Filing summary
Registrant discrepancy: The supplied filing is a Form 10-Q for Spherix Incorporated, not Dominari Holdings Inc. It covers the quarter ended June 30, 2018, and was signed August 14, 2018.
Business context and reporting period
Spherix describes itself as an intellectual-property monetization company transitioning toward technology development. It has generated minimal revenue and reports no assurance its business model will succeed. The filing presents unaudited second-quarter and six-month results through June 30, 2018.
Financial results and liquidity
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.262 million | $2.839 million |
| Operating loss | $1.262 million | $2.839 million |
| Net loss | $398,000 | $1.884 million |
| Basic and diluted loss per share | $0.05 | $0.25 |
For comparison, 2017 revenue was $311,000 for the quarter and $638,000 for the six-month period; net losses were $1.860 million and $2.779 million, respectively. Revenue in those periods principally reflected amortization of RPX license deferred revenue. Following adoption of ASC 606, Spherix eliminated approximately $3.2 million of deferred revenue through opening accumulated deficit and said it would recognize no future revenue from those licenses. With no 2018 revenue, a revenue margin is not meaningful.
Six-month operating cash use was $1.750 million, versus $1.816 million in 2017. Investing activities used $969,000, while financing provided $2.700 million, primarily from a March stock offering. Cash and cash equivalents were $178,000 at June 30; marketable securities were $4.634 million. Working capital was approximately $3.8 million. Total assets were $9.608 million and total liabilities $1.155 million; the balance sheet reports no debt. Management said available funds were sufficient for at least twelve months, but also stated that additional financing may be needed absent revenue growth.
Material changes, outlook, risks and unusual items
- Operating loss increased year over year, while net loss narrowed, largely because of non-operating fair-value changes. The six-month period included a $680,000 gain on the Hoth investment and a $465,000 gain from the change in warrant liabilities; these are valuation items, not operating revenue.
- Spherix’s Hoth investment was valued at $1.7 million, up approximately $680,000 during the first half; management’s valuation used Level 3 assumptions. The company also held an 8% interest in TheBit Daily, valued at $25,000.
- In March, Spherix raised approximately $3.0 million gross by selling 2,222,222 shares at $1.35 each. Net proceeds reported in financing cash flow were $2.7 million.
- After quarter-end, Spherix terminated its proposed DatChat merger and agreed to a $1.0 million strategic investment for 3.6% of DatChat: $500,000 cash plus forgiveness of prior advances and specified future compensation expenses capped together at $500,000. This commitment was made after June 30.
- Key risks include continuing expenses without revenue, dependence on future financing, uncertain patent monetization, potential patent litigation costs or invalidation, and contractual Rockstar participation payments from qualifying recoveries. Management warned that inability to execute its plan could require expense reductions or curtailment of operations.
- The filing reports an active patent case brought by Optic153 against Lumentum; the defendant’s answer was due September 6, 2018. The ADTRAN case was voluntarily dismissed. No counterclaims were pending, and the company reported no other material pending legal matters.
- Management concluded disclosure controls were ineffective at June 30 due to material weaknesses, including insufficient segregation of duties and controls to ensure material transactions and developments were reflected in the financial statements.
Important facts for investors to verify
- Confirm the issuer identity: this filing names Spherix Incorporated, despite the request identifying Dominari Holdings Inc.
- Review the post-quarter DatChat agreement, including the cash payment and the terms and timing of the remaining commitment.
- Assess liquidity using both cash and marketable securities, expected operating cash use, and management’s stated reliance on possible future financing.
- Examine the assumptions behind the Level 3 Hoth valuation and the quarter’s fair-value gains, which materially affected reported net loss.
- Review remediation of the disclosed internal-control material weaknesses and the status and potential economics of patent litigation and Rockstar recovery obligations.