Dominari Holdings Inc. quarterly report, Q2 FY2016

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Business context and reporting period

This is Spherix Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Spherix describes itself as an intellectual-property monetization company focused on licensing, settlements and patent litigation. The request metadata names Dominari Holdings Inc.; that does not match the company identified in the filing and should be verified.

Financial performance and condition

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

  • Revenue: $177,000 for Q2 2016 and $249,000 for the first half, versus nominal revenue ($0 and $2,000, respectively) in the comparable 2015 periods. 2016 revenue was principally amortization of RPX license-related deferred revenue.
  • Operating results: Q2 operating loss was $1.622 million and first-half operating loss was $3.183 million. Net loss was $2.078 million for Q2 and $2.127 million for the first half. There is no meaningful operating margin given the low revenue and operating losses.
  • Reported common-stockholder result: Income attributable to common stockholders was $29.402 million for Q2 and $29.353 million for the first half, or basic EPS of $9.61 and $10.18. This was driven by a $31.480 million deemed capital contribution associated with cancellation of Series H preferred stock—not operating profitability. The filing’s statement of operations reports diluted EPS of $9.21 for Q2 and $9.32 for the first half.
  • Cash flow: First-half operating cash flow was positive $1.804 million, compared with negative $2.492 million in 2015. The 2016 inflow included a $4.126 million increase in deferred revenue and noncash adjustments; it should not be read as evidence of profitable operations. Investing cash flow was negative $2.310 million and financing cash flow positive $756,000. Cash increased by $250,000.
  • Liquidity and assets: At June 30, cash was $392,000 and marketable securities were $5.671 million, versus $142,000 and $3.392 million at year-end 2015. Working capital was approximately $2.5 million. Total assets were $14.932 million; patent portfolios and rights, net, were $8.737 million.
  • Liabilities and equity: Total liabilities were $7.668 million, including $5.089 million of deferred revenue, $1.928 million of warrant liabilities and $317,000 of lease liabilities. The filing does not disclose material conventional borrowings. Stockholders’ equity was $7.264 million; accumulated deficit was $137.400 million.

Material changes versus the prior comparable period

  • Revenue increased from nominal levels as RPX license consideration began being recognized over service periods.
  • Operating and net losses were substantially lower than in 2015, principally because 2015 included a $37.212 million impairment charge. Patent amortization also declined, from $2.450 million to $531,000 in Q2 and from $4.872 million to $1.062 million for the first half.
  • First-half 2016 results included a $1.031 million gain from the decrease in fair value of warrant liabilities; Q2 included a $511,000 expense from the fair-value change. These noncash changes are reflected in other income or expense.
  • The May 2016 RPX license generated $4.355 million cash and cancellation of the remaining Series H preferred shares. The cancellation produced the $31.480 million deemed capital contribution affecting income attributable to common stockholders. Deferred revenue related to the agreement was recorded and is recognized over time.
  • Common shares outstanding increased from 2.540 million at December 31, 2015 to 3.229 million at June 30, 2016. The company completed a 1-for-19 reverse split in March 2016 and regained NASDAQ’s minimum-bid-price compliance.

Outlook, risks and unusual items

  • Going concern: Management states that recurring operating losses and cash-flow needs raise substantial doubt about the company’s ability to continue as a going concern. It says existing liquidity is insufficient to fund operations and other requirements for the foreseeable future and that additional financing and successful monetization are needed.
  • Financing after quarter-end: On August 8, 2016, the company closed an offering of 1,592,357 common shares at $1.57 per share, for $2.5 million gross proceeds before expenses. Underwriters had a 30-day option for up to 231,349 additional shares. The filing’s August 12 cover page reports 4,820,957 shares outstanding.
  • Business plans: No quantified revenue, earnings or cash-flow guidance is provided. Spherix planned to pursue patent monetization, financing and expense management. Under its Equitable agreement, Equitable was to use commercially reasonable efforts and file eight additional litigations by September 30, 2016; net monetization revenue is shared equally. Spherix may reclaim assigned patents at no cost if the filing condition is not met.
  • Patent and legal risks: The PTAB found eight asserted claims of the ’599 patent and all asserted claims of the ’899 patent invalid in proceedings involving VTech and Uniden. VTech’s litigation was dismissed after a license; Spherix appealed the PTAB decision relevant to Uniden, with an opening brief filed July 18, 2016. New Fairpoint and Level 3 litigation was initiated in April 2016. Outcomes, costs and recoveries are uncertain, and patent litigation may be expensive.
  • Other contingencies: Rockstar may receive contingent payments and a share of recoveries once contractual thresholds are met. The company also warns that enforcement costs may exceed recoveries and that patent claims could be invalidated or challenged.
  • Controls: Management concluded disclosure controls were not effective at June 30, 2016, citing lack of segregation of duties and insufficient controls to ensure material transactions and developments are reflected in the financial statements. Remediation was being developed; no material control changes during the quarter were reported.
  • Management and stock awards: CEO Anthony Hayes’s agreement provides annual base salary of $350,000 and a target bonus of up to 100% of base salary, subject to milestones. He also received 118,512 performance-based restricted stock units.

Important facts for investors to verify

  1. Confirm the issuer: the supplied metadata says Dominari Holdings Inc., while the filing is for Spherix Incorporated (ticker SPEX).
  2. Assess the going-concern disclosure against cash, marketable securities, obligations and the August 2016 offering proceeds; distinguish cash from securities and deferred-revenue cash flows.
  3. Reconcile the $29.4 million common-stockholder income and EPS with the $2.1 million net loss and the $31.48 million deemed capital contribution.
  4. Review the RPX and Equitable agreements, including deferred-revenue recognition, license scope, revenue sharing, litigation commitments and any patent-related payment obligations.
  5. Track patent validity and litigation outcomes, including the Uniden appeal and the status of newer cases, as well as associated legal costs.
  6. Monitor remediation of the disclosed material weakness and verify the share count, dilution and any exercise of the underwriters’ over-allotment option.