Dominari (DOMH) - 2019 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements detail the company's financial position, operational results, equity changes, and cash flows for the reported periods Condensed Consolidated Balance Sheets Total assets and stockholders' equity decreased from December 2018 to June 2019, driven by lower marketable securities and a larger accumulated deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $564 | $17 | | Marketable securities | $817 | $2,700 | | Total current assets | $1,487 | $2,905 | | Investments | $10,565 | $10,345 | | Total assets | $12,052 | $13,251 | | Total current liabilities | $845 | $1,153 | | Total liabilities | $845 | $1,153 | | Total stockholders' equity | $11,207 | $12,098 | | Accumulated deficit | $(141,876) | $(140,083) | Condensed Consolidated Statements of Operations The company reported a net loss for the three and six-month periods, with lower operating expenses offset by a significant reduction in other income Condensed Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total operating expenses | $888 | $1,262 | $1,601 | $2,839 | | Loss from operations | $(888) | $(1,262) | $(1,601) | $(2,839) | | Total other income (expense) | $244 | $864 | $(192) | $955 | | Net income (loss) | $(644) | $(398) | $(1,793) | $(1,884) | | Net income (loss) per share, basic & diluted | $(0.30) | $(0.20) | $(0.87) | $(1.06) | | Weighted average shares outstanding | 2,124,631 | 2,008,382 | 2,067,645 | 1,780,199 | - Operating expenses decreased for both the three-month and six-month periods ended June 30, 2019, primarily due to reduced amortization of patent portfolio and compensation expenses[14] - Other income significantly decreased for both periods, mainly due to a decrease in the change in fair value of investments and warrant liabilities[14] Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased to $11.207 million at June 30, 2019, primarily due to the net loss incurred, partially offset by new capital from stock issuance Changes in Stockholders' Equity Highlights (in thousands) | Metric | December 31, 2018 | June 30, 2019 | | :--- | :--- | :--- | | Balance at period start | $12,098 | $12,098 | | Issuance of common stock | - | $787 | | Stock-based compensation | - | $109 | | Net income (loss) | - | $(644) | | Balance at period end | $12,098 | $11,207 | - The company issued 221,000 shares of common stock and prefunded common stock warrants, generating $787 thousand in additional paid-in capital during the six months ended June 30, 2019[18][19] Condensed Consolidated Statements of Cash Flows The company saw a net increase in cash, driven by proceeds from marketable securities sales and financing activities, which offset cash used in operations Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,614) | $(1,750) | | Net cash provided by (used in) investing activities | $1,374 | $(969) | | Net cash provided by financing activities | $787 | $2,700 | | Net increase (decrease) in cash | $547 | $(19) | | Cash and cash equivalents, end of period | $564 | $178 | - Cash from investing activities shifted from a net use of $969 thousand in 2018 to a net provision of $1,374 thousand in 2019, primarily due to increased sales of marketable securities[24] - Cash from financing activities decreased from $2,700 thousand in 2018 to $787 thousand in 2019[24] Notes to the Condensed Consolidated Financial Statements (Unaudited) These notes detail the company's business transition, corporate actions, accounting policies, and financial instrument valuations Note 1. Organization and Description of Business Spherix has transitioned from patent monetization to technology development, focusing on biotechnology and blockchain investments and acquisitions - The company, incorporated in 1967, has transitioned from drug development and patent monetization to a technology development focus since Q4 2017[27][28][29] - Current efforts are concentrated on biotechnology research (investments in Hoth Therapeutics Inc and proposed CBM BioPharma, Inc acquisition) and blockchain technology research[29] Reverse Stock Split The company executed a one-for-4.25 reverse stock split on May 10, 2019, with all share and price data adjusted accordingly - A one-for-4.25 reverse stock split was effective on May 10, 2019, with fractional shares rounded up[30] CBM Asset Acquisition The company restructured its proposed merger with CBM into an $8.0 million Asset Purchase Agreement, funded by stock and contingent cash - On May 15, 2019, Spherix purchased 50,000 shares of CBM for $350,000 and entered into an Asset Purchase Agreement (APA) with CBM, terminating the previous merger agreement[31] - The aggregate consideration for the APA is $8.0 million, consisting of $7.0 million in common stock (based on $3.61 per share) and $1.0 million in cash[32] - The $1.0 million cash consideration is payable to CBM upon the company's first qualified financing exceeding $2.0 million, with CBM receiving proceeds in excess of the first $2.0 million[32] - The transaction is subject to governmental and third-party approvals, as well as shareholder approval, and may be terminated if conditions are not met by September 30, 2019[33] Note 2. Liquidity and Financial Condition Recurring operating losses and cash deficits raise substantial doubt about the company's ability to continue as a going concern - The company continues to incur operating losses and net operating cash flow deficits, raising substantial doubt about its ability to continue as a going concern within one year[38] - Financing strategies include managing current cash, seeking additional funds through security sales, credit facilities, and increasing revenue from patent portfolios and new ventures[34][35] - Working capital was approximately $0.6 million at June 30, 2019[37] Note 3. Summary of Significant Accounting Policies This note outlines the basis of presentation, use of estimates, and impact of recently adopted accounting standards on the financial statements Basis of Presentation and Principles of Consolidation The unaudited interim financial statements are prepared in accordance with U.S. GAAP and SEC instructions, including all subsidiaries - Financial statements are prepared in accordance with U.S. GAAP for interim information and SEC Form 10-Q instructions[40] - All material intercompany balances and transactions have been eliminated[39] Use of Estimates Financial statement preparation requires management to make significant estimates, particularly for valuing investments and deferred tax assets - Significant estimates include the valuation of investments and the valuation allowance related to deferred tax assets[41] Significant Accounting Policies No material changes have been made to the company's significant accounting policies since its last annual report on Form 10-K - No material changes to significant accounting policies other than those described in the notes, compared to the annual report on Form 10-K filed March 12, 2019[42] Net Income Loss per Share Basic loss per share is based on weighted average shares, while diluted loss per share excludes anti-dilutive securities - Diluted loss per share excludes shares from convertible preferred stock, warrants, and stock options if their effect is anti-dilutive[45] Securities Potentially Diluting Loss Per Share (Shares) | Security Type | June 30, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Convertible preferred stock | 688 | 688 | | Warrants to purchase common stock | 285,273 | 294,072 | | Options to purchase common stock | 100,407 | 124,396 | | Total | 386,368 | 419,156 | Recently Issued Accounting Standards The upcoming accounting standard on fair value measurement is not expected to have a material impact on the company's financial statements - ASU 2018-13 (Fair Value Measurement) is effective for fiscal years beginning after December 15, 2019, and is not expected to have a material impact[49] Recently Adopted Accounting Standards The adoption of new standards for leases, earnings per share, and stock compensation on January 1, 2019, had no material impact - ASU No. 2016-02 (Leases) adopted on January 1, 2019, had no material impact due to the absence of long-term leases[50] - ASU 2017-11 (Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging) adopted on January 1, 2019, had no impact[51] - ASU 2018-07 (Compensation-Stock Compensation) adopted on January 1, 2019, had no impact[52] Note 4. Investments in Marketable Securities The company reported net losses from marketable securities for the three and six months ended June 30, 2019, driven by realized losses Marketable Securities Performance (in thousands) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Realized gain (loss) | $(25) | $(177) | $(98) | $(275) | | Unrealized gain (loss) | $(10) | $41 | $138 | $(17) | | Dividend income | $7 | $44 | $24 | $78 | | Total | $(28) | $(92) | $64 | $(214) | Note 5. Investment in Hoth Therapeutics, Inc. The company's investment in Hoth Therapeutics, Inc. is recorded at a fair value of $10.084 million as of June 30, 2019 - The company's investment in Hoth Therapeutics, Inc. is valued at fair value[56] - Hoth closed its IPO on February 20, 2019, at $5.60 per share[56] Investment in Hoth Therapeutics, Inc. (June 30, 2019) | Security Name | Shares Owned | Fair Value per Share | Fair Value (in thousands) | | :--- | :--- | :--- | :--- | | HOTH | 1,735,714 | $5.81 | $10,084 | Note 6. Fair Value of Financial Assets and Liabilities Financial assets and liabilities are measured at fair value using a three-level hierarchy, with most assets classified as Level 1 - Financial instruments are measured at fair value using a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[57][58] - Due to Hoth's IPO in February 2019, the investment in Hoth was transferred from Level 3 to Level 1 during the six months ended June 30, 2019[63] Fair Value of Financial Assets and Liabilities (in thousands) | Asset/Liability | Total at June 30, 2019 | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Marketable securities - mutual and exchange traded funds | $817 | $817 | $- | $- | | Investments in Hoth | $10,084 | $10,084 | $- | $- | | Fair value of warrant liabilities | $8 | $- | $- | $8 | | Asset/Liability | Total at Dec 31, 2018 | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Marketable securities - mutual and exchange traded funds | $2,700 | $2,700 | $- | $- | | Investments in Hoth | $9,214 | $- | $- | $9,214 | | Fair value of warrant liabilities | $82 | $- | $- | $82 | Level 3 Valuation Techniques - Liabilities Level 3 warrant liabilities are valued using the Black-Scholes model, which incorporates significant unobservable inputs like volatility - Warrant liabilities are categorized as Level 3 and valued using the Black-Scholes model[64][66] - Key unobservable inputs include risk-free interest rate (1.75%-1.92% at June 30, 2019), expected volatility (67.11%-100.00%), and contractual life (1.44-2.00 years)[67] Changes in Fair Value of Level 3 Financial Liabilities (in thousands) | Metric | June 30, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Beginning balance | $82 | $822 | | Fair value adjustment of warrant liabilities | $(74) | $(465) | | Ending balance | $8 | $357 | Note 7. Stockholders' Equity and Convertible Preferred Stock This note details changes in common stock, warrants, and stock options, including a financing that generated $787 thousand in net proceeds Common Stock The company completed a registered common stock and warrant financing in May 2019, raising approximately $787 thousand in net proceeds - On May 29, 2019, the company sold 221,000 shares of common stock and pre-funded warrants for 86,692 shares, raising approximately $787 thousand in net proceeds[72] - An amendment on June 6, 2019, involved the exchange of 115,269 shares for an equal number of Penny Warrants to limit a purchaser's beneficial ownership[73] Warrants Warrant activity included issuances, exercises, and expirations, resulting in 318,606 warrants outstanding as of June 30, 2019 Warrant Activity (Six Months Ended June 30, 2019) | Metric | Warrants | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding as of December 31, 2018 | 294,072 | $38.15 | | Issued | 235,294 | - | | Exercised | (201,961) | - | | Expired | (8,799) | $476.66 | | Outstanding as of June 30, 2019 | 318,606 | $22.05 | - The company issued three warrants, each exercisable for 33,333 common shares at a $0.01 strike price, to a consultant, resulting in $0.1 million in stock-based compensation[75] Stock Options As of June 30, 2019, 100,407 stock options were outstanding and exercisable following the expiration of employee and non-employee options Stock Option Activity (Six Months Ended June 30, 2019) | Metric | Number of Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding as of December 31, 2018 | 124,381 | $209.22 | | Employee options expired | (23,664) | $378.67 | | Non-employee options expired | (310) | $571.71 | | Outstanding as of June 30, 2019 | 100,407 | $169.21 | | Options vested and expected to vest | 100,407 | $169.21 | | Options vested and exercisable | 100,407 | $169.21 | Stock-based Compensation Total stock-based compensation expense was $109 thousand for the three months and $115 thousand for the six months ended June 30, 2019 Stock-based Compensation Expense (in thousands) | Component | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Employee restricted stock awards | $- | $27 | $- | $107 | | Employee stock option awards | $2 | $71 | $8 | $179 | | Non-employee warrant awards | $107 | $- | $107 | $- | | Total compensation expense | $109 | $98 | $115 | $286 | Note 8. Commitments and Contingencies The company currently has no pending material claims or legal matters against it - The company has no pending material claims or legal matters as of the report date[80] Legal Proceedings As of the report date, there are no pending material legal proceedings against the company - No pending material claims or legal matters against the company as of the report date[80] Note 9. Subsequent Events The company entered into an At The Market Offering Agreement to sell up to $1.2 million of common stock subsequent to the quarter end - On August 9, 2019, the company entered an At The Market Offering Agreement to sell up to $1.2 million in common stock through H.C. Wainwright & Co., LLC[81] - H.C. Wainwright & Co., LLC will receive a 3.0% commission on gross proceeds from each sale[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategic shift, financial performance, operating results, and liquidity challenges, including recurring losses and financing needs Overview Spherix has transitioned to a technology development company focused on biotechnology and blockchain, highlighted by its investments and a key asset acquisition - The company has transitioned from patent monetization to a technology development focus since Q4 2017, concentrating on biotechnology and blockchain research[86] - Investments include Hoth Therapeutics Inc (19% ownership post-IPO), DatChat, Inc (encrypted communication), and a proposed asset acquisition of CBM BioPharma, Inc (cancer treatments)[86][87][88] - The CBM asset acquisition involves $8.0 million in consideration ($7.0 million in stock, $1.0 million cash contingent on future financing) for patent rights related to AML, ALL, and pancreatic cancer treatments[89][91][92] Results of Operations Operating losses narrowed due to lower expenses, but a significant drop in other income resulted in a mixed net loss performance compared to the prior year Three months ended June 30, 2019 compared to three months ended June 30, 2018 The operating loss decreased to $0.9 million, but a sharp decline in other income led to a higher net loss of $0.6 million for the quarter - Loss from operations decreased by $0.4 million (from $1.3 million to $0.9 million) for the three months ended June 30, 2019, primarily due to a $0.3 million decrease in patent amortization and a $0.2 million decrease in compensation expenses[104] - Other income decreased by $0.7 million (from $0.9 million to $0.2 million), mainly due to a $0.5 million decrease in the change in fair value of investments, partially offset by a $0.2 million decrease in warrant liabilities[105] - Net loss increased to $0.6 million in 2019 from $0.4 million in 2018 for the three-month period[14] Six months ended June 30, 2019 compared to six months ended June 30, 2018 The operating loss decreased to $1.6 million, and despite a shift to other expense from other income, the net loss slightly improved to $1.8 million - Loss from operations decreased by $1.2 million (from $2.8 million to $1.6 million) for the six months ended June 30, 2019, due to reduced patent amortization ($0.7 million), compensation ($0.3 million), professional fees ($0.1 million), and acquisition costs ($0.1 million)[106] - Other income (expense) decreased by $1.2 million (from $1.0 million income to $(0.2) million expense), primarily due to a $1.0 million decrease in the change in fair value of investments and a $0.4 million decrease in warrant liabilities, partially offset by a $0.3 million decrease in other expenses[107] - Net loss for the six-month period was $1.8 million in 2019, a slight improvement from $1.9 million in 2018[14] Liquidity and Capital Resources Recurring operating losses raise substantial doubt about the company's ability to continue, necessitating future financing through equity or debt offerings - The company has recurring operating losses and net operating cash flow deficits, leading to substantial doubt about its ability to continue as a going concern[110] - Working capital was approximately $0.6 million at June 30, 2019[109] - Financing plans include managing current cash, seeking additional funds through security sales or debt, and increasing revenue from patent portfolios and new business ventures[108] Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating | $(1,614) | $(1,750) | | Net cash provided by (used in) investing | $1,374 | $(969) | | Net cash provided by financing | $787 | $2,700 | | Net increase (decrease) in cash | $547 | $(19) | | Cash and cash equivalents, end of period | $564 | $178 | Off-balance sheet arrangements The company has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[116] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Spherix Incorporated is not required to provide these disclosures - Not required for smaller reporting companies[117] Item 4. Controls and Procedures Disclosure controls and procedures were deemed ineffective due to material weaknesses in internal controls, including a lack of segregation of duties - Disclosure controls and procedures were not effective as of June 30, 2019, due to material weaknesses in internal controls over financial reporting[120] - Material weaknesses include a lack of segregation of duties and insufficient controls to ensure all material transactions are reflected in financial statements[120] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2019[121] Part II. Other Information Item 1. Legal Proceedings The company has no pending material legal claims or counterclaims against it as of the report date - The company has no pending material claims or legal matters against it as of the report date[123] - No counterclaims are currently pending against the company[124] Item 1A. Risk Factors Investing in the company's stock involves significant risks related to strategic alternatives, acquisition integration, and the CBM Asset Acquisition Strategic Alternatives and Acquisitions The company's exploration of strategic alternatives and future acquisitions carries significant uncertainty and integration risks - The company is exploring strategic alternatives (e.g., sale, merger, asset divestiture), with no assurance of success or value creation for shareholders[126][127] - Future acquisitions, like the stake in Hoth Therapeutics, Inc and the proposed CBM asset acquisition, may lead to unforeseen operating difficulties, significant expenditures, and diversion of management attention[128][130] - There is no guarantee of identifying suitable acquisition opportunities, consummating pending or future acquisitions, or realizing anticipated benefits[130] CBM Asset Acquisition Risks The CBM Asset Acquisition poses risks including integration challenges, shareholder dilution, and the potential for the transaction to be delayed or terminated - Successful integration of CBM's business and operations is crucial for realizing anticipated benefits, and failure could adversely affect business and financial performance[131] - Current stockholders will have a reduced ownership and voting interest in the post-acquisition company due to the issuance of shares to CBM shareholders[132][133] - Completion of the Asset Acquisition is subject to customary conditions, including stockholder approval, and failure to satisfy these conditions could lead to termination or delay, negatively impacting the stock price and future business[134][135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased CBM and DatChat securities for $350,000 and restructured the CBM merger into an Asset Purchase Agreement - On May 15, 2019, the company purchased 50,000 shares of CBM common stock and certain securities/rights of DatChat for an aggregate of $350,000[137] - The investment represents a 20% interest in CBM and includes a $300,000 senior convertible note, a warrant for 2,250,000 DatChat common shares, and various options related to DatChat[137][138] - The proposed merger with CBM was restructured into an Asset Purchase Agreement, where the company agreed to purchase CBM's assets, including license agreements and contracts[139] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate amendments, purchase agreements, and required certifications - Exhibits include Certificate of Amendment to the Certificate of Incorporation, Asset Purchase Agreements with CBM BioPharma, Inc, Share Purchase Agreement, Securities Purchase Agreements, and certifications (302 and 906) under the Sarbanes-Oxley Act[141] - XBRL Instance, Schema, Calculation, and Definition Linkbase Documents are also included[141] Signatures The report was duly signed on August 14, 2019, by the company's Chief Executive Officer on behalf of Spherix Incorporated - The report was signed by Anthony Hayes, Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer, on August 14, 2019[143][144]