Dominari Holdings Inc. annual report, FY2017

Business context and reporting period

This is Spherix Incorporated’s Form 10-K for the fiscal year ended December 31, 2017, not a quarterly report. The request identifies Dominari Holdings Inc.; the supplied filing names Spherix Incorporated as the registrant. The filing does not explain any relationship between the two names.

Spherix was primarily a patent-monetization company, seeking revenue through licensing and litigation. It reported minimal monetization proceeds and said it began shifting toward blockchain-related businesses in late 2017. It held about 37% of development-stage biopharmaceutical company Hoth at year-end and, after year-end, agreed to acquire DatChat, a privacy and encrypted-messaging company.

Financial results and position

Amounts below are in U.S. dollars; financial statement figures are rounded to millions.

• Most revenue reflected straight-line recognition of consideration from two RPX patent-license agreements, rather than a recurring product or service business.
• Operating expenses were $5.058 million, down from $9.428 million. The filing attributes the improvement in operating loss mainly to no repeat of 2016’s $2.713 million patent impairment, lower patent amortization, and $1.3 million lower professional fees after cost reductions.
• 2016 common-stockholder income included a one-time $31.480 million deemed capital contribution from cancellation of preferred stock under the RPX transaction; it did not represent operating profitability.
• At December 31, 2017, cash was $0.197 million, marketable securities $3.998 million, current assets $4.345 million, working capital about $1.8 million, total assets $8.972 million, total liabilities $4.866 million, and stockholders’ equity $4.106 million. Patent assets were $3.578 million; the Hoth investment was carried at $1.020 million.
• Current liabilities included $0.822 million of warrant liabilities and $0.957 million of short-term deferred revenue. The filing reports no conventional borrowings in the balance-sheet data presented; verify other contractual and contingent payment obligations.
• Cash used in operations was $3.272 million. Investing activities provided $1.264 million, largely reflecting purchases and sales of marketable securities; financing provided $2.071 million, principally from the 2017 stock offering.

Changes, outlook, risks, and unusual items

• Management described ongoing operating cash needs and dependence on further financing and successful monetization. The notes say management believed funds would cover at least the next 12 months, while MD&A says existing liquidity was insufficient for foreseeable operating and financing needs. This is a material tension in the filing’s liquidity discussion.
• After year-end, Spherix raised about $3.0 million gross by issuing 2,222,222 shares at $1.35. It also agreed to issue DatChat stockholders 46,153,846 Spherix shares, valued in the agreement at $1.30 per share, subject to shareholder approvals and other closing conditions. Completion was not assured; the issuance could substantially dilute existing holders.
• The company formed Ether Mining Company to mine Ether and bought an 8% interest in TheBit Daily LLC for $25,000. These and the proposed DatChat acquisition mark a substantial strategic departure from patent monetization; the filing provides no quantified operating outlook for these activities.
• Under the Equitable monetization agreement, net patent-monetization proceeds are shared equally. Rockstar also has contingent participation and potential payment rights on specified future recoveries; no participation payments had been made as of the report date.
• Patent enforcement outcomes remained uncertain. Uniden settled and took a license, but the Federal Circuit affirmed the invalidation of eight asserted claims of one patent; other claim invalidations and numerous case dismissals or settlements are also described. The filing warns that litigation may be costly and that adverse rulings could impair portfolio value.
• No 2017 patent impairment was recorded, following a $2.713 million impairment in 2016. Hoth’s $1.020 million carrying value was a Level 3 fair-value estimate, based partly on an estimated $0.15 per-share value and unobservable assumptions.
• Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements. The auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
• Adoption of revenue-recognition Topic 606 on January 1, 2018 was expected to recognize license revenue when the customer obtains the right to use the IP and eliminate $3.245 million of deferred revenue, with a corresponding decrease in accumulated deficit. The filing gives no forward revenue or profitability guidance.

Important facts for investors to verify

1. Confirm the registrant’s identity and its relationship, if any, to Dominari Holdings Inc.; this filing is for Spherix Incorporated.
2. Review current liquidity and cash runway, reconciling management’s stated 12-month sufficiency with the separate warning that existing liquidity was insufficient for foreseeable needs.
3. Check the status and final terms of the DatChat merger, shareholder approvals, share issuance, escrow arrangements, and resulting dilution.
4. Assess whether the Hoth investment, Ether-mining subsidiary, and other blockchain initiatives produced measurable operations or returns after the reporting date.
5. Verify remediation of the disclosed material weaknesses and monitor the timing and accounting effects of Topic 606 adoption.
6. Review patent portfolio enforceability, Equitable’s monetization results, litigation outcomes, and contingent obligations to Rockstar.