SEC Filing Summary: Spherix Incorporated Form 10-Q
Reporting period: Quarter ended September 30, 2015; filed November 4, 2015. The supplied filing identifies the registrant as Spherix Incorporated, not Dominari Holdings Inc.; confirm that this is the intended filing.
Business context and financial results
Spherix describes itself as an intellectual-property monetization company, focused on licensing and enforcing patent rights. It reported owning more than 330 patents and patent applications. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q3 2015 | Nine months 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $0 | $0.002 | $0.002 for Q3; $0.009 for nine months |
| Operating loss | $1.959 | $46.378 | $5.162 for Q3; $24.756 for nine months |
| Net loss | $2.726 | $47.120 | $5.144 for Q3; $24.675 for nine months |
| Basic and diluted loss per share | $0.08 | $1.56 | $0.18 for Q3; $1.47 for nine months |
| Operating cash used | Not provided separately | $3.714 | $4.767 for nine months |
Revenue was nominal, so the filing does not provide a meaningful revenue-based margin picture. Operating expenses were $1.959 million in Q3 and $46.380 million for the first nine months. The nine-month total includes a $37.212 million non-cash impairment charge. No conventional funded debt balance is identified in the provided balance sheet; liabilities include lease obligations and warrant liabilities.
Liquidity, cash flow and balance sheet
- At September 30, cash and cash equivalents were $0.157 million and marketable securities were $0.775 million, versus $0.805 million and $3.500 million, respectively, at December 31, 2014.
- Working capital was a $1.6 million deficit, compared with $3.2 million of working capital at year-end 2014. Total assets were $14.891 million; total liabilities were $2.866 million; stockholders’ equity was $7.025 million.
- Operating activities used $3.714 million of cash in the first nine months. Investing activities provided $2.680 million, mainly reflecting $6.454 million of marketable securities sold and $3.774 million purchased. Financing activities provided $0.386 million, including approximately $1.3 million net proceeds from a July stock-and-warrant offering and a $0.935 million Series I preferred-stock redemption.
- The company had $5.0 million of Series I redeemable preferred stock outstanding, due for redemption on December 31, 2015. Management said it did not have sufficient cash or working capital to make that payment and concluded there was substantial doubt about the company’s ability to continue as a going concern.
Material changes versus prior periods
- Nine-month net loss increased to $47.120 million from $24.675 million, primarily because of the $37.212 million impairment charge, partly offset by lower stock-based compensation and professional expenses.
- Patent portfolio carrying value declined to $13.910 million from $55.004 million at year-end 2014. The company recorded a $35.5 million patent impairment and a $1.7 million goodwill impairment in Q2 2015; goodwill was reduced to zero. It reported no impairment indicators in Q3.
- Q3 operating loss improved versus 2014, which management attributed mainly to lower stock-based compensation and patent amortization following the impairment. Q3 net loss nevertheless included a $0.774 million non-cash loss from the change in fair value of warrant liabilities.
- Stock-based compensation for the first nine months fell to $0.223 million from $11.954 million. Common shares outstanding increased to 34.403 million at September 30 from 28.609 million at December 31, 2014.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management said it intended to fund operations through existing liquidity, future securities or debt financing, and increased patent monetization revenue. It warned that current liquidity was insufficient for foreseeable operating and financing needs and that new financing might not be available on favorable terms or at all.
- The July 2015 offering generated approximately $1.3 million net proceeds and included 7.035 million warrants, exercisable from January 22, 2016 at $0.43 per share. The warrants are liability-classified and subject to recurring fair-value adjustments. The financing agreement restricts variable-rate transactions and gives investors participation rights in certain subsequent financings.
- Failure to make the December 2015 preferred-stock redemption could trigger default consequences, including 15% interest and potential remedies involving patent collateral. The company also disclosed restrictions that may direct some financing or monetization proceeds to preferred-stock redemption.
- Nasdaq granted an extension through March 21, 2016 to regain the $1.00 minimum bid-price requirement. Continued listing remained conditional on compliance with other listing standards; the company said it might consider a reverse stock split.
- Patent litigation and inter partes review outcomes could affect patent value, monetization prospects and legal costs. The filing describes ongoing disputes involving Cisco, Juniper, VTech and Uniden, among others; VTech and Uniden cases were stayed pending patent-board decisions. Verizon litigation was settled in August 2015. After quarter-end, Spherix disclosed a Huawei settlement and license for a one-time $295,000 payment, subject to payment and dismissal steps.
- Management reported disclosure controls were ineffective as of September 30, citing inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements. Management said it was developing remediation procedures.
- The filing reports an RPX allegation that prior going-concern disclosures constituted a default under the preferred-stock-related security agreement; Spherix disputed the allegation and said no further breach action had followed at the time of filing.
Investor verification priorities
- Confirm the registrant identity: the source filing is for Spherix Incorporated, although the request names Dominari Holdings Inc.
- Verify the status and funding plan for the $5.0 million Series I preferred-stock redemption due December 31, 2015, and any subsequent default, amendment or payment.
- Review subsequent liquidity, financing, cash balances and the company’s going-concern status.
- Confirm receipt and accounting treatment of the $295,000 Huawei settlement payment and the status of the related dismissal.
- Check Nasdaq listing compliance and any reverse-stock-split action, and assess the reported material weakness and remediation progress.
- Track patent litigation and patent-board outcomes, including potential effects on recoveries, legal expense, patent carrying values and contingent payments to prior patent owners.