Business context and reporting period
The supplied filing is Spherix Incorporated’s Form 10-K for the fiscal year ended December 31, 2013, filed March 31, 2014. This does not match the request metadata naming Dominari Holdings Inc. or a “2013 Q4” period; the filing itself identifies Spherix and reports full-year results.
Spherix shifted from scientific research and drug development to patent acquisition, licensing and enforcement. In 2013 it acquired North South Holdings’ portfolio of 222 patents and two pharmaceutical-technology patents, and acquired mobile-communications patents from Rockstar. On December 31, it acquired another 101 patents and applications from Rockstar. The company reported more than 330 patents and patent applications and had three full-time employees.
Financial results and condition
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $27,000 | $20,000 |
| Operating expenses | $15.374 million | $3.492 million |
| Operating loss | $15.347 million | $3.472 million |
| Net loss | $17.965 million | $3.857 million |
| Cash used in operating activities | $5.270 million | $3.815 million |
| Cash and cash equivalents at year-end | $3.125 million | $4.498 million |
| Working capital at year-end | Approximately $1.8 million | Approximately $4.0 million |
Revenue from patent monetization was not significant; reported 2013 revenue came from licensing and product sales. Revenue was too small for margins to be a useful indicator. The 2013 net loss included $9.971 million of stock-based compensation and a $2.618 million expense from changes in warrant-liability fair value. Accumulated deficit was $53.276 million, versus $35.311 million in 2012.
At December 31, 2013, total assets were $69.853 million, including $64.835 million of net patent portfolios and $1.712 million of goodwill. Total liabilities were $1.551 million, including $1.000 million of accrued patent cost and a $48,000 warrant liability. Separately, $20 million of Series I preferred stock was classified as redeemable preferred stock, outside stockholders’ equity. Stockholders’ equity was $48.302 million. The filing states there is substantial doubt about the company’s ability to continue as a going concern; available liquidity was not sufficient to fund operations and anticipated requirements for the foreseeable future.
Cash used in continuing operating activities increased to $5.356 million from $3.648 million. Investing activities provided $662,000, including $2.662 million of cash acquired with North South and a $2.000 million cash payment for Rockstar patents. Financing activities provided $3.235 million, primarily from preferred-stock and common-stock issuances and a $500,000 note. Cash declined by $1.373 million during the year.
Material changes versus the prior comparable period
- Revenue remained very low, increasing from $20,000 to $27,000, while operating expenses rose from $3.492 million to $15.374 million and net loss increased from $3.857 million to $17.965 million.
- Stock-based compensation increased to $9.971 million from $56,000; professional fees rose to $4.143 million from $1.621 million, including costs associated with the North South acquisition.
- The company’s business changed materially: it sold its consulting subsidiary in December 2012 and pursued an intellectual-property monetization strategy in 2013. The consulting business had generated nearly all 2012 revenue and is presented as discontinued operations.
- Patent portfolios rose to $64.835 million net at year-end, reflecting acquisitions; 2013 amortization was $267,000. Cash fell from $4.498 million to $3.125 million, and working capital fell from approximately $4.0 million to $1.8 million.
- Financing included substantial securities issuance. The December Rockstar acquisition was reported at approximately $60 million in securities: about $1.7 million of common stock, $38.3 million of Series H preferred stock and $20 million of Series I preferred stock.
Outlook, risks, contingencies and unusual items
The filing provides no quantified revenue, earnings or cash-flow guidance. Management’s stated plans were to monetize patent portfolios, seek additional financing, manage available cash and pursue new business ventures. Management cautioned that additional financing might not be available on favorable terms, or at all.
- Redemption and contingent payment obligations: Series I preferred stock has a $20 million stated value and scheduled partial redemptions of up to $5 million on each of June 30 and December 31, 2014, and June 30 and December 31, 2015, subject to conversions and other terms. If the first required payment is not made, the filing says 15% interest accrues on outstanding stated value. The Rockstar patents secure the obligations. Rockstar also has contingent participation rights in future recoveries, including a disclosed $13 million payment after the specified recovery threshold; the filing says these payments could adversely affect liquidity.
- Patent litigation: Spherix reported active infringement actions, including actions involving AT&T, Uniden, VTech, T-Mobile and Cisco. A January 2014 cable-operator action against Rockstar and others, including Spherix, sought declaratory and other relief concerning patents and enforcement rights. Outcomes, patent validity and monetization recoveries are uncertain; legal and expert costs could be material and could exceed recoveries.
- Other legal matters: The company settled a LegalLink contract claim for $30,000. It lost a dispute over assignment of its Bethesda office lease and expected to continue paying rent under that lease.
- Control deficiencies: Management concluded disclosure controls were ineffective and reported material weaknesses involving inadequate segregation of duties and controls over complex, non-routine accounting, including stock-based compensation. The financial statements were audited, but the auditor did not attest to internal control effectiveness.
- Dilution and governance: Rockstar would own approximately 29% of common stock on a fully diluted basis, subject to conversion limits. Preferred securities carry significant conversion, voting, redemption or liquidation rights. The filing also reports a stockholder rights plan.
- Subsequent financing: On March 26, 2014, Spherix raised approximately $4.446 million in a private offering of common stock and warrants. This subsequent financing does not alter the December 31, 2013 cash balance.
The independent auditor issued an unqualified opinion on the 2013 financial statements while emphasizing the going-concern uncertainty. The filing reports that no impairment of goodwill or long-lived assets was identified for 2013.
Important facts for investors to verify
- Confirm the filing identity and period: this is Spherix Incorporated’s FY 2013 10-K, not a Dominari Holdings filing or a quarterly report.
- Review the Series I redemption calendar, security interest in Rockstar patents, potential 15% interest, and the company’s ability to meet those obligations.
- Examine the Rockstar participation-payment waterfall and its effect on cash available from any future licensing, settlement or litigation recovery.
- Assess the patent portfolios’ enforceability, useful lives, impairment assumptions and realistic monetization prospects against the company’s ongoing legal and operating costs.
- Track cash burn, the going-concern qualification, subsequent financing proceeds and any further financing or dilution.
- Review litigation developments and management’s remediation of the reported material weaknesses in internal controls.