Filing Summary
Entity and period: The supplied filing is Spherix Incorporated and subsidiaries’ unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing under the requested company name, Dominari Holdings Inc. The company describes itself as an intellectual-property monetization business transitioning toward technology development.
Financial Results and Position
| Metric | Q3 2018 / September 30, 2018 | Comparison |
|---|---|---|
| Revenue | $0 | $314,000 in Q3 2017 |
| Operating loss | $1.951 million | $959,000 in Q3 2017 |
| Net loss (income) | $1.891 million loss | $459,000 income in Q3 2017 |
| Net loss per share, basic and diluted | $0.22 | $0.08 income per share in Q3 2017 |
| Cash and cash equivalents | $109,000 | $197,000 at December 31, 2017 |
| Marketable securities | $3.409 million | $3.998 million at December 31, 2017 |
| Total assets / liabilities | $7.846 million / $1.256 million | $8.972 million / $4.866 million at December 31, 2017 |
| Working capital | Approximately $2.3 million | As reported by management |
For the nine months ended September 30, 2018, revenue was $0 versus $952,000 in 2017; operating loss was $4.790 million versus $2.705 million; and net loss was $3.775 million versus $2.320 million. No meaningful revenue margin is available because 2018 revenue was zero.
Nine-month operating cash use was $2.289 million, compared with $2.547 million in 2017. Investing activities used $499,000 versus providing $575,000; financing provided $2.700 million versus $2.071 million. The company reported no interest-bearing debt in the presented balance sheet; total liabilities were mainly accrued expenses, warrant liabilities, and a DatChat payable.
Material Changes and Unusual Items
- The company adopted ASC 606 on January 1, 2018 and treated its patent licenses as functional intellectual property, recognizing revenue at the point of transfer rather than over the license term. It eliminated approximately $3.2 million of deferred revenue through an opening accumulated-deficit adjustment; it said it would not recognize future revenue from the RPX licenses. This change explains the absence of 2018 license revenue and the prior-period comparison.
- A $1.051 million Q3 impairment charge reduced net patent assets to $1.5 million. The remaining weighted-average useful life was reported as one year.
- Other income was $60,000 in Q3, down from $1.418 million, largely reflecting smaller gains from Hoth investment valuation and warrant-liability remeasurement. For the nine-month period, other income was $1.015 million, including a $680,000 increase in Hoth’s fair value and a $560,000 gain from the reduction in warrant liabilities.
- In March 2018, Spherix raised approximately $3.0 million gross ($2.7 million net) by issuing 2,222,222 shares at $1.35 each.
- In August, the company terminated its planned DatChat merger and agreed to invest $1 million for 4.37% of DatChat. The investment included $500,000 cash, approximately $152,000 of prior advances and a $348,000 payable for specified future compensation expenses. The filing reports investments of $1.7 million in Hoth, $25,000 in TheBit Daily, and $1 million in DatChat at September 30.
Outlook, Risks, and Contingencies
- Management said available funds were sufficient for at least the next 12 months, while also stating that continued operations depend on financing and sufficient future cash flow. It may seek additional equity or debt and acknowledged such financing may not be available on favorable terms, or at all.
- After quarter-end, on October 10, 2018, Spherix agreed to acquire CBM BioPharma in a stock merger, subject to conditions including shareholder approval. CBM shareholders would receive 15 million Spherix shares, valued in the agreement at $1.10 per share. A termination under specified circumstances could require Spherix to deliver 400,000 shares to CBM. Closing and integration were uncertain.
- The company reported disclosure controls were ineffective as of September 30, 2018 because of material weaknesses, including inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements.
- Patent enforcement and validity disputes may be costly and could reduce the value or monetization potential of the portfolio. The filing described an affiliate’s pending patent case against Lumentum; an earlier ADTRAN case was dismissed. No counterclaims were pending against Spherix.
- Potential future recoveries on certain Rockstar patents may trigger substantial contractual participation payments, including a contingent $13 million payment under specified recovery conditions. The company reported that it had made no such payments as of the filing.
Important Facts to Verify
- Confirm the issuer: the source filing is for Spherix Incorporated, not Dominari Holdings Inc.
- Verify the ASC 606 adoption adjustment, treatment of RPX license revenue, and opening accumulated-deficit impact.
- Review the patent impairment assumptions and the short remaining amortization period.
- Assess the reliability and valuation assumptions for Level 3 investments, especially Hoth, and the DatChat investment terms and payable.
- Check the CBM merger’s subsequent status, approval conditions, share issuance and termination provisions.
- Evaluate the disclosed control weaknesses, cash runway, and need for additional financing.