1. business and industrial

SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly report pursuant to sections 13 or 15(d)
Filing Date: 2011-11-10 | Period of Report: 2011-09-30
SEC Accession No. 0001104659-11-063226
(HTML Version on secdatabase.com)
FILER
SPHERIX INC
CIK:12239| IRS No.: 520849320 | State of Incorp.:DE | Fiscal Year End: 1231
Type: 10-Q | Act: 34 | File No.: 000-05576 | Film No.: 111195781
SIC: 8700 Engineering, accounting, research, management
Mailing Address
6430 ROCKLEDGE DRIVE,
#503
BETHESDA MD 20817
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Business Address
6430 ROCKLEDGE DRIVE,
#503
BETHESDA MD 20817
301-897-2540
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 0-5576
SPHERIX INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
52-0849320
(I.R.S. Employer Identification No.)
6430 Rockledge Drive, Suite 503, Bethesda, MD 20817
(Address of principal executive offices)
301-897-2540
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the Registrant was required to submit and post such files.) Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large Accelerated Filer o
Accelerated Filer o
Non-accelerated Filer o
Smaller Reporting Company x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.
Class
Outstanding as of November 10, 2011
Common Stock, $0.01 par value
3,094,961 shares
Table of Contents
Spherix Incorporated
Form 10-Q
For the Quarter Ended September 30, 2011
Index
Page No.
Part I. Financial Information
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30,
2011 and 2010
3
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010
5
Notes to the Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
Item 4.
Controls and Procedures
15
Part II. Other Information
Item 1A.
Risk Factors
16
Item 6.
Exhibits
16
Signatures
17
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Spherix Incorporated
Part I. Financial Information
Item 1.
Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Sept. 30,
2011
Revenue
$
Operating expenses
Direct costs
Research and development expense
Selling, general and administrative expense
Total operating expenses
Loss from operations
Interest income
Other income
Gain on settlement of obligations
Loss before taxes
198,464
$
2011
368,838
690,817
$
1,028,268
(121,841)
(1,453,987)
(933,507)
(336,714)
(1,131,329)
(2,271,369)
(353,740)
(4,310,471)
(3,214,257)
(1,112,377)
(2,509,335)
(3,739,412)
(7,878,468)
(913,913)
595
—
—
(2,140,497)
1,054
—
—
(3,048,595)
2,680
53,007
845,000
(6,850,200)
5,270
—
—
(913,318)
(2,139,443)
(2,147,908)
(6,844,930)
—
$
$
2010
(87,399)
(371,327)
(653,651)
Income tax expense
Net loss
Nine Months Ended Sept. 30,
2010
(913,318)
Net loss per share, basic
Net loss per share, diluted
(14,485)
—
$
(0.36)
(0.36)
(2,139,443)
(1.25)
(1.25)
$
(2,162,393)
(0.86)
(0.86)
—
$
(6,844,930)
(3.99)
(3.99)
Weighted average shares outstanding, basic
2,562,488
1,715,065
2,524,541
1,715,065
Weighted average shares outstanding, diluted
2,562,488
1,715,065
2,524,541
1,715,065
See accompanying notes to financial statements.
3
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Spherix Incorporated
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Condensed Consolidated Balance Sheets
ASSETS
Current assets
Cash and cash equivalents
Trade accounts receivable, net of allowance of $8,174 and $65,000
Grants receivable
Other receivables
Prepaid research expenses
Prepaid expenses and other assets
Total current assets
$
Property and equipment, net of of accumulated depreciation of $248,642 and $197,971
Patents, net of accumulated amortization of $2,044 and $50,725
Deposit
Total assets
LIABILITIES AND STOCKHOLDERS’’ EQUITY
Current liabilities
Accounts payable and accrued expenses
Accrued salaries and benefits
Deferred revenue
Total current liabilities
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$
5,575,310
285,859
270,128
74,110
464,322
155,261
5,486,259
6,824,990
108,342
102
35,625
154,161
2,296
35,625
7,017,072
$
250,383
432,052
68,442
$
1,211,561
563,706
170,641
$
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5,022,165
167,045
—
81,975
211,934
3,140
$
Stockholders’ equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized; 5,250 series B issued and 1
outstanding at September 30, 2011 and December 31, 2010
Common stock, $0.01 par value, 5,000,000 shares authorized; 2,570,531 and 2,143,631 issued,
2,562,488 and 2,135,588 outstanding at September 30, 2011 and December 31, 2010,
respectively
Paid-in capital in excess of par value
Treasury stock, 8,043 shares, at cost at September 30, 2011 and December 31, 2010
Accumulated deficit
Total stockholders’ equity
4
2010
5,630,328
Commitments and contingencies
See accompanying notes to financial statements.
December 31,
(Unaudited)
$
Deferred compensation
Deferred rent
Total liabilities
Total liabilities and stockholders’ equity
Sept. 30, 2011
750,877
1,945,908
—
56,276
550,000
80,945
807,153
2,576,853
—
—
—
—
25,705
41,109,894
(464,786)
(35,847,638)
21,436
38,568,814
(464,786)
(33,685,245)
4,823,175
4,440,219
5,630,328
$
7,017,072
Spherix Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Sept. 30,
2011
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on settlement of obligation
Depreciation and amortization
Recovery of bad debt
Bad debt expense
Stock-based compensation
Changes in assets and liabilities:
Receivables
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred rent
Deferred compensation
Deferred revenue
Net cash used in operating activities
$
Cash flow from investing activities
Proceeds from the maturity of short-term investments
Purchase of property and equipment
Net cash (used in) provided by investing activities
Cash flow from financing activities
Proceeds from issuance of common stock, net
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2010
(2,162,393)
$
(845,000)
52,865
(13,525)
8,174
—
—
58,542
—
40,000
37,084
386,428
404,509
(492,832)
(24,669)
(305,000)
(102,199)
(148,937)
165,401
45,469
(21,300)
(30,000)
164,498
(3,093,642)
(6,534,173)
—
(4,852)
375,003
—
(4,852)
375,003
2,545,349
—
2,545,349
—
(553,145)
5,575,310
$
See accompanying notes to financial statements.
5
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Spherix Incorporated
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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(6,844,930)
5,022,165
(6,159,170)
9,026,002
$
2,866,832
1.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company are unaudited and do not include all of the information
and disclosures generally required for annual financial statements. In the opinion of management, the statements contain all material
adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2011,
the results of its operations for the three-month and nine-month periods ended September 30, 2011 and 2010, and its cash flows for the ninemonth periods ended September 30, 2011 and 2010. This report should be read in conjunction with the Company’s Annual Report on Form
10-K, which does contain the complete information and disclosure, for the year ended December 31, 2010.
The Company operates via two principal segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary
products for commercial application. Health Sciences provides technical and regulatory consulting services to biotechnology and
pharmaceutical companies, as well as providing technical support for the Biospherics segment.
The Company has created two wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., for its two operating
segments. The Company’s Health Sciences contracts are in the name of Spherix Consulting, Inc. and the Company’s patents are in the name
of Biospherics Incorporated. Spherix Incorporated provides management, strategic guidance, business development, marketing and other
services to its subsidiaries.
On May 6, 2011, the Company effected a one-for-ten reverse split of its common stock. The Company implemented the reverse stock
split under the authority granted to the Board of Directors by the Company’s stockholders at the annual meeting of stockholders held on
November 17, 2009, to effect a reverse stock split of the Company’s Common Stock, par value $0.01 per share. The reverse stock split
reduced the number of outstanding shares of Common Stock from 25,624,872 shares to 2,562,488 shares. All per share amounts and
outstanding shares, including all Common Stock equivalents, stock options, equity compensation plans, and warrants, have been retroactively
restated in the Financial Statements and in the Notes to the Financial Statements for all periods presented to reflect the reverse stock split. On
the Company’s balance sheet, the aggregate par value of the common stock at December 31, 2010 was retroactively reduced by $85,746 with
an off-setting increase to paid-in capital in excess of par.
2.
Liquidity and Capital Resources
The Company’s working capital was $4.7 million as of September 30, 2011, compared to working capital of $4.9 million as of
December 31, 2010. The change in working capital consisted principally of (i) $2.5 million received from the sale of equity in January 2011,
(ii) $3.1 million used in support of the Company’s operations, and (iii) the relief of a $600,000 purchase obligation in the first quarter.
The Company has incurred substantial development costs in its efforts to explore whether D-tagatose is an effective treatment for Type
2 diabetes, including a completed Phase 3 clinical trial and a related Phase 2 Dose Range trial. We have funded these costs from the cash we
received in the 2007 sale of InfoSpherix, and the net proceeds of our equity offerings.
Over the next 12 months, the Company expects that it will need to expend between $4 million and $6 million to support our currently
planned development operations. This estimate assumes (i) continuing efforts to sell, license, or obtain a partner for the diabetes drug
application, (ii) no further significant expenditures for developing D-tagatose as a drug for diabetes, (iii) continuing development of
SPX-106T as a treatment for high triglycerides, (iv) ongoing operation of the Health Sciences segment at the current level of activity, and (v)
that we raise additional funds to continue our development efforts beyond this 12-month period.
In October 2010, we obtained net proceeds of approximately $4.9 million in a registered offering. The common stock issued upon the
conversion of the Series B convertible preferred stock and the common stock, which may be issued upon the exercise of warrants issued in the
offering, have been registered under a Form S-1 registration statement declared effective by the Securities and Exchange Commission
(“SEC”) in October 2010.
6
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In January 2011, the Company obtained net proceeds of approximately $2.5 million in a registered direct offering. The common stock
issued in the offering and the common stock that may be issued upon exercise of warrants issued in the offering have been registered under a
Form S-3 registration statement declared effective by the SEC in October 2009.
In October 2011, the Company obtained net proceeds of approximately $1.15 million in a private placement. The Company has agreed
to use its best efforts to register under a Form S-3 registration statement the common stock issued in the offering and the common stock that
may be issued upon exercise of warrants issued in the offering for resale by the purchasing stockholders. See the subsequent event footnote,
Note 13, for more information.
Due to the nature of our business, we will need to raise additional funds on a consistent basis to continue operations and to fully pursue
the triglycerides opportunity. Fundraising will likely require the issuance of additional equity securities, and a purchaser of such securities
will likely insist that such securities be registered securities. NASDAQ rules require stockholder approval for certain stock issuances
constituting twenty percent (20%) or more of a company’s issued and outstanding stock.
Pursuant to SEC rules, the Company may not be in a position to issue additional shares of its common stock in another registered direct
primary offering under a Form S-3 registration statement until February 2012. Thus, if the Company wishes to conduct another registered
direct primary offering before February 2012, it will likely have to do so in whole or in part under a Form S-1 registration statement.
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,
that the Company will be able to obtain any required stockholder approval, or that the Company will be able to have additional registered
direct primary 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.
3.
Common Stock and Paid-in Capital in Excess of Par
During the nine months ended September 30, 2011, the Company issued shares of common stock as follows:
Paid-in
Preferred Stock
Shares
Balance, January 1, 2011
Balance, September 30, 2011
Amount
1
Sale of common stock, net of offering costs of
$229,501 (1)
Common Stock
$
—
1
$
Shares
—
2,143,631
—
—
426,900
—
2,570,531
Capital in
Amount
$
$
Excess of Par
21,436
—
$ 38,568,814
—
4,269
2,541,080
25,705
$ 41,109,894
(1) The stock issuance is further discussed in Note 2, “Liquidity and Capital Resources”
4.
Concentrations of Credit Risk
The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $250,000. At September 30, 2011, the Company’s cash and cash equivalents in excess of the FDIC limits were $4.8
million. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks.
5.
Use of Estimates and Assumptions
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The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. This requires management to make estimates
7
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and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the period. Accordingly, actual results could differ from
those estimates and assumptions.
6.
New Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-29, “Business combinations —
disclosure of supplementary pro forma information,” to amend topic ASC 805 “Business Combinations,” by improving disclosure
requirements related to the business combinations performed during the year being reported on. Under the amended guidance, a public entity
that presents comparative financial statements must disclose the pro forma revenue and earnings of the combined entity as though the business
combination had occurred as of the beginning of the prior annual reporting period. The adoption of these disclosure rules had no effect on the
Company’s financial position, results of operations or cash flows.
In May 2011, the FASB issued a new accounting standard on fair value measurements that clarifies the application of existing guidance
and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value
measurements. We are required to adopt this standard in the first quarter of 2012. We do not expect this adoption to have a material impact
on our financial statements.
In June 2011, the FASB issued a new accounting standard on the presentation of comprehensive income. The new standard requires the
presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of
adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net
income and the components of other comprehensive income are presented. We are required to adopt this standard as of the beginning of 2013.
We do not expect this adoption to have a material impact on our financial statements.
7.
Fair Value Measurements
The Company has elected not to apply the fair value option to measure any of the financial assets and liabilities on its balance sheet not
already valued at fair value under other accounting pronouncements. These other financial assets and liabilities are primarily accounts
receivable and accounts payable, which are reported at historical value. The fair value of these financial assets and liabilities approximate their
fair value because of their short duration.
8.
Net Loss Per Share
Basic net loss per common share has been computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. Diluted net loss per common share has been computed by dividing net loss by the weighted-average number of
common shares outstanding without an assumed increase in common shares outstanding for common stock equivalents, as common stock
equivalents are antidilutive. At September 30, 2011, none of the Company’s outstanding options, warrants and preferred stock to purchase up
to 3,509 shares, 567,574 shares and 80 shares of common stock, respectively, were included in the calculation of diluted earnings per share as
the exercise prices were all above the average market price of the Company’s common stock for the period and thus would be antidilutive. At
December 31, 2010, none of the Company’s 2,800 outstanding options and none of the warrants to purchase up to 118,717 shares of common
stock were included in the calculation of diluted earnings per share as the exercise prices were all above the average market price of the
Company’s common stock for the period and thus would be antidilutive.
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9.
Accounting for Stock-Based Compensation
During the three- and nine-months ended September 30, 2011, the Company had no stock-based compensation expense. For the threeand nine-months ended September 30, 2010, the Company recognized $0 and $30,000 in stock-based compensation expense relating to stock
options awarded in May 2010 and recognized $2,000 and $7,000 relating to restricted stock granted in August 2009, respectively. At
September 30, 2011, all of the outstanding options under the plan were fully vested.
A summary of option activity under the Company’s employee stock option plan for the nine months ended September 30, 2011, is
presented below:
Weighted-
Options
Outstanding at beginning of year
Granted
Exercised
Expired or forfeited
Outstanding at end of period
Exercisable at September 30, 2011
10.
Shares
Weighted-
Average
Average
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Price
Term
Value
6,309
—
—
(2,800)
$
$
$
$
16.10
—
—
22.00
3,509
$
11.40
3.6
$
—
3,509
$
11.40
3.6
$
—
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. A valuation allowance is established based upon periodic assessments made by
management to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the current tax provision for the
period and the change during the period in deferred tax assets and liabilities. The Company’s estimated annual effective tax rate was zero for
the first nine months of 2011 and 2010. The Company’s estimated effective tax rate was zero for the quarters ended September 30, 2011 and
September 30, 2010. However, the effective income tax rate for the nine months ended September 30, 2011 was approximately -0.7% as a
result of realizing a discrete item of $15,000 in the first quarter, compared to an effective income tax rate of 0.0% for the nine months ended
September 30, 2010.
11.
Information by Business Segment
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The
Company operates via two principal segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary products for
commercial application. Health Sciences provides technical and regulatory consulting services to biotechnology and pharmaceutical
companies, as well as aiding the Biospherics segment.
Financial information by business segment for the three and nine months ended September 30, 2011 and 2010 is summarized below:
9
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Three Months Ended Sept. 30,
2011
Revenue
Operating Profit (Loss) and
Loss from Operations
Before Income Taxes
Identifiable Assets
12.
Nine Months Ended Sept. 30,
2010
2011
2010
Biospherics
Health Sciences
$
—
198,000
$
—
369,000
$
—
691,000
$
—
1,028,000
Total revenue
$
198,000
$
369,000
$
691,000
$
1,028,000
Biospherics
Health Sciences
General
Total operating loss
Interest income
Other income
Gain on settlement of
obligations
Loss from operations before
income taxes
$
(407,000) $
(6,000)
(501,000)
(1,605,000) $
160,000
(695,000)
(1,244,000) $
152,000
(1,957,000)
(5,079,000)
314,000
(2,085,000)
(914,000)
1,000
—
(2,140,000)
1,000
—
(3,049,000)
3,000
53,000
(6,850,000)
5,000
—
—
$
(913,000) $
—
(2,139,000) $
Sept. 30,
Dec. 31,
2011
2010
Biospherics
Health Sciences
General corporate assets
$
193,000
249,000
5,188,000
$
739,000
359,000
5,919,000
Total assets
$
5,630,000
$
7,017,000
845,000
(2,148,000) $
—
(6,845,000)
Gain on Settlement of Obligations
Purchase Commitments
On January 14, 2011, Biospherics Incorporated 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 one of the Company’s D-Tagatose
suppliers, 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 on settlement of obligations of $600,000 in March 2011 on the release from its purchase obligation.
Related Party Transactions
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. The Company’s estimated liability to the
Levins 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.
13.
Subsequent Events
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The Company evaluated all events or transactions after September 30, 2011, through the date the financial statements were issued.
In October 2011, the Company obtained proceeds of approximately $1.15 million in a private placement, net of placement agency fees
of approximately $76,000. Spherix issued an aggregate of 532,559 shares of common stock at a price of $2.365 per share along with warrants
to purchase an additional 532,559 shares of common stock at an exercise price of $2.24 per share. The warrants are exercisable immediately
and expire in five years. The Company has agreed to use its best efforts to register under a Form S-3 registration statement the common stock
issued in the offering and the common stock which
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may be issued upon exercise of warrants issued in the offering for resale by the purchasing stockholders.
In connection with the closing of the October 2011 offering, the Company issued to Rodman & Renshaw, LLC warrants to purchase
15,977 shares of our common stock (at an exercise price of $2.95625 per share). The estimated fair value of the warrants at the date of grant
was $25,000. The warrants are exercisable at the option of the holder at any time beginning October 28, 2011 through and including October
27, 2016. These warrants were offered and sold by us in reliance upon exemptions from the registration statement requirements by Section
4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering.
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, 2010, 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.
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. Until June 2010, this development was limited to developing Dtagatose as a novel, first-in-class treatment for Type 2 diabetes. 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.
In June 2010, the Company announced that it would actively seek a pharma partner to continue the diabetes development and that it
would also explore D-tagatose as a potential treatment for high triglycerides, a risk factor for atherosclerosis, myocardial infarction, and
stroke. The Company has begun such exploration and is also evaluating other drug compounds it has licensed from the University of
Kentucky. Recently, the Company has focused its studies on treating high triglycerides with a combination of D-tagatose and one of the
licensed drug candidates, which combination is referred to as SPX-106T. Animal studies of SPX-106T are ongoing and an initial human
efficacy study could begin in early to mid 2012.
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We hold the patents for use of D-tagatose as a treatment for Type 2 diabetes and the license for the pending US and foreign patent
filings for SPX-106T in new formulations as a treatment for high blood triglycerides and related dyslipidemias. We have also filed for patent
protection on a D-tagatose and metformin combination. The use patents for D-tagatose as a treatment for Type 2 diabetes expire in 2012, not
including extensions. The use patent for the new SPX-106 and D-tagatose combination in the United States will last until twenty years after
the date of the original PCT filing, as will a patent protection on a D-tagatose and metformin combination. If D-tagatose is approved for use
as a drug by the FDA as a treatment for Type 2 diabetes, we believe we will be eligible for a five-year New Chemical Entity (“NCE”)
exclusivity period following FDA approval. Similar legislation in Europe could provide seven or more years of market exclusivity in the
European Union, if approved by the European Medicines Agency (EMA). If SPX-106 is
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approved for use as a drug by the FDA as a treatment for high triglycerides and related dyslipidemias, we believe we will be eligible for a
similar five-year New Chemical Entity (“NCE”) exclusivity period following FDA approval, and seven or more years of market exclusivity in
the European Union, if approved by the European Medicines Agency (EMA). The Company is also exploring the possibility of obtaining by
license or acquisition other clinical stage compounds/orphan drugs for continued development and commercialization.
Results of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
Revenue and Direct Costs
Health Sciences revenue for the three and nine months ended September 30, 2011, decreased $170,000 (46%) and $337,000 (33%)
between years and direct costs decreased $34,000 (28%) and $17,000 (5%) between comparative periods. respectively. The decrease in
revenue is attributable to lower effective rates on 2011 contracts in comparison to 2010 contracts. This is primarily driven by changing
demand in the market for Health Science based consulting services.
No substantial revenue is expected from the Biospherics segment until the Company is successful in selling or licensing its technology.
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 D-tagatose and SPX-106T for
future commercialization. We expense our research and development costs as they are incurred.
The clinical trials in the use of D-tagatose for the treatment of Type 2 diabetes was the primary focus of the Biospherics segment during
2010. Beginning in the fourth quarter of 2010, the Company began shifting the focus of its R&D efforts to the use of SPX-106T in lowering
triglyceride and cholesterol levels. The shift from late stage trials to a pre-clinical trial resulted in a decrease in R&D costs between years; the
Company anticipates that R&D cost will begin to increase again with the progression of triglyceride and cholesterol studies.
An application for an Investigational New Drug (“IND”) for the D-tagatose and SPX-106 combination drug is being prepared for
submission to the US FDA, and a human proof-of-concept trial may begin later in 2012. Combination therapy is an important tool in many
complex disease settings, including cancer, infectious diseases, cardiovascular disease, diabetes and the metabolic syndrome. Scientific
progress has increased understanding of the pathophysiological processes that underlie these and other multifactorial diseases. This increased
knowledge has advanced new therapeutic approaches using combinations of drugs targeted at multiple therapeutic targets to improve
treatment response and/or minimize development of drug resistance. In settings like metabolic syndrome, in which combination therapy may
offer significant therapeutic advantages, there is increasing interest in the development of combinations of investigational drugs not previously
developed for any purpose.
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We estimate that it will likely take 3 or more years to complete the studies/trials necessary to attract a pharma partner to complete the
development and an additional 2-4 years to complete all necessary studies for an NDA filing for D-tagatose or SPX-106T.
The Company is seeking to in-license or acquire additional drugs to diversify its pipeline. Clinical-stage compounds (phase 1 or phase
2) are of particular interest, as are orphan drugs, which can be eligible for accelerated approval processes.
The Company’s R&D expenses in 2011 for pre-clinical triglyceride trials were substantially less than the diabetes trials incurred in
2010. The R&D expenditures for 2010 consisted of both the Phase 3 clinical trial and a related Phase 2 Dose Range study. For the three and
nine months ended September 30, 2011, R&D expenses decreased by $1.1 million (74%) and $3.2 million (74%) between years, respectively,
following the completion of the clinical portions of the Phase 3 and Phase 2 diabetes trials in 2010.
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As noted, each of the Phase 3 trial to determine efficacy of D-tagatose as a treatment for Type 2 diabetes and the Phase 2 Dose Range
trial to evaluate the effectiveness of lower doses of D-tagatose in treating Type 2 diabetes were completed in late 2010. We are actively
seeking a pharma partner to continue the development of D-tagatose as a treatment for Type 2 diabetes, but there is no assurance that we will
obtain such a strategic relationship.
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, 2011 decreased by $280,000 (30%) and $943,000 (29%) from those of the prior year,
respectively. The decrease between years was primarily attributable to a scaling down of the Company’s business development activities for
the use of D-tagatose as a treatment for type 2 diabetes, which included consultants, market research and other related costs.
Interest
Interest income in 2011 and 2010 was primarily derived from interest earned on the net proceeds of our equity offerings.
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, in 2011 the Company recognized
$53,000 in other income.
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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.
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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.
Liquidity and Capital Resources, Consolidated
The Company’s working capital was $4.7 million as of September 30, 2011, compared to working capital of $4.9 million as of
December 31, 2010. The change in working capital for the three- and nine-months ended September 30, 2011 consisted principally of (i) $2.5
million received from the sale of equity in January 2011, (ii) $3.1 million used in support of the Company’s operations, and (iii) the relief of a
$600,000 purchase obligation in the first quarter.
The Company has incurred substantial development costs in its efforts to explore whether D-tagatose is an effective treatment for Type
2 diabetes, including a completed Phase 3 clinical trial and a related Phase 2 Dose Range trial. We have funded these costs from the cash we
received in the 2007 sale of InfoSpherix, and the net proceeds of our equity offerings.
Over the next 12 months, the Company expects that it will need to expend between $4 million and $6 million to support our currently
planned development operations. This estimate assumes (i) continuing efforts to sell, license, or obtain a partner for the diabetes drug
application, (ii) no further significant expenditures for developing D-tagatose as a drug for diabetes, (iii) continuing development of SPX-106
and D-tagatose as a combination drug for treatment of high triglycerides and related dyslipidemias, (iv) ongoing operation of the Health
Sciences segment at the current level of activity and (v) that we raise additional funds to continue our development efforts beyond this
12-month period.
In October 2010, we obtained net proceeds of approximately $4.9 million in a registered direct offering. The common stock issued
upon the conversion of the Series B convertible preferred stock and common stock, which may be issued upon the exercise of warrants issued
in the offering, have been registered under a Form S-1 registration statement declared effective by the SEC in October 2010.
In January 2011, the Company obtained net proceeds of approximately $2.5 million in a registered direct offering. The common stock
issued in the offering and the common stock that may be issued upon exercise of warrants issued in the offering have been registered under a
Form S-3 registration statement declared effective by the SEC in October 2009.
In October 2011, the Company obtained net proceeds of approximately $1.15 million in a private placement. The Company has agreed
to use its best efforts to register under a Form S-3 registration statement the common stock issued in the offering and the common stock that
may be issued upon exercise of warrants issued in the offering for resale by the purchasing stockholders.
Due to the nature of our business, we will need to raise additional funds on a consistent basis to continue operations and to fully pursue
the triglycerides opportunity. Fundraising will likely require the issuance of additional
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equity securities and a purchaser of such securities will likely insist that such securities be registered securities. NASDAQ rules require
stockholder approval for certain stock issuances constituting twenty percent (20%) or more of a company’s issued and outstanding stock.
Pursuant to SEC rules, the Company may not be in a position to issue additional shares of its common stock in another registered direct
primary offering under a Form S-3 registration statement until February 2012. Thus, if the Company wishes to conduct another registered
direct primary offering before February 2012, it will likely have to do so in whole or in part under a Form S-1 registration statement.
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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,
that the Company will be able to obtain any required stockholder approval, or that the Company will be able to have additional registered
direct primary 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.
Item 4. Controls and Procedures
Inherent Limitations on the Effectiveness of Controls
Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and
procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. These controls and procedures are based
closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. Rules adopted by
the SEC require that we present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures to provide reasonable assurance of achieving their objective pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures are effective at a reasonable assurance level, as of September 30, 2011.
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Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the period covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
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Item 1A.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A Risk
Factors” in our Form 10-K for the year ending December 31, 2010, which could materially affect our business, financial condition, and results
of operations. The risks described in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
Item 6.
Exhibits
31.1
Certification of Chief Executive Officer of Spherix Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2
Certification of Chief Financial Officer of Spherix Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1
Certification of Chief Executive Officer of Spherix Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2
Certification of Chief Financial Officer of Spherix Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
101.1
XBRL Instance Document
101.2
XBRL Taxonomy Extension Schema Document
101.3
XBRL Taxonomy Extension Calculation Linkbase Document
101.4
XBRL Taxonomy Extension Definition Linkbase Document
101.5
XBRL Taxonomy Extension Label Linkbase Document
101.6
XBRL Taxonomy Extension Presentation Linkbase Document
16
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Signatures
Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Spherix Incorporated
(Registrant)
Date:
November 10, 2011
By: /s/ Claire L. Kruger
Claire L. Kruger
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Chief Executive Officer and Chief Operating Officer
Date:
November 10, 2011
By: /s/ Robert L. Clayton
Robert L. Clayton, CPA
Chief Financial Officer and Treasurer
17
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Exhibit 31.1
Certification of
Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Claire L. Kruger, certify that:
1.
I have reviewed this report on Form 10-Q of Spherix Incorporated;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a—15(f) and 15d—15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ Claire L. Kruger
Claire L. Kruger
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Chief Executive Officer and Chief Operating Officer
November 10, 2011
1
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Exhibit 31.2
Certification of
Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert L. Clayton, certify that:
1.
I have reviewed this report on Form 10-Q of Spherix Incorporated;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a—15(f) and 15d—15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ Robert L. Clayton
Robert L. Clayton
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Chief Financial Officer and Treasurer
November 10, 2011
1
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Exhibit 32.1
Certification of
Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Claire L. Kruger, Chief Executive Officer and Chief Operating Officer, of Spherix Incorporated (the “Company”), in compliance with
Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, to the best of my knowledge, the Company’s Report on Form 10-Q for
the period ended September 30, 2011 (the “Report”) filed with the Securities and Exchange Commission:
·
Fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
·
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ Claire L. Kruger
Claire L. Kruger
Chief Executive Officer and Chief Operating Officer
November 10, 2011
A signed copy of this written statement required by Section 906 has been provided to Spherix Incorporated and will be retained by Spherix
Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
1
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Exhibit 32.2
Certification of
Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Robert L. Clayton, Chief Financial Officer and Treasurer, of Spherix Incorporated (the “Company”), in compliance with Section 906 of the
Sarbanes-Oxley Act of 2002, hereby certify that, to the best of my knowledge, the Company’s Report on Form 10-Q for the period ended
September 30, 2011 (the “Report”) filed with the Securities and Exchange Commission:
·
Fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
·
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ Robert L. Clayton
Robert L. Clayton
Chief Financial Officer and Treasurer
November 10, 2011
A signed copy of this written statement required by Section 906 has been provided to Spherix Incorporated and will be retained by Spherix
Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
1
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Condensed Consolidated
Balance Sheets
Sep. 30, 2011 Dec. 31, 2010
(Parenthetical) (USD $)
Condensed Consolidated Balance Sheets
Trade accounts receivable, allowance (in dollars)
$ 8,174
$ 65,000
Property and equipment, accumulated depreciation (in dollars) 248,642
197,971
Patents, accumulated amortization (in dollars)
$ 2,044
$ 50,725
Preferred stock, par value (in dollars per share)
$ 0.01
$ 0.01
Preferred stock, shares authorized
2,000,000
2,000,000
Preferred stock, shares issued
5,250
5,250
Preferred stock, shares outstanding
1
1
Common stock, par value (in dollars per share)
$ 0.01
$ 0.01
Common stock, shares authorized
5,000,000
5,000,000
Common stock, shares issued
2,570,531
2,143,631
Common stock, shares outstanding
2,562,488
2,135,588
Treasury stock, shares
8,043
8,043
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Condensed Consolidated
9 Months Ended
Statements of Cash Flows
Sep. 30, 2011 Sep. 30, 2010
(USD $)
Cash flows from operating activities
Net loss
$ (2,162,393) $ (6,844,930)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on settlement of obligation
(845,000)
Depreciation and amortization
52,865
58,542
Recovery of bad debt
(13,525)
Bad debt expense
8,174
40,000
Stock-based compensation
37,084
Changes in assets and liabilities:
Receivables
386,428
(148,937)
Prepaid expenses and other assets
404,509
165,401
Accounts payable and accrued expenses
(492,832)
45,469
Deferred rent
(24,669)
(21,300)
Deferred compensation
(305,000)
(30,000)
Deferred revenue
(102,199)
164,498
Net cash used in operating activities
(3,093,642) (6,534,173)
Cash flow from investing activities
Proceeds from the maturity of short-term investments
375,003
Purchase of property and equipment
(4,852)
Net cash (used in) provided by investing activities
(4,852)
375,003
Cash flow from financing activities
Proceeds from issuance of common stock, net
2,545,349
Net cash provided by financing activities
2,545,349
Net decrease in cash and cash equivalents
(553,145)
(6,159,170)
Cash and cash equivalents, beginning of period
5,575,310
9,026,002
Cash and cash equivalents, end of period
$ 5,022,165 $ 2,866,832
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Condensed Consolidated
Statements of Operations
(USD $)
3 Months Ended
9 Months Ended
Sep. 30, 2011 Sep. 30, 2010 Sep. 30, 2011 Sep. 30, 2010
Revenue
$ 198,464
Operating expenses
Direct costs
(87,399)
Research and development expense
(371,327)
Selling, general and administrative expense
(653,651)
Total operating expenses
(1,112,377)
Loss from operations
(913,913)
Interest income
595
Other income
Gain on settlement of obligations
Loss before taxes
(913,318)
Income tax expense
Net loss
$ (913,318)
Net loss per share, basic (in dollars per share)
$ (0.36)
Net loss per share, diluted (in dollars per share)
$ (0.36)
Weighted average shares outstanding, basic (in shares) 2,562,488
Weighted average shares outstanding, diluted (in shares) 2,562,488
$ 368,838
(121,841)
(1,453,987)
(933,507)
(2,509,335)
(2,140,497)
1,054
$ 690,817
$ 1,028,268
(336,714)
(353,740)
(1,131,329) (4,310,471)
(2,271,369) (3,214,257)
(3,739,412) (7,878,468)
(3,048,595) (6,850,200)
2,680
5,270
53,007
845,000
(2,139,443) (2,147,908) (6,844,930)
(14,485)
$ (2,139,443) $ (2,162,393) $ (6,844,930)
$ (1.25)
$ (0.86)
$ (3.99)
$ (1.25)
$ (0.86)
$ (3.99)
1,715,065
2,524,541
1,715,065
1,715,065
2,524,541
1,715,065
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9 Months Ended
Sep. 30, 2011
Net Loss Per Share
Net Loss Per Share
Net Loss Per Share
8.
Net Loss Per Share
Basic net loss per common share has been computed by dividing net loss by the weightedaverage number of common shares outstanding during the period. Diluted net loss per common share
has been computed by dividing net loss by the weighted-average number of common shares
outstanding without an assumed increase in common shares outstanding for common stock equivalents,
as common stock equivalents are antidilutive. At September 30, 2011, none of the Company’s
outstanding options, warrants and preferred stock to purchase up to 3,509 shares, 567,574 shares and
80 shares of common stock, respectively, were included in the calculation of diluted earnings per share
as the exercise prices were all above the average market price of the Company’s common stock for the
period and thus would be antidilutive. At December 31, 2010, none of the Company’s 2,800
outstanding options and none of the warrants to purchase up to 118,717 shares of common stock were
included in the calculation of diluted earnings per share as the exercise prices were all above the
average market price of the Company’s common stock for the period and thus would be antidilutive.
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9 Months Ended
Sep. 30, 2011
Subsequent Events
Subsequent Events
Subsequent Events
13.
Subsequent Events
The Company evaluated all events or transactions after September 30, 2011, through the date
the financial statements were issued.
In October 2011, the Company obtained proceeds of approximately $1.15 million in a private
placement, net of placement agency fees of approximately $76,000. Spherix issued an aggregate of
532,559 shares of common stock at a price of $2.365 per share along with warrants to purchase an
additional 532,559 shares of common stock at an exercise price of $2.24 per share. The warrants are
exercisable immediately and expire in five years. The Company has agreed to use its best efforts
to register under a Form S-3 registration statement the common stock issued in the offering and the
common stock which may be issued upon exercise of warrants issued in the offering for resale by the
purchasing stockholders.
In connection with the closing of the October 2011 offering, the Company issued to Rodman &
Renshaw, LLC warrants to purchase 15,977 shares of our common stock (at an exercise price of
$2.95625 per share). The estimated fair value of the warrants at the date of grant was $25,000. The
warrants are exercisable at the option of the holder at any time beginning October 28, 2011 through
and including October 27, 2016. These warrants were offered and sold by us in reliance upon
exemptions from the registration statement requirements by Section 4(2) of the Securities Act of 1933,
as amended, as transactions by an issuer not involving a public offering.
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9 Months Ended
Sep. 30, 2011
Concentrations of Credit
Risk
Concentrations of Credit
Risk
Concentrations of Credit Risk
4.
Concentrations of Credit Risk
The Company maintains cash balances at several banks. Accounts at each institution are insured
by the Federal Deposit Insurance Corporation up to $250,000. At September 30, 2011, the Company’s
cash and cash equivalents in excess of the FDIC limits were $4.8 million. The Company has not
experienced any losses in such accounts and believes it is not exposed to any significant risks.
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9 Months Ended
Sep. 30, 2011
Income Taxes
Income Taxes
Income Taxes
10.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is established based upon periodic
assessments made by management to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the current tax provision for the period and the change during the period in
deferred tax assets and liabilities. The Company’s estimated annual effective tax rate was zero for the
first nine months of 2011 and 2010. The Company’s estimated effective tax rate was zero for the
quarters ended September 30, 2011 and September 30, 2010. However, the effective income tax rate
for the nine months ended September 30, 2011 was approximately -0.7% as a result of realizing a
discrete item of $15,000 in the first quarter, compared to an effective income tax rate of 0.0% for the
nine months ended September 30, 2010.
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Information by Business
Segment
Information by Business
Segment
Information by Business
Segment
9 Months Ended
Sep. 30, 2011
11.
Information by Business Segment
Operating segments are components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The Company operates via
two principal segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary
products for commercial application. Health Sciences provides technical and regulatory consulting
services to biotechnology and pharmaceutical companies, as well as aiding the Biospherics segment.
Financial information by business segment for the three and nine months ended September 30,
2011 and 2010 is summarized below:
Three Months Ended Sept.
30,
2011
Revenue
Operating Profit
(Loss) and Loss
from Operations
Before Income
Taxes
Biospherics
Health Sciences
Total revenue
$
— $
198,000
$ 198,000 $
2011
— $
369,000
369,000 $
— $
—
691,000
1,028,000
691,000 $ 1,028,000
Biospherics
$ (407,000) $(1,605,000) $(1,244,000)
Health Sciences
(6,000)
160,000
152,000
(501,000)
(695,000) (1,957,000)
General
Total operating loss
(914,000) (2,140,000) (3,049,000)
Interest income
1,000
1,000
3,000
—
—
Other income
53,000
Gain on settlement
—
—
845,000
of obligations
Loss from operations
before income
$ (913,000) $(2,139,000) $(2,148,000)
taxes
Sept. 30,
2011
Identifiable Assets
Nine Months Ended Sept. 30,
2010
Dec. 31,
2010
Biospherics
$ 193,000 $ 739,000
Health Sciences
249,000
359,000
5,188,000
5,919,000
General corporate assets
$5,630,000 $7,017,000
Total assets
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2010
$(5,079,000)
314,000
(2,085,000)
(6,850,000)
5,000
—
—
$(6,845,000)
Accounting for Stock-Based
Compensation
Accounting for Stock-Based
Compensation
Accounting for Stock-Based
9.
Compensation
9 Months Ended
Sep. 30, 2011
Accounting for Stock-Based Compensation
During the three- and nine-months ended September 30, 2011, the Company had no stock-based
compensation expense. For the three- and nine-months ended September 30, 2010, the Company
recognized $0 and $30,000 in stock-based compensation expense relating to stock options awarded in
May 2010 and recognized $2,000 and $7,000 relating to restricted stock granted in August 2009,
respectively. At September 30, 2011, all of the outstanding options under the plan were fully vested.
A summary of option activity under the Company’s employee stock option plan for the nine
months ended September 30, 2011, is presented below:
Options
Outstanding at beginning of
year
Granted
Exercised
Expired or forfeited
Outstanding at end of period
Exercisable at September 30,
2011
WeightedAverage
Exercise
Price
Shares
6,309
—
—
(2,800)
3,509
WeightedAverage
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
$
$
$
$
$
16.10
—
—
22.00
11.40
3.6 $
—
3,509 $
11.40
3.6 $
—
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Liquidity and Capital
Resources
Liquidity and Capital
Resources
Liquidity and Capital
Resources
9 Months Ended
Sep. 30, 2011
2.
Liquidity and Capital Resources
The Company’s working capital was $4.7 million as of September 30, 2011, compared to
working capital of $4.9 million as of December 31, 2010. The change in working capital consisted
principally of (i) $2.5 million received from the sale of equity in January 2011, (ii) $3.1 million used
in support of the Company’s operations, and (iii) the relief of a $600,000 purchase obligation in the
first quarter.
The Company has incurred substantial development costs in its efforts to explore whether Dtagatose is an effective treatment for Type 2 diabetes, including a completed Phase 3 clinical trial and
a related Phase 2 Dose Range trial. We have funded these costs from the cash we received in the 2007
sale of InfoSpherix, and the net proceeds of our equity offerings.
Over the next 12 months, the Company expects that it will need to expend between $4 million
and $6 million to support our currently planned development operations. This estimate assumes (i)
continuing efforts to sell, license, or obtain a partner for the diabetes drug application, (ii) no further
significant expenditures for developing D-tagatose as a drug for diabetes, (iii) continuing development
of SPX-106T as a treatment for high triglycerides, (iv) ongoing operation of the Health Sciences
segment at the current level of activity, and (v) that we raise additional funds to continue our
development efforts beyond this 12-month period.
In October 2010, we obtained net proceeds of approximately $4.9 million in a registered
offering. The common stock issued upon the conversion of the Series B convertible preferred stock
and the common stock, which may be issued upon the exercise of warrants issued in the offering, have
been registered under a Form S-1 registration statement declared effective by the Securities and
Exchange Commission (“SEC”) in October 2010.
In January 2011, the Company obtained net proceeds of approximately $2.5 million in a
registered direct offering. The common stock issued in the offering and the common stock that may
be issued upon exercise of warrants issued in the offering have been registered under a Form S-3
registration statement declared effective by the SEC in October 2009.
In October 2011, the Company obtained net proceeds of approximately $1.15 million in a
private placement. The Company has agreed to use its best efforts to register under a Form S-3
registration statement the common stock issued in the offering and the common stock that may be
issued upon exercise of warrants issued in the offering for resale by the purchasing stockholders. See
the subsequent event footnote, Note 13, for more information.
Due to the nature of our business, we will need to raise additional funds on a consistent basis to
continue operations and to fully pursue the triglycerides opportunity. Fundraising will likely require
the issuance of additional equity securities, and a purchaser of such securities will likely insist that
such securities be registered securities. NASDAQ rules require stockholder approval for certain stock
issuances constituting twenty percent (20%) or more of a company’s issued and outstanding stock.
Pursuant to SEC rules, the Company may not be in a position to issue additional shares of its
common stock in another registered direct primary offering under a Form S-3 registration statement
until February 2012. Thus, if the Company wishes to conduct another registered direct primary
offering before February 2012, it will likely have to do so in whole or in part under a Form S-1
registration statement.
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, that the Company will be able to obtain any required
stockholder approval, or that the Company will be able to have additional registered direct primary
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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 dissolutionrelated obligations.
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Use of Estimates and
Assumptions
Use of Estimates and
Assumptions
Use of Estimates and
Assumptions
9 Months Ended
Sep. 30, 2011
5.
Use of Estimates and Assumptions
The accompanying condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America. This
requires management to make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the period. Accordingly, actual results could
differ from those estimates and assumptions.
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New Accounting
Pronouncements
New Accounting
Pronouncements
New Accounting
Pronouncements
9 Months Ended
Sep. 30, 2011
6.
New Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No.
2010-29, “Business combinations — disclosure of supplementary pro forma information,” to amend
topic ASC 805 “Business Combinations,” by improving disclosure requirements related to the
business combinations performed during the year being reported on. Under the amended guidance, a
public entity that presents comparative financial statements must disclose the pro forma revenue and
earnings of the combined entity as though the business combination had occurred as of the beginning
of the prior annual reporting period. The adoption of these disclosure rules had no effect on the
Company’s financial position, results of operations or cash flows.
In May 2011, the FASB issued a new accounting standard on fair value measurements that
clarifies the application of existing guidance and disclosure requirements, changes certain fair value
measurement principles and requires additional disclosures about fair value measurements. We are
required to adopt this standard in the first quarter of 2012. We do not expect this adoption to have a
material impact on our financial statements.
In June 2011, the FASB issued a new accounting standard on the presentation of
comprehensive income. The new standard requires the presentation of comprehensive income, the
components of net income and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. The
new standard also requires presentation of adjustments for items that are reclassified from other
comprehensive income to net income in the statement where the components of net income and the
components of other comprehensive income are presented. We are required to adopt this standard as
of the beginning of 2013. We do not expect this adoption to have a material impact on our financial
statements.
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9 Months Ended
Document and Entity
Information
Sep. 30, 2011
Nov. 10, 2011
Document and Entity Information
Entity Registrant Name
SPHERIX INC
Entity Central Index Key
0000012239
Document Type
10-Q
Document Period End Date
Sep. 30, 2011
Amendment Flag
false
Current Fiscal Year End Date
--12-31
Entity Current Reporting Status
Yes
Entity Filer Category
Smaller Reporting Company
Entity Common Stock, Shares Outstanding
3,094,961
Document Fiscal Year Focus
2011
Document Fiscal Period Focus
Q3
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9 Months Ended
Sep. 30, 2011
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
7.
Fair Value Measurements
The Company has elected not to apply the fair value option to measure any of the financial
assets and liabilities on its balance sheet not already valued at fair value under other accounting
pronouncements. These other financial assets and liabilities are primarily accounts receivable and
accounts payable, which are reported at historical value. The fair value of these financial assets and
liabilities approximate their fair value because of their short duration.
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9 Months Ended
Sep. 30, 2011
Basis of Presentation
Basis of Presentation
Basis of Presentation
1.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company are unaudited
and do not include all of the information and disclosures generally required for annual financial
statements. In the opinion of management, the statements contain all material adjustments (consisting
of normal recurring accruals) necessary to present fairly the Company’s financial position as of
September 30, 2011, the results of its operations for the three-month and nine-month periods ended
September 30, 2011 and 2010, and its cash flows for the nine-month periods ended September 30,
2011 and 2010. This report should be read in conjunction with the Company’s Annual Report on
Form 10-K, which does contain the complete information and disclosure, for the year ended December
31, 2010.
The Company operates via two principal segments, Biospherics and Health Sciences.
Biospherics seeks to develop proprietary products for commercial application. Health Sciences
provides technical and regulatory consulting services to biotechnology and pharmaceutical companies,
as well as providing technical support for the Biospherics segment.
The Company has created two wholly-owned subsidiaries, Biospherics Incorporated and
Spherix Consulting, Inc., for its two operating segments. The Company’s Health Sciences contracts
are in the name of Spherix Consulting, Inc. and the Company’s patents are in the name of Biospherics
Incorporated. Spherix Incorporated provides management, strategic guidance, business development,
marketing and other services to its subsidiaries.
On May 6, 2011, the Company effected a one-for-ten reverse split of its common stock. The
Company implemented the reverse stock split under the authority granted to the Board of Directors by
the Company’s stockholders at the annual meeting of stockholders held on November 17, 2009, to
effect a reverse stock split of the Company’s Common Stock, par value $0.01 per share. The reverse
stock split reduced the number of outstanding shares of Common Stock from 25,624,872 shares to
2,562,488 shares. All per share amounts and outstanding shares, including all Common Stock
equivalents, stock options, equity compensation plans, and warrants, have been retroactively restated in
the Financial Statements and in the Notes to the Financial Statements for all periods presented to
reflect the reverse stock split. On the Company’s balance sheet, the aggregate par value of the
common stock at December 31, 2010 was retroactively reduced by $85,746 with an off-setting increase
to paid-in capital in excess of par.
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Common Stock and Paid-in
Capital in Excess of Par
Common Stock and Paid-in Capital in
Excess of Par
Common Stock and Paid-in Capital in
Excess of Par
9 Months Ended
Sep. 30, 2011
3.
Common Stock and Paid-in Capital in Excess of Par
During the nine months ended September 30, 2011, the Company issued shares of
common stock as follows:
Preferred Stock
Shares
Balance, January 1, 2011
Sale of common stock, net
of offering costs of
$229,501 (1)
Balance, September 30, 2011
Common Stock
Amount
Shares
Amount
Paid-in
Capital in
Excess of Par
1 $
— 2,143,631 $ 21,436 $38,568,814
—
—
—
—
—
1 $
— 2,570,531 $ 25,705 $41,109,894
426,900
4,269
2,541,080
(1) The stock issuance is further discussed in Note 2, “Liquidity and Capital
Resources”
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Gain on Settlement of
Obligations
Gain on Settlement of
Obligations
Gain on Settlement of
Obligations
9 Months Ended
Sep. 30, 2011
12.
Gain on Settlement of Obligations
Purchase Commitments
On January 14, 2011, Biospherics Incorporated 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 one of the Company’s D-Tagatose suppliers, Inalco, had
breached the 2009 Manufacturing Support and Supply Agreement as Inalco (i) refused to supply Dtagatose 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 on settlement of obligations
of $600,000 in March 2011 on the release from its purchase obligation.
Related Party Transactions
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. The Company’s estimated
liability to the Levins 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.
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Condensed Consolidated
Balance Sheets (USD $)
Current assets
Cash and cash equivalents
Trade accounts receivable, net of allowance of $8,174 and $65,000
Grants receivable
Other receivables
Prepaid research expenses
Prepaid expenses and other assets
Total current assets
Property and equipment, net of accumulated depreciation of $248,642 and $197,971
Patents, net of accumulated amortization of $2,044 and $50,725
Deposit
Total assets
Current liabilities
Accounts payable and accrued expenses
Accrued salaries and benefits
Deferred revenue
Total current liabilities
Deferred compensation
Deferred rent
Total liabilities
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized; 5,250 series B issued and 1
outstanding at September 30, 2011 and December 31, 2010
Common stock, $0.01 par value, 5,000,000 shares authorized; 2,570,531 and 2,143,631
issued, 2,562,488 and 2,135,588 outstanding at September 30, 2011 and December 31,
2010, respectively
Paid-in capital in excess of par value
Treasury stock, 8,043 shares, at cost at September 30, 2011 and December 31, 2010
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
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Sep. 30,
2011
Dec. 31,
2010
$ 5,022,165 $ 5,575,310
167,045
285,859
270,128
81,975
74,110
211,934
464,322
3,140
155,261
5,486,259 6,824,990
108,342
154,161
102
2,296
35,625
35,625
5,630,328 7,017,072
250,383
432,052
68,442
750,877
56,276
807,153
1,211,561
563,706
170,641
1,945,908
550,000
80,945
2,576,853
25,705
21,436
41,109,894 38,568,814
(464,786) (464,786)
(35,847,638) (33,685,245)
4,823,175 4,440,219
$ 5,630,328 $ 7,017,072