Dominari Holdings Inc. - Quarter Report: 2014 March (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 May 14, 2014
Common Stock, $0.0001 par value		12,269,812 shares

		Page No.
Part I.  Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2014 and 2013	3
	Notes to the Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
Part II.  Other Information
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosure	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

 

 

 

		March 31, 2014				December 31,
		(Unaudited)				2013
ASSETS
Current assets
Cash and cash equivalents		$	4,503			$	3,125
Prepaid expenses and other assets			107				151
Total current assets			4,610				3,276
Patent portfolios, net of accumulated amortization of $2,695 and $267			62,407				64,835
Goodwill			1,712				1,712
Deposit			30				30
Total assets		$	68,759			$	69,853
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	1,039			$	270
Accrued salaries and benefits			77				233
Accrued patent cost			-				1,000
Warrrant liability			8				48
Total liabilities			1,124				1,551
Series I redeemable preferred stock, $0.0001 par value; 119,760 shares issued and outstanding; liquidation preference of $167 per share			20,000				20,000
Commitments and contingencies
Stockholders' equity
Preferred Stock, $0.0001 par value, 50,000,000 shares and 5,000,000 shares authorized at March 31, 2014 and December 31, 2013, respectively
Series A: no shares issued and outstanding, at March 31, 2014 and December 31, 2013; liquidation preference $0.0001 per share			-				-
Convertible preferred stock：
Series B: 1 share issued and outstanding at March 31, 2014 and December 31, 2013; liquidation preference $0.0001 per share			-				-
Series C: 1 shares issued and outstanding at March 31, 2014 and December 31, 2013 ; liquidation preference $0.0001 per share			-				-
Series D: 18,000 shares issued and outstanding at March 31, 2014, and 1,227,582 shares issued and outstanding at December 31, 2013; liquidation value of $0.0001  per share			-				-
Series D-1: 945,139 shares issued and outstanding at March 31, 2014, and 59,265 shares issued and outstanding, at December 31, 2013; liquidation value of $0.0001  per share			-				-
Series E: no shares issued and outstanding, at March 31, 2014 and December 31, 2013; liquidation preference $0.0001 per share			-				-
Series F: no shares issued and outstanding, at March 31, 2014 and December 31, 2013; liquidation preference $0.0001 per share			-				-
Series F-1: 156,250 shares issued and outstanding at March 31,2014, and 156,250 shares issued and outstanding, at December 31, 2013; liquidation preference $0.0001 per share			-				-
Series H: 459,043 shares issued and outstanding at March 31, 2014, and 459,043 shares issued and outstanding at December 31, 2013; liquidation preference $83.50 per share			-				-
Common stock, $0.0001 par value, 200,000,000 shares and 50,000,000 shares authorized at March 31, 2014 and December 31, 2013, respectively; 8,206,335 shares and 3,770,113 shares issued at at March 31, 2014 and December 31, 2013, respectively; 8,196,107 and 3,769,712 shares outstanding at March 31, 2014 and December 31, 2013, respectively			1				-
Additional paid-in-capital			109,137				102,043
Treasury stock, at cost, 228 shares at March 31, 2014 and 401 shares at December 31, 2013, respectively			(264	)			(465	)
Accumulated deficit			(61,239	)			(53,276	)
Total stockholders' equity			47,635				48,302
Total liabilities and stockholders' equity		$	68,759			$	69,853

See accompanying notes to condensed consolidated financial statements

 

 

 

Note 1.

Organization and Description of Business

On April 23, 2014, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating the Series B Convertible Preferred Stock, Series E Convertible Preferred Stock and Series F Convertible Preferred Stock and returning them to authorized but undesignated shares of preferred stock. No shares of the foregoing series of preferred stock were outstanding.

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.

As a result of the Company’s recurring operating losses and net operating cash flow deficits, there is substantial doubt about the Company’s ability to continue as a going concern.  The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any 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.

(Unaudited)

 

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

"Patents" includes the cost of patents or patent rights (hereinafter, collectively “patents”), acquired from third-parties or acquired in connection with business combinations.  Patent acquisition costs are amortized utilizing the straight-line method over their remaining economic useful lives, ranging from one to ten years. Certain patent application and prosecution costs incurred to secure additional patent claims, that based on management’s estimates are deemed to be recoverable, are capitalized and amortized over the remaining estimated economic useful life of the related patent portfolio.

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. 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.

 

		For the three months ended March 31,
		2014				2013
Convertible preferred stock			16,773,275				229,341
Warrants to purchase common stock			775,021				75,757
Non-vested restricted stock awards			10,000				122,500
Options to purchase common stock			3,323,876				7,163
Total			20,882,172				434,761

 

Note 4.

Goodwill and Intangible Assets

 

 

		For the three months ended
		March 31, 2013
Revenues		$	53
Net loss		$	(3,810	)
Loss per share - basic and diluted		$	(5.51	)

 

Date Acquired and Description		Intangible Assets at December 31, 2013, net				Weighted Average Life (in years)				Amortization Expense for the Three Months Ended March 31, 2014				Amount Recorded as of March 31, 2014, net
7/24/13 - Rockstar patent portfolio		$	3,792				8.50			$	115			$	3,677
9/10/13 - North South patent portfolio			1,062				8.50				32				1,030
12/31/13 - Rockstar patent portfolio			59,981				6.50				2,281				57,700
		$	64,835							$	2,428			$	62,407

 

 

		Rockstar				North South				Rockstar
		Portfolio				Portfolio				Portfolio
		Acquired				Acquired				Acquired				Total
		July 24, 2013				September 10, 2013				December 13, 2013				Amortization
Nine Months Ended December 31, 2014			355				98				6,950				7,403
December 31, 2015			470				130				9,225				9,825
December 31, 2016			471				130				9,250				9,851
December 31, 2017			470				130				9,225				9,825
December 31, 2018			470				130				9,225				9,825
Thereafter			1,441				412				13,825				15,678
Total		$	3,677			$	1,030			$	57,700			$	62,407

 

Note 5.

Stockholders’ Equity

The Company had certificates of designation of ten separate series as summarized below as of March 31, 2014 and December 31, 2013:

		Number of Shares Issued
		and Outstanding as of
		March 31, 2014				December 31, 2013				Par Value				Conversion Ratio
Series "A"			-				-			$	0.0001				N/A
Series "B"			1				1				0.0001			4:1
Series "C"			1				1				0.0001			1:1
Series “D"			18,000				1,227,582				0.0001			10:1
Series “D-1"			945,139				59,265				0.0001			10:1
Series “E”			-				-				0.0001			1:1
Series “F"			-				-				0.0001			1:1
Series “F-1"			156,250				156,250				0.0001			1:1
Series “H"			459,043				459,043				0.0001			10:1
Series “I”			119,760				119,760				0.0001			20:1

The Company’s board of directors has designated 500,000 shares of its preferred stock as Series A Participating Preferred Stock (“Series A Preferred Stock”).

(Unaudited)

The Series B Convertible Preferred Stock is convertible at the option of the holder at any time into shares of the Company’s common stock at a conversion ratio determined by dividing the stated value of the convertible preferred stock, or $1,000, by a conversion price of $250 per share.  The conversion price is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar recapitalization transactions.  The conversion price may also be subject to adjustment if the Company issues rights, options or warrants to all holders of its common stock entitling them to subscribe for or purchase shares of its common stock at a price per share less than the daily volume weighted average price of its common stock, if the Company distributes evidence of its indebtedness or assets or rights or warrants to subscribe for or purchase any security to all holders of its common stock, or if the Company consummates a fundamental corporate transaction such as a merger or consolidation, sale or other disposition of all or substantially all of its assets, or an exchange or tender offer accepted by the holders of 50% or more of the Company’s outstanding common stock.  Subject to limited exceptions, a holder of shares of Series B Convertible Preferred Stock will not have the right to convert any portion of its Series B Convertible Preferred Stock if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion.  The Series B Convertible Preferred Stock is entitled to receive dividends (on an “as converted to common stock” basis) to and in the same form as dividends actually paid on shares of the Company’s common stock.  Except as required by law, holders of the Series B Convertible Preferred Stock are generally not entitled to voting rights.

(Unaudited)

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 (10) shares 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 the Company’s 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 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 the Company’s issued and outstanding common stock.  The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock dividends, splits and fundamental 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.

(Unaudited)

On December 31, 2013, the Company designated 459,043 shares of preferred stock as Series H Convertible Preferred Stock (“Series H Preferred Stock”).  On December 31, 2013, the Company issued approximately $38.3 million of Series H Preferred Stock (or 459,043 shares) to Rockstar.  Each share of Series H Preferred Stock is convertible into ten (10) shares of common stock and has a stated value of $83.50.  The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.  The Company is prohibited from effecting the conversion of the Series H Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99% (which may be increased to 9.99% and subsequently to 19.99%, each upon 61 days’ written notice), in the aggregate, of the Company’s issued and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series H Preferred Stock.  Holders of the Series H Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series H Preferred Stock are convertible, subject to applicable beneficial ownership limitations.  The Series H Preferred Stock provides a liquidation preference of $83.50 per share.  The shares of Series H Preferred Stock were not immediately convertible and did not possess any voting rights until such a time as the Company had obtained stockholder approval of the issuance, pursuant to NASDAQ Listing Rule 5635.   On April 16, 2014, the Company obtained the required shareholder approval pursuant to NASDAQ Listing Rule 5635 and, as a result, all outstanding shares of Series H Preferred Stock are convertible and possess voting rights in accordance with its terms. As of March 31, 2014 and December 31, 2013, 459,043 shares of Series H Preferred Stock were outstanding.

(Unaudited)

Additionally, in the event the Company consummates a Fundamental Transaction (as defined in the Certificate of Designation of Preferences, Rights and Limitations of Series I Convertible Preferred Stock), the Company shall be required to redeem such portion of the outstanding shares of Series I Preferred Stock as shall equal (i) 50% of the net proceeds of the Fundamental Transaction after deduction of the amount of net proceeds required to leave the Company with cash and cash equivalents on hand of $5.0 million and up until the net proceeds leave the Company with cash and cash equivalents on hand of $7.5 million and (ii) 100% of the net proceeds of the Fundamental Transaction thereafter.

 

The Company incurred aggregate costs associated with the Offering of approximately $572,000, and issued a five-year warrant to purchase 118,561 shares of Common Stock to the placement agent (Laidlaw and Company Ltd.) at an exercise price of $4.67 per share of Common Stock (the “Placement Agent Warrant”).  The Placement Agent Warrant is exercisable beginning on the six month anniversary of the date of issuance.

(Unaudited)

		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 March 31, 2014			775,021			$	5.85			$	-

Also on January 28, 2014, pursuant to and subject to the available number of shares reserved under the 2014 Plan, the Company issued non-qualified options with a term of five (5) years and an exercise price of $5.83 to the individuals below for the number of shares of Common Stock set forth opposite their respective names:

 

·	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

·	Robert Knie – 25,000, vesting immediately.

 

		For the Three Months ended March 31, 2014
Exercise price		$	4.29 - $5.83
Expected stock price volatility			80.5% - 90.6	%
Risk-free rate of interest			0.76% - 1.53	%
Term (years)			5.0 - 10.0

 

(Unaudited)

		Number of Shares				Weighted Average Exercise Price				Total Intrinsic Value				Weighted Average Remaining Contractual Life (in years)
Outstanding as of December 31, 2013			1,983,876			$	7.14			$	1,935,990				9.2
Employee options granted			1,310,000				5.73								5.2
Non-employee options exercised			-
Non-employee options cancelled			-
Outstanding as of March 31, 2014			3,293,876			$	6.58				-				7.5
Options vested and expected to vest			3,293,876				6.58				-				7.5
Options vested and exercisable			1,646,126			$	6.59			$	-				7.1

 

		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			-				-								-
Non-employee options exercised			-
Non-employee options cancelled			-
Outstanding as of March 31, 2014			30,000				7.08				-				9.0
Options vested and expected to vest			30,000				7.08				-				9.0
Options vested and exercisable			30,000			$	7.08			$	-				9.0

(Unaudited)

 

		Number of Units				Weighted Average Grant Day Fair Value
Nonvested at December 31, 2013			250			$	6.83
Granted			10,000				4.67
Vested			(250	)			4.67
Forfeited			-				-
Nonvested at March 31, 2014			10,000			$	4.74

		For the three months ended March 31,
		2014				2013
Employee restricted stock awards		$	2			$	3
Employee stock option awards			3,394				1
Total compensation expense		$	3,396			$	4

 

Note 6.

Related Party Transactions

Note 7.

Commitments and Contingencies

 

		Operating Lease
December 31, 2014		$	128
December 31, 2015			161
December 31, 2016			165
December 31, 2017			170
December 31, 2018			43
		$	667

 

 

 

 

Note 8.

Subsequent Events

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

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