Business context and reporting period
Period: Three months ended March 31, 2013. The supplied filing is for Spherix Incorporated, not Dominari Holdings Inc.; verify that this is the intended filing. Spherix had sold its consulting subsidiary in December 2012 and was focused on biotechnology research and development, while exploring intellectual-property commercialization.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $5,761 | $0 |
| Operating expenses | $916,308 | $1,063,895 |
| Operating loss | $910,547 | $1,063,895 |
| Net loss | $3,696,570 | $834,283 |
| Net loss per share, basic and diluted | $5.35 | $4.48 |
| Net cash used in operating activities | $1,049,711 | $1,166,912 |
Gross profit was $5,761; the filing does not provide a meaningful operating margin given the minimal revenue. Revenue comprised $4,000 of D-tagatose sales and $1,760 of royalties according to MD&A, which totals $5,760 and does not exactly reconcile to reported revenue. Cash and cash equivalents were $3.45 million, versus $4.50 million at year-end 2012; working capital was $3.1 million. Total assets were $3.57 million and total liabilities were $715,000. No conventional borrowing balance is reported; warrant liabilities were $216,000, down from $3.13 million at year-end.
Material changes versus the prior period
- Operating loss narrowed by about $153,000, as R&D expense fell to $43,068 from $371,403 after SPX106T preclinical studies concluded in late 2012. SG&A rose to $873,240 from $692,492, including $288,000 in severance and retention expense.
- Net loss increased substantially, primarily reflecting a $2.79 million noncash loss from the change in fair value of warrant liabilities; Q1 2012 had a $339,308 gain. The warrant valuation is Level 3 and uses significant unobservable inputs.
- Cash used in operating activities improved by about $117,000. Cash declined by approximately $1.05 million during the quarter; there were no financing proceeds in Q1 2013.
- On March 6, 2013, investors exchanged warrants for 229,337 Series C convertible preferred shares, convertible one-for-one into common shares subject to ownership limits. The transaction reduced warrant liabilities and increased paid-in capital.
Outlook, risks and notable items
Management said cash on hand was expected to fund operations for at least 12 months, including $146,000 of additional severance in Q2 2013. The company nevertheless anticipated needing future financing and warned that inability to raise funds could force it to cease activities and potentially dissolve. Revenue from the pharmaceutical business or new ventures was not assured.
After quarter-end, Spherix agreed to acquire North South Holdings’ patent-related assets through Nuta Technology, in exchange for 118,483 common shares and 1,488,152 Series D preferred shares convertible one-for-ten. Closing depended on customary conditions, a fairness opinion and shareholder approval. The company also announced a proposed D-tagatose production collaboration with ChromaDex. In April, it granted 2,010,500 options under a shareholder-approval-dependent plan; disclosed grant-date fair value was approximately $11.2 million.
A significant reporting concern is that management concluded disclosure controls were ineffective as of March 31, 2013. Previously issued financial statements dating back to mid-November 2009 were deemed unreliable because warrants had been incorrectly accounted for as equity rather than liabilities. The restatements involved noncash adjustments and, according to the filing, did not change cash balances or reported cash flows. The filing reports no legal proceedings. Lease commitments totaled approximately $866,000.
Important facts to verify
- Confirm the intended issuer: this filing identifies Spherix Incorporated, whereas the request names Dominari Holdings Inc.
- Review the warrant-accounting restatements, related controls remediation, and the impact of Level 3 warrant valuations on reported earnings.
- Check current cash needs, severance payments, and the company’s ability to obtain financing beyond management’s stated 12-month runway.
- Verify whether the North South merger and shareholder approvals were completed, and assess the resulting dilution from preferred shares and option grants.
- Reconcile reported revenue of $5,761 with the MD&A components totaling $5,760.