Business context and reporting period
This is Spherix Incorporated’s unaudited Form 10-Q for the quarter ended March 31, 2018—not a filing under the name Dominari Holdings Inc. Spherix described itself as an intellectual-property monetization company and said it was transitioning toward blockchain technology development. Its proposed acquisition of DatChat, a secure-messaging company using blockchain technology, was pending shareholder approval.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $0 | $327,000 |
| Operating expenses | $1.577 million | $1.296 million |
| Operating loss | $1.577 million | $969,000 |
| Other income | $91,000 | $50,000 |
| Net loss | $1.486 million | $919,000 |
| Basic and diluted loss per share | $0.23 | $0.19 |
| Net cash used in operating activities | $1.076 million | $845,000 |
At March 31, 2018, total assets were $10.178 million, including $63,000 of cash and cash equivalents and $5.574 million of marketable securities. Current assets were $5.865 million and current liabilities $1.425 million; reported working capital was approximately $4.4 million. Total liabilities were $1.425 million, including $634,000 of warrant liabilities. The balance sheet reports no interest-bearing debt. Stockholders’ equity was $8.753 million.
Investing activities used $1.758 million, primarily reflecting purchases of marketable securities net of sales; financing activities provided $2.700 million from a common-stock offering. Cash declined by $134,000 during the quarter. Operating margins are not meaningful given zero revenue.
Material changes and significant transactions
- Revenue fell from $327,000 to zero. The prior-year amount was deferred revenue amortization from RPX patent licenses. Upon adopting ASC 606 on January 1, 2018, Spherix recognized those licenses at the point the customer obtained the right to use the intellectual property, eliminated approximately $3.2 million of deferred revenue through an opening accumulated-deficit adjustment, and said it would not recognize future revenue from those licenses.
- Net loss increased by $567,000. Management attributed the higher operating loss mainly to increased professional fees, DatChat-related acquisition costs, and other selling, general and administrative expenses.
- On March 19, Spherix sold 2,222,222 shares at $1.35 per share, receiving approximately $3.0 million gross and $2.7 million net. The filing said proceeds were intended to develop DatChat’s business in connection with the proposed merger.
- The DatChat merger agreement was amended May 3, after quarter-end, reducing the stated consideration from 46,153,846 to 34,615,385 Spherix shares, valued in the agreement at $1.30 per share. Closing remained subject to shareholder approval.
- Spherix acquired an 8% interest in TheBit Daily LLC for $25,000. Its approximately 36% interest in Hoth Therapeutics was valued at $1.020 million, unchanged during the quarter.
Outlook, risks and contingencies
Management said available funds were sufficient for at least the next 12 months, but emphasized that longer-term success depends on generating cash flow and obtaining financing. It may seek equity or debt financing; availability and terms are uncertain. The business had generated limited IP-monetization funds, and management said failure to execute its plan could require expense reductions, curtailed operations, or other alternatives.
Patent enforcement and defense involve litigation risk, including challenges to patent validity, counterclaims, legal costs, and potential fee-shifting. The filing described an active patent case against Lumentum Operations LLC; the ADTRAN case had been voluntarily dismissed. No counterclaims were pending. Potential future payments to Rockstar depend on specified patent-recovery thresholds and could affect liquidity; none had been paid as of the filing.
Disclosure controls were deemed ineffective at March 31, 2018 due to material weaknesses in internal controls over financial reporting, including inadequate segregation of duties and insufficient controls to ensure material transactions and developments were reflected in the financial statements. The company reported no material changes to its disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Spherix Incorporated, notwithstanding the request metadata naming Dominari Holdings Inc.
- Check the DatChat merger’s approval, closing status, final share consideration, and dilution implications.
- Assess liquidity and financing needs against ongoing operating cash use, the stated 12-month funding assessment, and the availability of additional capital.
- Review the ASC 606 adoption and the treatment of deferred RPX license revenue and the opening accumulated-deficit adjustment.
- Evaluate remediation of the disclosed material weaknesses and the status and potential financial impact of patent litigation and contingent Rockstar payments.