Dominari Holdings Inc. - Quarter Report: 2014 June (Form 10-Q)

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

Class		Outstanding as of August 13, 2014
Common Stock, $0.0001 par value		27,911,427 shares

		Page No.
Part I.  Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2014 and 2013	3
	Notes to the Condensed Consolidated Financial Statements	4-22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
Part II.  Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities	31
Item 6.	Exhibits	31
Signatures		32

(in thousands except share and per share amounts)

 

 

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Note 1.

Organization and Description of Business

 

Note 2.

Liquidity and Financial Condition

·	managing current cash and cash equivalents on hand from the Company’s past equity offerings,

·	seeking additional funds raised through the sale of additional securities in the future, and

·	increasing revenue from its patent portfolios, license fees and new business ventures.

 

 

In addition, the costs of enforcing the Company’s patent rights may exceed its recoveries from such enforcement activities.  Accordingly, in order for the Company to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues, including any profit sharing arrangements with inventors or prior owners of the patents. The Company’s failure to monetize its patent assets or the occurrence of unforeseen circumstances that could have a negative impact on the Company’s liquidity could significantly harm its business.

Note 3.

Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Biospherics Incorporated, Nuta Technology Corp., Spherix Portfolio Acquisition I, Inc. (“SPXI”), Spherix Portfolio Acquisition II, Inc. (“SPXII”), Guidance IP, LLC (“Guidance”), CompuFill LLC (“CompuFill”) , Directional IP, LLC (“Directional”) and NNPT, LLC (“NNPT”).  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company estimates the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired. The Company tests goodwill for impairment at least annually in conjunction with the preparation of its annual business plan, or more frequently if events or circumstances indicate it might be impaired. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist.

 

		As of June 30,
		2014				2013
Convertible preferred stock			5,834,881				258,945
Warrants to purchase common stock			775,021				75,757
Non-vested restricted stock awards			10,000				120,250
Options to purchase common stock			4,218,877				6,663
Total			10,838,779				461,615

 

 

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes 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. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.  The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations. 

Note 4.

Goodwill and Intangible Assets

 

		For the three months ended				For the six months ended
		June 30, 2013				June 30, 2013
Revenues		$	47			$	100
Net loss		$	(919	)			(4,729	)
Loss per share - basic and diluted		$	(1.30	)			(6.76	)

 

The Company’s intangible assets with finite lives consist of its patents and patent rights, with estimated remaining economic useful lives ranging from six months to 12 years. For all periods presented, all of the Company’s identifiable intangible assets were subject to amortization. The gross carrying amounts and accumulated amortization related to acquired intangible assets as of June 30, 2014 are as follows (in thousands, except year amounts):

Date Acquired and Description		Patent Portfolios at December 31, 2013, Net				Weighted Average Life (in years)				Amortization Expense for the Six Months Ended June 30, 2014				Patent Portfolios at June 30, 2014, Net
7/24/13 - Rockstar patent portfolio		$	3,792				8.50			$	232			$	3,560
9/10/13 - North South patent portfolio			1,062				8.50				65				997
12/31/13 - Rockstar patent portfolio			59,981				6.50				4,581				55,400
		$	64,835							$	4,878			$	59,957

		Rockstar				North South				Rockstar
		Portfolio				Portfolio				Portfolio
		Acquired				Acquired				Acquired				Total
		24-Jul-13				10-Sep-13				31-Dec-13				Amortization
Six Months Ended December 31, 2014			237				65				4,650				4,953
Year Ended December 31, 2015			470				130				9,225				9,825
Year Ended December 31, 2016			471				130				9,250				9,851
Year Ended December 31, 2017			470				130				9,225				9,825
Year Ended December 31, 2018			470				130				9,225				9,825
Thereafter			1,441				412				13,825				15,678
Total		$	3,559			$	997			$	55,400			$	59,957

 

Note 5.

Stockholders’ Equity

		Number of Shares Issued
		and Outstanding as of
		June 30, 2014				December 31, 2013				Par Value				Conversion Ratio
Series "A"			-				-			$	0.0001				N/A
Series "B"			-				1				0.0050			4:1
Series "C"			1				1				0.0001			1:1
Series “D"			4,725				1,227,582				0.0001			10:1
Series “D-1"			68,638				59,265				0.0001			10:1
Series “F-1"			-				156,250				0.0001			1:1
Series “H"			439,043				459,043				0.0001			10:1
Series “I”			35,541				119,760				0.0001			20:1
Series “J”			-				-				0.0001			1:1

 

 

 

On March 6, 2013, the Company and certain investors that participated in the Company’s November 2012 private placement transaction, and entered into separate Warrant Exchange Agreements pursuant to which the investors exchanged common stock purchase warrants acquired in the private placement transaction for 229,337 shares of the Company’s Series C Convertible Preferred Stock (“Series C Preferred Stock”).  Each share of Series C Preferred Stock is convertible into one (1) share of common stock at the option of the holder.  The Series C 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 Preferred Stock.  During the year ended December 31, 2013, 229,336 shares of Series C Preferred Stock were converted into 229,336 shares of common stock.  As of June 30, 2014 and December 31, 2013, one (1) share of Series C Preferred Stock remained issued and outstanding.

 

During the six months ended June 30, 2014, (a) 1,222,857 shares of Series D Preferred Stock were exchanged for Series D-1 Preferred Stock and (b) 1,213,484 shares of Series D-1 Preferred Stock were converted into 12,134,840 shares of common stock.  As of June 30, 2014, 68,638 shares of Series D-1 Preferred Stock remained issued and outstanding.

 

 

 

During the quarter of June 30, 2014, the Company redeemed 84,219 shares of Series I Preferred Stock. In accordance with this Redemption Payment, the Company paid Rockstar $14.1 million.
 

As of June 30, 2014, 35,514 shares of Series I Preferred Stock remained issued and outstanding.

 

 

Pursuant to the terms of the Subscription Agreement, the Company registered with the United States Securities and Exchange Commission (“SEC”) all Shares and the shares of common stock underlying the Warrants issued in the Private Placement Offering (including the placement agent warrant described below) on Form S-3, which was declared effective on May 16, 2014.

 

		Warrants				Weighted Average Exercise Price				Total Intrinsic Value
Outstanding as of December 31, 2013			65,263			$	5.83				-
Issued			711,355				5.90
Cancelled			(1,597	)			28.00
Outstanding as of June 30, 2014			775,021			$	5.85			$	-

 

 

 

·	Edward Karr – 200,000 shares, vesting in two equal annual installments with 50% vesting immediately on the date of issue and the remaining 50% on the one-year anniversary of the date of issue so long as the recipient has not been removed as a director for cause;

·	Harvey Kesner – 600,000 shares, vesting in two equal annual installments with 50% vesting immediately on the date of issue and the remaining 50% on the one-year anniversary of the date of issue so long as the recipient has not been removed as a director for cause; and

·	An individual third party – 25,000, vesting immediately.

·	An individual third party – 25,000 shares, vesting immediately;

·	Anthony Hayes – 500,000 shares, with 50% vesting immediately on the date of issue and the remaining 50% vesting upon the Company’s receipt of gross proceeds of at least $30 million by April 3, 2015 from an offering of its securities;

·	Edward Karr – 100,000 shares, vesting immediately;

·	Harvey Kesner – 200,000 shares, vesting immediately; and

·	Alexander Poltorak – 75,000 shares, vesting immediately.

The Company determined that the achievement of the performance target by Mr. Hayes was probable on the grant date.

 

		For the Six Months ended
		June 30, 2014
Exercise price		$	1.94 - $5.83
Expected stock price volatility			78.9% - 90.6	%
Risk-free rate of interest			0.76% - 1.71	%
Term (years)			2.5 - 5.5

		Number of Shares				Weighted Average Exercise Price				Total Intrinsic Value				Weighted Average Remaining Contractual Life (in years)
Outstanding as of December 31, 2013			1,983,877			$	7.14			$	-				-
Employee options granted			2,235,000				4.52
Outstanding as of June 30, 2014			4,218,877				5.75				-				6.8
Options vested and expected to vest			4,218,877				5.75				-				6.8
Options vested and exercisable			3,451,714			$	6.01			$	-				6.9

 

		Number of Shares				Weighted Average Exercise Price				Total Intrinsic Value				Weighted Average Remaining Contractual Life (in years)
Outstanding as of December 31, 2013			30,000			$	7.08			$	29,400				9.3
Non-employee options granted			25,000				2.86								4.8
Outstanding as of June 30, 2014			55,000				5.16				-				6.9
Options vested and expected to vest			55,000				5.16				-				6.9
Options vested and exercisable			55,000			$	5.16			$	-				6.9

 

		Number of Units				Weighted Average Grant Day Fair Value
Nonvested at Decemeber 31, 2013			250			$	6.83
Granted			109,285				1.82
Vested			(99,535	)			1.67
Nonvested at June 30, 2014			10,000			$	3.49

 

		For the Three Months Ended June 30,								For the Six Months  Ended June 30,
		2014				2013				2014				2013
Employee restricted stock awards		$	12			$	3			$	14			$	6
Employee stock option awards			6,757				1				10,150				2
Non-employee restricted stock awards			175				-				176				-
Non-employee option awards			48				-				48				-
Total compensation expense		$	6,992			$	4			$	10,388			$	8

Note 6.

Related Party Transactions

 

Note 7.

Commitments and Contingencies

		Operating Lease
Six Months Ended December 31, 2014		$	130
Year Ended December 31, 2015			188
Year Ended December 31, 2016			165
Year Ended December 31, 2017			170
Year Ended December 31, 2018			43
		$	696

 

 

As stipulated in the Registration Rider of the December 2013 Rockstar patent acquisition agreement, the Company was required to both (i) file a registration statement for the securities issued as consideration in the agreement by February 3, 2014 (unless a later date was consented to by Rockstar), and (ii) such registration statement was to be declared effective by the SEC within sixty (days) after its filing.  Failure to comply with the registration requirement required that the Company issue to Rockstar additional consideration (“Additional Rockstar Shares”) in the form of shares of Common Stock equal to five (5%) percent of the number of shares of Common Stock and Series H Convertible Stock (taken together) issued to Rockstar (subject to certain beneficial ownership restrictions).  Additionally, if the issuance of “Additional Rockstar Shares” would have resulted in violation of certain beneficial ownership limitations, then the issuance of such “Additional Rockstar Shares” would be deferred until such time as the issuance would not cause Rockstar to exceed the applicable Beneficial Ownership set out with in the agreement.

 

Note 8.

Subsequent Events

                           

·	Anthony Hayes, Chief Executive Officer and Director – 100,000 shares, vesting immediately;

·	Edward Karr – 200,000 shares, vesting immediately;

·	Douglas Brown – 200,000 shares, vesting immediately;

·	Alexander Poltorak – 200,000 shares, vesting immediately; and

·	Robert Vander Zanden – 200,000 shares, vesting immediately.

 

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

 

·	managing current cash and cash equivalents on hand from our past equity offerings,

·	seeking additional funds raised through the sale of additional securities in the future, and

·	increasing revenue from the monetization of its patent portfolios, license fees, and new business ventures.

Should the Company be unsuccessful in its efforts to execute its business plan, it could become necessary for the Company to reduce expenses, curtail its operation or explore various alternative business opportunities or possibly suspend or discontinue its business activities.

 

 

 

 

 

 

 

 

3.1	Amended and Restated Certificate of Incorporation of Spherix Incorporated, filed on April 24, 2014 (incorporated by reference to Current Report on Form 8-K filed with the SEC on April 25, 2014)
4.1	Certificate of Elimination of Series B Convertible Preferred Stock, Series E Convertible Preferred Stock, and Series F Convertible Preferred Stock of Spherix Incorporated, dated April 22, 2014 (incorporated by reference to Current Report on Form 8-K filed with the SEC on April 25, 2014)
4.2	Certificate of Designation of Preferences, Rights and Limitations of Series J Convertible Preferred Stock of Spherix Incorporated, dated May 28, 2014 (incorporated by reference to Amendment to Current Report on Form 8-K/A filed with the SEC on June 2, 2014)
10.1	Form of Subscription Agreement, dated as of May 28, 2014 (incorporated by reference to Current Report on Form 8-K filed with the SEC on April 25, 2014)
10.2	Indemnification Agreement between Spherix Incorporated and Jeffrey Ballabon ( incorporated by reference to Current Report on Form 8-K filed with the SEC on June 13, 2014)

 

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

 

Spherix Incorporated (Registrant)
Date:  August 13, 2014	By: /s/ Anthony Hayes Anthony Hayes Chief Executive Officer (Principal Executive Officer)
Date: August 13, 2014	By: /s/ Richard Cohen Richard Cohen Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)