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SPEX > SEC Filings for SPEX > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SPHERIX INC

Form 10-Q for SPHERIX INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K.

Certain statements in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are identified by the use of forward-looking words or phrases such as "believes," "expects," is or are "expected," "anticipates," "anticipated," "should" and words of similar impact. These forward-looking statements are based on the Company's current expectations. Because forward-looking statements involve risks and uncertainties, the Company's actual results could differ materially.


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Overview

The Company operates via two segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary pharmaceutical products. Health Sciences provides technical and regulatory consulting services to food, consumer products, biotechnology and pharmaceutical companies, as well as providing technical support to the Biospherics segment.

Biospherics is dedicated to development of pharmaceuticals. Recently, the Company has focused its studies on treating high triglycerides and other dyslipidemias with a combination of D-tagatose and SPX106, a licensed drug compound, which combination is referred to as SPX106T.

Tagatose, a naturally occurring sugar, is a low-calorie, full-bulk sweetener previously approved by the Food and Drug Administration ("FDA") as a GRAS (Generally Recognized As Safe) food ingredient. It is a true sugar that looks, feels, and tastes like table sugar. During human safety studies supporting food use, we discovered and patented a number of health and medical uses for D-tagatose.

We have incurred negative cash flow from operations in each of the two most recent fiscal years. We anticipate incurring negative cash flows from operating activities for the foreseeable future.

On April 20, 2012, the Company received a deficiency notice from NASDAQ regarding the bid price of the Company's common stock. Following a 1 for 20 reverse stock split, on October 8, 2012, NASDAQ provided confirmation to the Company that the Company has regained compliance with Marketplace Rule 5550(a)(2) since the closing bid price of its common stock, $0.01 par value per share, had traded at $1.00 per share or greater for at least ten
(10) consecutive business days. This is the second time the Company employed a reversed stock split to avoid NASDAQ delisting.

On September 25, 2012, (the Company received written notification from NASDAQ advising the Company that the minimum number of publicly held shares of the Company's common stock had fallen below the minimum 500,000 shares required for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Rule 5550(a)(4) (the "Rule"). On November 12, 2012, the Company completed a private placement for the sale 483,657 shares of common stock and warrants for net proceeds of approximately $2.3 million. Following the closing of this transaction the Company's number of publicly held shares of common stock outstanding increased to 690,741. The Company believes that the placement of 483,657 additional shares in this transaction will satisfy the required listing requirement.

The Company has recently expanded its Board of Directors and will be re-examining its business strategies and exploring strategic alternatives. This effort may result in the divestiture or winding down of certain of our current businesses and the possible entry into a new, yet identified business, including via acquisitions.

Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Revenue and Direct Costs

Revenue and direct contract costs are primarily related to the Company's Health Sciences business. The consulting business generally provides services on either a fixed-price basis or a "time and expenses" basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. The decrease in revenue for the three months ended September 30, 2012 of $4,000 and nine months ended September 30, 2012 of $80,000 is primarily related to lower effective billing rates on contracts from those of the corresponding 2011 period.

No substantial revenue is expected from the Biospherics segment until the Company is successful in selling or licensing its technology.


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Research and Development

Research and development expenditures relate solely to the Biospherics segment and consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, and other expenses related to our efforts to develop SPX106T for use in lowering triglyceride and cholesterol levels. We expense our research and development costs as they are incurred.

The decrease in R & D costs for the three and nine months ended September 30, 2012 from those of the corresponding period of the prior year reflects the completion of SPX106T preclinical studies. No further studies are presently planned.

Selling, General and Administrative

Our selling, general and administrative (S,G&A) expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and other corporate expenses, including facilities-related expenses. S,G&A expenses for the three and nine months ended September 30, 2012 and 2011 increased between years as a result of holding the Company's annual meeting earlier in the year than in 2011.

Interest

Interest income for the three and nine months ended September 30, 2012 was consistent with the prior year and primarily derived from interest earned on the net proceeds of our equity offerings.


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Other Income

In October 2010, the Company was awarded two one-time grants from the U.S. Government under the Patient Protection and Affordable Care Act. The awards were for the Company's Diabetes and Triglyceride research. As a result, the Company recognized $53,000 in other income for the three and nine month periods ended September 30, 2011; no such grants were received during the nine-month period ended September 30, 2012.

Gain on Settlement of Obligations

On January 14, 2011, Biospherics Incorporated, a wholly-owned subsidiary of the Company, filed a Complaint For Injunction Relief And Damages in The United States District Court For The District Of Maryland against Inalco S.p.A. (the "Complaint"). The Complaint alleged that Inalco had breached the 2009 Manufacturing Support and Supply Agreement as Inalco (i) refused to supply D-tagatose previously paid for by Biospherics, (ii) refused to provide a promised bank guarantee, and (iii) shut-down its D-tagatose production facilities. On March 16, 2011, both parties signed a settlement agreement whereby Inalco agreed to supply Spherix with 8.5 metric tons of D-tagatose, which has been received by Spherix, and both parties have agreed to release each other from any other obligations under the previous agreement. As a result, the Company recognized a gain of $600,000 in March 2011 on the release from its purchase obligation.

In January 2011, the Company entered into a Letter Agreement with Gilbert V. Levin and M. Karen Levin pursuant to which the Company agreed to make a one time lump sum payment of $450,000 to the Levins in full satisfaction of the Company's obligation to make a series of continuing payments to the Levins relating to their prior employment by the Company. Per the terms of the agreement, Gilbert V. Levin resigned as a member of the Board of Directors of the Company on January 13, 2011. The Company's estimated liability to the Levins at December 31, 2010, and prior to the above agreement was approximately $695,000. The $450,000 lump sum payment was made on January 31, 2011, and the Company recognized the $245,000 difference as a gain on settlement of obligations in January 2011.

No similar gains were realized during the three- and nine-month period ended September 30, 2012.

Liquidity and Capital Resources, Consolidated

We may continue to incur substantial development costs in our Biospherics segment in the next several years, without substantial corresponding revenue, and we will continue to incur ongoing administrative and other expenses, including public company expenses. We intend to finance our activities through:

the remaining proceeds of our equity offerings; and

additional funds we will seek to raise through the sale of additional securities in the future.

Working capital was $3.1 million at September 30, 2012, and cash on hand as of that date was $3.7 million. Management believes that this cash on hand, plus the $2.3 million the Company subsequently raised in November 2012 (see below), will be sufficient to sustain operations for the next twelve months.

In February 2012, the Company obtained net proceeds of approximately $1.1 million in a registered direct offering of common stock and warrants. Both the common stock issued in the offering and the underlying common stock for the warrants issued in the offering were previously registered under a Form S-3 shelf registration statement declared effective by the SEC in October 2009.

In November 2012, the Company obtained net proceeds of approximately $2.3 million in a private placement of common stock and warrants. The Company sold an aggregate of 483,657 shares of common stock at a price of $5.324 per share along with warrants to purchase an additional 483,657 shares of common stock at an exercise price of $6.53


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per share. The warrants shall be exercisable for a period of five years, but will not be effective until approved by the shareholders of the Company. Common stock and warrants were issued in a private placement of securities exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The Company and the Investors have executed a Registration Rights Agreement pursuant to which the Company has agreed to register the common stock sold in the offering and the common stock issuable upon exercise of the warrants. Failure on the part of the Company to satisfy certain deadlines described in the Registration Rights Agreement may subject the Company to payment of certain monetary penalties. The Investors shall have the right to participate for 100% of any future debt or equity offerings of the Company during the two years following the Closing.

Due to the nature of our business, we will need to raise additional funds from time to time. NASDAQ rules require stockholder approval for certain stock issuances constituting twenty percent (20%) or more of a company's issued and outstanding stock.

The Company's Form S-3 shelf registration statement expired on October 1, 2012.

The Company cannot be assured that it will be able to attract a purchaser of securities to raise the additional funds it will likely require in the future; that the Company will be able to obtain any required stockholder approval; or that the Company will be able to have additional offerings. If we reach a point where we are unable to raise needed additional funds to continue our business activities, we will be forced to cease our development activities and dissolve the Company. In such an event, we will need to satisfy various severance, lease termination and other dissolution-related obligations.

On April 20, 2012, the Company received a deficiency notice from NASDAQ regarding the bid price of the Company's common stock. Following a 1 for 20 reverse stock split, on October 8, 2012, NASDAQ provided confirmation to the Company that the Company has regained compliance with Marketplace Rule 5550(a)(2) since the closing bid price of its common stock, $0.01 par value per share, had traded at $1.00 per share or greater for at least ten
(10) consecutive business days. This is the second time the Company employed a reverse stock split to avoid NASDAQ delisting.

On September 25, 2012, (the Company received written notification from NASDAQ advising the Company that the minimum number of publicly held shares of the Company's common stock had fallen below the minimum 500,000 shares required for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Rule 5550(a)(4) (the "Rule").

On November 12, 2012, the Company completed a private placement for the sale 483,657 shares of common stock and warrants for net proceeds of approximately $2.3 million. Following the closing of this transaction the Company's number of publicly held shares of common stock outstanding increased to 690,741. The Company believes that the placement of 483,657 additional shares in this transaction will satisfy the required listing requirement.

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