DOMH

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009 for Spherix Incorporated (trading as SPEX on the NASDAQ Capital Market). The Company operates two primary segments: Biospherics, a biotechnology R&D business focused on developing D-tagatose as a treatment for Type 2 diabetes, and Health Sciences, a technical and regulatory consulting business. In 2009, the Company reorganized its operations into two wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc.

Key Financial Metrics

Revenue Composition: 99% of revenue ($1,350,000) was derived from the Health Sciences segment. Biospherics generated only $9,000 in revenue.

Liquidity: As of December 31, 2009, the Company held approximately $9.4 million in cash and short-term investments. The Company expects to expend between $9 million and $11 million over the next 12 months to complete clinical trials and fund commercialization activities.

Material Changes vs. Prior Period

• Increased Losses: Net loss increased by approximately $5 million year-over-year, driven primarily by a 70% increase in R&D expenses ($6.8M vs $4.0M) due to the expansion of Phase 3 clinical trials to India and the purchase of pharmaceutical-grade D-tagatose.
• Revenue Growth: Total revenue increased by 32% ($333,000), almost entirely attributable to the Health Sciences consulting segment.
• Capital Raise: In November 2009, the Company completed a registered direct offering, selling 2,760,870 shares and warrants for gross proceeds of approximately $6.3 million (net proceeds ~$6 million).
• Discontinued Operations: The 2008 results included a $2 million gain from the final escrow payment related to the 2007 sale of the InfoSpherix subsidiary. No such income was present in 2009.

Guidance, Outlook, and Risks

Clinical Trial Status: The Company is conducting a Phase 3 trial and a Phase 2 Dose Range trial for D-tagatose. Enrollment for the Phase 3 trial was completed in January 2010. The efficacy portion of the Phase 3 trial and the Dose Range trial are expected to be completed in mid- to late-2010, with the safety portion expected in early 2011. An NDA filing is targeted for mid-2011.

Outlook: Management expects to incur substantial development costs without corresponding revenue in 2010. The Company anticipates needing to raise additional capital in 2010 to continue operations beyond the fourth quarter of 2010. There is no assurance that additional funding will be available on acceptable terms.

Key Risks:

• Going Concern: The independent auditor has raised substantial doubt about the Company's ability to continue as a going concern due to recurring losses and the need for additional financing.
• Regulatory Approval: Commercialization depends entirely on FDA approval of D-tagatose, which is not guaranteed even if clinical endpoints are met.
• Market Acceptance: Even if approved, the product may not achieve market acceptance due to the dosing regimen (powder form, three times daily).
• Patent Expiration: Key use patents for D-tagatose as a diabetes treatment expire in 2012, creating urgency for FDA approval to secure potential exclusivity extensions.

Investor Verification Checklist

• Cash Burn Rate: Verify the Company's ability to fund operations through Q4 2010 with current cash reserves of ~$9 million against projected burn of $9M-$11M.
• Financing Capability: Assess the likelihood of securing additional equity financing in 2010, noting restrictions on Form S-3 offerings until mid-November 2010 and potential dilution.
• Clinical Trial Milestones: Monitor the completion dates for the Phase 3 efficacy and safety trials (mid-late 2010 and early 2011) and the interim data analysis results.
• Revenue Concentration: Note that 99% of revenue comes from consulting services, which are terminable at will by clients, while the core biotech asset generates no revenue.
• Patent Timeline: Confirm the status of patent extension efforts given the 2012 expiration of key use patents.