Business context and reporting period
The supplied filing is Spherix Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014—not a filing identified as Dominari Holdings Inc. The filing describes Spherix as an intellectual-property company seeking to monetize patent portfolios through licensing, settlements, commercialization and litigation. The financial summary below reflects the filing’s stated issuer and period.
Financial results and position
Amounts are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $0.003 million | $0.007 million | $0 in Q2; $0.006 million in first half |
| Operating loss | $11.586 million | $19.594 million | $0.947 million in Q2; $1.857 million in first half |
| Net loss | $11.568 million | $19.531 million | $0.807 million in Q2; $4.504 million in first half |
| Basic and diluted loss per share | $0.69 | $1.80 | $1.14 in Q2; $6.44 in first half |
| Operating cash used | Not stated separately | $3.285 million | $1.978 million in first half |
- Gross margin is not meaningful from the filing’s presentation: revenue was nominal and no cost-of-revenue line is reported.
- At June 30, 2014, cash and cash equivalents were $7.146 million, working capital was approximately $6.3 million, total current assets were $7.233 million and current liabilities were $0.923 million.
- Total assets were $68.932 million, including $59.957 million of patent portfolios and $1.712 million of goodwill. Total liabilities were $0.923 million; the balance sheet reports no conventional debt balance. Series I redeemable preferred stock was separately presented as temporary equity at $5.935 million.
- Cash increased by $4.021 million in the first half. Financing activities provided $8.306 million, including approximately $18.5 million net proceeds from the Series J offering and $3.9 million from a private placement, offset in part by a $14.065 million Series I redemption. Investing activities used $1.0 million for deferred patent acquisition costs.
Changes versus prior comparable periods
- First-half net loss increased to $19.531 million from $4.504 million; Q2 net loss increased to $11.568 million from $0.807 million. Operating losses also rose substantially, while revenue remained nominal.
- Management attributed the higher expenses mainly to patent amortization ($4.878 million for the first half), stock-based compensation ($10.388 million), higher professional fees and a $0.654 million registration-rights penalty. Q2 included a $4.3 million one-time stock-compensation charge after a director’s resignation triggered accelerated vesting of options.
- First-half operating cash use increased to $3.285 million from $1.978 million, notwithstanding substantial noncash charges. Cash rose from $3.125 million at year-end, primarily reflecting equity financing net of the preferred-stock redemption and patent-related payment.
- Common shares outstanding rose from 3.770 million at December 31, 2013 to 27.786 million at June 30, 2014, reflecting conversions and equity issuances. The filing also reports 27.911 million shares outstanding as of August 13, 2014.
Outlook, risks, contingencies and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management said it expects to fund operations through existing cash, future securities sales and increased income from patent monetization and other ventures.
- The filing states that recurring operating losses and operating cash deficits raise substantial doubt about the company’s ability to continue as a going concern. Management says existing liquidity is insufficient to fund operations and other requirements for the foreseeable future and that additional financing may be needed; availability and terms are uncertain.
- Patent monetization depends on uncertain litigation and licensing outcomes. The filing warns that enforcement costs could exceed recoveries, patents could be invalidated or found not infringed, and adverse outcomes or fee awards could materially harm results and liquidity.
- Active patent matters included claims involving T-Mobile, VTech, Uniden, AT&T, Cisco, Juniper, Huawei and Verizon. A cable-operator action against Spherix and others was dismissed without prejudice in June 2014, with each party bearing its own costs and an agreement to negotiate before further actions concerning covered patents. The company reported no loss provision for specified counterclaims it believed lacked merit.
- A landlord dispute was decided against the company; it accrued an estimated $50,000 for potential legal costs and continued to occupy and pay rent for the premises. A separate financial-advisor dispute was settled effective June 30 for $150,000 cash and $225,000 in registered shares; the settlement was completed July 10, and the agreement remained in effect through December.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2014 because of a lack of segregation of duties. Management said it was developing remediation procedures, subject to financial and staffing constraints.
- Other notable financing and dilution items included the March private placement of common stock and warrants, the June Series J preferred offering (all 10 million shares converted to common stock by June 30), and the Series I redemption. The Series I security also has scheduled redemption terms and patent collateral provisions described in the filing.
Important facts for investors to verify
- Confirm issuer identity and reporting period: the supplied 10-Q is for Spherix Incorporated for Q2 2014, not Dominari Holdings Inc.
- Review the going-concern disclosure, cash runway assumptions and the company’s ability to obtain further financing on acceptable terms.
- Assess patent-portfolio carrying values, scheduled amortization, monetization prospects, litigation costs and outcomes, and possible fee-shifting exposure.
- Check dilution and preferred-stock terms, including conversions, Series I redemption obligations and the reported common shares outstanding.
- Track remediation of the disclosed segregation-of-duties material weakness and confirm whether controls improved after quarter-end.
- Reconcile the filing’s Series I shares outstanding: the balance sheet and one note report 35,541 shares at June 30, while another note reports 35,514.