Business context and reporting period
The filing is Spherix Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing identified as Dominari Holdings Inc. Spherix described itself as an intellectual-property company after discontinuing drug-development operations in 2012 and selling its consulting subsidiary. It was pursuing patent monetization and other business opportunities.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2013: $213; 2012: $0 | 2013: $5,974; 2012: $0 |
| Operating expenses | 2013: $946,830; 2012: $668,940 | 2013: $1,863,138; 2012: $1,732,835 |
| Net loss | 2013: $807,105; 2012: $404,691 | 2013: $4,503,675; 2012: $1,238,974 |
| Basic and diluted loss per share | 2013: $1.14; 2012: $1.95 | 2013: $6.44; 2012: $5.96 |
Gross profit equaled revenue because cost of goods sold was reported as zero. Meaningful operating or net margins are not indicated given the very small revenue base and operating losses.
- Six-month operating cash use was $1,978,343, compared with $1,766,214 in 2012. Cash fell by $1,478,343 to $3,019,894.
- At June 30, current assets were $3,090,063 and current liabilities were $446,238; reported working capital was $2,643,825. Total liabilities were $567,056, including $76,506 of warrant liabilities. The balance sheet reports no conventional borrowing at June 30.
- Warrant liabilities were measured using Level 3 inputs. Their fair-value remeasurement contributed a $2,647,048 loss for the six-month period, a noncash item. The filing reports $139,347 of warrant-liability fair-value income for the second quarter.
Material changes versus the prior comparable period
Six-month net loss increased substantially, reflecting the warrant fair-value loss and higher selling, general and administrative costs; the prior-year period included $190,275 of discontinued-operation losses, versus none in 2013. Research and development expense declined to $49,368 from $509,652, which management attributed to completion of SPX106T preclinical studies in late 2012. Selling, general and administrative expense rose to $1,813,770 from $1,223,183 in the financial statements; management cited severance, separation and retention payments, intellectual-property consulting, and North South merger costs. The MD&A instead gives prior-year six-month SG&A of $1,568,021, inconsistent with the financial statements.
Outlook, risks and unusual items
- Management said revenue from the sports and nutritional supplement effort was not expected to be substantial until technology was sold or licensed or a market developed. It planned to pursue monetization of patent portfolios, licensing, commercialization, settlements and litigation.
- The North South merger had shareholder approval as of August 16, 2013, after quarter-end; closing was expected after the statutory waiting period, scheduled to expire September 2. Management expected at least $2 million of North South cash to become available and a $500,000 North South note to be canceled at closing. Management said the transaction was important to its plans; without it, management believed resources would support current operations through at least July 1, 2014.
- After quarter-end, Spherix acquired mobile-communications patents on July 24 for $3 million: $2 million cash and $1 million in stock, plus a share of future profits under specified terms. It also issued a $500,000 North South note on August 6, due in 24 months and bearing 0.25% interest, which was to be retired at merger closing.
- Cash balances exceeded FDIC insurance limits by $2,518,892 at June 30. The company had $821,167 of remaining minimum operating-lease payments. It also disclosed that disclosure controls were ineffective because of limited internal resources and insufficient levels of transaction review; its CFO resigned June 28, and the interim CEO was serving as principal accounting officer.
- Potential dilution includes convertible preferred stock, warrants, restricted stock and options. A proposed 2013 equity plan, including 2,005,500 option grants with an estimated grant-date fair value of approximately $11.2 million, remained subject to shareholder approval and had not yet been recognized for accounting purposes.
Important facts for investors to verify
- Confirm the legal issuer and reporting period: the supplied filing is for Spherix Incorporated, not Dominari Holdings Inc.
- Check merger completion, the availability and use of North South’s cash, cancellation of the note, and final consideration and dilution.
- Reconcile the MD&A’s prior-year SG&A figure with the financial-statement figure and verify the post-quarter share count against the June 30 capitalization and subsequent issuances.
- Assess cash runway and funding needs against ongoing cash burn, very limited revenue, patent-monetization uncertainty, and the disclosed ineffective controls.
- Review the terms and economics of the Rockstar patent acquisition, including the future-profit participation, and the valuation assumptions behind Level 3 warrant liabilities and pending equity awards.