News Column

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

May 15, 2014

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 March 26, 2014, we conducted a private placement of $4,446,081 of our securities pursuant to which we sold to certain accredited investors, (i) 1,185,614 shares of common stock and (ii) five year warrants to purchase an aggregate of 592,794 shares of common stock at an exercise price of $6.15 per share, which are exercisable beginning on the six month anniversary of the date of issuance. The warrants may be callable at $0.01 per warrant upon us consummating a financing with a per share offering price of at least $8.00 and net proceeds to the Company of at least $15 million.

On April 23, 2014, we filed a Certificate of Elimination with the Secretary of State of the State of Delaware, eliminating our Series B Convertible Preferred Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock, returning them to the authorized but undesignated shares of the Company's preferred stock. None of the Series B Series B Convertible Preferred Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock were outstanding.

On April 24, 2014, we filed an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to, among other things, increase the authorized number of shares of common stock and preferred stock to 200,000,000 shares from 50,000,000 shares and to 50,000,000 shares from 5,000,000 shares, respectively. The Amended and Restated Certificate of Incorporation also requires us to indemnify our directors, officers and agents and advance expenses to such persons to the fullest extent permitted by Delaware law.

Results of Operations

Three months ended March 31, 2014 compared to three months ended March 31, 2013

During the three months ended March 31, 2014, we incurred a loss from operations of $8.0 million, as compared to $0.9 million in the prior year period. The increase in net loss can be primarily attributed increased stock based compensation expenses (increase of $3.4 million) as a result of the options issued during 2013 and the first quarter of 2014, increased professional fees, a $0.7 million 5% registration rights fee related to the Series H and common stock held by Rockstar as well as amortization expenses related to the Rockstar patents acquired by the Company during 2013.

During the three months ended March 31, 2014 and 2013, revenue was nominal.

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During the three months ended March 31, 2014, we incurred $8.0 million in operating expenses as compared to $0.9 million in the prior year period. The increase in operating expenses of $7.1 million from 2013 or 779% is primarily attributed to increased stock based compensation expenses (increase of $3.4 million) as a result of the options issued during 2013 and the first quarter of 2014, increased professional fees, a $0.7 million 5% registration rights fee related to the Series H and common stock held by Rockstar as well as amortization expenses related to the Rockstar patents acquired by the Company during 2013.

During the three months ended March 31, 2014, we recorded a fair value adjustment of $0.04 million on the warrant liability, compared to $0.005 for the same period in 2013.

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. Working capital was $3.5 million as of March 31, 2014 and cash and cash equivalents were $4.5 million as of March 31, 2014.

Operating activities used $1.5 million in cash for the three months ended March 31, 2014. The sources of cash from operating activities, comprised primarily of $6.5 million of net non-cash charges primarily related amortization expenses attributable to the Rockstar patents acquired by the Company during 2013 and $3.4 million of stock based compensation expenses and $0.7 million attributable to a 5% registration rights fee on the Series H and common stock held by Rockstar. The uses of cash from operating activities primarily comprised of a net loss of approximately $8.0 million and a $0.2 million decrease in accrued salaries and benefits.

Our investing activities used cash of 1.0 million. During the first quarter of 2014, we paid down $1.0 million of the deferred purchase price related to the December 2013 Rockstar patent portfolio acquisition.

Our financing activities provided cash of $3.9 million for the three months ended March 31, 2014. On March 26, 2014, we received net proceeds of $3.9 million in a private offering ("Offering") made solely to accredited investors. Pursuant to the Offering, investors purchased (i) 1,185,614 shares of our common stock, par value $0.0001 per share, and (ii) five year warrants to purchase an aggregate of 592,794 shares of our common stock, at an exercise price of $6.15 per share.

Our financial statements for the year ended December 31, 2013 indicated there is substantial doubt about our ability to continue as a going concern as we are dependent on our ability to retain short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis in order to attain profitability, as well as successfully obtain financing on favorable terms to fund our long term plans. Our business will require significant amounts of capital to sustain operations and make the investments we need to execute our longer term business plan. Our working capital amounted to approximately $3.5 million and $1.7 million at March 31, 2014 and December 31, 2013, respectively. Our existing liquidity is not sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for the foreseeable future. We will need to seek to obtain additional debt or equity financing, especially if we experience downturns or cyclical fluctuations 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. If we attempt to obtain additional debt or equity financing, we cannot assume that such financing will be available to us on favorable terms, or at all.

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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 partes reviews in an effort to avoid or limit liability and damages for patent infringement or case 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.


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Source: Edgar Glimpses


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