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SPEX > SEC Filings for SPEX > Form 10-Q on 20-May-2013All Recent SEC Filings

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Form 10-Q for SPHERIX INC


Quarterly Report

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


Until the sale of Spherix Consulting, Inc. in December 2012, our principal segments have been Biospherics, our biotechnology research and development business, and Spherix Consulting, a technical and regulatory consulting business. On December 3, 2012, the Company sold all of the stock of Spherix Consulting, Inc. Accordingly, the operations of Spherix Consulting, Inc. are reported in the accompanying financial statements as discontinued operations in the Consolidated Statement of Operations. In 2013, the Company formed a new wholly-owned subsidiary, Nuta Technology Corp.


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Following the sale of Spherix Consulting, the Company engaged in an examination of its business strategies and strategic alternatives. The Company has determined to augment its biotechnology research and development business with a new business segment, monetization of intellectual property assets. To that end, on April 2, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with its wholly owned subsidiary, Nuta and North South Holdings, Inc., a Delaware corporation ("North South"), the owner or assignee of certain patents, licenses and applications (the "North South Intellectual Property"), and the shareholders of North South (the "North South Shareholders"). Upon closing of the transaction contemplated under the Merger Agreement (the "Merger"), North South will merge with and into Nuta with Nuta as the surviving corporation. Nuta will operate in the State of Virginia as the record owner of the North South Intellectual Property. The closing of the Merger is subject to customary closing conditions, including the receipt of a fairness opinion that the Merger Consideration (as defined below) is fair to stockholders and the Company from a financial point of view, based on, among other things, the North South Intellectual Property assets, and the approval of the Company's shareholders holding a majority of the outstanding voting capital of the Company to issue the Merger Consideration pursuant to NASDAQ listing standards. Pursuant to the terms and conditions of the Merger, at the closing of the Merger, all outstanding shares of North South's capital stock will be converted into the right to receive an aggregate of 118,483 shares of the Company's common stock, par value $0.0001 per share and 1,488,152 shares of the Company's newly designated Series D Convertible Preferred Stock, par value $0.0001 per share (the "Series D Preferred Stock"), which is convertible into shares of the Company's Common Stock on a one-for-ten basis (collectively with the 118,483 shares of Common Stock, the "Merger Consideration").

The Company has filed a preliminary consent solicitation with the Securities and Exchange Commission ("SEC") seeking shareholder approval of the issuance of the Merger Consideration. Upon clearance by the SEC, the Company will forward the consent solicitation to the shareholders in an effort to obtain such approval.

Biospherics has been active in efforts to develop pharmaceuticals. Our strategy to achieve this development has been to:

ˇ utilize our clinical development experience to manage and drive drug candidates through the clinical development process to approval;

ˇ identify and explore licensing and partnership opportunities for drug candidates;

ˇ seek to acquire medically important drug candidates in early-stage to mid-stage clinical development; and

ˇ commercialize our drug candidates, either alone or more likely in partnership.

We previously conducted a Phase 3 trial to determine efficacy of D-tagatose as a treatment for Type 2 diabetes and a Phase 2 Dose Range trial to evaluate the effectiveness of lower doses of D-tagatose in treating Type 2 diabetes. In spite of favorable Phase 3 and Phase 2 results, in 2010 we determined that continued development of D-tagatose as a treatment for Type 2 diabetes required the involvement of a pharma partner with the resources needed to fund the rest of the development and bring it to market. We believe we obtained favorable Phase III results and are seeking a Pharma or other partner to fund additional Phase III clinical trials and a cardiovascular safety study requested by the FDA, which could require substantial expenditures.

More recently, the Company 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. High triglyceride levels are sometimes a symptom of conditions associated with heart disease such as obesity and metabolic syndrome, which is a condition associated with elevated glucose levels as well as excess fat around the waist, high blood pressure, high triglycerides, low HDL cholesterol, and other dyslipidemias.
Biospherics and the University of Kentucky Research Foundation ('UKRF") have a License Agreement pursuant to which UKRF has granted Biospherics an exclusive worldwide license to commercialize certain compounds including SPX106. Upon commercialization, UKRF is entitled to royalties generally equal to 3% of net sales. UKRF has the right to terminate the license agreement if Biospherics fails to continue its commercialization efforts.


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In early May 2013, the Company announced that it will explore the prospects for a more efficient process for the production of D-tagatose with a goal of selling D-tagatose as a food ingredient.

D-tagatose is a natural sweetener present in only small amounts in fruits and dairy products, but it can be commercially produced through an enzymatic process beginning with other natural sugars. With the same bulk and sweetness of regular sugar (i.e., sucrose) and no after-taste, D-tagatose is an ideal solution for sweet and savory products. D-tagatose has a documented prebiotic effect and a low caloric value of 1.5 kcal per gram. D-tagatose has a glycemic and insulin index of only 3% of that of glucose.

In the fourth quarter of 2012, Spherix entered into an agreement granting Fullife, India, an exclusive, royalty bearing license for the use of Spherix's clinical data and proprietary knowledge to support the marketing and dosing of D-tagatose and is supplying D-tagatose from its inventory. Bio Foods, Chile, has exchanged a nonbinding term sheet with Spherix for D-tagatose's introduction in Chile. Spherix entered into a nondisclosure agreement with WIO SmartFoods LLC, Utah, and began selling D-tagatose for use in WIO SmartFoods product line. WIO certifies bariatric clinics and diet clinics to use its proprietary meal replacement plan to promote weight loss. WIO focuses on helping people with the metabolic syndrome, which is characterized by obesity, diabetes, and atherosclerosis. The Company is seeking to expand the structure function claims for D-tagatose make it more valuable than a simple artificial sweetener.

The biggest problem with widespread adoption of tagatose is the cost of production. ChromaDex has agreed to provide support in seeking more efficient scalable processes for the production of tagatose. We selected ChromaDex in part in order to obtain the assistance of their principal investigator, the Director of New Technologies and Supply Chain Development, who brings 14 years of experience in business, operations, and R&D management to the task, and previously participated in the introduction of the TruviaŽ brand stevia artificial sweetener for Cargill Health and Nutrition. ChromaDex also obtained a right of first refusal for marketing and selling the new D-tagatose.

In late February, 2013, the Board of Directors appointed Harvey J. Kesner as interim Chief Executive Officer of the Company.

In early March, 2013, we issued Series C Convertible Preferred Stock in exchange for certain warrants we issued in our November, 2012 private placement transaction.

Results of Operations for the Three Months Ended March 31, 2013 and 2012


During the three months ended March 31, 2013, the Company earned $4,000 from the sale of D-tagatose and $1,760 on royalties from an oil detection licensing agreement. 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 ("R&D") 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, including the Company's supply of D-tagatose, of which the Company maintained an estimated 8 metric tons at March 31, 2013. The decrease in R & D costs of $328,000 from $371,403 for the three months ended March 31, 2012 to $43,068 for the same period in 2013 reflects the completion of SPX106T preclinical studies in late 2012.

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 increased $181,000 to $873,240 for the three months ended March 31, 2013 from $692,492 in the comparable prior year period. Severance/retention expense for the continuing staff is being recognized evenly over the required performance period from the date of each agreement, with $288,000 recognized during the three months ended March 31, 2013 and none in the corresponding period in 2012. This increase was partially offset by an otherwise general decrease in S,G&A spending during the first quarter of 2013. The remaining $146,000 in severance/retention expense will be recognized during the second quarter of 2013.

Unrealized (Loss) Gain on the Change in Fair Value of Warrant Liabilities

Unrealized (loss) gain on the change in fair value of warrant liabilities is the result of the change in the carrying amount of the warrant liability caused by changes in the fair value as determined using a Black-Scholes option valuation method. The change between years was the result of an increase in the Company's stock price during the first quarter of 2013, which resulted in the unrealized loss in that period.


Interest income for the three months ended March 31, 2013 was consistent with the prior year and primarily derived from interest earned on the net proceeds of our equity offerings.

Liquidity and Capital Resources

We continue to incur ongoing administrative and other expenses, including public company expenses, without significant corresponding revenue.

Until such time as we earn revenue from our pharmaceutical development business or from a new business venture, we intend to finance our activities through:

ˇ the current cash and cash equivalents on hand from our past equity offerings; and

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

Working capital was $3.1 million and $4.0 million at March 31, 2013 and December 31, 2012, and cash on hand was $3.4 million and $4.5 million, respectively. Management believes that the cash on hand will be sufficient to sustain operations for at least the next twelve months, including payment of severances aggregating $146,000 in the second quarter of 2013.

The Company cannot be assured that it will be able to attract an investor in our securities or raise the additional funds it will likely require in the future, that the Company will be able to obtain any required stockholder approval for such financings, or that the Company will be able to successfully complete additional offerings or sales of its securities. If the Company is unable to raise needed additional funds to continue its business activities, it may be forced to cease business activities in which case the Company could also be required to terminate its operations and dissolve.


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