Dominari Holdings Inc. annual report, FY2019

Filing overview

Issuer identification: The supplied filing is Spherix Incorporated’s Form 10-K, not a filing identified as Dominari Holdings Inc. It covers the fiscal year ended December 31, 2019, with 2018 comparatives; the 10-K was signed January 31, 2020. Spherix traded as SPEX on Nasdaq.

Spherix had shifted from patent monetization toward biotechnology development. On December 5, 2019, it acquired CBM BioPharma assets and university license rights, including preclinical cancer drug candidates. The company reported three full-time employees at year-end.

Financial results and liquidity

Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.

At December 31, 2019, current assets were $1.129 million, including $857,000 of marketable securities; current liabilities were $750,000, leaving working capital of approximately $379,000. Total liabilities were $750,000. The balance sheet lists no borrowings or other debt. Total assets were $11.282 million, including $10.128 million in Hoth Therapeutics shares; total stockholders’ equity was $10.532 million. Margins are not meaningful given negligible revenue and ongoing development-stage losses.

Investing activities provided $1.256 million in 2019, principally reflecting net marketable-securities sales. Financing activities provided $1.835 million, including approximately $1.0 million net proceeds from the ATM offering and $787,000 from an equity and prefunded-warrant financing. Common shares outstanding increased from 2,010,025 at year-end 2018 to 4,825,549 at year-end 2019.

Changes versus prior year

• Operating loss narrowed to $5.685 million from $6.874 million. The filing attributes the improvement mainly to lower patent amortization and impairment charges, partly offset by $2.5 million of research and development expense associated with acquired licenses.
• Results moved from 2018 net income of $1.727 million to a 2019 net loss of $4.183 million. The filing reports lower gains from changes in investment fair value in 2019; those noncash valuation movements materially affected the comparison.
• Research and development expense rose from zero to $2.522 million, including the CBM intellectual-property acquisition. The acquisition was treated as an asset acquisition, and its approximately $2.5 million cost was expensed because the acquired intellectual property had not received regulatory approval.
• The 2019 CBM transaction issued 1,939,058 shares. The agreement also provides for $1 million cash consideration upon a qualifying equity financing exceeding $2 million, with financing proceeds above that threshold and subsequent equity proceeds directed to CBM until the amount is paid.
• Spherix distributed approximately 100,000 Hoth shares to its stockholders in 2019; the filing records a $1.698 million reduction in equity for the distribution.

Outlook, risks and unusual items

• Going concern: The auditor’s report includes a substantial-doubt paragraph. Management said research and development will require funding beyond available resources, expected no product revenue during development, and stated there was substantial doubt about the company’s ability to continue as a going concern within one year of the filing. Additional financing may not be available on acceptable terms, or at all.
• Development outlook: The company’s stated pipeline includes pancreatic cancer, acute myeloid leukemia (AML) and acute lymphoblastic leukemia (ALL) candidates. Management described the compounds as preclinical. The filing says Spherix planned to seek an IND for DHA-dFdC and hoped to begin human testing in 2021, without assurance of meeting that target. It expected product revenue, if any, only after several years.
• Commercial and regulatory risks: Candidates had not reached clinical development or marketing approval. Clinical safety and efficacy, funding, regulatory review, intellectual-property protection, partnerships, manufacturing, reimbursement and competition all pose material uncertainties. The company said it lacked sales, marketing and manufacturing capabilities and did not have product-liability insurance.
• Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end 2019, citing inadequate segregation of duties, insufficient controls to capture material transactions and developments, and lack of written control documentation. The auditor did not provide an internal-control opinion.
• Strategic alternatives: Management and the board had begun reviewing alternatives, potentially including a sale, merger, asset divestiture, collaboration, acquisition or recapitalization; no outcome was assured.
• Potential disclosure inconsistencies: The filing describes the pipeline chiefly as pancreatic cancer, AML and ALL, but elsewhere says DHA-dFdC development would focus on prostate cancer. The MD&A also describes a DatChat investment loss and Hoth unrealized loss, while the financial statements report a positive $1.406 million change in fair value of investments for 2019. These descriptions do not clearly reconcile.

Key facts investors should verify

• Confirm issuer identity and ticker: this source is Spherix Incorporated (SPEX), not Dominari Holdings Inc.
• Review the going-concern disclosure, cash runway, near-term obligations and the availability and terms of additional financing.
• Verify the CBM purchase accounting and the contingent $1 million payment and financing-proceeds waterfall.
• Reconcile the investment fair-value discussion, especially Hoth and DatChat, to the audited statements and notes.
• Clarify which indication is the intended lead focus for DHA-dFdC and check subsequent progress toward IND filing and clinical testing.
• Assess dilution and ownership effects from the CBM share issuance, 2019 financing, potential warrants and options, and any further capital raises.
• Track remediation of the disclosed internal-control weaknesses and confirm whether controls were subsequently judged effective.