News Column

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

August 13, 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 Preferred Stock, Series E 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 Preferred Stock, Series E 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.

On May 28, 2014, we entered into an placement agency agreement with the Placement Agent in connection with the registered direct offering of 10,000,000 shares of our Series J Preferred Stock, which were convertible into a total of 10,000,000 shares of our common stock. The Series J Preferred Stock in the offering was sold at a public offering price of $2.00 per share, with net offering proceeds of approximately $18.5 million, after deducting placement agent fees and other offering related expenses. The sale of the Series J Preferred Stock was made pursuant to a subscription agreement between the Company and the participating investors in the offering, and was completed pursuant to the Company's effective registration statement on Form S-3 (Registration No. 333-195346). The offering closed on June 2, 2014.

Subject to certain ownership limitations as described below, shares of the Series J Preferred Stock were convertible at any time at the option of the holder into shares of the Company's common stock in an amount equal to one share of the Company's common stock for each one share of Series J Preferred Stock surrendered. Subject to limited exceptions, holders of shares of Series J Preferred Stock did not have the right to convert any portion of their Series J Preferred Stock that would result in the holder, together with its affiliates, beneficially owning in excess of 9.99% of the number of shares of the Company's common stock outstanding immediately after giving effect to its conversion; notwithstanding the foregoing, some Investors elected to have the 9.99% beneficial ownership limitation to initially be set at 4.99%. As of June 30, 2014, all shares of the Series J Preferred Stock were converted to common stock.

In connection with the Offering, we filed a Certificate of Designation of Series J Convertible Preferred Stock with the Secretary of State for the State of Delaware, which became effective on the closing date.

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Results of Operations

Three months ended June 30, 2014 compared to three months ended June 30, 2013

During the three months ended June 30, 2014, we incurred a loss from operations of $11.6 million, compared to $0.9 million in the prior year period. The increase in net loss can be primarily attributed increased amortization expenses ($2.5 million) related to the Rockstar patents acquired by the Company during 2013; increased stock-based compensation expense ($6.8 million) as a result of the options issued during 2013 and the first and second quarters of 2014; and increased professional expenses of $0.87 million related to legal services, consulting services and accounting services.

During the three months ended June 30, 2014 and 2013, revenue was nominal.

During the three months ended June 30, 2014, we recorded a fair value (gain) adjustment of $7,000 on the warrant liability, compared to $0.1 million gain for the same period in 2013.

Six months ended June 30, 2014 compared to six months ended June 30, 2013

During the six months ended June 30, 2014, we incurred a loss from operations of $19.6 million, as compared to $1.9 million in the prior year period. The increase in net loss can be primarily attributed increased stock based compensation expenses (increase of $10.2 million) as a result of the options issued during 2013 and the first and second quarters of 2014; increased professional fees of $1.6 million related to legal services, consulting services and accounting services; a $0.7 million 5% registration rights fee related to the Series H and common stock held by Rockstar as well as amortization expenses ($4.9 million) related to the Rockstar patents acquired by the Company during 2013.

During the six months ended June 30, 2014 and 2013, revenue was nominal.

During the six months ended June 30, 2014, we recorded a fair value (gain) adjustment of $0.05 million on the warrant liability, compared to $2.6 million expense for the same period in 2013.

Liquidity and Capital Resources

We continue to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding revenue.

While we continue to execute and implement our business plan, we intend to finance our 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, and

increasing revenue from the monetization of its patent portfolios,

license fees, and new business ventures.

Our 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 $6.3 million and $1.7 million at June 30, 2014 and December 31, 2013, respectively; and cash and cash equivalents were $7.1 million and $3.1 million, respectively. Our existing liquidity is not sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for the foreseeable future. Absent generation of sufficient revenue from the execution of our 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 us on favorable terms, or at all.

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Operating activities used $3.3 million and $2.0 million in cash for the six months ended June 30, 2014 and 2013, respectively. The sources of cash from operating activities during the six months ended June 30, 2014, comprised primarily of $15.9 million of net non-cash charges primarily related amortization expenses attributable to our patent portfolio, $10.4 million of stock-based compensation expenses and $0.7 million attributable to a 5% registration rights fee on the Series H Preferred Stock and common stock held by Rockstar. The uses of cash from operating activities primarily comprised of a net loss of approximately $19.5 million and a $0.2 million decrease in accrued salaries and benefits.

Our investing activities used cash of 1.0 million and zero for the six months ended June 30, 2014 and June 30, 2013, respectively. 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 $8.3 million and $0.5 million for the six months ended June 30, 2014 and June 30, 2013, respectively. On March 26, 2014, we received net proceeds of $3.9 million in a private placement made solely to accredited investors. On June 2, 2014, we issued 10,000,000 shares of our Series J Preferred Stock. The net offering proceeds to the Company from the sale of the shares were approximately $18.5 million, after deducting placement agent fees and other estimated offering expenses. In June, 2014, we redeemed 84,219 shares of Series I Preferred Stock, resulting in a $14.1 million payment to Rockstar.

Our financial statements for the quarter ended June 30, 2014 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 $6.3 million at June 30, 2014. 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 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. 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.

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 cause the Company to incur additional costs as a strategy. If such efforts are successful, they may have an impact on the value of the patents and preclude the Company from deriving revenue from the patents, the patents could be declared invalid by a court or the US Patent and Trademark Office, in whole or in part, or the costs of the Company could 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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