seeking additional liquidity through credit facilities or other debt

arrangements, and

? increasing revenue from its patent portfolios, license fees and new business

   ventures.



Our ultimate success is dependent on our ability to obtain additional financing and generate sufficient cash flow to meet our obligations on a timely basis. Our business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan to support new technologies and help advance innovation. Our working capital amounted to approximately $0.6 million at . Absent generation of sufficient revenue from the execution of our long-term business plan, we will need to obtain additional debt or equity financing, especially if we experience downturns in our business that are more severe or longer than anticipated, or if we experience significant increases in expense levels resulting from being a publicly-traded company or operations. If we attempt to obtain additional debt or equity financing, we cannot assume that such financing will be available to the Company on favorable terms, or at all.

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



                                       16




Cash Flows from Operating Activities -For the six months ended and 2018, net cash used in operations was approximately $1.6 million and $1.8 million, respectively. The cash used in operating activities for the six months ended primarily resulted from a net loss of $1.8 million, $0.1 million unrealized loss on marketable securities and $0.2 million changes in assets and liabilities, and partially offset by $0.3 million change in fair value of our investment. The cash used in operating activities for the six months ended primarily resulted from a net loss of $0.4 million, $0.7 million change in fair value of our investment in Hoth and $0.5 million change in fair value of warrant liabilities, and partially offset by amortization expenses of $0.3 million.

Cash Flows from Investing Activities- For the six months ended and 2018, net cash provided by investing activities was approximately $1.4 million and net cash used in investing activities was approximately $1.0 million, respectively. The cash provided by investing activities primarily resulted from our sale of marketable securities for the six months ended of $6.9 million, partially offset by our purchase of marketable securities of $5.0 million. The cash used in investing activities primarily resulted from our purchase of marketable securities for the six months ended of $10.0 million, partially offset by our sale of marketable securities of $9.1 million.

Cash Flows from Financing Activities - Cash provided by financing activities for the six months ended was $0.8 million, which reflects the net proceeds from investors in exchange of issuance of common stock and prefunded common stock warrants. Cash provided by financing activities for the six months ended was approximately $2.7 million, which related to issuance of 2,222,222 shares of its common stock.

Off-balance sheet arrangements.

None.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     

Blockchain in Fintech - Discussion at the EU Parliament

From the recent Blockchain For Europe Summit in Brussels: Panel on Financial Market Infrastructure