Filing summary
Entity and period: The supplied filing is Spherix Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. This does not match the request metadata identifying Dominari Holdings Inc.; verify that this is the intended filing.
Business context
Spherix operated through Biospherics, which pursued pharmaceutical development, and Health Sciences, which provided technical and regulatory consulting. Health Sciences generated all reported revenue; Biospherics had no revenue. The company had completed Phase 3 and Phase 2 trials of D-tagatose for Type 2 diabetes and was seeking a partner to continue that program while shifting development focus toward high triglycerides, including a D-tagatose/SPX-106 combination.
Financial performance
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $186,050 | $327,139 | $492,353 | $659,430 |
| Operating loss | $1,022,982 | $2,559,839 | $2,134,682 | $4,709,703 |
| Net loss | $1,013,739 | $2,557,611 | $1,249,075 | $4,705,487 |
| Net loss per share | $0.40 | $1.49 | $0.50 | $2.74 |
Quarterly revenue fell about 43%; six-month revenue fell about 25%. Operating losses narrowed substantially, mainly as research and development costs declined after the diabetes trials ended. Net losses also narrowed, but the 2011 six-month comparison includes an $845,000 gain on settlement of obligations ($600,000 related to a supplier purchase obligation and $245,000 related to a former-employee payment obligation). Health Sciences revenue declined, while direct costs were described as broadly consistent; the filing attributes the revenue decline to a large, lower-margin contract expected to finish in the third quarter of 2011.
Cash and cash equivalents were $5.56 million at June 30, 2011, versus $5.58 million at year-end 2010. Six-month operating cash use was $2.55 million; investing cash use was $2,374; financing provided $2.55 million from stock issuance. Working capital was $5.6 million, compared with $4.9 million at year-end. Total liabilities were $741,041; the balance sheet reports no interest-bearing debt. Current assets were $6.32 million and current liabilities $676,164. Cash exceeding FDIC insurance limits was reported as $5.3 million.
The filing does not provide a consolidated profit margin measure. Revenue less direct costs was approximately 36% of revenue in Q2 2011 versus 66% in Q2 2010, and approximately 49% for the first half of 2011 versus 65% for the first half of 2010.
Material changes, outlook, and risks
- Research and development expense declined 74% in the quarter and 73% for the six months, following completion of the diabetes clinical trials in 2010. SG&A expense declined 44% and 29%, respectively, principally due to reduced diabetes business-development activity.
- The company reported $53,007 of other income from government research grants. In a spring 2011 preclinical trial, it said SPX-106 was 200–300 times more potent than D-tagatose in lowering cholesterol and triglycerides on a weight basis; these findings are preliminary, not proof of clinical efficacy.
- Management estimated $3 million–$5 million of spending over the next 12 months for planned development and operations. This assumes no significant further spending on D-tagatose for diabetes, continued triglyceride development, current Health Sciences activity, and additional fundraising for development beyond that period.
- The company said it would need to raise funds consistently, likely through additional equity, and could not assure that financing or required stockholder approvals would be available. It warned that inability to raise needed funds could force it to cease development and dissolve, with severance, lease termination, and other costs.
- Management estimated at least three years of studies to attract a pharmaceutical partner and another two to four years to complete studies needed for a possible NDA. It was preparing an IND for the combination program and said a human proof-of-concept trial might begin later in 2012.
- In May 2011, the company effected a one-for-ten reverse stock split; share and per-share amounts were retroactively adjusted. It issued 426,900 shares during the first half and reported 2,562,488 shares outstanding as of August 8, 2011.
- Management concluded disclosure controls were effective at a reasonable assurance level as of June 30, 2011, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that the Spherix Incorporated filing, rather than a Dominari Holdings filing, is the intended document.
- Review financing availability, potential dilution, stockholder-approval requirements, and the company’s ability to fund operations beyond the stated 12-month spending estimate.
- Assess the status and evidence for the D-tagatose diabetes and triglyceride programs, including partnership prospects, patent life, regulatory milestones, and the proposed IND and human trial timing.
- Separate recurring operating performance from the $845,000 settlement gain and $53,007 grant income when evaluating losses and cash needs.
- Check the lower-margin Health Sciences contract’s completion and any resulting effect on revenue and segment profitability.