Notes to Condensed Consolidated Financial
Statements
Note 1. Organization and Description of Business
Organization and Description of Business
Spherix Incorporated (the “Company”)
is an intellectual property company incorporated in the State of Delaware that owns patented and unpatented intellectual property. The
Company was formed in 1967 as a scientific research company and for much of its history pursued drug development including through
Phase III clinical studies which were discontinued. Through the Company’s acquisition of patents and patent applications
developed by Nortel Networks Corporation from Rockstar Consortium US, LP (“Rockstar”) and Harris Corporation from North
South Holdings Inc. (“North South”) in 2013, the Company has expanded its activities.
The Company is currently a patent commercialization
company focused on generating revenues from the monetization of intellectual property, or IP. Such monetization includes,
but is not limited to, acquiring IP from patent holders in order to maximize the value of the patent holdings by conducting and
managing a licensing campaign, or through the settlement and litigation of patents. We intend to generate revenues and related
cash flows from the granting of intellectual property rights for the use of patented technologies that we own, that we manage for
others, or that others manage on our behalf. To date, we have generated minimal revenues and no assurance can be provided that
our business model will be successful.
The Company continually works to enhance
its portfolio of intellectual property through acquisitions and strategic partnerships. The Company’s mission is to partner
with inventors, or other entities, who own undervalued intellectual property. The Company then works with the inventors or
other entities to commercialize the IP.
In March 2016, the Company entered into
an agreement (which was subsequently amended in April and May 2016) with Equitable IP Corporation (“Equitable”) to
facilitate the monetization of its patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement,
the Company is working together with Equitable to further develop and revise its ongoing litigation plan. See Note 4 for additional
details surrounding the Monetization Agreement.
Note 2. Liquidity and Financial Condition
The Company continues to incur ongoing
administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While
the Company continues to implement its business strategy, it intends to finance its activities through:
|
●
|
managing current cash and cash equivalents on hand from the Company’s past debt and equity offerings,
|
|
●
|
seeking additional funds raised through the sale of additional securities in the future,
|
|
●
|
seeking additional liquidity through credit facilities or other debt arrangements, and
|
|
●
|
increasing revenue from its patent portfolios, license fees and new business ventures.
|
Management believes the Company currently has sufficient funds
to meet its operating requirements for at least the next twelve months.
The Company’s ultimate success is
dependent on its ability to obtain additional financing and generate sufficient cash flow to meet its obligations on a timely basis. The
Company’s business will require significant amounts of capital to sustain operations and make the investments it needs to
execute its longer term business plan. The Company’s working capital amounted to approximately $2.8 million at
March 31, 2017, and net loss amounted to approximately $1.0 million for the three months ended March 31, 2017. The Company
had an approximately $142.7 million of accumulated deficit as of March 31, 2017. Absent generation of sufficient revenue from the
execution of the Company’s long term business plan, the Company will need to obtain additional debt or equity financing,
especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company
experiences significant increases in expense levels resulting from being a publicly-traded company or operations. If
the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available
to the Company on favorable terms, or at all.
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 United States Patent and Trademark Office, in whole or in part, or the costs of the Company can increase. Recent
rulings also create an increased risk that if the Company is unsuccessful in litigation it could be responsible to pay the attorneys’
fees and other costs of defendants by lowering the standard for legal fee shifting sought by defendants in patent cases.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles
of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Nuta Technology Corp. (“Nuta”), Spherix
Portfolio Acquisition II, Inc. (“SPXII”), Guidance IP, LLC (“Guidance”), Directional IP, LLC (“Directional”),
Spherix Management Services, LLC (“SMS”) and NNPT, LLC (“NNPT”). All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US
GAAP”). This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue
and expenses during the period. The Company’s significant estimates and assumptions include the recoverability and useful
lives of long-lived assets, stock-based compensation, the valuation of derivative liabilities, 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.
Marketable Securities
Marketable securities are classified as
trading and are carried at fair value. The Company’s marketable securities consist of corporate bonds and highly liquid mutual
funds and exchange-traded & closed-end funds which are valued at quoted market prices. During the three months ended March
31, 2017 and 2016, the Company incurred realized losses of approximately $93,000 and $66,000, respectively, and unrealized gains
of approximately $72,000 and $12,000, respectively, on its investments in marketable securities, which are included in other income,
net on the consolidated statements of operations. In addition, during the three months ended March 31, 2017 and 2016, the
Company earned dividend income of approximately $8,000 and $13,000, respectively, which is included in other income, net on the
consolidated statement of operations. The Company reinvested such dividend income into its marketable securities during the
three months ended March 31, 2017 and 2016. The market value of marketable securities held as of March 31, 2017 and December 31,
2016 were $5.1 million and $6.0 million, respectively.
Accounting for Warrants
The Company accounts for the issuance of
common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives
and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement
or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement
or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company)
or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do
not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies
these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Company assessed the classification
of common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability
classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments
to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants
are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities”
in the consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation
model (see Note 6).
Net Loss per Share
Basic loss per share is computed by dividing
the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period.
Net income (loss) attributable to common stockholders includes the effect of the deemed capital contribution on extinguishment
of preferred stock and the deemed dividend related to the immediate accretion of beneficial conversion feature of convertible preferred
stock. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise
of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants
(using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock and
the exercise of stock options and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Securities that could potentially dilute
loss per share in the future that were not included in the computation of diluted loss per share at March 31, 2017 and 2016 are
as follows:
|
|
As of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Convertible preferred stock
|
|
|
2,926
|
|
|
|
217,119
|
|
Warrants to purchase common stock
|
|
|
1,251,709
|
|
|
|
2,304,333
|
|
Options to purchase common stock
|
|
|
309,037
|
|
|
|
289,380
|
|
Total
|
|
|
1,563,672
|
|
|
|
2,810,832
|
|
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in
a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The FASB has subsequently
issued ASU No. 2016-10, Revenue from Contracts with Customer (Topic 606) Identifying Performance Obligations and Licensing to address
issues arising from implementation of the new revenue recognition standard. ASU 2014-09 and ASU 2016-10 are effective for interim
and annual periods beginning January 1, 2018, and may be adopted earlier, but not before Janaury 1, 2017. The revenue standards
are required to be adopted by taking either a full retrospective or a modified retrospective approach. The Company is currently
evaluating the impact that ASU 2014-09 and 2016-10 will have on the Company’s financial statements and determining the transition
method, including the period of adoption, that it will apply.
In January 2016, the FASB issued ASU No.
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU No. 2016-01 requires equity
investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment
of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates
the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value
that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business
entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial
liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial
statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective
for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company is currently evaluating the impact ASU No. 2016-01 will have on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
, which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for
the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard
is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The
adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position
and results of operations.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU
2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale
debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized
for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal
of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020. Early adoption
will be available on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its
condensed consolidated financial statements and related disclosures.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
, which addresses eight
specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact of this new pronouncement on its condensed consolidated statements of cash
flows.
In January 2017, the FASB issued ASU No.
2017-04,
Intangibles - Goodwill and Other (Topic 350):
Simplifying the Accounting for
Goodwill Impairment
. ASU No.
2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required
to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial
statements.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU No.
2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
(“ASU
2016-09”). Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional
paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense
or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that
excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax
benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09
will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability
classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a
statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes
owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU 2016-09 requires a company to
classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as
a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should
be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1)
recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the
estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods
beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. Effective
on January 1, 2017, the Company began accounting for forfeitures as they occur. Ultimately, the actual expenses recognized over
the vesting period will be for those shares that vested. Prior to making this election under ASU 2016-09, the Company estimated
their forfeiture rate at 0%, or they did not have a significant history of forfeitures.
Note 4. Intangible Assets
Patent Portfolio and Patent Rights
The Company’s intangible assets with
finite lives consist of its patents and patent rights. For all periods presented, all of the Company’s identifiable intangible
assets were subject to amortization. The carrying amounts related to acquired intangible assets as of March 31, 2017 are as follows
($ in thousands):
|
|
Net Carrying Amount
|
|
|
Weighted average
amortization period (years)
|
|
Patent Portfolios and Patent Rights at December 31, 2016, net
|
|
$
|
4,951
|
|
|
|
3.65
|
|
Amortization expenses
|
|
|
(338
|
)
|
|
|
|
|
Patent Portfolios and Patent Rights at March 31, 2017, net
|
|
$
|
4,613
|
|
|
|
3.41
|
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The amortization expenses related to acquired
intangible assets for the three months ended March 31, 2017 and 2016 are as follows ($ in thousands):
|
|
Amortization Expense for the Three Months
Ended March 31,
|
|
Date Acquired and Description
|
|
2017
|
|
|
2016
|
|
7/24/13 - Rockstar patent portfolio
|
|
$
|
18
|
|
|
$
|
26
|
|
9/10/13 - North South patent portfolio
|
|
|
5
|
|
|
|
8
|
|
12/31/13 - Rockstar patent portfolio
|
|
|
315
|
|
|
|
497
|
|
|
|
$
|
338
|
|
|
$
|
531
|
|
The future amortization of these intangible
assets was based on the adjusted carrying amount. Future amortization of all patents is as follows ($ in thousands):
|
|
Rockstar
|
|
|
North South
|
|
|
Rockstar
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Total
|
|
|
|
24-Jul-13
|
|
|
10-Sep-13
|
|
|
31-Dec-13
|
|
|
Amortization
|
|
Nine Months Ended December 31, 2017
|
|
|
53
|
|
|
|
17
|
|
|
|
965
|
|
|
|
1,035
|
|
Year Ended December 31, 2018
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2019
|
|
|
71
|
|
|
|
22
|
|
|
|
1,280
|
|
|
|
1,373
|
|
Year Ended December 31, 2020
|
|
|
71
|
|
|
|
22
|
|
|
|
638
|
|
|
|
731
|
|
Year Ended December 31, 2021
|
|
|
71
|
|
|
|
22
|
|
|
|
-
|
|
|
|
93
|
|
Thereafter
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
8
|
|
Total
|
|
$
|
341
|
|
|
$
|
109
|
|
|
$
|
4,163
|
|
|
$
|
4,613
|
|
Equitable Agreement
In March 2016, the Company entered into
an agreement (which was subsequently amended) with Equitable IP Corporation (“Equitable”) to facilitate the monetization
of the Company’s patents (the “Monetization Agreement”). Pursuant to the Monetization Agreement, the Company
has worked together with Equitable to develop and revise the Company’s ongoing litigation plan. Under the Monetization Agreement,
Equitable is obligated to use its best, commercially reasonable efforts to monetize the Company’s patents. To that end, Equitable
has filed several litigations, six of which are currently pending. The Company will share net monetization revenue derived from
all monetization activity equally with Equitable. To facilitate the litigation plan, approximately 186 of over 330 of the Company’s
patents and applications have been assigned to Equitable, which will pay all maintenance and prosecution fees going forward. No
assigned patents may be transferred by Equitable to a third party without the Company’s consent. In the event that all terms
of the Monetization Agreement are met by December 2017, the Company will further assign approximately 140 additional patents and
applications to Equitable for monetization. The Company has retained a grant-back license to practice all transferred patents.
The Company concluded that the Monetization
Agreement did not constitute a sale of the patents. The Company’s retention of the right to use the patents, the requirement
for the Company’s consent to any sale, and the significant economic benefits the Company retained with respect to the litigation,
licensing, and sale proceeds, did not meet the sale of patent criteria. The Monetization Agreement has been treated as an
agreement to outsource its licensing activities to an outside servicer, for contingent fees based on the success of the servicer’s
efforts. As such, the Company will not remove the patents from its consolidated balance sheet, and will record its share of litigation,
licensing, and sales proceeds, if any, when those proceeds are received, or when due if the other revenue recognition criteria
are met under ASC 605,
Revenue Recognition
.
Note 5. Fair Value of Financial Assets and Liabilities
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.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
The Company uses three levels of inputs
that may be used to measure fair value:
Level 1 - quoted prices in active
markets for identical assets or liabilities
Level 2 - quoted prices for
similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable
(for example, cash flow modeling inputs based on assumptions)
The following table presents the Company’s
assets and liabilities that are measured at fair value at March 31, 2017 and December 31, 2016 ($ in thousands):
|
|
Fair value measured at March 31, 2017
|
|
|
|
Total carrying value
at March 31,
|
|
|
Quoted prices in
active markets
|
|
|
Significant other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - corporate bonds and mutual funds
|
|
$
|
5,083
|
|
|
$
|
480
|
|
|
$
|
4,603
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
824
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
824
|
|
|
|
Fair value measured at December 31, 2016
|
|
|
|
Total carrying value
at December 31,
|
|
|
Quoted prices in
active markets
|
|
|
Significant other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - corporate bonds
|
|
$
|
6,025
|
|
|
$
|
211
|
|
|
$
|
5,814
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liabilities
|
|
$
|
702
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
702
|
|
There were no transfers between Level 1,
2 or 3 during the three months ended March 31, 2017.
Level 2 Valuation Techniques
The fair values of Level 2 marketable securities
are determined using quoted market prices from daily exchange traded markets based on the closing prices as of March 31, 2017 and
December 31, 2016.
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.
A significant decrease in the volatility
or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the
Company’s consolidated statements of operations.
On July 21, 2015, the Company issued the
July 2015 Warrants to purchase an aggregate of 370,263 shares of common stock to the investors in the July 2015 Financing. The
July 2015 Warrants became exercisable on January 22, 2016 for a period of 5 years at an exercise price of $8.17 per share. The
warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in
the July 2015 Warrants) at the Company and therefore are classified as liabilities. The July 2015 Warrants have been recorded at
their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent
balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity,
risk free rates, as well as volatility.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
On December 7, 2015, the Company issued
Series A warrants to purchase up to 1,052,624 shares of common stock and Series B warrants to purchase up to 842,099 shares of
common stock contained in such offering. Series A Warrants had an exercise price of $3.80 per share and were exercisable at any
time between December 7, 2015 and May 6, 2016. 852,624 shares of Series A warrants expired unexercised on May 24, 2016, and no
Series A Warrants remain outstanding as of December 31, 2016. Series B Warrants have an exercise price of $4.75 per share and are
exercisable at any time between December 7, 2015 and December 6, 2020. The Warrants require the issuance of registered shares upon
exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities. The
Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The Series B warrants have been recorded
at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent
balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity,
risk free rates, as well as volatility.
A summary of quantitative information with
respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that
are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of March 31, 2017 is as follows:
Date of valuation
|
|
March 31, 2017
|
|
Risk-free interest rate
|
|
|
1.93
|
%
|
Expected volatility
|
|
|
98.22% - 131.41
|
%
|
Expected life (in years)
|
|
|
3.69 - 3.81
|
|
Expected dividend yield
|
|
|
-
|
|
The risk-free interest rate was based on
rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based
on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement
feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s
underlying stock price's daily logarithmic returns. The expected life of the warrants was determined by the expiration date of
the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common
stock, and does not expect to pay dividends on its common stock in the future.
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 as of March 31, 2017 and 2016 ($ in thousands):
|
|
Fair Value of Level 3 financial liabilities
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Beginning balance
|
|
$
|
702
|
|
|
$
|
2,959
|
|
Fair value adjustment of warrant liabilities
|
|
|
122
|
|
|
|
(1,542
|
)
|
Ending balance
|
|
$
|
824
|
|
|
$
|
1,417
|
|
Note 6. RPX License Agreement
On November 23, 2015, the Company and RPX
Corporation (“RPX”) entered into a Patent License Agreement (the “RPX License Agreement”) under which the
Company granted RPX the right to sublicense various patent license rights to certain RPX clients. The consideration to the Company
included: (i) the transfer to the Company for cancellation of its remaining outstanding Series I Redeemable Convertible Preferred
Stock (the “Series I Preferred Stock”), as to which a $5,000,000 mandatory redemption payment would have been due from
the Company on or by December 31, 2015; (ii) the transfer to the Company for cancellation of 13%, or 57,076 shares, of its Series
H Convertible Preferred Stock (the “Series H Preferred Stock”) then held by RPX, having a total carrying amount of
$4,765,846 at the time the stock was issued to Rockstar; (iii) cancellation of the only outstanding security interest on 101 of
the Company’s patents and patent applications that originated at Nortel Networks (“Nortel”) and were purchased
by the Company from Rockstar, which security interest had previously been transferred to RPX by Rockstar (“RPX Security Interest”);
and (iv) $300,000 in cash to the Company. While the license granted to RPX is non-exclusive and the duration of the license is
for the life of the patents, the Company’s ongoing obligations in the arrangement is to provide certain specific RPX licensors
with a non-exclusive license to any new patents that may be acquired by or exclusively licensed to the Company during the two-year
period following the effective date of the agreement. Therefore, the Company will recognize $0.6 million revenue ratably over the
two-year period that it is obligated to provide these RPX licensees with licenses to such new patents. During the year ended December
31, 2016 and 2015, the Company recorded approximately $290,000 and $31,000, respectively, in revenue related to the amortization
of the license.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
On May 23, 2016, the Company, and RPX,
entered into a second, separate, Patent License Agreement (the “RPX License”) under which the Company granted RPX the
right to sublicense various patent rights only to current RPX clients (as of May 23, 2016). In exchange for the rights granted
by the Company under the RPX License, the Company received the following consideration: (i) a cash payment made to the Company
in May 2016 in the amount of $4,355,000; and (ii) cancellation of 100% of the remaining 381,967 shares of the Company’s outstanding
Series H Convertible Preferred Stock currently held by RPX, having a total carrying amount of $31,894,244 at the time the stock
was issued to Rockstar Consortium US LP (“Rockstar”).
In consideration of the above, the Company
granted RPX the rights to grant to its current clients: (i) a fully paid portfolio license, to the extent such parties did not
already have licenses to the Company’s patents; (ii) a covenant-not-to-sue current RPX clients for supply of chipsets; (iii)
a standstill of litigation involving any patents acquired in the next five years (“Standstill”).
The Company also granted to Alcatel-Lucent
a license to the portfolio acquired from the Harris Corporation.
Under a separate agreement between the
Company and RPX, the Company granted RPX the ability to grant to VTech Telecommunications Ltd. (“VTech”) a sublicense
for a fully paid portfolio license in exchange for an additional $20,000 in cash consideration.
The license granted under the terms of
the RPX License described herein does not extend to entities/companies that are not clients of RPX and provide chipsets or other
hardware to current RPX clients.
The carrying value of Series H Convertible
Preferred Stock on the extinguishment date was estimated at approximately $31.9 million. The fair value on the same date was estimated
at approximately $414,000 based upon equivalent common shares that the Series H Convertible Preferred Stock could have converted
into at the closing price on May 23, 2016. This resulted in the Company receiving cash from RPX of $4.4 million, a deemed capital
contribution of approximately $31.5 million, short term deferred revenue $1.1 million and long term deferred revenue of $3.7 million.
A summary of information with respect the RPX transaction on
May 23, 2016 is as follows:
Assumptions
|
|
|
|
|
Stock price on May 22, 2016
|
|
$
|
2.06
|
|
|
|
|
|
|
Series H Assumptions
|
|
|
|
|
Series H Shares
|
|
|
381,967
|
|
Series H - Liquidation preference
|
|
$
|
83.50
|
|
Series H -Carrying value
|
|
$
|
31,894,245
|
|
|
|
|
|
|
Equivalent common shares - Series H
|
|
|
201,035
|
|
Fair Value of Series H preferred
|
|
$
|
414,133
|
|
|
|
|
|
|
Contribution/Deemed dividend
|
|
$
|
31,480,112
|
|
The deferred revenue will be amortized
over a 5-year service period as the RPX License includes a standstill agreement which requires Spherix to provide the licensee
with the right to use any future acquired patents for five years. During the three months ended March 31, 2017, the Company recorded
approximately $307,000 in revenue related to the amortization of the license.
ASC 260-10-S99-2,
Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock
, requires the gain or loss on extinguishment
of equity-classified preferred stock to be included in net income per common stockholder used to calculate earnings per share (similar
to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred
to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted
from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Note 7. Stockholders’ Equity and Redeemable Convertible
Preferred Stock
Preferred Stock
The Company had designated separate series
of its capital stock as of March 31, 2017 and December 31, 2016 as summarized below:
|
|
Number of Shares Issued
|
|
|
|
|
|
|
|
|
and Outstanding as of
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Par Value
|
|
|
Conversion Ratio
|
Series "A"
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.0001
|
|
|
N/A
|
Series "C"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “D"
|
|
|
4,725
|
|
|
|
4,725
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “D-1"
|
|
|
834
|
|
|
|
834
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “F-1"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “H"
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.53:1
|
Series “I”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
1.05:1
|
Series “J”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
0.05:1
|
Series “K”
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0001
|
|
|
263.16:1
|
Warrants
A summary of warrant activity for the three
months ended March 31, 2017 is presented below:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life
(in years)
|
|
Outstanding as of December 31, 2016
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
$
|
-
|
|
|
|
3.91
|
|
Outstanding as of March 31, 2017
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
|
|
|
|
|
3.67
|
|
Exercisable as of March 31, 2017
|
|
|
1,250,311
|
|
|
$
|
9.21
|
|
|
$
|
-
|
|
|
|
3.67
|
|
Stock Options
Also approved by the Company’s Stockholders
on February 26, 2016 was an amendment to the Company’s 2014 Equity Incentive Plan, which increased the number of shares of
common stock authorized to be issued pursuant to the 2014 Plan from 4,161,892 to 8,250,000 prior to effectuation of the 1:19 reverse
stock split. As a result of the split, the total share authorization under the plan was reduced to 434,210 shares.
A summary of option activity under the
Company’s employee stock option plan for the three months ended March 31, 2017 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2016
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
-
|
|
|
|
4.1
|
|
Employee options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of March 31, 2017
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
-
|
|
|
|
3.9
|
|
Options vested and expected to vest
|
|
|
310,091
|
|
|
$
|
82.25
|
|
|
$
|
-
|
|
|
|
3.9
|
|
Options vested and exercisable
|
|
|
302,199
|
|
|
$
|
84.35
|
|
|
$
|
-
|
|
|
|
3.8
|
|
A summary of option activity under the
Company’s non-employee stock option plan for the three months ended March 31, 2017 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining Contractual
Life (in years)
|
|
Outstanding as of December 31, 2016
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.4
|
|
Non-employee options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of March 31, 2017
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.2
|
|
Options vested and expected to vest
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.2
|
|
Options vested and exercisable
|
|
|
2,893
|
|
|
$
|
98.07
|
|
|
$
|
-
|
|
|
|
4.2
|
|
Stock-based compensation to employees and
non-employees was approximately $4,000 and $131,000 for the three months ended March 31, 2017 and 2016, respectively. Unamortized
stock-based compensation expense amounted to approximately $0 at March 31, 2017.
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
Stock-based Compensation
Stock-based compensation for the three
months ended March 31, 2017 and 2016 was comprised of the following ($ in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Employee stock option awards
|
|
$
|
4
|
|
|
$
|
1
|
|
Non-employee restricted stock awards
|
|
|
-
|
|
|
|
130
|
|
Total compensation expense
|
|
$
|
4
|
|
|
$
|
131
|
|
Note 8. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the
Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of patented technology.
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course
of business. There were no pending material claims or legal matters as of the date of this report other than the following matters:
Spherix Incorporated v. Uniden Corporation
et al., Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas
On August 30, 2013, we initiated litigation against Uniden Corporation
and Uniden America Corporation (collectively “Uniden”) in
Spherix Incorporated v. Uniden Corporation et al.
,
Case No. 3:13-cv-03496-M, in the United States District Court for the Northern District of Texas (“the Court”) for
infringement of U.S. Patent Nos. 5,581,599; 5,752,195; 6,614,899; and 6,965,614
(collectively,
the “Asserted Patents”). The complaint alleges that Uniden has manufactured, sold, offered for sale and/or imported
technology that infringes the Asserted Patents. We sought relief in the form of a finding of infringement of the Asserted Patents,
an accounting of all damages sustained by us as a result of Uniden’s infringement, actual damages, enhanced damages under
35 U.S.C. Section 284, attorney’s fees and costs. On June 3, 2014, in an effort to narrow the case, the parties filed a stipulation
dismissing without prejudice all claims and counterclaims related to U.S. Patent No. 5,752,195. On September 4, 2014, Uniden America
Corporation, together with VTech Communications, Inc., filed a request for
inter partes
review (“IPR”) of U.S.
Patent No. 5,581,599 (the “‘599 Patent”) and 6,614,899 (the “‘899 Patent”) in the United States
Patent and Trademark Office. On March 3, 2015, the U.S. Patent Trial and Appeal Board (“PTAB”) entered decisions instituting,
on limited grounds, IPR proceedings regarding a portion of the claims for the two Spherix patents. On March 19, 2015, the Court
issued its
Markman
order, construing a total of 13 claim terms that had been disputed by the parties. On April 2, 2015,
we filed an Amended Complaint with Jury Demand and the parties filed a Settlement Conference Report informing the Court that the
parties have not yet resumed settlement negotiations. On September 10, 2015, the Court stayed the case and ordered the parties
to file a status report within 10 days of the Patent Office issuing its decision in the IPR proceedings. On October 13, 2015, the
Court ordered the case administratively closed until the PTAB issued its final written decisions. On February 3, 2016, the PTAB
issued its final decisions in the IPR proceedings, finding invalid eight of the 15 asserted claims of the ‘599 Patent and
all asserted claims of the ‘899 Patent. Our deadline to file a Notice of Appeal of the PTAB’s decision to the United
States Court of Appeals for the Federal Circuit was set for April 6, 2016. On February 29, 2016, at the parties’ joint request,
the Court ordered that the stay of the case remain in effect for 30 days so the parties may work to resolve the case without further
Court intervention. The parties timely filed a Joint Status Report on March 31, 2016, in which we requested that the stay remain
in effect pending the Federal Circuit issuing a ruling in connection with the appeal of IPR2014-01431 relating to the ‘599
Patent. On April 1, 2016, we filed our Patent Owner’s Notice of Appeal in IPR2014-01431. On April 11, 2016, the Court granted
the parties’ motion to continue the stay. On January 12, 2017, we settled the case with Uniden and Uniden took a license
under the Asserted Patents. The appeal to the Federal Circuit continues with the Patent and Trademark Office (“PTO”)
as an adverse party.
International License Exchange of America, LLC v. Fairpoint Communications, Inc., Case No. 1:16-cv-00305-RGA,
in the United States District Court for the District of Delaware
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
On April 26, 2016, we initiated litigation
against Fairpoint Communications, Inc. in
Spherix Incorporated v. Fairpoint Communications, Inc.
, Case No. 1:16-cv-00305-RGA,
in the United States District Court for the District of Delaware (the “Court”) for infringement of U.S. Patent No.
RE40,999 (the ‘999 Patent”). In the Complaint, we sought relief in the form of a finding of infringement of the ‘999
Patent, damages sufficient to compensate us for Fairpoint’s infringement together with pre-and post-judgment interest and
costs, a declaration that the case is exceptional under 35 U.S.C. § 285, and the Company’s attorney’s fees. On
October 13, 2016, Fairpoint filed its answer with no counterclaims. On November 16, 2016, International License Exchange of America,
LLC, a wholly-owned subsidiary of Equitable (“ILEA”), filed a motion to substitute itself as the plaintiff, consistent
with our Monetization Agreement with Equitable. On November 17, 2016, the Court granted ILEA’s motion.
International License Exchange of America,
LLC Litigations
Under our Monetization Agreement with Equitable,
ILEA has filed the patent infringement litigations listed below.
|
·
|
On August 12, 2016, litigation against Cincinnati Bell, Inc., case number 1:16-cv-00715-RGA, in
the U.S. District Court for the District of Delaware, related to alleged infringement of U.S. Patent No. RE40,999 (“the ‘999
patent”), U.S. Patent No. 6,970,461, and U.S. Patent No. 7,478,167. On March 8, 2017, Cincinnati Bell filed a motion to dismiss,
alleging lack of personal jurisdiction and improper venue. On March 29, 2017, the parties filed a joint motion to stay all deadlines
until April 29, 2017, stating that the parties have reached an agreement in principal to resolve all claims asserted in the case.
On April 3, 2017, the court granted the parties motion to stay all deadlines until April 29, 2017. On May 5, 2017, the Court ordered
the parties to file a joint status report by three days from the date of the order. On May 5, 2017, the parties filed a joint stipulation
of dismissal and the Court terminated the case.
|
|
·
|
On August 12, 2016, litigation against Frontier Communications Corporation, case number 1:16-cv-00714-RGA,
in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent. Frontier’s
response to the complaint is currently due on May 19, 2017.
|
|
·
|
On August 12, 2016, litigation against Echostar Corporation, case number 1:16-cv-00716-RGA, in
the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent. On April 17, 2017,
ILEA filed a notice of voluntary dismissal of the case, and on April 18, 2017, the court closed the case.
|
|
·
|
On August 15, 2016, litigation against ATN International, Inc. Commnet Wireless, LLC Choice Communications
LLC, and Choice Communications, LLC (“Choice Wireless”), case number: 1:16-cv-00718-RGA, in the U.S. District Court
for the District of Delaware, related to alleged infringement of the ‘999 patent. On April 12, 2017, the parties jointly
dismissed the case by filing a stipulation dismissing the case with prejudice.
|
|
·
|
On August 15, 2016, litigation against Sprint Corporation and Clearwire Corporation case number
1:16-cv-00719-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent.
On May 1, 2017, ILEA filed a notice of voluntary dismissal of the case, and the court closed the case on May 2, 2017.
|
|
·
|
On August 16, 2016, litigation against ViaSat, Inc., case number 1:16-cv-00720-RGA, in the U.S.
District Court for the District of Delaware, related to alleged infringement of the ‘999 patent. On March 7, 2017, ViaSat
filed a motion to dismiss, alleging failure to state a plausible claim of patent infringement. On March 21, 2017, ILEA filed its
brief in opposition to the motion to dismiss. On March 28, 2017, ViaSat filed its reply brief on the motion to dismiss.
|
|
·
|
On September 9, 2016, litigation against Fortinet Inc., case number 1:16-cv-00795-RGA, in the U.S.
District Court for the District of Delaware, related to alleged infringement of the ‘999 patent. On March 7, 2017, Fortinet
filed its answer to the Complaint and the case now proceeds to the disclosure and discovery phase.
|
|
·
|
On September 9, 2016, litigation against GTT Communications, Inc., case number 1:16-cv-00796-RGA,
in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent. GTT’s
response to the complaint is currently due on May 22, 2017.
|
|
·
|
On November 22, 2016, litigation against Alcatel-Lucent SA and Alcatel-Lucent USA Inc., case number
1:16-cv-01077-RGA, in the U.S. District Court for the District of Delaware, related to alleged infringement of the ‘999 patent
and U.S. Patent Nos. 7,158,515; 6,222,848; 6,578,086; and 6,697,325. On March 28, 2017, ILEA filed a notice of voluntary dismissal
of the case and on that date the court closed the case.
|
|
·
|
On May 4, 2017, litigation against
Telefonaktiebolaget
LM Ericsson, Ericsson Holding II Inc., and Ericsson Inc., case number 1:17-cv-00507-UNA, in the
U.S. District Court for
the District of Delaware, related to alleged infringement of the ‘999 patent along with U.S. Patent No. 5,959,990 (the “‘990
patent”).
|
|
·
|
On May 4, 2017, litigation against
NTT Communications ICT
Solutions Pty Ltd., NTT America, Inc., and NTT Security (US) Inc., case number 1:17-cv-00508-UNA, in the
U.S. District Court
for the District of Delaware, related to alleged infringement of the ‘999 patent and the ‘990 patent.
|
SPHERIX INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
In July 2016, a lawsuit relating to the
‘999 Patent was dismissed in anticipation of settlement with the counterparty. In May 2017, settlement was reached, pursuant
to which the counterparty granted to Equitable the right to monetize a portfolio of 112 patents (the “Settlement Patents”).
Pursuant to the Company’s Monetization Agreement with Equitable, the Company is entitled to receive a portion of the net
revenue generated by Equitable’s monetization of the Settlement Patents.
Counterclaims
In the ordinary course of business, we,
or with our wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believe have infringed
on our intellectual property rights and technologies. The initiation of such litigation exposes us to potential counterclaims initiated
by the defendants. Currently, there are no counterclaims pending against us. In the event such counterclaims are filed, we can
provide no assurance that the outcome of these claims will not have a material adverse effect on our financial position and results
from operations.
Note 9. Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the consolidated financial statements are issued. Based upon the evaluation, the
Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in
the consolidated financial statements other than disclosed.