Business context and reporting period
The supplied filing is Spherix Incorporated’s unaudited Form 10-Q for the quarter ended September 30, 2013; it does not identify Dominari Holdings Inc. as the registrant. Spherix described a shift from biotechnology research toward patent ownership and monetization. During the quarter it completed the North South Holdings acquisition and pursued patent licensing and enforcement.
Key financial metrics
| Metric | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2013 |
|---|---|---|
| Revenue | $1,837 | $7,811 |
| Operating expenses | $9.319 million | $11.182 million |
| Operating loss | $9.317 million | $11.174 million |
| Net loss | $9.280 million | $13.784 million |
| Basic and diluted loss per share | $6.93 | $14.43 |
- Revenue was negligible relative to expenses; meaningful operating margins are not evident.
- Nine-month operating cash outflow was $3.639 million, versus $2.313 million in the comparable 2012 period. Cash declined $1.956 million to $2.542 million.
- At September 30, cash was $2.542 million, working capital was $1.056 million, total current assets were $2.593 million and current liabilities were $1.537 million.
- Total liabilities were $1.622 million, including $1.000 million accrued patent costs and $39,923 in warrant liabilities. No external long-term borrowing is listed on the balance sheet; a $500,000 note issued to North South was eliminated in consolidation.
- Total assets were $9.302 million, including a $4.968 million net patent portfolio and $1.712 million goodwill. Stockholders’ equity was $7.680 million.
Material changes versus prior comparable periods
- Third-quarter revenue fell to $1,837 from $16,710; nine-month revenue was $7,811 versus $16,710.
- Third-quarter net loss rose to $9.280 million from $707,550. Nine-month net loss rose to $13.784 million from $1.947 million.
- Operating expenses increased sharply, primarily reflecting $7.402 million of nine-month stock-based compensation, acquisition-related professional costs and patent amortization.
- The nine-month warrant fair-value adjustment was a $2.610 million expense, compared with a $740,605 gain in 2012. This is a noncash, valuation-sensitive item.
- Cash was down from $4.498 million at December 31, 2012, while working capital fell from $3.975 million. The North South acquisition added approximately $2.684 million of cash, alongside patents and goodwill.
Outlook, risks and unusual items
- Management said operations require significant capital and planned to rely on existing cash, future securities sales and patent monetization. The filing provides no quantified revenue, earnings or cash-flow guidance.
- In November 2013, after quarter-end, Spherix reported a private placement generating $2.235 million gross proceeds through common and Series F preferred shares.
- The company warned that patent litigation may be costly, outcomes uncertain, patents may be invalidated, and enforcement costs may exceed recoveries. If monetization fails, it may need to cut expenses, curtail operations or consider alternatives.
- During the quarter, Spherix acquired Rockstar patents for a stated $4.0 million contractual price, paid $2.0 million cash and issued shares valued at $1.0 million, and accrued a further $1.0 million payable after filing its first complaint. Rockstar is also entitled to a share of future profits under specified terms.
- Spherix filed patent suits against Uniden and VTech, and its subsidiary filed a suit against T-Mobile. Management could not predict the outcomes of the Uniden or VTech cases. The company was also litigating over its Bethesda office lease; a landlord motion for summary judgment was pending.
- Management reported disclosure controls were not effective at September 30, 2013, citing lack of segregation of duties and difficulty applying complex accounting rules, including derivative and stock-compensation accounting.
- Other commitments include operating lease payments of $776,349 through 2018 and a two-year CEO employment agreement with $350,000 annual base salary, bonus potential up to 100% of base salary and a $100,000 signing bonus.
Important facts to verify
- Confirm the intended issuer: this filing names Spherix Incorporated, not Dominari Holdings Inc.
- Assess cash runway and the timing and terms of subsequent financing, including the November 2013 private placement and any further capital needs.
- Review patent portfolio valuations, acquisition consideration and profit-sharing obligations, and the status, costs and potential outcomes of the patent cases.
- Verify the accounting and dilution implications of the large option grants, preferred-stock conversions and warrant fair-value adjustments.
- Track remediation of the reported ineffective disclosure controls and the outcomes of the Bethesda lease and LegalLink disputes.