Business context and reporting period
This filing is Spherix Incorporated’s unaudited Form 10-Q for the quarter ended March 31, 2012; it does not identify Dominari Holdings Inc. as the filer. Spherix operated through Biospherics, which pursued drug development, and Health Sciences, which provided technical and regulatory consulting. All reported first-quarter revenue came from Health Sciences.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $209,562 | $306,303 |
| Direct costs | $109,464 | $130,296 |
| Gross profit and margin | $100,098; 47.8% | $176,007; 57.5% |
| Research and development | $371,403 | $355,503 |
| Selling, general and administrative | $885,672 | $932,204 |
| Operating loss | $1,156,977 | $1,111,700 |
| Net loss | $1,155,955 | $235,336 |
| Basic and diluted loss per share | $0.31 | $0.10 |
| Cash used in operating activities | $1,166,911 | $1,573,735 |
| Cash and cash equivalents at period end | $4,808,841 | $6,544,793 |
At March 31, 2012, total assets were $5.27 million, current liabilities $600,022, and total liabilities $639,097. The balance sheet reports no debt. Working capital was approximately $4.6 million. Cash decreased by $102,509 during the quarter; financing provided $1.07 million, primarily from a February stock-and-warrant offering. Cash balances above FDIC insurance limits were reported at $4.6 million.
Material changes versus the prior period
- Revenue fell 32%, reflecting lower effective contract rates and consulting staff time redirected to company research and development. Direct costs declined, but gross margin also contracted.
- Operating loss increased modestly, while net loss rose substantially because Q1 2011 included $44,630 of other income and an $845,000 gain on settlement of obligations; neither item recurred in Q1 2012.
- Weighted-average basic shares increased to 3.72 million from 2.45 million. The company issued 1,064,815 common shares in Q1 2012.
- Cash used in operations improved year over year, but remained substantial. Cash at quarter-end was below the $6.54 million reported a year earlier.
Outlook, risks and notable items
- Management expected cash on hand to sustain operations through 2012, but estimated $4 million to $5 million in spending over the following 12 months. This forecast assumed no significant new D-tagatose-for-diabetes spending and assumed additional funding would be raised for efforts beyond that period.
- The company expected continued operating cash outflows and said it would need to raise funds regularly, likely through equity issuance. It warned that inability to obtain financing could force it to stop development activities and dissolve.
- Development focused on SPX-106T, a combination of D-tagatose and SPX-106 for high triglycerides and other dyslipidemias. Animal studies were ongoing; an IND application was being prepared, and a human proof-of-concept study was contemplated for the second half of 2012. Management estimated at least three years to complete studies needed to attract a pharmaceutical partner, followed by another two to four years for studies toward an NDA filing.
- The existing shelf registration had 2,695,350 shares available but was expected to expire October 1, 2012; the company said it was unlikely to use it for another significant offering before expiration. Future registered offerings and any required shareholder approval were not assured.
- On April 20, 2012, NASDAQ notified Spherix that its share price had been below the $1 minimum for 30 consecutive trading days. The company had until October 17, 2012 to regain compliance and said it would monitor the price; a reverse split was among possible options, but no decision had been made.
- Customer and contract concentration was material: four customers accounted for 65% of Q1 2012 revenue, and five contracts represented 83% of quarter-end trade receivables.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Spherix Incorporated, not Dominari Holdings Inc.
- Assess whether the company could raise further capital before the shelf registration expired and whether any later financing would materially dilute shareholders.
- Track operating cash burn against management’s $4 million to $5 million 12-month spending estimate and its assumption of future fundraising.
- Verify progress on the IND, human study, and development timetable for SPX-106T, including the availability of trial funding.
- Monitor NASDAQ minimum-bid-price compliance and any potential delisting or reverse-split action.
- Consider the dependence on Health Sciences revenue and the concentration of revenue and receivables among a small number of customers and contracts.