Dominari (DOMH) - 2019 Q1 - Quarterly Report

FORM 10-Q Filing Information This section provides details on the Spherix Incorporated Form 10-Q filing for the period ended March 31, 2019, including registrant information and filer status Filing Details This chapter details the Spherix Incorporated Form 10-Q filing for Q1 2019, including registrant, filer status, and outstanding common stock - Filing Type: Quarterly Report (Form 10-Q) for the period ended March 31, 2019[2] - Registrant: SPHERIX INCORPORATED, incorporated in Delaware[2] Filer Status | Filer Status | Status | | :-------------------- | :----- | | Large Accelerated Filer | ☐ | | Accelerated Filer | ☐ | | Non-accelerated Filer | ☒ | | Smaller Reporting Company | ☒ | | Emerging Growth Company | ☐ | - As of May 13, 2019, there were 2,010,074 shares of common stock outstanding[5] Part I. Financial Information This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Spherix Incorporated Item 1. Financial Statements (Unaudited) This section presents Spherix Incorporated's unaudited condensed consolidated financial statements for Q1 2019, including balance sheets, statements of operations, equity, and cash flows Condensed Consolidated Balance Sheets Total assets and stockholders' equity decreased from December 31, 2018, to March 31, 2019, mainly due to reduced marketable securities and an accumulated deficit Condensed Consolidated Balance Sheet Highlights ($ in thousands) | Item | March 31, 2019 | December 31, 2018 | | :------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $446 | $22 | | Marketable securities | $1,256 | $2,700 | | Investments | $10,070 | $10,345 | | Total current assets | $1,867 | $2,905 | | Total assets | $11,937 | $13,251 | | Total current liabilities | $982 | $1,153 | | Total liabilities | $982 | $1,153 | | Total stockholders' equity | $10,955 | $12,098 | | Accumulated deficit | $(141,232) | $(140,083) | Condensed Consolidated Statements of Operations The company reported a net loss of $1.149 million for Q1 2019, an improvement from the prior year, driven by reduced operating expenses Condensed Consolidated Statements of Operations Highlights ($ in thousands) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Amortization of patent portfolio | $0 | $338 | | Compensation and related expenses | $181 | $355 | | Professional fees | $399 | $597 | | Acquisition costs | $11 | $145 | | Other selling, general and administrative | $122 | $142 | | Total operating expenses | $713 | $1,577 | | Loss from operations | $(713) | $(1,577) | | Other income (expenses), net | $92 | $(97) | | Change in fair value of investment | $(475) | $0 | | Change in fair value of warrant liabilities | $(53) | $188 | | Total other (expenses) income | $(436) | $91 | | Net loss | $(1,149) | $(1,486) | | Net loss per share, basic and diluted | $(0.57) | $(0.96) | | Weighted average shares outstanding | 2,010,025 | 1,549,481 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from December 31, 2018, to March 31, 2019, primarily due to the net loss incurred during the period Condensed Consolidated Statements of Changes in Stockholders' Equity Highlights ($ in thousands) | Item | Balance at Dec 31, 2018 | Stock-based compensation | Net loss | Balance at Mar 31, 2019 | | :--------------------------------- | :---------------------- | :----------------------- | :---------- | :---------------------- | | Additional paid-in-capital | $152,445 | $6 | $0 | $152,451 | | Accumulated deficit | $(140,083) | $0 | $(1,149) | $(141,232) | | Total stockholders' equity | $12,098 | $6 | $(1,149) | $10,955 | | Item | Balance at Dec 31, 2017 | Issuance common stock | Stock-based compensation | Cumulative effect of ASC 606 | Net loss | Balance at Mar 31, 2018 | | :--------------------------------- | :---------------------- | :-------------------- | :----------------------- | :--------------------------- | :---------- | :---------------------- | | Additional paid-in-capital | $149,425 | $2,700 | $188 | $0 | $0 | $152,313 | | Accumulated deficit | $(145,055) | $0 | $0 | $3,245 | $(1,486) | $(143,296) | | Total stockholders' equity | $4,106 | $2,700 | $188 | $3,245 | $(1,486) | $8,753 | Condensed Consolidated Statements of Cash Flows Net cash increased in Q1 2019, primarily from investing activities, despite ongoing cash usage in operating activities Condensed Consolidated Statements of Cash Flows Highlights ($ in thousands) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(896) | $(1,076) | | Net cash provided by (used in) investing activities | $1,320 | $(1,758) | | Net cash provided by financing activities | $0 | $2,700 | | Net increase (decrease) in cash and cash equivalents | $424 | $(134) | | Cash and cash equivalents, beginning of period | $22 | $197 | | Cash and cash equivalents, end of period | $446 | $63 | Notes to the Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed information on Spherix's organization, accounting policies, liquidity, investments, and subsequent events, contextualizing the financial statements Note 1. Organization and Description of Business Spherix transitioned to technology development, focusing on biotech and blockchain, with recent events including a reverse stock split and a restructured CBM merger - Company's business focus has transitioned from scientific research and IP monetization to technology development, specifically in biotechnology and blockchain research, since Q4 2017[23][24][25] - On May 10, 2019, the Company effected a reverse stock split of its common stock at a ratio of one-for-4.25[26] - The proposed merger with CBM BioPharma, Inc. (CBM) from October 2018 was restructured on May 15, 2019, into an Asset Purchase Agreement, terminating the original merger agreement[27][78][79] Note 2. Liquidity and Financial Condition Spherix faces substantial doubt about its going concern ability due to recurring losses, planning to finance operations through existing cash, future sales, and new ventures - The Company continues to incur ongoing administrative and other expenses in excess of revenue[34] - Financing strategies include managing current cash, seeking additional funds through security sales, credit facilities, and increasing revenue from patent portfolios and new business ventures[34] - Working capital amounted to approximately $0.9 million at March 31, 2019[35] - Due to recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company's ability to continue as a going concern within one year[36] Note 3. Summary of Significant Accounting Policies Financial statements adhere to US GAAP, with key policies covering estimates, net loss per share, and new accounting standards, none materially impacting the financials - Unaudited condensed consolidated financial statements are prepared in accordance with US GAAP for interim financial information and SEC regulations[38] - Significant estimates and assumptions include the valuation of investments and the valuation allowance related to deferred tax assets[39] - The adoption of ASU No. 2016-02 (Leases), ASU 2017-11 (Earnings Per Share), and ASU 2018-07 (Compensation-Stock Compensation) on January 1, 2019, did not have a material impact on the Company's condensed consolidated financial statements[46][49][50] Securities Potentially Diluting Loss Per Share (in thousands) | Item | As of March 31, 2019 | As of March 31, 2018 | | :--------------------------------- | :------------------- | :------------------- | | Convertible preferred stock | 688 | 688 | | Warrants to purchase common stock | 285,273 | 294,072 | | Options to purchase common stock | 109,387 | 112,630 | | Total | 395,348 | 407,390 | Note 4. Investments in Marketable Securities The company reported a net gain from marketable securities in Q1 2019, driven by unrealized gains, contrasting with a prior-year net loss Marketable Securities Performance ($ in thousands) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------- | :-------------------------------- | :-------------------------------- | | Realized gain (loss) | $(73) | $(99) | | Unrealized gain (loss) | $148 | $(58) | | Dividend income | $17 | $33 | | Total | $92 | $(124) | Note 5. Investment in Hoth Therapeutics, Inc. Spherix's investment in Hoth Therapeutics was valued at $8.9 million as of March 31, 2019, following Hoth's IPO and additional share purchases - Hoth Therapeutics, Inc. (Hoth) closed its initial public offering (IPO) on February 20, 2019, with shares offered at $5.60 per share[52] - The Company purchased 35,714 shares of Hoth's common stock for $0.2 million in February 2019[53] - As of March 31, 2019, the Company owned 1,735,714 shares of Hoth common stock with a fair value of $8.9 million (based on a closing price of $5.15)[54] Note 6. Fair Value of Financial Assets and Liabilities Spherix measures financial assets and liabilities using a three-level hierarchy, reclassifying Hoth investment to Level 1 post-IPO, while warrant liabilities remain Level 3 - The Company uses a three-level hierarchy (Level 1, 2, 3) for fair value measurements, prioritizing observable inputs[55][56][59] - Due to Hoth's IPO in February 2019, the Company's investment in Hoth was transferred from Level 3 to Level 1 during the three months ended March 31, 2019[60] - Warrant liabilities are classified as Level 3 financial liabilities and are valued using the Black-Scholes valuation model, incorporating factors like stock price, contractual terms, maturity, risk-free rates, and volatility[61][63] Fair Value of Assets and Liabilities ($ in thousands) | Item | Total at Mar 31, 2019 | Level 1 | Level 2 | Level 3 | | :---------------------------------------- | :-------------------- | :------ | :------ | :------ | | Marketable securities | $1,256 | $1,256 | $0 | $0 | | Investments in Hoth | $8,939 | $8,939 | $0 | $0 | | Fair value of warrant liabilities | $135 | $0 | $0 | $135 | | Item | Total at Dec 31, 2018 | Level 1 | Level 2 | Level 3 | | :---------------------------------------- | :-------------------- | :------ | :------ | :------ | | Marketable securities | $2,700 | $2,700 | $0 | $0 | | Investments in Hoth | $9,214 | $0 | $0 | $9,214 | | Fair value of warrant liabilities | $82 | $0 | $0 | $82 | Changes in Fair Value of Level 3 Financial Liabilities ($ in thousands) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $82 | $822 | | Fair value adjustment of warrant liabilities | $53 | $(188) | | Ending balance | $135 | $634 | Note 7. Stockholders' Equity and Convertible Preferred Stock This note details changes in outstanding warrants and stock options, and a significant year-over-year decline in stock-based compensation expense Warrant Activity (Three Months Ended March 31, 2019) | Item | Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | | :--------------------------------- | :------- | :------------------------------ | :----------------------------------------------------- | | Outstanding as of December 31, 2018 | 294,072 | $38.15 | 1.92 | | Expired | (8,799) | — | — | | Outstanding as of March 31, 2019 | 285,273 | $24.63 | 1.67 | Stock Option Activity (Three Months Ended March 31, 2019) | Item | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | | :--------------------------------- | :--------------- | :------------------------------ | :----------------------------------------------------- | | Outstanding as of December 31, 2018 | 124,381 | $209.22 | 4.8 | | Employee options expired | (14,994) | — | — | | Outstanding as of March 31, 2019 | 109,387 | $173.51 | 5.2 | Stock-based Compensation Expense ($ in thousands) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Non-employee restricted stock awards | $0 | $80 | | Employee stock option awards | $6 | $108 | | Total compensation expense | $6 | $188 | Note 8. Commitments and Contingencies Spherix has short-term office lease commitments and no pending material legal claims or counterclaims as of the report date - The Company leases office space on a month-to-month basis in New York, NY, and Longview, TX, and terminated a lease in Williamsburg, VA, on April 30, 2019[72] - Rent expense for the three months ended March 31, 2019 and 2018 was approximately $21,000 and $22,000, respectively[72] - The Company knows of no pending material claims or legal matters against it as of the date of this report, nor are there any counterclaims pending[73][74] Note 9. Subsequent Events Subsequent events include a reverse stock split, a share purchase agreement for CBM and DatChat securities, and the restructuring of the CBM merger into an $8 million asset purchase agreement - On May 10, 2019, the Company effected a reverse stock split (one-for-4.25) of its outstanding common stock[76] - On May 15, 2019, the Company entered into a Share Purchase Agreement to acquire 50,000 shares of CBM and various securities/rights of DatChat for an aggregate of $350,000[77] - On May 15, 2019, the proposed merger with CBM was restructured into an Asset Purchase Agreement (APA), where the Company agreed to purchase CBM's assets for an aggregate consideration of $8,000,000 (comprising $7,000,000 in stock and $1,000,000 in cash)[78][82] - The CBM Merger Agreement was terminated, and all termination fees were waived in connection with the APA[79][83] - The Asset Acquisition is subject to various closing conditions, including governmental, third-party, and shareholder approvals, and the absence of adverse legal actions or material adverse effects[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Spherix's financial condition and operations, highlighting its strategic shift, investment activities, Q1 2019 performance, and liquidity challenges Overview Spherix transitioned to technology development, focusing on biotech and blockchain, with recent investments in Hoth and DatChat, and a restructured CBM merger - The Company is a technology development company, having shifted focus from IP monetization since Q4 2017[89][91] - Key investments include Hoth Therapeutics, Inc. (19% ownership post-IPO) and a recent Share Purchase Agreement for CBM BioPharma, Inc. and DatChat securities[91][92][95] - The proposed merger with CBM BioPharma was restructured into an Asset Purchase Agreement on May 15, 2019, for $8 million consideration (stock and cash), terminating the original merger agreement[96][97] - A reverse stock split (one-for-4.25) was effected on May 10, 2019[104] Results of Operations Spherix significantly reduced its operating loss in Q1 2019 due to lower operating expenses, though total other expenses increased from changes in fair value - Loss from operations decreased to approximately $0.7 million for the three months ended March 31, 2019, from $1.6 million in the prior-year period[105] - The decrease in operating loss was primarily attributed to reductions in amortization of patent portfolio ($0.3 million), professional fees ($0.2 million), acquisition costs ($0.1 million), and compensation expenses ($0.2 million)[105] - Other expenses increased to approximately $0.4 million in Q1 2019, compared to $91,000 of other income in Q1 2018, mainly due to a $0.5 million decrease in the change in fair value of warrant liabilities and investments[106] Liquidity and Capital Resources Spherix faces going concern doubt due to recurring losses, planning to fund operations via existing cash, future financings, and revenue growth, with positive investing cash flow in Q1 2019 - The Company's working capital was approximately $0.9 million at March 31, 2019[108] - Substantial doubt exists about the Company's ability to continue as a going concern due to recurring operating losses, net operating cash flow deficits, and an accumulated deficit[110] Cash Flow Summary ($ in thousands) | Cash Flow Type | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(896) | $(1,076) | | Net cash provided by (used in) investing activities | $1,320 | $(1,758) | | Net cash provided by financing activities | $0 | $2,700 | - Cash provided by investing activities in Q1 2019 was primarily from the sale of marketable securities ($4.4 million), partially offset by purchases ($2.8 million)[112] Off-balance sheet arrangements. The company reported no off-balance sheet arrangements - The Company has no off-balance sheet arrangements[115] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Spherix Incorporated is not required to provide market risk disclosures - Not required for smaller reporting companies[116] Item 4. Controls and Procedures Disclosure controls were ineffective as of March 31, 2019, due to material weaknesses in internal controls, with no material changes during the quarter - Management concluded that disclosure controls and procedures were not effective as of March 31, 2019[119] - Material weaknesses identified include a lack of segregation of duties and insufficient controls to ensure all material transactions and developments impacting financial statements are reflected[119] - No changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2019, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[120] Part II. Other Information This part covers legal proceedings, risk factors, equity sales, other information, and exhibits for Spherix Incorporated Item 1. Legal Proceedings Spherix has no pending material claims or legal matters against it, nor any pending counterclaims, as of the report date - The Company knows of no pending material claims or legal matters against it as of the date of this report[122] - Currently, there are no counterclaims pending against the Company[123] Item 1A. Risk Factors Investing in Spherix common stock involves significant risks, including strategic alternative uncertainties, acquisition integration challenges, and potential dilution - The Company is exploring strategic alternatives, but there is no assurance of success in identifying or completing any transaction, or that it will yield additional shareholder value[125][126] - Risks associated with integrating future acquisitions, such as Hoth Therapeutics and the CBM Asset Acquisition, include unforeseen operating difficulties, failure to realize expected synergies, and diversion of management attention[127][128][132] - Current stockholders will experience reduced ownership and voting interest after the CBM Asset Acquisition due to the issuance of common stock to CBM shareholders[133][134] - The CBM Asset Acquisition is subject to various closing conditions, and failure to complete or delays in consummation could negatively impact the stock price and future business operations[135][136] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[137] Item 5. Other Information This section reiterates details of the Share Purchase Agreement and the restructured CBM merger into an Asset Purchase Agreement - On May 15, 2019, the Company agreed to purchase 50,000 shares of CBM and certain securities/rights of DatChat for an aggregate of $350,000 via a Share Purchase Agreement[138] - On May 15, 2019, the proposed merger with CBM was restructured into an Asset Purchase Agreement, involving the purchase of CBM's assets, including license agreements and contracts[139] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including key agreements, certifications, and XBRL documents - Exhibits include the Asset Purchase Agreement (May 15, 2019), Form of Share Purchase Agreement (May 15, 2019), Certifications of Principal Executive and Financial Officers (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL Instance, Schema, Calculation, Definition, and Label Linkbase Documents[141] Signatures The report was duly signed on behalf of Spherix Incorporated by its Chief Executive Officer, Anthony Hayes, on May 15, 2019 - The report was signed by Anthony Hayes, Chief Executive Officer (also Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) on May 15, 2019[144]