Dominari Holdings Inc. - Quarter Report: 2013 March (Form 10-Q)

 

 

 

 

 

 

 

Delaware		52-0849320
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

7927 Jones Branch Drive, Suite 3125, Tysons Corner, VA 22102

(Address of principal executive offices)

703-992-9260

(Registrant’s telephone number, including area code)

 

 

Class		Outstanding as of May 15, 2013
Common Stock, $0.0001 par value		820,518 shares

 

Index

 

		Page
Part I.	Financial Information	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012	1
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)	3
	Notes to the Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4.	Controls and Procedures	16
Part II.	Other Information	17
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sale of Equity Securities	17
Item 6.	Exhibits	18
	Signatures

 

Condensed Consolidated Balance Sheets

ASSETS		March 31, 2013 (Unaudited)				December 31,  2012
Current assets
Cash and cash equivalents		$	3,448,526			$	4,498,237
Trade accounts receivable			1,315				-
Other receivables			3,508				3,425
Prepaid expenses and other assets			82,206				100,474
Assets of segment held for sale			-				104,265
Total current assets			3,535,555				4,706,401
Property and equipment, net of accumulated depreciation of $319,830 and $308,386			7,930				24,009
Deposit			29,504				25,625
Total assets		$	3,572,989			$	4,756,035
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	358,376			$	425,774
Accrued salaries and benefits			85,277				280,263
Liabilities of segment held for sale			10,205				25,040
Total current liabilities			453,858				731,077
Deferred rent			45,285				45,081
Warrant liabilities			215,853				3,125,393
Total liabilities			714,996				3,901,551
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized; Series B: 1 share issued and outstanding at March 31, 2013 and December 31, 2012; liquidation preference $1,000 per share			-				-
Series C: 229,337 shares issued and outstanding at March 31, 2013, and none issued and outstanding at December 31, 2012; liquidation preference $0.0001 per share			23				-
Common stock, $0.0001 par value, 50,000,000 shares authorized; 814,114 issued at at March 31, 2013 and December 31, 2012 and 813,713 outstanding at March 31, 2013 and December 31, 2012			82				82
Paid-in capital in excess of par value			42,330,462				36,630,406
Treasury stock, at cost, 401 shares at March 31, 2013
and December 31, 2012			(464,786	)			(464,786	)
Accumulated deficit			(39,007,788	)			(35,311,218	)
Total stockholders' equity			2,857,993				854,484
Total liabilities and stockholders' equity		$	3,572,989			$	4,756,035

 

 

 

		Three Months Ended March 31,
		2013				2012
Revenues		$	5,761			$	-
Costs of goods sold			-				-
Gross profit			5,761				-
Operating expenses
Research and development			(43,068	)			(371,403	)
Selling, general and administrative			(873,240	)			(692,492	)
Total operating expenses			(916,308	)			(1,063,895	)
Loss from operations			(910,547	)			(1,063,895	)
Unrealized (loss) gain on the change in fair value of warrant liabilities			(2,786,395	)			339,308
Interest income			372				1,022
Loss from continuing operations			(3,696,570	)			(723,565	)
Income tax expense			-				-
Loss from continuing operations			(3,696,570	)			(723,565	)
Discontinued operations
Loss from discontinued operations			-				(110,718	)
Income tax expense			-				-
Loss from discontinued operations			-				(110,718	)
Net loss		$	(3,696,570	)		$	(834,283	)
Net loss per share, basic and diluted
Continuing operations		$	(5.35	)		$	(3.89	)
Discontinued operations		$	-			$	(0.59	)
Basic and diluted net loss per share		$	(5.35	)		$	(4.48	)
Weighted average number of shares outstanding, basic and diluted			691,213				186,101

 

 Condensed Consolidated Statements of Cash Flows

 

		Three Months Ended March 31,
		2013				2012
Cash flows from operating activities
Net loss		$	(3,696,570	)		$	(834,283	)
Adjustments to reconcile net loss to net cash used in operating activities:
Fair value adjustment of warrant liabilities			2,786,395				(339,308	)
Issuance costs of warrants accounted for at fair value			-				17,636
Depreciation and amortization			16,079				15,888
Stock-based compensation			4,144				2,672
Changes in assets and liabilities:
Trade and other receivables			(1,398	)			(27,187	)
Prepaid expenses and other assets			14,389				241,023
Accounts payable and accrued expenses			(262,384	)			(170,851	)
Deferred rent			204				(8,600	)
Net cash used in activities of continuing operations			(1,139,141	)			(1,103,010	)
Net cash provided by (used in) activities of discontinued operations			89,430				(63,902	)
Net cash used in operating activities			(1,049,711	)			(1,166,912	)
Cash flows from investing activities
Net cash used in activities of discontinued operations			-				(1,598	)
Net cash used in investing activities			-				(1,598	)
Cash flows from financing activities
Proceeds from issuance of common stock and warrants			-				1,150,001
Issuance cost of common stock and warrants			-				(84,000	)
Net cash provided by activities of continuing operations			-				1,066,001
Net cash provided by financing activities			-				1,066,001
Net decrease in cash and cash equivalents			(1,049,711	)			(102,509	)
Cash and cash equivalents, beginning of year			4,498,237				4,911,350
Cash and cash equivalents, end of year		$	3,448,526			$	4,808,841
Supplemental disclosures of cash flow information:
Cash paid for taxes		$	-			$	-
Non-cash financing activity:
Issuance of Series C Convertible Preferred Stock in connection with exchange of warrants		$	5,695,935			$	-

 

Spherix Incorporated and Subsidiaries

    We continue to incur ongoing administrative and other expenses, including public company expenses, without significant corresponding revenue.

·	the current cash and cash equivalents on hand from our past equity offerings; and

·	additional funds we will seek to raise through the sale of additional securities in the future.

    Working capital was $3.1 million and $4.0 million at March 31, 2013 and December 31, 2012, and cash on hand was $3.4 million and $4.5 million, respectively.  Management believes that the cash on hand will be sufficient to sustain operations for at least the next twelve months, including payment of severances aggregating $146,000 in the second quarter of 2013.

 

 

    On March 6, 2013, the Company, and certain investors that participated in the November 2012 private placement transaction (“Investors”), entered into separate Warrant Exchange Agreements pursuant to which the Investors exchanged common stock purchase warrants acquired in the private placement transaction for shares of the Company’s newly designated Series C Convertible Preferred Stock.  Each share of Series C Convertible Preferred Stock is convertible into one (1) share of Common Stock at the option of the holder, subject to certain limitations on conversions that would result in the Investors acquiring more than 4.99%/9.99% of the outstanding voting stock of the Company.  The Series C Convertible Preferred Stock was established on March 5, 2013 by the filing in the State of Delaware of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Certificate of Designation”).    The liquidation preference of the Series C Convertible Preferred Stock is $0.0001 per share.

 

Fair value measurements at March 31, 2013 using

March 31, 2013

Quoted prices in active markets for identical assets (Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Liabilities:

Fair value of warrant liabilities

$

215,853

–

–

$

215,853

Fair value measurements at December 31, 2012 using

December 31, 2012

Quoted prices in active markets for identical assets (Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Liabilities:

Fair value of warrant liabilities

$

3,125,393

–

–

$

3,125,393

    Level 3 financial liabilities consist of the warrants 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 derivative liabilities are recorded in “Loss due to change in fair value of derivative instruments” in the Company’s condensed consolidated statements of operations.

 

 

		For the three months ended March 31,
		2013				2012
Beginning balance		$	3,125,393			$	916,621
Issuance of new warrants			-				214,288
Unrealized loss (gain) on the warrant liabilities			2,786,395				(339,308)
Reclassification to stockholders’ equity			(5,695,935)				-
Ending balance		$	215,853			$	791,601

		For the three months ended
		March 31, 2013				March 31, 2012
Convertible preferred stock			229,341				4
Warrants to purchase common stock			75,757				67,637
Non-vested restricted stock awards			122,500				-
Options to purchase common stock			7,163				2,425
Total			434,761				70,066

    The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award.  Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant.  These options generally vest over a four- to ten-year period.

 

		Number of Units			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013			122,500		$6.83
Granted			-
Vested			-
Forfeited			-
Nonvested at March 31, 2013			122,500		$6.83

 

    In January 2013, the Company entered into a Retention Agreement with its President, Dr. Robert A. Lodder, which provides that (i) Dr. Lodder will remain with the Company as an executive officer through June 30, 2013 and receive compensation at the rate previously provided to him and (ii) the Company will pay Dr. Lodder a severance of $233,398 as had been provided under the terms of his Employment Agreement, which was terminated under the terms of his Retention Agreement.

 

    On April 2, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with its wholly owned subsidiary, Nuta Technology Corp., a Virginia corporation (“Nuta”), North South Holdings, Inc., a Delaware corporation ("North South"), the owner or assignee of certain patents, licenses and applications (the “North South Intellectual Property”), and the shareholders of North South (the "North South Shareholders"). Upon closing of the transaction contemplated under the Merger Agreement (the "Merger"), North South will merge with and into Nuta with Nuta as the surviving corporation.  Nuta will operate in the State of Virginia as the record owner of the North South Intellectual Property.  The closing of the Merger is subject to customary closing conditions, including the receipt of a fairness opinion that the Merger Consideration (as defined below) is fair to stockholders and the Company from a financial point of view, based on, among other things, the North South Intellectual Property assets, and the approval of the Company’s shareholders holding a majority of the outstanding voting capital of the Company to issue the Merger Consideration pursuant to NASDAQ listing standards.

    At the effective time of the Merger, from the Merger Consideration, 150,000 shares of the Series D Preferred Stock (the “Escrow Shares”) shall be delivered to an escrow agent and shall be held pursuant to an escrow agreement to secure the Company from certain claims that may arise with respect to the representations, warranties, covenants or indemnification obligations of the North South Shareholders for a period of twelve (12) months following the closing of the Merger.  The Escrow Shares are the sole remedy for indemnifiable losses payable under the Merger Agreement.

    Set forth below is information relating to the option grants under the 2013 Plan.

(1)

750,000 options vest in 4 equal semi-annual installments beginning on October 4, 2013 as long as the shareholders have approved the 2013 Plan.  Remaining 250,000 options are subject to certain performance conditions requiring the Company to achieve a VWAP of $12 per share for 30 out of 90 consecutive days prior to December 31, 2014 and provided Optionee remains a director.

(2)	Eligibility date of October 4, 2013, provided Optionee remains a director of Spherix through said date.

(3)	Eligibility effective immediately upon shareholder approval.

(4)	Eligibility upon the last to occur of (i) shareholder approval of Plan, (ii) closing of merger of North South Holdings, Inc. into Nuta Technology Corp, and (iii) Optionee’s employment as the Chief Executive Officer of Spherix.

(5)	Eligibility effective immediately upon shareholder approval.

(6)	Eligibility effective immediately upon shareholder approval.

 

    Following the sale of Spherix Consulting, the Company engaged in an examination of its business strategies and strategic alternatives.  The Company has determined to augment its biotechnology research and development business with a new business segment, monetization of intellectual property assets.  To that end, on April 2, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with its wholly owned subsidiary, Nuta and North South Holdings, Inc., a Delaware corporation ("North South"), the owner or assignee of certain patents, licenses and applications (the “North South Intellectual Property”), and the shareholders of North South (the "North South Shareholders"). Upon closing of the transaction contemplated under the Merger Agreement (the "Merger"), North South will merge with and into Nuta with Nuta as the surviving corporation.  Nuta will operate in the State of Virginia as the record owner of the North South Intellectual Property.  The closing of the Merger is subject to customary closing conditions, including the receipt of a fairness opinion that the Merger Consideration (as defined below) is fair to stockholders and the Company from a financial point of view, based on, among other things, the North South Intellectual Property assets, and the approval of the Company’s shareholders holding a majority of the outstanding voting capital of the Company to issue the Merger Consideration pursuant to NASDAQ listing standards.

    The Company has filed a preliminary consent solicitation with the Securities and Exchange Commission (“SEC”) seeking shareholder approval of the issuance of the Merger Consideration.  Upon clearance by the SEC, the Company will forward the consent solicitation to the shareholders in an effort to obtain such approval.

·	utilize our clinical development experience to manage and drive drug candidates through the clinical development process to approval;

·	identify and explore licensing and partnership opportunities for drug candidates;

·	seek to acquire medically important drug candidates in early-stage to mid-stage clinical development; and

·	commercialize our drug candidates, either alone or more likely in partnership.

    More recently, the Company focused its studies on treating high triglycerides and other dyslipidemias with a combination of D-tagatose and SPX106, a licensed drug compound, which combination is referred to as SPX106T.  High triglyceride levels are sometimes a symptom of conditions associated with heart disease such as obesity and metabolic syndrome, which is a condition associated with elevated glucose levels as well as excess fat around the waist, high blood pressure, high triglycerides, low HDL cholesterol, and other dyslipidemias.

 

 

 

 

·	the current cash and cash equivalents on hand from our past equity offerings; and

·	additional funds we will seek to raise through the sale of additional securities in the future.

    The Company cannot be assured that it will be able to attract an investor in our securities or raise the additional funds it will likely require in the future, that the Company will be able to obtain any required stockholder approval for such financings, or that the Company will be able to successfully complete additional offerings or sales of its securities.  If the Company is unable to raise needed additional funds to continue its business activities, it may be forced to cease business activities in which case the Company could also be required to terminate its operations and dissolve.

 

 

4.1

Rights Agreement dated as of December 31, 2012, between Spherix Incorporated and Equity Stock Transfer, LLC (incorporated by reference to Form 8-K filed January 30, 2013)

4.2

Certificate of Designation of Preferences, Rights and Limitations of Series C Participating Preferred Stock (incorporated by reference to Form 8-K filed March 7, 2013)

4.3

Certificate of Designation of Preferences, Rights and Limitations of Series C Participating Preferred Stock (incorporated by reference to Form 8-K filed April 4, 2013)

10.1

2013 Equity Incentive Plan (incorporated by reference Form 8-K filed April 4, 2013)

10.2

Warrant Exchange Agreement dated March 1, 2013 between the Company and certain investors (incorporated by reference to Form 8-K filed March 7, 2013)

31.1

Certification of Chief Executive Officer of Spherix Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer of Spherix Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer of Spherix Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer of Spherix Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1

XBRL Instance Document

101.2

XBRL Taxonomy Extension Schema Document

101.3

XBRL Taxonomy Extension Calculation Linkbase Document

101.4

XBRL Taxonomy Extension Definition Linkbase Document

101.5

XBRL Taxonomy Extension Label Linkbase Document

101.6

XBRL Taxonomy Extension Presentation Linkbase Document

(Registrant)

 

Date: May 20, 2013		By: /s/ Harvey J. Kesner
		Harvey J. Kesner
		Director and Interim Chief Executive Officer
Date: May 20, 2013		By: /s/ Robert L. Clayton
		Robert L. Clayton, CPA
		Chief Financial Officer and Treasurer and Corporate Secretary