Part I. Financial Information

Item 1. Financial Statements

SPHERIX INCORPORATED AND SUBSIDIARIES 

Condensed Consolidated Balance Sheets 

($ in thousands except share and per share amounts) 

(Unaudited)

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

($ in thousands except share and per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES 

Consolidated Statements of Changes in Stockholders’ Equity

($ in thousands except share and per share amounts)  

(Unaudited)

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES 

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Organization and Description of Business

Organization and Description of Business

Spherix Incorporated (the “Company”) is an intellectual propertytechnology development company committed to the fostering of innovative ideas. The Company was incorporated in 1967 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 a patent commercialization companywas formerly focused on generating revenues from the monetization of intellectual property, or IP. Such monetization includes, but is not limited to,commercializing and monetizing patents by 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.

Since March 1, 2013, the Company has received limited funds from its IP monetization. In addition to ourits patent monetization efforts, since the fourth quarter of 2017, we havethe Company has been transitioning to focus ourits efforts as a technology development company. These efforts have focused on biotechnology research and blockchain technology research. The Company made noCompany’s biotechnology research development includes investments in new IP during 2017 and started the transition with its investment in Hoth Therapeutics Inc. duringand the third quarter of 2017.proposed merger with CBM BioPharma, Inc. (“CBM”).  

In March

On May 10, 2019, 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 April 15, 2019, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”).  Unless the context otherwise requires, all references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect the Reverse Stock Split.   Fractional shares were not issued, and the final number of shares were rounded up to the next whole share.

CBM Merger

On October 10, 2018, the Company entered into an agreementAgreement and planPlan of merger,Merger (the “CBM Merger Agreement”), by and among the Company, Spherix Delaware Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Spherix (“Merger Sub”), CBM, and Scott Wilfong in the capacity as the representative from and after the effective time of the Merger (as defined below) (the “Effective Time”) for the stockholders of CBM as of immediately prior to the Effective Time (the “Stockholder Representative”).

Pursuant to the CBM Merger Agreement and subject to shareholder approval,the terms and conditions set forth therein, at the closing of the transactions contemplated by the CBM Merger Agreement, Merger Sub would merge with DatChat, Inc.and into CBM (the “DatChat Merger”“Merger”), a secure messaging applicationwith CBM continuing as the surviving corporation in the Merger. Subject to the terms and conditions set forth in the CBM Merger Agreement, at the Effective Time, it was contemplated that: (i) all shares of capital stock of CBM (the “CBM Stock”) issued and outstanding immediately prior to the Effective Time would be converted into the right to receive the Stockholder Merger Consideration (as defined below).

As consideration for the Merger, it was agreed that utilizes blockchain technology, as amended on May 3, 2018. After further negotiations, the Company determined notwould deliver to pursuethe stockholders of CBM an aggregate of 3,529,412 shares of Company common stock (the “Stockholder Merger Consideration”), with each share of Company common stock valued at $4.68 per share. At or prior to the Closing, the Company, the Stockholder Representative, and a merger with DatChatmutually agreeable escrow agent (the “Escrow Agent”), would enter into an Escrow Agreement, effective as of the Effective Time, in form and on August 8, 2018, entered into a Securities Purchase Agreement with DatChatsubstance reasonably satisfactory to the parties (the “Escrow Agreement”), pursuant to which the Company shall deposit with the Escrow Agent 352,942 shares from the Stockholder Merger Consideration otherwise deliverable to the stockholders of CBM who own beneficially and DatChat agreedof record greater than 10% of the CBM common stock issued and outstanding immediately prior to terminate the DatChatClosing (each a “Significant Company Stockholder”) (including any equity securities paid 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. Each stockholder of CBM Stockholder at the Effective Time (each, a “CBM Stockholder”) would receive its pro rata share of the Stockholder Merger Consideration (less, in the case of each of the Significant Company Stockholders, its pro rata portion of the Escrow Shares held in the Escrow Account) based on the number of shares of CBM Stock owned by such CBM Stockholder as compared to the total number of shares of CBM Stock owned by all CBM Stockholders as of immediately prior to the Effective Time. The Escrow Shares would serve as a security for, and a source of payment of, the indemnity rights of the Company agreedindemnified parties.

In the event that the CBM Merger Agreement was to make a $1,000,000 strategic investment in DatChat which consisted of (a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChatbe terminated by the Company and (c) an obligationpursuant to certain sections of the agreement, then the Company might have been required to pay certain specific future compensation expensesdeliver to CBM certificate(s) representing an aggregate of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted94,118 shares of DatChat common stock which is equalthe Company’s Common Stock within two (2) business days of termination (the “Termination Fee”).

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to 3.6%Consolidated Financial Statements

(Unaudited)

As discussed further in Note 9, on May 15, 2019, the Company restructured the proposed terms of the issued and outstanding common stock of DatChat.transaction. See Note 9 for additional details.

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:

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 to support new technologies and help advance innovation. The Company’s working capital amounted to approximately $3.8$0.9 million at June 30, 2018.March 31, 2019. 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

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the assertionCompany’s ability to continue as a going concern within one year from the date of patents and other intellectual property rights are highly complex and technical.this filing. 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 whichcondensed consolidated financial statements have been prepared assuming that the Company is involved may allege defenses and/or file counterclaims or initiate inter-party reviews in an effort to avoid or limit liability and damages for patent infringement or cause the Company to incur additional costswill continue as a strategy.  If such efforts are successful, they may have an impactgoing concern, and do not include any adjustments to reflect the possible future effects on the valuerecoverability and classification of assets, or the patentsamounts and preclude the Company from deriving revenueclassification of liabilities that may result 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 costsoutcome 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.this uncertainty.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated interim 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”).subsidiaries. All significantmaterial intercompany balances and transactions have been eliminatedeliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in consolidation.accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of March 31, 2019, condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2019 and 2018, and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.

Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).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, the valuation of investments 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.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Concentration of CashSignificant Accounting Policies

The Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents. As of June 30, 2018 and December 31, 2017, the Company had $0.2 million in cash and cash equivalents. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Marketable Securities

Marketable securities are classifiedOther than 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 June 30, 2018 and 2017, the Company incurred realized losses of approximately $0.2 million and $36,000, respectively, and unrealized gains of approximately $41,000 and $66,000, respectively, on its investments in marketable securities, which are included in other income, net on the consolidated statements of operations. In addition, during the six months ended June 30, 2018 and 2017, the Company earned dividend income of approximately $44,000 and $47,000, respectively, which is included in other income, net on the consolidated statement of operations.

During the six months ended June 30, 2018 and 2017, the Company incurred realized losses of approximately $0.3 million and $0.1 million, respectively, and unrealized losses of approximately $17,000 and unrealized gains of approximately $0.1 million, respectively, on its investments in marketable securities, which are included in other income, net on the consolidated statements of operations. In addition, during the six months ended June 30, 2018 and 2017, the Company earned dividend income of approximately $78,000 and $55,000, respectively, which is included in other income, net on the consolidated statement of operations.

The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and six months ended June 30, 2018 and 2017 are as follows ($ in thousands): 

The Company reinvested such dividend income into its marketable securities during the six months ended June 30, 2018 and 2017. The fair values of such marketable securities held as of June 30, 2018 and December 31, 2017 were $4.6 million and $4.0 million, respectively. 

The marketable securities were classified as a Level 2 financial instrument at June 30, 2018 (see Note 7).

Digital Currencies Translations and Remeasurements

The Company accounts for digital currencies, which it considers to be an asset, at their initial cost and subsequently remeasures the carrying amounts of digital currencies it owns at each reporting date based on their current fair value. Thedescribed below, there have been no material changes in the fair value of digital currencies are included as a component of income or loss. The Company currently classifies digital currencies as a current asset.

The Company obtains the equivalency rate of bitcoinsCompany’s significant accounting policies to USD from various exchanges including, Bitstamp, Kraken and Coinbase. Equivalency rate obtained from these sources represents a generally well recognized quoted price in an active market for bitcoins, which market and related database are accessible to the Company on an ongoing basis.

Investment

The Company elected the fair value option for its investment in Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”). As of June 30, 2018, the fair value of this investment was $1,700,000. The Company also elected the fair value option for its investment in TheBit Daily LLC, a Delaware limited liability company (“TheBit Daily”). As of June 30, 2018, the fair value of this investment was $25,000. These investments were classified as a Level 3 financial instrument at June 30, 2018 (see Note 4).

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as an unrealized gain on investmentthose previously disclosed in the Condensed Consolidated Statements of Operations.Company’s annual report on Form 10-K, which was filed with the SEC on March 12, 2019.

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)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.

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share atJune 30, March 31, 2019 and 2018 and 2017 are as follows:

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement when the services have been provided to the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related to revenue generated from its settlement and licensing agreements. the appropriate recognition of revenue is determined as one performance obligation and revenue is recognized upon delivery of the final performance obligations, including the license for past and future use and the release.

The Company recognizes revenue under ASC 606,Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

As of June 30, 2018, there were no contract assets or liabilities associated with the Company’s settlement and licensing agreements. During the six months ended June 30, 2018, the Company did not generate any revenue.

Recently Issued Accounting PronouncementsStandards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13,Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements. 

Recently Adopted Accounting Standards

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 Company does not have any long-term leases, therefore the adoption of this standard ison January 1, 2019 did not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire   instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adoptingadopted ASU 2017-11 on itsJanuary 1, 2019 and the adoption did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—StockCompensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—StockCompensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently assessing the effect this guidance may have on its financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified byadopted ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach. The Company has determined that its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated and accumulated deficit as of January 1, 2018 was decreased by approximately $3.2 million so that the Company will not recognize revenue on earnings statements in the future as to its license.

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 adopted the provisions of ASU 2016-012018-07 on January 1, 2018. The adoption of this update did not impact the Company’s consolidated financial statements2019 and related disclosures.  

In May 2017, the Financial Accounting Standards Board (the FASB) issued ASU 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, (ASU 2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of this ASU did not have a materialan impact on the Company’s condensed consolidated financial positionstatements

Note 4. Investments in Marketable Securities

The realized gain or resultsloss, unrealized gain or loss, and dividend income related to marketable securities for the three months ended March 31, 2019 and 2018, which are recorded as a component of operations.other (expenses) income on the consolidated statements of operations, are as follows ($ in thousands):

Note 4.5. Investment in Hoth Therapeutics, Inc.

On June 30, 2017 (the “Closing Date”),February 20, 2019, Hoth closed its initial public offering (“IPO) of 1,250,000 shares of its common stock at an initial offering price to the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hoth Therapeutics, Inc., a Nevada corporation (“Hoth”), for the purchasepublic of an aggregate of 6,800,000$5.60 per share. All shares of common stock par value $0.0001 (the “Shares”),were offered by Hoth. 

In February 2019, the Company purchased 35,714 shares of Hoth,Hoth’s common stock for a purchase pricetotal value of $675,000. $0.2 million.

The Company adopted therecords this investment at fair value option for this investment and recorded changesrecords any change in fair value in the statementstatements of operations (see Note 7)6).

Note 5. Investment in TheBit Daily LLC

On March 23, 2018, Spherix Incorporated purchased 8.0% of the issued and outstanding limited liability company membership interests of TheBit Daily LLC, a development stage media and education platform focused on the blockchain and cryptocurrency space, for a subscription price of $25,000.

The Company adopted theowns 1,735,714 shares of Hoth common shares as of March 31, 2019. The fair value option for this investment and recorded changes in fair value, if any, in the statement of operations (see Note 7).  

Note 6. Intangible Assets

Patent Portfolio and Patent Rights

The Company’s intangible assets with finite lives consistHoth common shares as 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 June 30, 2018 are as follows ($ in thousands): 

The amortization expenses related to acquired intangible assets for the six months ended June 30, 2018 and 2017 are as follows ($ in thousands):

The future amortization of these intangible assetsMarch 31, 2019 was $8.9 million based on the adjusted carrying amount. Future amortizationclosing price of all patents is$5.15 reported on The Nasdaq Capital Market as follows ($ in thousands):of March 31, 2019.

Note 7.6. 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.

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 

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 June 30, 2018March 31, 2019 and December 31, 20172018 ($ in thousands):

ThereThe table above excludes the Company’s investment in DatChat for $1.0 million and its investment in Mellow Scooters for $0.1 million as of March 31, 2019. Such investments were recorded on adjusted cost method measurement alternative in accordance with ASU 2016-01.

Due to the Hoth’s IPO in February 2019, the Company’s investment in Hoth was transferred from Level 3 to Level 1  during the three months ended March 31, 2019 and there were no transfers between Level 1, 2 or 3 during the sixthree months ended June 30,March 31, 2018.

Level 2 Valuation Techniques

The fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 Valuation Techniques - Liabilities

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.

The Series A and 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. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions at the Company or 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.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 June 30, 2018March 31, 2019 and December 31, 20172018 is as follows:

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 for the six months ended June 30, 2018 and 2017 that are measured at fair value on a recurring basis for the three months ended March 31, 2019 and 2018 ($ in thousands):

The Company owns approximately 33% of common shares in Hoth as of June 30, 2018. The value of the Company’s investment in Hoth increased by approximately $0.7 million during the six months ended June 30, 2018.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets for the six months ended June 30, 2018 and 2017 that are measured at fair value on a recurring basis:

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as change in fair value of investment in the Consolidated Statements of Operations.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s valuation in Hoth that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of June 30, 2018 and December 31, 2017 is as follows:

The investment in Hoth Therapeutics was valued using a hybrid probability weighted expected return method, with scenarios including (1) Hoth continuing to operate as a private company through an estimated potential exit date, and (2) Hoth undergoing an IPO in the near future. The private-company scenario utilizes a reverse option pricing method (backsolve) based on the recent Series A transaction. Key inputs to the backsolve, in addition to the Series A price, include volatility (75.00%) and expected maturity (1.0 years). The IPO scenario is based on initial value indications proposed by investment bankers. The primary inputs, in addition to the pre-money value indications, include the estimated time to IPO (end of November) and a discount rate of 15%. The valuation conclusion is sensitive to the probability weightings assigned to each scenario. The weightings (1/3 IPO scenario, 2/3 private company scenario), were determined according to management expectations regarding exit opportunities, based on what was known or knowable as of June 30, 2018. 

Note 8.7. Stockholders’ Equity and Redeemable Convertible Preferred Stock

Series D Convertible Preferred Stock

On April 2, 2013, the Company designated 1,488,152 shares of preferred stock as Series D Preferred Stock. In connection with the acquisition of North South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred Stock (“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock has a stated value of $0.0001 per share and is convertible into ten-nineteenths of a share of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and the conversion limitations described below. At no time may shares of Series D Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of issued and outstanding Common Stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to the Company. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.

As of June 30, 2018 and December 31, 2017, 4,725 shares of Series D Preferred Stock remained issued and outstanding.

Series D-1 Convertible Preferred Stock

On November 20, 2013, the Company designated 1,379,685 shares of preferred stock as Series D-1 Preferred Stock. The Company’s Series D-1 Convertible Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into ten- nineteenths of a share of Common Stock.  Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis.  Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D-1 Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation.  At no time may shares of Series D-1 Preferred Stock be converted if such conversion would cause the holder to hold in excess of 9.99% of issued and outstanding Common Stock. The conversion ratio of the Series D-1 Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company commenced an exchange with holders of Series D Convertible Preferred Stock pursuant to which the holders of the Company’s outstanding shares of Series D Preferred Stock acquired in the Merger could exchange such shares for shares of the Company’s Series D-1 Preferred Stock on a one-for-one basis.

As of June 30, 2018 and December 31, 2017, 834 shares of Series D-1 Preferred Stock remained issued and outstanding.

Common Stock

On March 19, 2018, the Company closed a public offering of common stock for gross proceeds of approximately $3.0 million. The offering was a shelf takedown off of the Company’s registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement (the “Agreement”) between the Company and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts basis with respect to the offering (the “Placement Agent”), that was entered into on March 14, 2018. The Company sold 2,222,222 shares of its common stock in the offering at a purchase price of $1.35 per share.  

Warrants

A summary of warrant activity for the sixthree months ended June 30, 2018March 31, 2019 is presented below:

Stock Options

On February 16, 2018, pursuant to and subject to the available number of shares reserved under the 2014 Plan, the Company issued an aggregate of 150,000 options to purchase common stock of the Company to three of its directors. The aggregate grant date fair value of these options was approximately $0.2 million. These stock options vest over six months.  

On May 3, 2018, a new director was granted options to purchase 50,000 shares of the Company’s common stock, at an exercise price of $1.04 per share, which options vested 50% at May 3, 2018 with the remaining 50% vesting at May 3, 2019. The aggregate grant date fair value of these options was approximately $46,000. These stock options vest over twelve months.  

A summary of option activity under the Company’s employee stock option plan for the six months ended June 30, 2018 is presented below:

A summary of option activity under the Company’s non-employee stock option plan for the sixthree months ended June 30, 2018March 31, 2019 is presented below:

Stock-based compensation associated with the amortization of stock option expense was approximately $71,000$6,000 and $8,000$0.1 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, and was approximately $0.2 million and $11,000 for the six months ended June 30, 2018 and 2017, respectively. 

Restricted Stock AwardsSPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On February 16, 2018, the Company granted each of its three directors 20,000 shares of restricted common stock. The grant date fair value of each restricted stock award was approximately $27,000. These restricted stock awards vested immediately.

On April 26, 2018, the Company issued 25,410 shares of its common stock to an employee for services pursuant to employment agreement. The grant date fair value of this restricted stock award was approximately $27,000 (based upon the closing price of the Company’s common stock on April 26, 2018). This restricted stock award vested immediately.(Unaudited)

Stock-based Compensation

Stock-based compensation for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 was comprised of the following ($ in thousands):

Unamortized stock-based compensation expense was approximately $42,000 at June 30, 2018.

Note 9.8. Commitments and Contingencies

Office lease

The Company leases office space in New York, NY, on a month to month basis, that commenced on August 1, 2018, for approximately $3,500 a month. The Company also leases office space in Longview, TX that commenced January 1, 2018, for approximately $2,000 a month.   During the year 2018, the Company leased office space in Williamsburg, VA for approximately $500 a month. This lease commenced on May 15, 2018 and was terminated by the Company on April 30, 2019. Rent expense for the three months ended March 31, 2019 and 2018 was approximately $21,000 and $22,000, respectively. The initial lease term is 12 months. In according with ASC 842, this lease meets the definition of a short term lease.

Legal Proceedings

In the past, in the ordinary course of business, the Company actively pursuespursued 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 wereThe Company knows of no pending material claims or legal matters against it as of the date of this report other than the following matters:report.

International License Exchange of America, LLC Litigations

Under our Monetization Agreement with Equitable, ILEA filed the patent infringement litigation below.

Optic153 LLC Litigations

Under our Monetization Agreement with Equitable, Optic 153 LLC, an Equitable subsidiary, has filed the following litigations relating to patents acquired under the terms of settlement of one of our prior litigations:

Counterclaims 

In the ordinary course of business, we,the Company, or with ourits wholly-owned subsidiaries or monetization partners, will initiate litigation against parties whom we believeit believes have infringed on ourits intellectual property rights and technologies. The initiation of such litigation exposes usthe Company to potential counterclaims initiated by the defendants. Currently, there are no counterclaims pending against us.the Company. In the event such counterclaims are filed, wethe Company can provide no assurance that the outcome of these claims will not have a material adverse effect on ourits financial position and results from operations.

Note 10. DatChat, Inc.9. Subsequent Events

The MergerCompany evaluates events that have occurred after the balance sheet date but before the condensed 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 condensed consolidated financial statements other than disclosed.

On March 12, 2018,May 10, 2019, the Company entered into an Agreement and Planeffected the Reverse Stock Split. The Reverse Stock Split, which was approved by the Company’s board of Merger (the “Merger Agreement”),directors under authority granted by and among Spherix, Spherix Merger Subisdiary Inc., a Nevada corporation and a wholly-owned Subsidiarythe Company’s stockholders at the Company’s 2019 Annual Meeting of Spherix (“Merger Sub”), DatChat, Inc., a Nevada corporation (“DatChat”), and Darin Myman in the capacity as the representative from and after the effective time of the Merger (the “Effective Time”) for the stockholders of DatChat as of immediately priorStockholders held on April 15, 2019, was consummated pursuant to the Effective Time (the “Stockholder Representative”).Certificate of Amendment.

Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of 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 is expected to close within 10 business days of the execution of the agreement.

On May 15, 2019, 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 agreed to purchase CBM’s Purchased Assets (as defined in the APA), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

In connection with the execution of the APA, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

SPHERIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 Closing Date (as defined in the APA) (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 convertible 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”), less the sum of (A) the amount of any Affiliate Receivables (as defined in the APA), (B) the amount of the outstanding Indebtedness (as defined in the APA) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the APA) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the APA), if any, to the recipients thereof. 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 Qualified Financing (as defined in the APA) 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.

The Company is prohibited from issuing shares of Common Stock under the APA which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the APA, the Company and CBM agreed to terminate the Merger Agreement, subjectincluding all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.

Additionally, at or prior to the termsClosing, the Company, the Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow Agreement, effective as of the Effective Time, 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 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. Each stockholder of CBM (each, a “CBM Stockholder”) shall receive its pro rata share of the Stock Consideration based on their percentage ownership of CBM. The Escrow Shares shall serve as a security for, and a source of payment of, the indemnity rights of the Company indemnified parties.

The obligations of the Company and CBM to consummate the transaction are subject to: (i) (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the APA) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the APA) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the APA) being brought by a third-party non-Affiliate (as defined in the APA) to enjoin or restrict the transaction; and (dii) certain customary closing conditions, set forth therein, atincluding but not limited to the closingaccuracy 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.

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 (as defined in the APA) are not satisfied or waived by September 30, 2019 (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 (as defined in the APA) has issued an Order (as defined in the APA) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub would merge with and into DatChat (the “Merger”), with DatChat continuing as the surviving corporation in the Merger. SubjectAPA (unless a condition to the terms and conditions set forth in the Merger Agreement, at the Effective Time: (i) all sharesClosing is due to breach or violation of capital stock of DatChat (the “DatChat Stock”) issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 46,153,846 shares of Spherix common stock (the “Stockholder Merger Consideration”).

On May 3, 2018, Spherix, Merger Sub, DatChat and the Stockholder Representative entered into that certain First Amendment to Agreement and Plan of Merger (the “Amendment”), pursuant to which the Merger Agreement was amended to reduce the Stockholder Merger Consideration from 46,153,846 shares of Spherix common stock to 34,615,385 shares of Spherix common stock.

After further negotiations, the Company determined not to pursue a merger with DatChat and on August 8, 2018, entered into a securities purchase agreement (the “Securities Purchase Agreement”) with DatChat pursuant to whichor CBM of any representation, warrant, covenant or obligation under the APA), (iv) by written notice of the Company and DatChat agreed to terminate the DatChat Merger and eachif there is has been an incurable material breach by CBM of the parties to the Merger Agreement agreed to release and discharge and hold harmless eachany of the other parties with respect to the transaction contemplatedits representations, warranties, covenants or obligations, (v) by the Merger Agreement.

In addition to the termination, under the Securities Purchase Agreement, the Company agreed to make a $1,000,000 strategic investment in DatChat which consistedwritten notice of (a) a cash payment of $500,000, (b) the forgiveness of prior advances made to DatChatCBM if there is or has been an incurable material breach by the Company and (c) an obligationof any of its representations, warranties, covenants or obligations, or (vi) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the APA) on the Company following the date of the Company to pay certain specific future compensation expenses of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restricted shares of DatChat common stock which is equal to 3.6% of the issued and outstanding common stock of DatChat.

APA.

Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 an intellectual propertya technology development company that owns patented and unpatented intellectual property.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. Through our acquisitionsSuch monetization included, but was not limited to, acquiring IP from patent holders in order to maximize the value of 108 patentsthe patent holdings by conducting and patent applications from Rockstar Consortium US, LPmanaging a licensing campaign, commercializing the IP, or through the settlement and acquisitionlitigation of several hundred patents issued to Harris Corporation as a result of our acquisition of North South, we have expanded our activities in wireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality and cellular.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 ourtechnology development and monetizing related 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.property.

Since March 1, 2013, 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 focus our efforts as a technology development company. The Company made no investments in new IP during 2017 and 2018 and started the transition with its investment in Hoth Therapeutics, Inc. during the third3rd quarter of 2017.2017, and with its agreement with DatChat, Inc. (“DatChat”) in March 2018 (which was subsequently terminated in August 2018). 

Pursuant to a Share Purchase Agreement, dated as of May 15, 2019, the Company agreed to purchase: (i) 50,000 shares of CBM BioPharma, Inc. 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 is expected to close within 10 business days of the execution of the agreement.

In MarchOctober 2018, the Company entered into an agreement and plan of merger, subject to shareholder approval, with DatChat,CBM BioPharma, Inc. (the “DatChat Merger”(“CBM”), a secure messaging application that utilizes blockchain technology,pharmaceutical company focusing on the development of cancer treatments, pursuant to which all shares of capital stock of CBM will be converted into the right to receive an aggregate of 3,529,411 shares of the Company’s common stock with CBM continuing as amendedthe surviving corporation in the merger.

On February 15, 2019, Hoth announced the pricing of its initial public offering (“IPO) of 1,250,000 shares of its common stock at an initial offering price to the public of $5.60 per share. All shares of common stock were offered by Hoth. In addition, Hoth granted the underwriters a 30-day option to purchase up to an additional 187,500 shares of common stock at the initial public offering price, less the underwriting discount, to cover over-allotments, if any.

Hoth’s common stock commenced trading on May 3, 2018. After further negotiations,The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”.  The IPO closed on February 20, 2019. As of the date of this report, the Company determined not to pursue aand its affiliates own approximately 19% of Hoth.

On May 15, 2019, the Company restructured the terms of its proposed merger with DatChatCBM as agreed to in an Agreement and on August 8,Plan of Merger dated October 10, 2018 (the “CBM Merger Agreement”) and entered into a securities purchase agreementan Asset Purchase Agreement (the “Securities Purchase Agreement”“APA”) with DatChatCBM, whereby the Company purchased CBM’s Purchased Assets (as defined in the APA), including, among other things, a license agreement relating to certain technologies in the areas of acute myeloid leukemia (AML), acute lymphoblastic leukemia (ALL), acral lentiginous melanoma and pancreatic cancer, university contracts, and contracts with a chief scientist and an advisory board (the “Purchase” or “Asset Acquisition”).

In connection with the execution of the APA, the CBM Merger Agreement was terminated and any and all termination fees thereunder have been waived.

As consideration for the Purchase, the Company agreed to pay aggregate consideration of $8,000,000 to CBM consisting of (i) the Stock Consideration comprised of (A) 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 convertible 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) the Cash Consideration Amount, less the sum of (A) the amount of any Affiliate Receivables (as defined in the APA), (B) the amount of the outstanding Indebtedness (as defined in the APA) as of the Closing Date, if any, to the applicable creditor(s), (C) the amount of the unpaid Transaction Expenses (as defined in the APA) as of the Closing Date, if any, to the applicable payee, and (D) the amount of unpaid Transaction Bonuses (as defined in the APA), if any, to the recipients thereof. 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 Qualified Financing (as defined in the APA) 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.

The Company is prohibited from issuing shares of Common Stock under the APA which, when aggregated with any other shares of Common Stock of the Company, would exceed 19.99% shares of Common Stock of the Company, unless and until shareholder approval of the issuance of the Common Stock is approved. Upon the execution of the APA, the Company and CBM agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, and waived the Termination Fee.

Additionally, at or prior to the Closing, the Company, the Stockholder Representative, and a mutually agreeable escrow agent (the “Escrow Agent”), shall enter into an Escrow Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the parties (the “Escrow Agreement”), pursuant to which the Company and DatChat agreed to terminateshall deposit with the DatChat Merger and eachEscrow Agent 10% of the parties to the Merger Agreement agreed to release and discharge and hold harmless each of the other partiesStock Consideration (including any equity securities paid 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. Each stockholder of CBM (each, a “CBM Stockholder”) shall receive its pro rata share of the Stock Consideration based on their percentage ownership of CBM. The Escrow Shares shall serve as a security for, and a source of payment of, the indemnity rights of the Company indemnified parties.

The obligations of the Company and CBM to consummate the transaction are subject to: (a) all necessary approvals being obtained by relevant governmental authorities, third parties, and the shareholders of the Company and CBM, (b) the absence of any Law (as defined in the APA) being enacted, issued, promulgated, enforced or entered, or any Order (as defined in the APA) by a Governmental Authority which makes the transaction illegal, and (c) no pending Action (as defined in the APA) being brought by a third-party non-Affiliate (as defined in the APA) to enjoin or restrict the transaction; and (d) 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.

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 (as defined in the APA) are not satisfied or waived by September 30, 2019 (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 (as defined in the APA) has issued an Order (as defined in the APA) or taken action restraining, enjoining or prohibiting the transactions contemplated by the Merger Agreement.

In additionAPA (unless a condition to Closing is due to breach or violation of the termination,Company or CBM of any representation, warrant, covenant or obligation under the Securities Purchase Agreement,APA), (iv) by written notice of the Company agreed to make a $1,000,000 strategic investment in DatChat which consistedif there is has been an incurable material breach by CBM of (a) a cash paymentany of $500,000, (b) the forgivenessits representations, warranties, covenants or obligations, (v) by written notice of prior advances made to DatChatCBM if there is has been an incurable material breach by the Company and (c) an obligationof any of its representations, warranties, covenants or obligations, or (v) by written notice by the Buyer if there shall have been a Material Adverse Effect (as defined in the APA) on the Company following the date of the APA.

On May 10, 2019, the Company to pay certain specific future compensation expenseseffected a reverse stock split of DatChat (amounts in clauses (b) and (c) not to exceed a maximum of $500,000 in the aggregate); in exchange for $1,000,000 of restrictedits outstanding shares of DatChat common stock at a ratio of one-for-4.25 (the “Reverse Stock Split”). The Reverse Stock Split, which is equalwas 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 April 15, 2019, was consummated pursuant to 3.6%a Certificate of Amendment filed with the issued and outstandingSecretary of State of Delaware on May 9, 2019 (the “Certificate of Amendment”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Standard Time, on May 10, 2019 (the “Effective Date”).  Unless the context otherwise requires, all references in this report to shares of our common stock, including prices per share of DatChat.

DatChat agreed to certain covenants, includingour common stock, reflect the covenant in the event that DatChat completes (i) a public offering of its securities pursuant to an effective registration statement or (ii) a merger, consolidation, transfer or share exchange transaction pursuant to which DatChat becomes subject to the reporting requirements of the Securities Exchange Act of 1934, (each, a “Going Public Event”), and until the time that the Company holds no shares of DatChat, DatChat agreed to certain covenants, including the covenant to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by DatChat pursuant to the Exchange Act of 1934, as amended the “Exchange Act”), provided that, if after becoming subject to the Exchange Act, DatChat is thereafter no longer required to file reports pursuant to the Exchange Act, DatChat will, for as long as the Company owns shares of DatChat, prepare and furnish to the Company and make publicly available in accordance with Rule 144(c) such information as is required for the Company to sell such shares, including without limitation, under Rule 144. Under the Securities Purchase Agreement, DatChat further covenants that it will take such further action as the Company may reasonably request, to the extent required from time to time to enable the Company to sell its DatChat shares without registration under the Securities Act of 1933, as amended, including, without limitation, within the requirements of the exemption provided by Rule 144.

DatChat also agreed that, from and after a Going Public Event, and subject to certain exceptions, neither DatChat nor any other person acting on its behalf will provide the Company with any information that constitutes, or that DatChat reasonably believes constitutes, material non-public information, unless prior thereto, the Company shall have consented to the receipt of such information and agreed with DatChat to keep such information confidential.Reverse Stock Split.

Results of Operations

Three months ended June 30, 2018March 31, 2019 compared to three months ended June 30, 2017March 31, 2018  

During the three months ended June 30,March 31, 2019 and 2018, and 2017, revenue was approximately $0 and $311,000, respectively. $311,000 in 2017 represented the amortization of deferred revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23, 2015 and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated through a debit adjustment in the amount of approximately $3.2 million through the accumulated deficit at the beginning of 2018. The Company will not recognize revenue from the RPX license in the future. 

During the three months ended June 30, 2018 and 2017, we incurred a loss from operations of approximately $1.3$0.7 million and $0.8$1.6 million, respectively. The increasedecrease in net loss in the 2019 period was primarily attributed to $0.1$0.3 decrease in amortization of patent portfolio, $0.2 million increasedecrease in professional fees, $66,000 increase$0.1 million decrease in acquisition costs related to the DatChat Merger and $48,000 increase in compensation and related expenses, and was partially offset by $94,000 decrease in other selling, general and administrative expenses.

During the three months ended June 30, 2018, other income was approximately $0.9 million as compared to other expenses of approximately $1.1 million for the comparable prior period. The increase in other income was primarily attributed to $0.7 million increase in fair value of our investment in Hoth, and $1.5 million increase in change in fair value of warrant liabilities. 

Net loss was $0.4 million in the three months ended June 30, 2018 compared to net loss of $1.9 million in the three months ended June 30, 2017.

Six months ended June 30, 2018 compared to six months ended June 30, 2017

During the six months ended June 30, 2018 and 2017, revenue was approximately $0 and $638,000, respectively. $638,000 represents the amortization of deferred revenue related to the two patent license agreements we entered into with RPX Corporation (“RPX”) on November 23, 2015 and May 22, 2016 (the “RPX License Agreements”). The Company has determined that its licenses represent functional intellectual property under Topic 606. Therefore, revenue is recognized at the point in time when the customer has the right to use the intellectual property rather than over the license period. Accordingly, the Company’s deferred revenue related to its licenses was eliminated through a debit in the amount of approximately $3.2 million through the accumulated deficit at the beginning of 2018. The Company will not recognize revenue from the RPX license in the future. 

During the six months ended June 30, 2018 and 2017, we incurred a loss from operations of approximately $2.8 million and $1.7 million, respectively. The increase in net loss was primarily attributed to $0.5 million increase in professional fees and $0.2 million increase in acquisition costs related to the DatChat Merger, and was partially offset by $0.2 million decrease in compensation and related expenses.

During the sixthree months ended June 30, 2018,March 31, 2019, other incomeexpenses was approximately $1.0$0.4 million as compared to approximately $91,000 of other expenses of approximately $1.0 millionincome for the comparable prior period. The increase inof other incomeexpenses was primarily attributed to $0.7a $0.5 million increase in fair value of our investment in Hoth, and $1.8 million increasedecrease in change in fair value of warrant liabilities.liabilities and investments recorded at fair value. 

Net loss was $1.9 million in the six months ended June 30, 2018 compared to net loss of $2.8 million in the six months ended June 30, 2017.

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.

We While we continue to implement our business strategy, we intend to finance our activities through:

Cash Flows from Operating Activities - For the six months ended June 30, 2018 and 2017, net cash used in operations was approximately $1.7 million and $1.8 million, respectively. The cash used in operating activities for the six months ended June 30, 2018 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. The cash used in operating activities for the six months ended June 30, 2017 primarily resulted from $1.3 million of change in fair value of warrant liabilities and amortization expenses of $0.7 million, partially offset by $1.0 million of changes in assets and liabilities.

Cash Flows from Investing Activities - For the six months ended June 30, 2018 and 2017, net cash used in investing activities was approximately $1.0 million and net cash provided by investing activities was approximately $2.4 million, respectively. The cash used in investing activities primarily resulted from our purchase of marketable securities for the six months ended June 30, 2018 of $10.0 million, partially offset by our sale of marketable securities of $9.1 million. The cash provided by investing activities primarily resulted from our sale of marketable securities for the six months ended June 30, 2017 of $9.6 million, partially offset by our purchase of marketable securities of $6.5 million.  

Cash Flows from Financing Activities - Cash provided by financing activities for the six months ended June 30, 2018 was approximately $2.7 million, which related to issuance of 2,222,222 shares of its common stock. Cash used in financing activities for the six months ended June 30, 2016 was approximately $24,000, which related to repurchase of restricted stock units to pay for employee withholding taxes. 

The Company’sOur ultimate success is dependent on itsour ability to obtain additional financing and generate sufficient cash flow to meet itsour obligations on a timely basis.  The Company’sOur 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’splan to support new technologies and help advance innovation. Our working capital amounted to approximately $3.8$0.9 million at June 30, 2018.March 31, 2019. Absent generation of sufficient revenue from the execution of the Company’sour long-term business plan, the Companywe will need to obtain additional debt or equity financing, especially if the Company experienceswe experience downturns in itsour business that are more severe or longer than anticipated, or if the Company experienceswe experience significant increases in expense levels resulting from being a publicly-traded company or operations.  If the Company attemptswe attempt to obtain additional debt or equity financing, the Companywe cannot assume that such financing will be available to the Company on favorable terms, or at all.

We have filed a shelf registration statement on Form S-3 with the SEC. The registration statement, which has been declared effective, was filed in reliance on Instruction I.B.6 of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period. At the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6 may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital.

On March 19, 2018, we closed on a public offering of common stock for gross proceeds of approximately $3.0 million.  The offering was a shelf takedown off of our registration statement on Form S-3 (File No. 333-222488) and was conducted pursuant to a placement agency agreement between us and Laidlaw & Company (UK) Ltd., the sole placement agent, on a best-efforts basis with respect to the offering (“Laidlaw”), that was entered into on March 14, 2018. We sold 2,222,222 shares of our common stock in the offering at a purchase price of $1.35 per share.

Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. We may be forced to litigate against others to enforce or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which we are 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. If such efforts are successful, they may have an impact on the value of the patents and preclude us 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.

Should we be unsuccessful inBecause of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about our efforts to execute our business plan, it could become necessary for us to reduce expenses, curtail operations or explore various alternative business opportunities or possibly suspend or discontinue our business activities.

Rockstar will be entitled to receive a contingent recovery percentage of future profits (“Participation Payments”) from licensing, settlements and judgments against defendants with respect to patents purchased under the First Patent Purchase Agreement; however, no payment is required unless the Company receives a recovery. The Participation Payments under the First Patent Purchase Agreement are equal to zero percent until the Company recovers with respect to patents purchased under the First Patent Purchase Agreement at least (a) $8.0 million or (b) if we recover less than $17.0 million, an amount equal to $5.0 million plus $3.0 million times a fraction equal to total recoveries minus $10.0 million, divided by $7.0 million (clause (a) or (b), as applicable, being the “Initial Return”), in each case net of certain expenses.  Once we obtain recoveries in excess of the Initial Return, we are required to make a payment to Rockstar of $13.0 million, payable only from the proceeds of such recovery, within six months after such recovery. In addition, no later than 30 days after the end of each quarter in which we make such a recovery, we are required to pay to Rockstar a percentage of such recovery, net of certain expenses, scaling from 30% if such cumulative recoveries net of certain expenses are less than or equal to $50.0 million, to 70% to the extent cumulative recoveries net of certain expenses are in excess of $1.0 billion.  

Rockstar will also be entitled to receive Participation Payments from licensing, settlements and judgments against defendants with respect to patents purchased under the Second Patent Purchase Agreement; however, no payment is required unless we receive a recovery. The Participation Payments under the Second Patent Purchase Agreement are equal to zero percent until we recover with respect to patents purchased under the Second Patent Purchase Agreement at least $120.0 million, net of certain expenses.  Once we obtain recoveries in excess of that amount, we are required to pay to Rockstar 50% of our recovery in excess of that amount, no later than 30 days after the end of each quarter in which we make such a recovery.  

Our ability to fund these Participation Payments or the $13.0 million contingent payment will depend on the liquidity of our assets, recoveries, alternative demands for cash resources and access to capital at the time.  Furthermore, our obligation to fund Participation Payments could adversely impact our liquidity and financial position. As ofcontinue as a going concern within one year from the date of this report,filing. The consolidated financial statements have been prepared assuming that we havewill continue as a going concern, and do not madeinclude any such Participation Payments.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.

Cash Flows from Operating Activities - For the three months ended March 31, 2019 and 2018, net cash used in operations was approximately $0.9 million and $1.1 million, respectively. The cash used in operating activities for the three months ended March 31, 2019 primarily resulted from a net loss of $1.1 million, and partially offset by change in fair value of investment of $0.5 million. The cash used in operating activities for the three months ended March 31, 2018 primarily resulted from a net loss of $1.5 million, and partially offset by amortization expenses of $0.3 million. 

Cash Flows from Investing Activities - For the three months ended March 31, 2019 and 2018, net cash provided by investing activities was approximately $1.3 million and net cash used in investing activities was approximately $1.8 million, respectively. The cash provided by investing activities primarily resulted from our sale of marketable securities for the three months ended March 31, 2019 of $4.4 million, partially offset by our purchase of marketable securities of $2.8 million. The cash used in investing activities primarily resulted from our purchase of marketable securities for the three months ended March 31, 2018 of $5.3 million, partially offset by our sale of marketable securities of $3.6 million.

Cash Flows from Financing Activities - Cash provided by financing activities for the three months ended March 31, 2019 was $0. Cash provided by financing activities for the three months ended March 31, 2018 was approximately $2.7 million, which related to issuance of common stock.

Off-balance sheet arrangements.

None.

Item 3.           Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4.           Controls and Procedures

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

With respect to the quarter ended June 30, 2018,March 31, 2019, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective as of June 30, 2018March 31, 2019 due to the material weaknesses in our internal controls over financial reporting. We have a lack of segregation of duties, and a lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected.

Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2018March 31, 2019 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II.           Other Information

Item 1.           Legal Proceedings

In the past, in the ordinary course of business, we work with Equitable under our Monetization Agreementactively pursued legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technology. Other thanFrom time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary routine litigation incidental to the business and other than as set forth below, wecourse of business. We know of no pending material activeclaims or pending legal proceedingsmatters against us except for those described below.

International License Exchangeas of America, LLC Litigations

Under our Monetization Agreement with Equitable, ILEA has filed the patent infringement litigations listed below.

Optic153 LLC Litigations

Under our Monetization Agreement with Equitable, Optic 153 LLC, an Equitable subsidiary, has filed the following litigations relating patents acquired under the termsdate of settlement of one of our prior litigations:this report.

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.  

Item 1A.        Risk Factors

Investing in our common stock is subject to a number of risks and uncertainties. You should carefully consider the risk factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and2018, in other reports we file with the SEC.SEC, and below.

We are exploring and evaluating strategic alternatives and there can be no assurance that we will be successful in identifying, or completing any strategic alternative or that any such strategic alternative will yield additional value for shareholders.

Our management and Board of Directors has commenced a review of strategic alternatives which could result in, among other things, a sale, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. For example, on October 10, 2018, we entered into an agreement and plan of merger with CBM BioPharma, Inc. (“CBM”), pursuant to which all shares of capital stock of CBM will be converted into 3,529,411 shares of the Company’s common stock, which on May 15, 2019, we restructured by way of the APA, pursuant to which the Company agreed to purchase CBM’s Purchased Assets (as defined in the APA) for the Purchase Consideration. CBM is a privately held pharmaceutical company focused on the development of cancer treatments. There have beencan be no changesassurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction, and there can be no assurance that the transaction with CBM will close. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the riskprocess, our business, financial condition and results of operations could be adversely affected. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors disclosedthat may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our Annual Reportbusiness and the availability of financing to potential buyers on Form 10-Kreasonable terms.

We may be unsuccessful at integrating future acquisitions.

If we find appropriate opportunities in the future, we may acquire businesses to strategically increase the number of patents in our portfolio and pursue monetization. For example, on June 30, 2017, we acquired a stake in 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. Hoth has a sublicense from Chelexa Biosciences, Inc. to use Chelexa’s BioLexa products for the year ended December 31, 2017treatment of eczema and such sublicense includes the right to further sublicense to third parties to make, use, have made, import, offer for sale and sell BioLexa products. There can be no guarantee that Hoth will be successful in its efforts to monetize its sublicense agreement with Chelexa. In addition, on March 12, 2018, we entered into an agreement and plan of merger with DatChat, pursuant to which we were going to acquire 100% ownership of DatChat, which is a privately held personal privacy platform focused on encrypted communication, internet security and digital rights management, which we subsequently terminated on August 8, 2018. Most recently, on October 10, 2018, we entered into an agreement and plan of merger with CBM, pursuant to which CBM will be the surviving corporation in the merger, which on May 15, 2019, we restructured by way of the APA, pursuant to which the Company agreed to purchase CBM’s Purchased Assets (as defined in the APA) for the Purchase Consideration. There can be no guarantee that we believe are material. Additional risks and uncertainties not presently known to uswill be successful in closing the transaction contemplated by the agreement with CBM or that we will be successful in managing the operations of CBM, which is in the early stages of development of cancer treatments.

As we acquire businesses or substantial stakes in certain businesses, the process of integration may produce unforeseen operating difficulties and expenditures, fail to result in expected synergies or other benefits and absorb significant attention of our management that would otherwise be available for the ongoing development of our business. In addition, in the event of any future acquisitions, we may record a portion of the assets we acquire as goodwill, other indefinite-lived intangible assets or finite-lived intangible assets. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The recoverability of goodwill and indefinite-lived intangible assets is dependent on our ability to generate sufficient future earnings and cash flows. Changes in estimates, circumstances or conditions, resulting from both internal and external factors, could have a significant impact on our fair valuation determination, which could then have a material adverse effect on our business, financial condition and results of operations. We cannot guarantee that we will be able to identify suitable acquisition opportunities, consummate any pending or future acquisitions or that we will realize any anticipated benefits from any such acquisitions.

If the CBM Asset Acquisition is completed, the Company may not be able to successfully integrate the business of CBM and realize the anticipated benefits of the Asset Acquisition.

Realization of the anticipated benefits of the CBM asset acquisition will depend on our ability to successfully integrate our businesses and operations with CBM. We will be required to devote significant management attention and resources to integrating its business practices, operations, and support functions. The process of integrating CBM’s operations could cause an interruption of, or loss of momentum in, our business and financial performance, and in CBM’s business and financial performance as well. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business, financial results.

Our stockholders will have a reduced ownership and voting interest after the Asset Acquisition and will exercise less influence over our management and policies than they did prior to the Asset Acquisition.

Our stockholders currently believehave the right to vote in the election of our board of directors on other matters affecting us. When, and if the Asset Acquisition occurs, because of the issuance of shares of common stock to the CBM shareholders, our current stockholders will hold a percentage ownership of the post-acquisition company that is much smaller than the stockholder’s current percentage ownership of ours. Because of this, our current stockholders will have less influence over the management and policies of the Company than they now have after the consummation of the Asset Acquisition.

The CBM Asset Acquisition is subject to certain conditions to closing that could result in the Asset Acquisition not being completed or being delayed, either of which could negatively impact its stock price and future business and results of operations.

Completion of the Asset Acquisition is subject to a number of customary conditions, including, but not limited to, the approval of the Asset Acquisition Agreement by our stockholders. In addition, if any governmental authority shall have enacted, issued, promulgated or enforced any law or order which has the effect of making the transactions or agreements contemplated by the Asset Acquisition Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by the Asset Acquisition Agreement, CBM may elect not to consummate the Asset Acquisition. There is no assurance that we will satisfy the conditions necessary for completion of the Asset Acquisition. If any of the conditions to the Asset Acquisition are immaterialnot satisfied or, where waiver is permissible, waived, the Asset Acquisition will not be consummated. Failure to complete the Asset Acquisition would prevent us from realizing the anticipated benefits of the Asset Acquisition. We have already and expect to continue to incur significant costs associated with transaction fees, professional services, taxes and other costs related to the Asset Acquisition. In the event that the Asset Acquisition is not completed, we will remain liable for these costs and expenses. In addition, the current market price of our common stock may reflect a market assumption that the Asset Acquisition will occur, and a failure to complete the Asset Acquisition could result in a negative perception by the market of ours generally and a resulting decline in the market price of our common stock. The market price may also maydecline if the market disapproves of the Asset Acquisition. Any delay in the consummation of the Asset Acquisition or any uncertainty about the consummation of the Asset Acquisition could also negatively impact our business.stock price and future business and results of operations. The Asset Acquisition may not be consummated, there may be a delay in the consummation of the Asset Acquisition or the Asset Acquisition may not be consummated on the terms contemplated by the Asset Acquisition Agreement.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

None.