Business context and reporting period
This is Spherix Incorporated’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing describes an intellectual-property monetization business, with revenue primarily from amortizing RPX patent-license agreements. The filing company is Spherix Incorporated, not Dominari Holdings Inc.; verify the issuer identity associated with the request.
Key financial metrics
Amounts are in thousands of dollars except per-share data. Balance-sheet comparisons are September 30, 2017 versus December 31, 2016.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $314 | $314 | $952 | $563 |
| Operating loss | $(959) | $(1,486) | $(2,705) | $(4,669) |
| Net income (loss) | $459 | $(446) | $(2,320) | $(2,573) |
| Net income (loss) per share, basic | $0.08 | $(0.11) | $(0.44) | $8.72 |
| Operating cash flow | Not presented by quarter | $(2,547) | $905 |
- Nine-month revenue increased about 69% year over year; Q3 revenue was unchanged. Revenue came from amortization of RPX license consideration, not a reported increase in new operating activity.
- Operating expenses were $1,273 in Q3 and $3,657 for nine months. The filing does not present gross profit or gross margin; operating loss was approximately 305% of revenue in Q3 and 284% for the nine-month period.
- At September 30, cash was $233 and marketable securities were $4,735; working capital was approximately $2.6 million. Current assets were $5,010 and current liabilities $2,372.
- Total liabilities were $4,902, including $3,530 of deferred revenue and $961 of warrant liabilities. The filing does not report conventional interest-bearing debt.
- Nine-month investing cash flow was $575 and financing cash flow was $2,071. Cash increased by $99 to $233.
- Total assets were $9,984, including patent assets of $3,924 and a $1,020 fair-value investment in Hoth Therapeutics. Accumulated deficit was $144,069.
Material changes versus prior comparable periods
- Q3 operating loss narrowed by $527 year over year, primarily due to lower patent amortization and compensation expense. Nine-month operating loss narrowed by $1,964, with lower amortization and professional fees cited as drivers.
- Q3 net income of $459 compared with a $446 loss in 2016, reflecting $1,418 of other income, including a $345 increase in Hoth’s fair value and a $1,067 gain from changes in warrant-liability fair value.
- Nine-month net loss improved modestly from $2,573 to $2,320. The much larger 2016 net income attributable to common stockholders ($28,907) included a one-time $31,480 deemed capital contribution from extinguishment of Series H preferred stock; it is not comparable to recurring earnings.
- Operating cash flow shifted from $905 provided in the prior-year period to $2,547 used. Deferred revenue declined by $932 during the 2017 period.
- A July 2017 common-stock offering raised $2,500 gross and approximately $2,100 net, issuing 1.25 million shares.
Outlook, risks and unusual items
- Management said available funds were sufficient for at least the next 12 months, but also stated that longer-term execution depends on additional financing and revenue generation. Financing may not be available on favorable terms or at all. The company reported it was then ineligible to sell securities under its effective Form S-3 registration statement.
- The business had generated minimal revenue historically and depends on patent licensing, settlements and litigation. Patent validity challenges, litigation costs, adverse rulings and potential fee shifting could impair monetization or increase costs. Rockstar is entitled to contingent payments from specified patent recoveries, which could materially affect liquidity if triggered.
- The company invested $675 in Hoth and recorded a $345 fair-value gain; the $1,020 carrying value is a Level 3 estimate based on unobservable inputs and valuation assumptions.
- Under its Equitable monetization arrangement, net monetization revenue is shared equally. Approximately 186 patents and applications had been assigned for monetization, with a further assignment conditional on terms being met by December 2017.
- Several patent cases were settled, dismissed or otherwise terminated; the Federal Circuit affirmed the PTAB decision invalidating claims relating to the ’599 patent. The filing reported an ADTRAN case still pending and described other proceedings and settlements.
- Management concluded disclosure controls were not effective at September 30, 2017, citing inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements. Remediation was being developed.
- No specific financial guidance or quantified revenue outlook was provided. The filing discusses significant estimation uncertainty and states that failure to execute the business plan could require expense reductions, curtailed operations or suspension of activities.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Spherix Incorporated, despite the request metadata naming Dominari Holdings Inc.
- Assess cash runway using operating cash burn, marketable-security liquidity and management’s 12-month sufficiency statement.
- Separate recurring patent-license revenue and operating performance from noncash fair-value changes and the prior-year preferred-stock accounting gain.
- Review the assumptions supporting the Hoth Level 3 valuation and the fair value and potential dilution from warrant liabilities and outstanding warrants.
- Track patent litigation outcomes, Equitable revenue-sharing terms, Rockstar contingent payment thresholds and any financing needs.
- Monitor remediation of the disclosed material weakness in disclosure controls.