Dominari Holdings Inc. (filing identifies registrant as Spherix Incorporated)
Filing and period: Form 10-Q for the quarter ended June 30, 2017, filed August 11, 2017. The supplied company metadata says Dominari Holdings Inc., but the filing itself is for Spherix Incorporated; verify the issuer identity before relying on this summary.
Business context and reporting period
Spherix describes itself as an intellectual-property monetization company, seeking revenue from patent licensing, settlements, litigation and related arrangements. Its reported revenue in these periods primarily reflects amortization of deferred revenue from two RPX patent-license agreements, rather than new licensing proceeds. Financial amounts below are in U.S. dollars; statement figures are generally in thousands unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $311,000 | $638,000 |
| Operating expenses | $1.088 million | $2.384 million |
| Operating loss | $777,000 | $1.746 million |
| Net loss | $1.860 million | $2.779 million |
| Loss per share, basic and diluted | $0.38 | $0.56 |
| Cash used in operating activities | Not separately reported for the quarter | $1.816 million |
- Balance sheet at June 30: cash and cash equivalents of $733,000; marketable securities of $2.920 million; current assets of $3.748 million; total assets of $8.723 million; and total liabilities of $6.197 million. Working capital was approximately $322,000.
- Liabilities and equity: current liabilities included $2.028 million of warrant liabilities and $1.073 million of short-term deferred revenue. Total deferred revenue was $3.844 million. The filing reports lease liabilities but no conventional borrowings or debt balance.
- Cash flows, six months: investing activities provided $2.439 million, primarily from net sales of marketable securities, including a $675,000 investment in Hoth Therapeutics. Financing activities used $24,000. Cash increased by $599,000 from year-end.
- Patent assets: net patent portfolios and rights were $4.270 million, down from $4.951 million at December 31, 2016, reflecting $681,000 of six-month amortization.
- Margins: the filing does not present a gross-profit measure; operating expenses substantially exceeded revenue.
Material changes versus the prior comparable period
- Revenue rose from $177,000 to $311,000 in the quarter and from $249,000 to $638,000 for the six-month period, largely from RPX deferred-revenue amortization.
- Operating loss narrowed from $1.622 million to $777,000 in the quarter and from $3.183 million to $1.746 million for six months. Management attributed this mainly to lower patent amortization following a 2016 impairment and reduced professional fees after cost-cutting.
- Warrant remeasurement was a significant adverse noncash item: the six-month change in warrant liabilities was $1.326 million of expense, versus $1.031 million of income in the prior-year period. The reported warrant liability increased to $2.028 million from $702,000 at year-end.
- Six-month net loss increased from $2.127 million to $2.779 million. The prior-year comparison is distorted by a one-time $31.480 million deemed capital contribution associated with cancellation of Series H preferred stock under the RPX transaction, which produced reported net income attributable to common stockholders in 2016.
- Cash from operations shifted from $1.804 million provided in the first half of 2016 to $1.816 million used in the first half of 2017, including a $618,000 decrease in deferred revenue.
Outlook, commentary, risks and unusual items
- Management said available funds were sufficient for operating requirements for at least the next 12 months, but also emphasized that the company needs successful patent monetization and may need additional financing. It cited approximately $144.5 million of accumulated deficit and approximately $2.8 million of six-month net loss.
- After quarter-end, the company completed a public offering of 1,250,000 shares at $2.00 each, raising $2.5 million gross and approximately $2.115 million net. The filing reports 6,229,898 shares outstanding as of August 9, 2017.
- The company said it could not assume future debt or equity financing would be available on favorable terms, or at all. It also warned that unsuccessful execution could require expense reductions, curtailed operations or suspension of business activities.
- Patent litigation outcomes are uncertain: patents may be challenged or invalidated, litigation may increase costs, and fee-shifting could expose the company to defendants’ legal costs. Under its Equitable monetization agreement, the company shares net monetization revenue equally; six litigations were described as pending in the notes. Several other matters had been settled, dismissed or otherwise closed, and the Uniden patent appeal was affirmed against the company in July 2017.
- The company invested $675,000 in Hoth Therapeutics, a development-stage biopharmaceutical company; the investment was valued at $675,000 at June 30 using Level 3 inputs.
- Management concluded that disclosure controls and procedures were ineffective at June 30, 2017, citing inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements. Remediation was being developed; the filing says no material changes to internal control over financial reporting occurred during the quarter.
- Potential future payments to Rockstar depend on recoveries from certain patent portfolios and could materially affect liquidity if monetization succeeds.
Important facts for investors to verify
- Confirm that this Spherix Incorporated filing is the intended filing for Dominari Holdings Inc.; the issuer names do not match.
- Review the July 2017 offering’s net proceeds, dilution and the resulting post-offering share count.
- Assess whether recurring cash generation can improve: current-period revenue was largely deferred-revenue amortization, while operating activities used $1.816 million in six months.
- Track warrant-liability fair-value changes and their effect on reported earnings; these are valuation-sensitive and not equivalent to operating cash flow.
- Monitor patent litigation, settlements, the Equitable revenue-sharing arrangement, and any resulting cash recoveries or obligations to Rockstar.
- Follow remediation of the disclosed material weakness in disclosure controls and procedures.