**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(Mark one)**

 

**x****      ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year****ended******** December ****31, 2009**

 

**o****         TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                               to                               **

 

**Commission file number  0-5576**

 

**SPHERIXINCORPORATED**

(Exact name of Registrantas specified in its Charter)

 

| **Delaware**                                                    | ** ** | **52-0849320**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**6430 Rockledge Drive, Suite 503,Bethesda, Maryland 20817**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: **301-897-2540**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of  each class**                 |   | **Name of  each exchange on which registered** |
|------------------------------------------|--------|------------------------------------------------|
| Common Stock ($.005 par value per share) |   | NASDAQ Capital Market                          |

 

Securities registeredpursuant to Section 12(g) of the Act: **None.**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 ofthe Exchange Act).  

 

| Large  Accelerated Filer o |   | Accelerated  Filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  Filer o   |   | Smaller  Reporting Company x |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter (forpurposes of this determination, only our Directors and Executive Officers havebeen deemed affiliates):  Common Stock(Par Value $.005) — $17,020,921

 

There were 17,150,648shares of the Registrant’s Common Stock outstanding as of March 29, 2010.

 

 

 

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**PART I**

 

Certain statementscontained in this Form 10-K, including without limitation, statementscontaining the words “believes,” “estimates,” “expects” and words of similarimport, constitute “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  Such words and expressionsare intended to identify such forward looking statements, but are not intendedto constitute the exclusive means of identifying such statements.  Such forward looking statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward looking statements.  Given these uncertainties, prospectiveinvestors are cautioned not to place undue reliance on such forward lookingstatements.  The Company disclaims anyobligation to update any such factors or to publicly announce the results ofany revisions to any of the forward looking statements contained herein toreflect any events or developments.  Seethe Company’s Form 8-K filed October 10, 2007, for a more detailedstatement concerning forward looking statements.

 

**Item1.  DESCRIPTION OF BUSINESS**

 

**General**

 

Spherix Incorporated (the “Company” or “Spherix”), a Delaware corporation, was foundedin 1967.  The Company’s principalsegments are Biospherics, our biotechnology research and development business,and Health Sciences, a technical and regulatory consulting business.  The Health Sciences segment was created in July 2007when Claire L. Kruger, CEO and COO, joined the Company in advance of theanticipated sale of the Company’s wholly-owned subsidiary, InfoSpherixIncorporated.  InfoSpherix was theCompany’s information services segment and was sold on August 15, 2007 ina move to allow the Company to devote its resources to the activities of the Biospherics segment.

 

The Company has created two wholly-ownedsubsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., forits two operating segments.  The Company’sHealth Sciences contracts are now in the name of Spherix Consulting, Inc.and the Company’s patents and other assets and operations have been transferredinto the name of Biospherics Incorporated. The subsidiaries began operations on January 1, 2009.  Spherix provides management, strategicguidance, business development, marketing and other services to itssubsidiaries.

 

The principalexecutive offices of the Company are located at 6430 Rockledge Drive, Suite 503,Bethesda, Maryland 20817, and its telephone number is (301) 897-2540.

 

The Company’sCommon Stock trades on the NASDAQ Capital Market system under the symbol SPEX.

 

**Available Information**

 

Our principalInternet address is www.spherix.com.  We makeavailable free of charge on www.spherix.com our annual, quarterly and current reports, andamendments to those reports, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission (“SEC”).

 

**Biospherics**

** **

Biospherics isdedicated to development of a single proprietary product, D-tagatose, as anovel, first-in-class treatment for Type 2 diabetes.  D-tagatose is believed to depress elevationsof blood sugar levels in diabetic patients by increasing glycogen synthesiswhile decreasing glycogen utilization, resulting in an improvement of bloodsugar control and modulation of HbA1c.

 

D-tagatose, anaturally occurring sugar, is a low-calorie, full-bulk sweetener previouslyapproved by the Food and Drug Administration (“FDA”) as a GRAS (Generally RecognizedAs Safe) food ingredient.  It is a truesugar that looks, feels, and tastes like table sugar.  During human safety studies supporting fooduse, the Company discovered and patented a number of health and medical usesfor D-tagatose.  The Company holds thepatents for use of D-tagatose as a treatment for Type 2 diabetes.  The use patents for D-tagatose as a treatmentfor Type 2 diabetes expire in 2012, not including extensions.  If approved for use as a drug by the FDA, the Company believes it willbe eligible for a five year

 

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New Chemical Entity (“NCE”)exclusivity period following FDA approval.  Similarlegislation in Europe could provide seven years of market exclusivity in theEuropean Union, if approved by the European Medicines Agency (EMA).

 

As set forthbelow, this product is in the development stage and will require substantialadditional investment to bring it to market.  The Company intends to continue to develop D-tagatoseand simultaneously search for a sale, license, partner, or other strategicalliance to take D-tagatose through the FDA approval process and to bringD-tagatose to market.  We are hopefulthat as we proceed with our development efforts, incremental successes mayafford us the opportunity to achieve such a strategic alliance.

 

In initial human clinical trials conducted at the University of MarylandSchool of Medicine in 1996 D-tagatose was found to be effective as a treatment of Type 2diabetes.  In addition to lowering HbA1c,over the one-year trial, all eight (8) subjects lost weight atphysician-approved rates.  As a result,in late 2005, the FDA provided the Company permission to begin a Phase 3 clinical trial forD-tagatose as a stand-alone drug to treat Type 2 diabetes.

 

The Company is conductingtwo clinical trials:  a Phase 3 trial todetermine efficacy of D-tagatose as a treatment for Type 2 diabetes; and aPhase 2 Dose Range trial to evaluate the effectiveness of lower doses of D-tagatosein treating Type 2 diabetes.  Enrollmentfor the Phase 3 trial was completed in January 2010.  The Dose Range trial and the efficacy portionof the Phase 3 trial are expected to be completed in mid- to late-2010, and thesafety portion of the Phase 3 trial is expected to be completed in early2011.  The primary endpoint in each studyis a statistically significant decrease in HbA1c levels.  HbA1c is a key indicator that measuresglycated hemoglobin in the blood and is a measure of long-term control of bloodglucose.  The secondary endpoints are measurements of fasting blood glucose,insulin, lipid profiles, changes in body weight, and the proportion of subjectsachieving HbA1c targets under 7% and/or under 6.5%.

 

The ongoing double-blind,placebo-controlled Phase 3 trial is designed to evaluate the safety andefficacy of D-tagatose over the dosing period. The study is currently underway at clinical research sites in the USAand India, and seeks to complete 332 patients. The study is powered to detect a 0.5% change in HbA1c.  The primary efficacy analysis will comparethe change in HbA1c in patients receiving D-tagatose versus a placebo.

 

Results of the blindedinterim data analysis of the Phase 3 trial demonstrate a significant reductionin variability of HbA1c levels, the primary endpoint of the trial.  The analysis was conducted by an independentstatistics and regulatory consulting firm. The results suggest the study is powered sufficiently and the plannedsample size may be adequate to detect a statistically significant effect in reductionof HbA1c.  The observed data to-dateindicate the change in variability of HbA1c from baseline is favorable, andsuggest that the current sample size gives the study sufficient power toachieve the statistical significance if and when the study reaches the plannednumber of patients completing treatment. The results also demonstrate a significant decrease in the mean bodymass index (BMI) at all time points.  Themean BMI and serum triglycerides decreased monotonically at each visit, whilethe relationship between LDL or HDL cholesterol and visit number wasnon-monotonic.  Taken together, theresults of these secondary variables are in agreement with that of the HbA1cresults.  The interim analysis is ablinded analysis and there is no statistical penalty.

 

In addition to the powercalculation, a summary of HbA1c “responders” (i.e., subjects achieving HbA1ctarget of <6.5%) was in the interim analysis report.  NIH Medline Plus states that, in general, anHbA1c of 6% or less is normal, and diabetic patients should try to keep theirHbA1c level at or below 7%.  The Phase 3protocol sets an HbA1c lower limit of 6.6% for randomization into the trial,and an upper limit of 9%.  At the time ofthe interim analysis, not all subjects had finished the entire treatment courseof this trial; therefore the number of responders was different for differentmonths of therapy.  The incidences ofresponders achieving an HbA1c target of <6.5% at 1, 2, 4 and 6 months oftreatment were 4%, 13%, 19% and 18% respectively.  Because the trial is randomized 1:1 in termsof drug and placebo, approximately 50% of the patients receive the placebotreatment.

 

In addition, preliminarydata from the Phase 2 Dose Range study demonstrates reductions of HbA1c levelsat doses lower than those used in the current Phase 3 trial.  The doses being tested are: 2.5, 5.0, and 7.5g, which are administered orally with meals, three times daily.  After 6 months on drug, patients in the 7.5 ggroup experienced an average reduction of 0.3% in HbA1c over those of the HbA1cof the 2.5 g group. Over the same period, the 5.0 g group averaged a reductionin HbA1c of 0.05% over those from the 2.5 g group.  D-tagatose appears to begin showing an effecton HbA1c within the range of doses selected for this minimum-dose study.  The ongoing Phase 3 efficacy study is beingconducted at a 15 g dose, three times a day.

 

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Over the course of theDose Range study, D-tagatose also changed the average serum triglycerides ofthe patients by -59 mg/dl by the end of the first month on therapy, a decreasefrom baseline that remained at -41 mg/dl by the end of the 6 months of thetrial. D-tagatose also changed serum LDL by an average -13 mg/dl by the end ofthe first month on therapy, while serum HDL was essentially unchanged (+0.9mg/dl). The LDL:HDL ratio was improved for two of the three dose groups by anaverage of 0.3.

 

D-tagatose’s safety inhumans was established in 2001 when it received the designation as GenerallyRecognized As Safe (“GRAS”) in foods by the FDA.  The Phase 3 and Dose Range trials haveprovided further support that D-tagatose is safe and well tolerated, withacceptable rates of treatment-related events noted at all doses.  The most common adverse events reported inthe Phase 3 study and the Dose Range study were gastrointestinal related andwere generally mild and predominantly transient in nature.  Previous studies have indicated thatD-tagatose does not stimulate insulin secretion.

 

Since receiving FDA permissionto begin the Phase 3 clinical trial, Biospherics’s research and development (R&D)activity has been focused primarily on planning, instituting, and running thePhase 3 trial.  The trial is being guidedby the Company’s CEO, Claire L. Kruger, an experienced FDA regulatoryconsultant, and theCompany’s President, Robert A. Lodder, an experienced professor ofpharmaceutical sciences, as well as drawing on the in-house support andexpertise of the staff of the Company’s Health Sciences segment.  Basedon current enrollment and retention numbers, the Company expects that the efficacy portion of the Phase 3 trial and theDose Range trial will be completed in mid- to late-2010, and that the safetyportion of the Phase 3 trial will be completed in early 2011, and that the NewDrug Application (“NDA”) could be filed as early as mid-2011.  The FDA review process typically takesbetween one and two years to complete. Approval of an NDA is at the discretion of the FDA; in some instancesthe FDA requires additional studies before final processing of an application.

 

The Company expects toincur substantial development costs, without substantial correspondingrevenue.  The Company intends to financeits development activities through the remaining proceeds received from the2007 sale of InfoSpherix and the November 2009 stock placement, as well asadditional funds it may seek to raise through the sale of additional stock.

 

*Administration of the Phase 3 andDose Range Trials*

 

The trials were initiallycommenced in both Australia and in the United States.  In 2007, the Company terminated theAustralian operations and expanded the United States portion of the trial.  However, patient recruitment in the U.S.proceeded slower than expected.  Toenhance enrollment and retention, the Company successfully petitioned the FDAto eliminate the need for pre-mixed liquid solutions for the delivery of studymedicine.  The solutions were replacedwith powder sachets, which are more convenient for the trial participants, andtherefore improved patient retention. Beginning in October 2008, Biospherics also started conducting a portion of thePhase 3 and Dose Range trials in India where patient retention is greaterthan in the U.S.  These changes have beensuccessful in enhancing recruitment and compliance in the trials.  Enrollment for the Phase 3 trial wascompleted in January 2010 and the Company expects that the Phase 2 DoseRange trial and the efficacy portion of the Phase 3 trial will likely be completed in mid- to late-2010, basedon the current enrollment and retention numbers, and that the safety portion ofthe Phase 3 trial will likely be completed in early 2011.

 

*Manufacturing*

 

Biospherics does not own or operate its own manufacturingfacilities.  Spherix first acquired D-tagatosefor use in the trials from Arla Foods Ingredients amba (“Arla”), our previousfood and beverage use licensee.  However,Arla has discontinued manufacture of D-tagatose.  In 2009, the Company’s Biospherics subsidiarysigned a Supply Agreement with Inalco, S.p.A., a manufacturer capable ofproviding the Company with batches of pharmaceutical grade D-tagatose forsubmission to the Drug Master File (“DMF”) in support of the planned New DrugApplication (“NDA”) submission. Biospherics is now using both Inalco and Arla D-tagatose in the Phase 3trial in an effort to satisfy one of the FDA’s requirements.  Successfully bridging the drug from eachsource is a critical step in achieving FDA approval.

 

*MarketDevelopment*

 

In response to theinterim Phase 3 results and the preliminary Dose Range preliminary results,management has taken steps to significantly increase its commercializationefforts for D-tagatose.  The Company hasformed a Medical Advisory Board and has contracted with consulting firms toanalyze the competitive situation in the diabetes market and 

 

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generateforecasts to allow Biospherics to evaluate market segment opportunities and theimpact of Medicaid, government initiatives, and third party payers on thediabetes therapeutic category.  Primarymarket research is being conducted to evaluate the impact of formulation types,size and packaging on sales in the diabetes therapeutic category.

 

*Plan forCommercialization of D-tagatose*

 

The Company does not havethe resources to prepare, submit and pursue the FDA NDA and if approved, to manufactureand market D-tagatose as a Type 2 diabetes drug.  The Company is therefore applying itsresources to continue the Phase 3 and Dose Range trials and to explore themanufacturing and marketing issues with a goal to market, sell and/or license D-tagatose to apharmaceutical or other company which would complete thecommercialization.  To date, the Companyhas not had, and does not expect to have, any meaningful offers until theefficacy of D-tagatose has been demonstrated further.

 

The total cost ofcompleting the Phase 3 trial is difficult to determine and can be affected by anumber of factors, including completion of the trials in a timely manner.  Continued progress on the clinical trial ofD-tagatose as a treatment of Type 2 diabetes and on the other initiativesdescribed above is dependent upon many factors including, but not limited to,the Company raising sufficient funds.

 

*Food andBeverage Use*

 

In 1997, andthrough a subsequent amendment, the world-wide right to sell D-tagatose forfood and beverage uses, and the right to manufacture D-tagatose for all uses,was licensed to Arla (formerly MD Foods Ingredients amba, “MDFI”) ofDenmark.  Arla has not been successful ingenerating any substantial market for D-tagatose, Arla has ceased manufacturingD-tagatose, and the Company has received no meaningful royalties from Arlaunder the license agreement.

 

Biosphericsrevenue from miscellaneous royalties accounted for 1% of the Company’s totalrevenue from continuing operations in 2009.

 

In June 2009,Spherix terminated the 1996 license agreement pursuant to which it granted ArlaFoods Ingredients Amba (“Arla”) the food and beverage rights toD-tagatose.  Per the terminationagreement, Spherix and Arla have fully released one another from allobligations.

 

**HealthSciences**

 

In July 2007, theCompany entered into the Health Sciences business when Claire L.Kruger, CEO and COO, joined the Company in advance of the anticipated sale ofthe Company’s wholly-owned subsidiary, InfoSpherix Incorporated.  The Health Sciences business provides technical and regulatory consultingservices to biotechnology and pharmaceutical companies, as well as providingtechnical support for the Company’s own R&D activities.

 

During 2009 and 2008,Health Sciences provided services to 12 and 16 companies, respectively.  The Company generally provides its serviceson either a fixed-price basis or a “time and expenses” basis, charging hourlyrates for each staff member involved in a project, based on his or her skillsand experience.  Our engagementagreements typically provide for monthly billing and payment of our invoiceswithin thirty days of receipt.

 

The projects rangefrom safety analyses of food ingredients to safety analyses of pharmaceuticalmanufacturing and dispensing equipment. Many clients are large, well-known companies with a number of successfulproducts on the market.  Theproliferation of new products in the food and pharmaceutical areas creates agrowing need for the regulatory services of the Company.

 

Revenues are primarilyderived from services provided in response to client requests or events thatoccur without notice, and engagements, generally billed as services are performed,are terminable or subject to postponement or delay at any time by clients.  Revenues and operating margins for anyparticular quarter are generally affected by staffing mix, resourcerequirements, and timing and size of engagements.

 

Health Sciences is alsomonitoring and directing the Phase 3 clinical trial of D-tagatose for Biospherics.

 

Health Sciencesrevenue accounted for 99% of the Company’s total revenue in each of  2009 and 2008.

 

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**GovernmentContracts**

 

None.

 

**IndustrySegments**

 

See Note 12, “Informationby Business Segment,” of the Notes to the Financial Statements included hereinpursuant to Part II, Item 8 of this Form 10-K for industry segmentinformation of the Company, which information is incorporated herein byreference.

 

**MarketConcentration**

 

During each of 2009 and2008, 99% of the Company’s revenue was generated from the Health Sciencesbusiness.  Revenue from five customersaccounted for 19%, 16%, 14%, 12% and 11% in 2009, and three customers accountedfor 38%, 14% and 14% of the Company’s revenue in 2008.  No other single customer accounted for 10percent or more of consolidated revenue. The loss of any of these customers could have a material effect on theCompany taken as a whole if not replaced.

 

**Patents and Trademarks**

 

The Company hasestablished a worldwide patent position for D-tagatose.  These patents are detailed in the followingtable:

 
| **Patent  No.**  | ** ** | **Patent Title**                                                      | ** ** | **Issue  Date** | ** ** | **Expiration  Date** |
|------------------|------------|-----------------------------------------------------------------------|------------|-----------------|------------|----------------------|
| Canada 2,077,257 |       | Process for Manufacturing  D-Tagatose                                 |       | 2/19/02         |       | 1/7/11               |
| Finland 106861   |       | Process for  Manufacturing D-Tagatose                                 |       | 4/30/01         |       | 1/7/11               |
| Japan 3,120,403  |       | Process for  Manufacturing D-Tagatose                                 |       | 10/20/00        |       | 1/7/11               |
| Korea 190671     |       | Process for  Manufacturing D-Tagatose                                 |       | 1/21/99         |       | 1/7/11               |
| EPO 0 518 874    |       | Process for  Manufacturing D-Tagatose                                 |       | 5/15/96         |       | 1/7/11               |
| U.S. 5,447,917   |       | D-Tagatose as  Anti-Hyperglycemic Agent                               |       | 9/5/95          |       | 9/5/12               |
| U.S, 5,356,879   |       | D-Tagatose an  Anti-Hyperglycemic Agent                               |       | 10/18/94        |       | 2/14/12              |
| Canada 1,321,730 |       | D-Tagatose as a  Low-Calorie Carbohydrate Sweetener and Bulking Agent |       | 8/31/93         |       | 8/31/10              |

 

The Company believes thatthose patents related to the use of D-tagatose as an anti-diabetes treatmentmay be eligible for a five year NCD exclusivity period following FDA approval.

 

Trademarks. The Company has trademarked each of “Spherix” and “Biospherics.”

 

With respect to all ofits inventions, the Company has received numerous patents, including foreign issues.  In addition to its patent position, theCompany relies on the common law protection of such information as tradesecrets and on confidentiality agreements to protect the value of these assets.

 

**SalesBacklog**

 

The Company’s backlog asof December 31, 2009 and 2008 from the Health Sciences business wasapproximately $770,000 and $1.2 million, respectively.  The Company bills for its consulting servicesprimarily on a time and expense basis and these amounts represent estimatedcontract values.  Further, the Company’sconsulting contracts are generally terminable or subject to postponement ordelay at any time by clients.  As aresult, backlog at any particular time is not a reliable indicator of revenuesfor any future periods.

 

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** **

**Competition**

 

*Biospherics*

 

Competitors of Biospherics are numerous and include, among others,major pharmaceutical, chemical, consumer, and biotechnology companies;specialized firms; universities and other research institutions.  The Company’s competitors may succeed indeveloping technologies and products that are more effective than any that arebeing developed by the Company, and that could render the Company’s technologyand potential products obsolete and noncompetitive.  Many of these competitors have substantiallygreater financial and technical resources and production and marketingcapabilities than the Company.  Ifapproved, the Company’s major competitor as a monotherapy in the treatment ofType 2 diabetes will be Metformin.

 

*HealthSciences*

 

Competitors of HealthSciences are numerous, including some that are much larger companies withgreater resources.  The segment’s successin winning and retaining clients is heavily dependent on the efforts andreputation of its CEO.  We believe thebarriers to entry in particular areas of our consulting expertise are low.

 

**Researchand Development**

 

Biospherics expenditures for research anddevelopment were approximately $6.2 million and $4.0 million in 2009 and 2008,respectively.  These expenditures wereincurred in the ongoing efforts to commercialize D-tagatose.

 

In December 2009,the Company entered into a Manufacturing Support and Supply Agreement withInalco S.p.A of Italy.  Under theagreement the Company committed to the purchase of 25 metric tons of D-tagatose.  The entire purchase commitment of $1,100,000was booked as an expense in 2009.  Ofthis amount $500,000 was paid in 2009, with the remaining balance payable in2010.  An additional $300,000 ofD-tagatose, separate from the above Manufacturing Support and SupplyAgreement,  was also purchased in 2009from Inalco.

 

**GovernmentalRegulation**

 

The business activitiesof the Company are subject to a variety of Federal and state compliance,licensing, and certification requirements. Products such as D-tagatose may not be commercially marketed withoutprior approval from the FDA and comparable agencies in foreign countries.  In the United States, the process forobtaining FDA approval typically includes pre-clinical studies, the filing ofan Investigational New Drug application, or IND, human clinical trials andfiling and approval of a New Drug Application, or NDA.  The FDA may, at any time, impose a clinicalhold on ongoing clinical trials.  If theFDA imposes a clinical hold, clinical trials cannot commence or recommencewithout FDA authorization and then only under terms authorized by the FDA.

 

Theresults of the trialsand other information are then submitted to the FDA in the form of an NDA forreview and potential approval to commence commercial sales.  In responding to an NDA, the FDA may grantmarketing approval, request additional information in a complete responseletter, or deny the approval if it determines that the NDA does not provide anadequate basis for approval.  A completeresponse letter generally contains a statement of specific conditions that mustbe met in order to secure final approval of the NDA and may require additionaltesting.  If and when those conditionshave been met to the FDA’s satisfaction, the FDA will typically issue anapproval letter, which authorizes commercial marketing of the product withspecific prescribing information for specific indications.  Any approval required from the FDA might notbe obtained on a timely basis, if at all.

 

Amongthe conditions for NDA approval is the requirement that the manufacturingoperations conform on an ongoing basis with current Good ManufacturingPractices, or cGMP.  A successfulinspection of the manufacturing facility by the FDA is a prerequisite for finalapproval.  As we are now using Inalcomanufactured D-tagatose instead of Arla manufactured D-tagatose which was usedat the beginning of the Phase 3 trial, we will need to demonstrate to FDA thecomparability of such materials. Following approval of the NDA, the third-party manufacturer(s) remainsubject to periodic inspections by the FDA. We also face similar inspections coordinated by the EMA by inspectorsfrom particular European Union member countries that conduct inspections onbehalf of the European Union and from other foreign regulatoryauthorities.  Any determination by theFDA or other regulatory authorities of manufacturing or other deficienciescould materially adversely affect our business.

 

Regulatoryrequirements and approval processes in European Union countries are similar inprinciple to those in the United States and can be at least as costly anduncertain.  The European Union hasestablished a unified centralized filing and approval system administered by the Committee forMedicinal Products for Human Use designed to reduce the administrative burdenof processing applications for pharmaceutical products derived from new

 

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technologies.  In addition to obtaining regulatory approvalof products, it is generally necessary to obtain regulatory approval of thefacility in which the product will be manufactured.

 

In2008, the FDA issueda directive for diabetes trials to demonstrate that the therapy will not resultin an unacceptable increase in cardiovascular risk.  The Company believes the design of its Phase 3clinical trial of D-tagatose as a treatment for Type 2 diabetes meets therequirements of the FDA directive.

 

The Company is requiredto comply with the Sarbanes-Oxley Act of 2002, including the provisions of Section 404on the assessment of internal controls as modified for non-acceleratedfilers.  Starting with its year ended2007, Spherix performed an annual evaluation of the effectiveness of theCompany’s internal control over financial reporting and reports on management’sassessment of the adequacy of those controls in its annual report on Form 10-K.  An annual independent audit assessment of ourinternal controls will also be required beginning with the year ending December 31,2010.

 

The increase in accountingrelated regulations over the years, particularly those governing publiccompanies, has had the effect of increasing the Company’s cost for externalaccounting services, from 0.3% of revenue in 1997 ($40,000) to 18% in 2009($240,000).  The Company anticipates thecost of compliance is likely to further increase in 2010 with theimplementation of the external audit requirements of Section 404 fornon-accelerated filers.

 

**Environment**

** **

Compliance with currentfederal, state and local provisions regulating the discharge of materials intothe environment, or otherwise relating to the protection of the environment,has not had, and in the opinion of management will not have, a material effecton the Company’s financial position, results of operations, capitalexpenditures, cash flows or competitive position.

 

**Employees**

 

The Company employs 11individuals on a full- or part-time basis. Of this total, 10 are full-time employees.  The Company’s employees are not currentlyunionized, and management believes that its relations with the Company’semployees are harmonious.

 

**Item 1A.  RISK FACTORS**

 

Any of the risk factorswe describe below could severely harm our business, financial condition andoperating results.  The market price ofour common stock could decline if one or more of these risks and uncertaintiesdevelop into actual events.

 

**RISKSRELATED TO OUR BUSINESS**

 

**OUR DRUG CANDIDATE IS STILL INDEVELOPMENT AND REMAINS SUBJECT TO CLINICAL TESTING AND REGULATORYAPPROVAL.  THIS PROCESS IS HIGHLYUNCERTAIN AND WE MAY NEVER BE ABLE TO COMMERCIALIZE D-TAGATOSE.**  We have limited our biotech efforts toattempting to commercialize one single product, D-tagatose as a treatment forType 2 diabetes.  We are engaged in aPhase 3 clinical trial and a Phase 2 Dose Range trial, both solely focused onD-tagatose as a Type 2 diabetes treatment, and are devoting nearly all of ouravailable resources to this singular effort. If we are not successful, we will likely need to cease all operations.

 

**WE DO NOT CURRENTLY HAVE THE RESOURCESTO BECOME A FULL SCALE BIOTECHNOLOGY COMPANY AND WE MAY NOT BE ABLE TOATTRACT A NECESSARY BUYER/LICENSEE/PARTNER/STRATEGIC PARTNER BEFORE WE EXPENDALL OF OUR FUNDS.**  We intend to continue to develop D-tagatoseas a viable Type 2 diabetes treatment and to continuously seek a sale, license,or partner.  Our hope and expectation isthat as we proceed with the development, incremental successes may allow us tonegotiate a favorable transaction.  Therecan be no assurance, however, that we will have such incremental successes, orthat even if we achieve them, we will attract a buyer, licensee orpartner.  We have limited resources.  As of December 31, 2009, our cash andshort-term investments were reduced to approximately $9.4 million.  We currently expect that we will have cash tofund our current operations into the fourth quarter of 2010.  We will need to raise additional funds tocontinue our development operations and we may not be able to do so in a timelyfashion.

 

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**CLINICAL TESTS ARE A LONG,EXPENSIVE AND UNCERTAIN PROCESS.  IFD-TAGATOSE DOES NOT RECEIVE THE NECESSARY REGULATORY APPROVALS, WE WILL BEUNABLE TO COMMERCIALIZE D-TAGATOSE AS A DRUG.**  We have not received, any may never receive,regulatory approval for the commercial sale of D-tagatose.  Clinical trials are a long, expensive anduncertain process.  Satisfaction ofregulatory requirements typically depends on the nature, complexity and noveltyof the product, and requires the expenditure of substantial resources.  Data obtained from clinical trials can beinterpreted in different ways, which could delay, limit or prevent regulatoryapproval.  Negative or inconclusiveresults or medical events during a clinical trial could cause us to delay orterminate our development efforts.

 

Furthermore, interimresults of preclinical or clinical studies do not necessarily predict theirfinal results.  Clinical trials have ahigh risk of failure.  A number ofcompanies in the pharmaceutical industry, including biotechnology companies,have suffered significant setbacks in advanced clinical trials, even afterachieving what appeared to be promising results in earlier trials.  If we experience delays in the testing orapproval process or if we need to perform more or larger clinical trials thanoriginally planned, our financial results and the commercial prospects forD-tagatose may be materially impaired. In addition, we have limited experience in conducting and managing theclinical trials necessary to obtain regulatory approval in the United Statesand abroad and, accordingly, may encounter unforeseen problems and delays inthe approval process.

 

**REGULATORY AUTHORITIES MAY NOTAPPROVE OUR PRODUCT EVEN IF IT MEETS SAFETY AND EFFICACY ENDPOINTS IN CLINICALTRIALS.**  The FDA and foreign regulatory agencies candelay, limit or deny marketing approval for many reasons, including:

 

·                  aproduct candidate may not be considered safe or effective;

·                  themanufacturing processes or facilities we have selected may not meet theapplicable requirements;  and

·                  changesin approval policies or adoption of new regulations may require additional workon our part.

 

Any delay in, or failureto receive or maintain, approval for D-tagatose as a treatment for Type 2diabetes could prevent us from ever generating meaningful revenues.

 

D-tagatose may notbe approved even if it achieves endpoints in clinical trials.  Regulatory agencies, including the FDA, ortheir advisors may disagree with our trial design and our interpretations ofdata from preclinical studies and clinical trials.  Regulatory agencies may change requirementsfor approval even after a clinical trial design has been approved, includingrequiring additional tests or trials. Regulatory agencies may also approve a product candidate for fewer ormore limited indications than requested, or may grant approval subject to theperformance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claimsthat are necessary or desirable for the successful commercialization ofD-tagatose.

 

**OURFINANCIAL RESOURCES ARE LIMITED AND WE WILL NEED TO RAISE ADDITIONAL CAPITAL INTHE NEAR FUTURE TO CONTINUE OUR BUSINESS. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING IF NEEDED. **As of December 31, 2009, the Company had cash andshort-term investments of approximately $9.4 million and expects to expend allof this amount within the next twelve (12) months.  Our future capital requirements will dependon many factors, including the progress of the clinical trials andcommercialization of D-tagatose, as well as general and administrative costs.  We will need to raise additional capital in2010 to continue our business beyond this period.  The current economic downturn and its impacton the stock markets will most likely have a negative impact on our efforts toraise additional capital.  We cannotensure that additional funding will be available or, if it is available, thatit can be obtained on terms and conditions we will deem acceptable.  Any additional funding derived from the saleof equity securities is likely to result in significant dilution to ourexisting stockholders.  These mattersinvolve risks and uncertainties that may prevent us from raising additionalcapital or may cause the terms upon which we raise additional capital, ifadditional capital is available, to be less favorable to us than wouldotherwise be the case.

 

**UNSTABLEMARKET CONDITIONS MAY HAVE SERIOUS ADVERSE CONSEQUENCES ON OUR BUSINESS.** The recent economic downturn and market instability has made thebusiness climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictableand unstable market conditions, including:

 

·                  one or more of our current service providers, manufacturers and otherpartners may encounter difficulties during challenging economic times, whichwould directly affect our ability to attain our goals on schedule and onbudget;

 

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·                  demand for our consulting services may decrease resulting in a decreasein revenue;

·                  our ability to collect on trade receivables may be negatively impactedby slow payments or bad debt;

·                  our efforts to raise additional capital may be negatively impacted;

·                  additional funding may not be available or, if it is available, may notbe on terms and conditions we deem acceptable;

·                  any additional funding derived from the sale of equity securities islikely to result in significant dilution to our existing stockholders; and

·                  failure to secure the necessary financing in a timely manner and onfavorable terms could have a material adverse effect on our business strategy,financial performance, and stock price and could require us to delay or abandonthe clinical development plans.

 

**IFCLINICAL TRIALS OF D-TAGATOSE ARE PROLONGED, DELAYED OR SUSPENDED, IT MAY TAKESIGNIFICANTLY LONGER AND COST SUBSTANTIALLY MORE TO OBTAIN APPROVAL FOR OURDRUG CANDIDATE AND ACHIEVE PROFITABILITY, IF AT ALL. **We have already encountered several challenges whichhave delayed our Phase 3 trial.  Eachdelay makes it more likely that we will need interim financing to complete thePhase 3 trial.  We cannot predict whetherwe will encounter additional problems with our trial that will cause us orregulatory authorities to delay or suspend the clinical trial, or delay theanalysis of data from the ongoing trial. Any of the following could delay the clinical development of D-tagatoseas a drug:

 

·                  ongoing discussions with the FDAregarding the scope or design of our trial;

·                  delays in receiving, or the inability toobtain, required approvals from reviewing entities at clinical sites selectedfor participation in our trial;

·                  a lower than anticipated retention rateof patients in the trial;

·                  the need to repeat the trial or conductanother trial as a result of inconclusive or negative results or unforeseencomplications in testing;

·                  inadequate supply or deficient quality ofmaterials necessary to conduct our trial;

·                  serious and unexpected drug-related sideeffects experienced by participants in our clinical trials;

·                  the placement by the FDA of a clinicalhold on a trial;  or

·                  any restrictions on or post-approvalcommitments with regard to any regulatory approval we ultimately obtain thatrender the drug candidate not commercially viable.

 

**WECURRENTLY RELY ON THIRD PARTIES TO CONDUCT PORTIONS OF OUR TRIAL, AND THOSETHIRD PARTIES MAY NOT PERFORM SATISFACTORILY. **We rely on third parties to enroll qualified patients,conduct our trial, provide services in connection with such trial, andcoordinate and oversee significant aspects of the trial.  Our reliance on these third parties forclinical development activities reduces our control over these activities.  Accordingly, these third party contractorsmay not complete activities on schedule, or may not conduct our trial inaccordance with regulatory requirements or the trial design.  If these third parties do not successfullycarry out their contractual duties or meet expected deadlines, we may berequired to replace them or we may be required to provide these services withour own personnel.  Although we believethere are a number of third party contractors we could engage to continue theseactivities, replacing a third party contractor may result in a delay or affectthe trial.  If this were to occur, ourefforts to obtain regulatory approvals for and commercialize our drug candidatemay be delayed.

 

**OURCORPORATE COMPLIANCE EFFORTS CANNOT GUARANTEE THAT WE ARE IN COMPLIANCE WITHALL POTENTIALLY APPLICABLE REGULATIONS. **The development, manufacturing, pricing,sales, and reimbursement of drug products are subject to extensive regulationby federal, state and other authorities within the United States and numerousentities outside of the United States. We are a relatively small company with only 11 employees.  We also have significantly fewer employeesthan many other companies that have a product candidate in clinicaldevelopment, and we rely heavily on third parties to conduct many importantfunctions.  While we believe that ourcorporate compliance program is sufficient to ensure compliance with applicableregulation, we cannot assure that we are or will be in compliance with allpotentially applicable regulations.  Ifwe fail to comply with any of these regulations we could be subject to a rangeof regulatory actions including suspension or termination of clinical trials,the failure to approve our product candidate, restrictions on our products ormanufacturing processes, withdrawal of products from the market, significantfines, or other sanctions or litigation.

 

**WE DO NOTHAVE INTERNAL MANUFACTURING CAPABILITIES, AND IF WE FAIL TO DEVELOP ANDMAINTAIN SUPPLY RELATIONSHIPS WITH OUTSIDE MANUFACTURERS, WE MAY BE UNABLETO DEVELOP OR COMMERCIALIZE D-TAGATOSE.**  Our ability todevelop and commercialize

 

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D-tagatose will depend inpart on our ability to arrange for other parties to manufacture D-tagatose at acompetitive cost, in accordance with regulatory requirements and in sufficientquantities for clinical testing and eventual commercialization.  If we are unable to enter into or maintaincommercial-scale manufacturing agreements on acceptable terms, or if we areunable to successfully bridge material from a manufacturer to the Arla materialused in the trials, the development and commercialization of D-tagatose couldbe delayed, which would adversely affect our ability to generate revenues andwould increase our expenses.

 

**FAILURETO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT MARKETINGOF D-TAGATOSE.**  We expect to have D-tagatose marketed bothinside and outside of the United States. In order to market D-tagatose in the European Union and many otherforeign jurisdictions, we must obtain separate regulatory approvals and complywith numerous and varying regulatory requirements.  The approval procedure varies among countriesand can involve additional testing.  Thetime required to obtain approval may differ from that required to obtain FDAapproval.  The foreign regulatoryapproval process may include all of the risks associated with obtaining FDAapproval.  We may not obtain foreignregulatory approvals on a timely basis, if at all.  Approval by the FDA does not ensure approvalby regulatory authorities in other countries, and approval by one foreignregulatory authority does not ensure approval by regulatory authorities inother foreign countries or by the FDA. We and our collaborators may not be able to file for regulatoryapprovals and may not receive necessary approvals to commercialize our productsin any market.  The failure to obtainthese approvals could materially adversely affect our business, financialcondition and results of operations.

 

**EVEN IFOUR CLINICAL TRIALS ARE SUCCESSFUL, WE MAY NOT HAVE A COMMERCIALLY VIABLEDRUG OR PRODUCT. **We have a number of hurdles to overcometo have a commercially viable drug or product even assuming our clinical trialsare successful, including:

 

·                  We must secure one or more manufacturersfor D-tagatose and we must bridge the materials supplied by the manufacturer(s) tothe previously supplied Arla materials to gain FDA approval.

·                  We must demonstrate that the product willbe accepted in the market place.  Even ifthe clinical trial is successful, the market may not accept a drug which mustbe consumed in powder form, three times a day, and in the quantities used inour trial.

 

**IFPHYSICIANS AND PATIENTS DO NOT ACCEPT D-TAGATOSE, WE MAY NOT BE ABLE TOGENERATE SIGNIFICANT REVENUES FROM PRODUCT SALES. **Even if we obtain regulatory approval for D-tagatose,it may not gain market acceptance among physicians, patients and the medicalcommunity for a variety of reasons including:

 

·                  timing of market introduction ofcompetitive drugs;

·                  lower demonstrated clinical safety andefficacy compared to other drugs;

·                  lack of cost-effectiveness;

·                  lack of availability of reimbursementfrom managed care plans and other third-party payors;

·                  inconvenient and/or difficultadministration;

·                  prevalence and severity of adverse sideeffects;

·                  potential advantages of alternativetreatment methods;

·                  safety concerns with similar drugsmarketed by others;

·                  the reluctance of the target populationto try new therapies and of physicians to prescribe these therapies;  and

·                  ineffective sales, marketing anddistribution support.

 

If D-tagatose fails toachieve market acceptance, we would not be able to generate significant revenueor achieve profitability.

 

**BIOTECHNOLOGYBUSINESS HAS A SUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS.  THE DEFENSE OF ANY PRODUCT LIABILITY CLAIMBROUGHT AGAINST US WILL DIVERT MANAGEMENT TIME AND REQUIRE SIGNIFICANT EXPENSE. **We could be exposed to significant potential product liabilityrisks that are inherent in the development, manufacture, sales and marketing ofdrugs and related products.  Ourinsurance may not, however, provide adequate coverage against potentialliabilities.  Furthermore, productliability insurance is becoming increasingly expensive.  As a result, we may be unable to maintaincurrent amounts of insurance coverage or obtain additional or sufficientinsurance at a reasonable cost to protect against losses that could have amaterial adverse effect on us.  If aclaim is brought against us, we might be required to pay legal and

 

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other expenses to defendthe claim, as well as uncovered damage awards resulting from a claim broughtsuccessfully against us.  Furthermore,whether or not we are ultimately successful in defending any such claims, wemight be required to redirect significant financial and managerial resources tosuch defense, and adverse publicity is likely to result.

 

**OURPATENT PROTECTION MAY NOT BE SUFFICIENT TO PROTECT US. **Our current use patent for D-tagatose as a treatmentfor Type 2 diabetes expires in 2012.  Weare exploring the prospects of extending the life of the patent of D-tagatosefor up to an additional five years.  Inorder for the Company’s request for an extension to be considered, FDA approvalis needed prior to the patent’s expiration in 2012.  There is no assurance, however, that thiseffort will be successful.

 

**WE HAVESUSTAINED LOSSES IN THE PAST AND WE MAY SUSTAIN LOSSES IN THE FUTURE.** We have incurred losses from continuing operations in prior years,including 2009 and 2008. Our net losses from continuing operations before taxesfor the years ended December 31, 2009 and 2008 were $9.1 million and $6.2million, respectively.  We expect toincur substantial losses in 2010 and thereafter until we find apurchaser/licensee.  We may not return toprofitable operations.

 

**WE MAY NOTBE ABLE TO RETAIN OUR KEY EXECUTIVES AND PERSONNEL.** Asa small company, our success depends on the services of key employees inexecutive and other positions.  The lossof the services of one or more of such employees could have a material adverseeffect on us.

 

**WE FACEINTENSE COMPETITION BY COMPETITORS.**  Ourcompetitors in the biotechnology products business are numerous.  Many of our competitors have significantlygreater financial, marketing and distribution resources than we do.  Our competitors may succeed in developing ormarketing biotechnology products that are more effective than ours.

 

**WE FACEEVOLVING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE THAT MAY RESULTIN ADDITIONAL EXPENSES AND CONTINUING UNCERTAINTY.** Changing laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of 2002, newSEC regulations and NASDAQ Stock Market LLC rules are creating uncertaintyfor public companies.  We are presentlyevaluating and monitoring developments with respect to new and proposed rules andcannot predict or estimate the amount of the additional costs we may incur orthe timing of these costs.  For example,compliance with the internal control requirements of Section 404 of theSarbanes-Oxley Act has to date required the commitment of significant resourcesto document and test the adequacy of our internal control over financialreporting.  While our assessment, testingand evaluation of the design and operating effectiveness of our internalcontrol over financial reporting resulted in our conclusion that, as of December 31,2009, our internal control over financial reporting was effective, we canprovide no assurance as to conclusions of management or by our independentregistered public accounting firm with respect to the effectiveness of ourinternal control over financial reporting in the future.  These new or changed laws, regulations andstandards are subject to varying interpretations, in many cases due to theirlack of specificity, and, as a result, their application in practice may evolveover time as new guidance is provided by regulatory and governing bodies.  This could result in continuing uncertaintyregarding compliance matters and higher costs necessitated by ongoing revisionsto disclosure and governance practices. We are committed to maintaining high standards of corporate governanceand public disclosure.  As a result, weintend to invest the resources necessary to comply with evolving laws,regulations and standards, and this investment may result in increased generaland administrative expenses and a diversion of management time and attentionfrom revenue-generating activities to compliance activities.  If our efforts to comply with new or changedlaws, regulations and standards differ from the activities intended byregulatory or governing bodies, due to ambiguities related to practice orotherwise, regulatory authorities may initiate legal proceedings against us,which could be costly and time-consuming, and our reputation and business maybe harmed.

 

**RISKSRELATED TO OWNERSHIP OF OUR COMMON STOCK**

 

**THE PRICEOF SPHERIX’S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS WHICHWILL CONTINUE TO AFFECT THE PRICE OF OUR STOCK.**  Our commonstock has traded as low as $0.20 and as high as $4.15 between January 1,2008 and December 31, 2009. Some of the factors leading to this volatilityinclude:

 

·                  relatively small amounts of our stock trading on anygiven day;

 

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·                  fluctuations in our operating results;

·                  announcements of technological innovations or newproducts which we or our competitors make;

·                  developments with respect to patents or proprietaryrights; and

·                  recent economic downturn and market instability.

 

**OURCOMMON STOCK WILL BE DELISTED FROM THE NASDAQ CAPITAL MARKET SYSTEM IF WE FAILTO COMPLY WITH CONTINUED LISTING STANDARDS.**  Our commonstock is currently traded on the Nasdaq Capital Market under the symbol “SPEX.”  If we fail to meet any of the continuedlisting standards of the Nasdaq Capital Market, our common stock could bedelisted from the Nasdaq Capital Market. These continued listing standards include specifically enumeratedcriteria, such as:

 

·                  a $1.00 minimum closing bid price;

·                  shareholders’ equity of $2.5 million;

·                  500,000 shares of publicly-held common stock with amarket value of at least $1 million;

·                  300 round-lot stockholders;  and

·                  compliance with Nasdaq’s corporate governance requirements,as well as additional or more stringent criteria that may be applied in theexercise of Nasdaq’s discretionary authority.

 

In the future, if ourcommon stock were to fail to meet the minimum bid price requirement or any ofthe other listing requirements it could be delisted from the Nasdaq CapitalMarket.  In that case trading of ourcommon stock most likely will be conducted in the over-the-counter market (“OTC”)Bulletin Board market, an electronic bulletin board established for unlistedsecurities.  Such delisting could alsoadversely affect our ability to obtain financing for the continuation of ouroperations and could result in the loss of confidence by investors, suppliersand employees.

 

**WE COULDFAIL IN FINANCING EFFORTS OR BE DELISTED FROM NASDAQ IF WE FAIL TO RECEIVESHAREHOLDER APPROVAL WHEN NEEDED.**  We arerequired under the NASDAQ Marketplace rules to obtain shareholder approvalfor any issuance of additional equity securities that would comprise more than20% of the total shares of our common stock outstanding before the issuance ofsuch securities sold at a discount to the greater of book or market value in anoffering that is not deemed to be a “public offering” by NASDAQ.  Funding of our operations in the future mayrequire issuance of additional equity securities that would comprise more than20% of the total shares of our common stock outstanding, but we might not besuccessful in obtaining the required shareholder approval for such anissuance.  If we are unable to obtainfinancing due to shareholder approval difficulties, such failure may have amaterial adverse effect on our ability to continue operations.

 

**DIVIDENDSON OUR COMMON STOCK ARE NOT LIKELY. **We intend to retain future earnings, ifany, in order to provide funds for use in the operation and expansion of ourbusiness and for further research and development.  Accordingly, we do not anticipate paying cashdividends on our common stock in the foreseeable future.  Investors must look solely to appreciation inthe market price of the shares of our common stock to obtain a return on theirinvestment.

 

**BECAUSEOF THE RIGHTS AGREEMENT AND “ANTI-TAKEOVER” PROVISIONS IN OUR CERTIFICATE OFINCORPORATION AND BYLAWS, A THIRD PARTY MAY BE DISCOURAGED FROM MAKING ATAKEOVER OFFER WHICH COULD BE BENEFICIAL TO OUR STOCKHOLDERS.** In 2001, we adopted a shareholder rights plan.  The effect of this rights plan and of certainprovisions of our Certificate of Incorporation, By-Laws, and the anti-takeoverprovisions of the Delaware General Corporation Law, could delay or prevent athird party from acquiring us or replacing members of our board of directors,even if the acquisition or the replacements would be beneficial to ourstockholders.  These factors could alsoreduce the price that certain investors might be willing to pay for shares ofthe common stock and result in the market price being lower than it would bewithout these provisions.

 

**INSIDERSOWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OURSTOCKHOLDERS’ ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS**. As of December 31, 2009, our officers and directors and theiraffiliates owned approximately 15% of the outstanding shares of our commonstock.  As a result, our officers anddirectors are able to exert considerable influence over the outcome of anymatters submitted to a vote of the holders of our common stock, including theelection of our Board of Directors.  Thevoting power of these stockholders could prevent or frustrate attempts toeffect a transaction that is in the best interests of the other stockholdersand could also discourage others from seeking to purchase our common stock,which might depress the price of our common stock.

 

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**Item 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**Item 2.  PROPERTIES**

 

The Company’s office islocated in Bethesda, Maryland, where it leases 5,000 square feet of officespace under a lease that expires March 31, 2013.  The Company also leased 5,000 square feet ofresearch lab and warehouse space for Biospherics in Annapolis, Maryland under a leasethat expired June 30, 2009.  The capacity of the Bethesda facility is adequate for the Company’s currentneeds.

 

**Item 3.  LEGAL PROCEEDINGS**

 

None.

 

**Item4.  REMOVED AND RESERVED**

 

**PART II**

 

**Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

 

As of March 29,2010, the number of shareholders of record of the Company’s common stock wasapproximately 820.  The Company’s commonstock is traded in the over-the-counter market and is quoted in the NASDAQCapital Market System under the symbol SPEX. No dividends were paid in 2009 or 2008.

 

The following tablestates the high and low sales prices of the Company’s common stock for eachquarter during the two year period ended December 31, 2009, based on thedaily high and low prices as reported by NASDAQ:

 
| ** **        | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------|------------|----------|------------|---------|------------|
| 1st  Quarter 2009 |       | $        | 0.90       |    | $          | 0.25 |   |
| 2nd  Quarter 2009 |       | $        | 2.67       |    | $          | 0.70 |   |
| 3rd  Quarter 2009 |       | $        | 2.61       |    | $          | 1.10 |   |
| 4th  Quarter 2009 |       | $        | 4.15       |    | $          | 1.10 |   |
|              |       |     |       |    |       |
| 1st  Quarter 2008 |       | $        | 1.30       |    | $          | 1.00 |   |
| 2nd  Quarter 2008 |       | $        | 1.24       |    | $          | 0.65 |   |
| 3rd  Quarter 2008 |       | $        | 0.82       |    | $          | 0.49 |   |
| 4th  Quarter 2008 |       | $        | 0.75       |    | $          | 0.20 |   |

 

On November 16,2009, the Company entered into a securities purchase agreement with certain investors,to sell an aggregate of 2,760,870 shares of its common stock and warrants topurchase up to an additional 1,104,348 shares of its common stock to suchinvestors for gross proceeds of approximately $6.3 million.  The common stock and warrants were sold inunits, with each unit consisting of one share of common stock and a warrant topurchase 0.40 of a share of common stock. The purchase price per unit was $ 2.30. Subject to certain ownership limitations, the warrants are exercisableat any time on or after the initial issue date and on or prior to November 16,2014, but not thereafter, at an exercise price of $ 3.25.  The exercise price of the warrants is subjectto adjustment in the case of stock splits, stock dividends, combinations ofshares and similar recapitalization transactions.  The net proceeds to the Company from theregistered direct offering, after deducting placement agent fees and theCompany’s offering expenses, and excluding the proceeds, if any, from theexercise of the warrants issued in the offering, were approximately $6million.  The common stock issued in theNovember, 2009 offering and the common stock which may be issued pursuant tothe exercise of the warrants have been registered pursuant to a Form S-3registration statement which became effective in October, 2009.

 

On November 6, 2009,in connection with the closing of our registered direct offering of convertiblepreferred stock and warrants to purchase common stock, the Company issued toRodman & Renshaw, LLC, as partial consideration for its services asplacement agent, warrants to purchase up to 82,826 shares of our common stockat an 

 

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exercise price of $2.875per share.  The warrants are exercisableat the option of the holder at any time beginning on November 16, 2009through and including November 16, 2011. These warrants were offered and sold by us in reliance upon exemptionsfrom the registration statement requirements by Section 4(2) of theSecurities Act of 1933, as amended, as transactions by an issuer not involvinga public offering.

 

On November 17,2009, the stockholders authorized a reverse split of the Company’s common stockwithin a range of 1:5 to 1:20. Accordingly, the Board of Directors has the authority, at any time untilmid-May 2011, to determine whether and when to implement a reverse stocksplit and the actual ratio of such a split within the 1:5 to 1:20 range.

 

The Company fullyregained compliance with the requirements for continued listing on the NASDAQCapital Market as described below.

 

*Minimum Bid Price Requirement*

 

On July 21, 2008,NASDAQ notified the Company that its common stock failed to maintain a minimumbid price of $1.00 over the previous 30 consecutive business days as requiredby the NASDAQ Listing Rules.  In October 2008,NASDAQ suspended enforcement of the minimum bid price and market value ofpublicly held shares requirements through January 16, 2009. On December 19,2008, NASDAQ extended its suspension of the requirements until April 20,2009 and on March 24, 2009 NASDAQ again extended the suspension until July 20,2009.

 

On May 20, 2009, theCompany received notification from NASDAQ confirming that it has regainedcompliance with the minimum bid price requirement for continued listing onNASDAQ under Listing Rule 5550(a)(2). In the letter, NASDAQ stated that this matter is now closed.

 

*Independent Director Requirement*

 

On April 17, 2009,the Company reported in the Current Report on Form 8-K filed with theSecurities and Exchange Commission, that Mr. A. Paul Cox, Jr., one ofour independent directors, passed away on April 13, 2009.  On April 23, 2009, NASDAQ notified theCompany that the Company no longer complied with NASDAQ Listing Rule 5605,which requires that a majority of the board of directors be comprised ofindependent directors.

 

On May 18, 2009, theCompany received notification from NASDAQ confirming that it had regainedcompliance with the independent director requirement for continued listing onNASDAQ under Listing Rule 5605(b)(1). NASDAQ’s determination was based on the Company’s appointment of ThomasB. Peter to the Company’s Board of Directors as reported in the Company’sCurrent Report Form 8-K filed on May 14, 2009.  In the letter, NASDAQ stated that this matteris now closed.

 

At September 30,2008, the Company’s stockholders’ equity fell below the $10 million limitrequired for continued listing on the NASDAQ Global Market.  Accordingly, the Company transferred itslisting from the NASDAQ Global Market to the NASDAQ Capital Market, which has alower stockholders’ equity limit of $2.5 million.  At December 31, 2009, the Company’sstockholders’ equity was $10.2 million, after raising $6.3 million in aregistered direct stock offering.

 

**Equity Compensation PlanInformation**

 

The following tableprovides information about the Company’s Common Stock that may be issued uponthe exercise of options and rights under all of the Company’s existing equitycompensation plans as of December 31, 2009.

 
| **Plan  Category**                                            | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights   (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation plans  (excluding securities reflected in  column (a)) (c)** | ** **    |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
| Equity  compensation plans approved by security holders       |       |  40,500                                                                                             |       | $                                                                                       | 2.57       |                                                                                                                                                    |  857,700 |   |
| Equity  compensation plans not approved by securities holders |       |  *1,104,348                                                                                         |       | $                                                                                       | 3.25       |                                                                                                                                                    |  N/A     |   |
| Total                                                         |       | 1,144,848                                                                                                |       |                                                                                    |       | 857,700                                                                                                                                                 |          |

 

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*The 1,104,348 warrantswere issued in the November 2009 registered direct offering describedearlier in this Item 5.

 

**Item 6.****          ****SELECTED FINANCIAL DATA**

 

Not applicable.

 

**Item 7.****          ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

TheCompany operates via two segments, Biospherics and Health Sciences.  Biospherics seeks to develop a singleproprietary product for commercial application. Health Sciences provides technical and regulatory consulting services tofood, consumer products, biotechnology and pharmaceutical companies, as well asproviding technical support to the Biospherics segment.

 

Biospherics engages inproduct development of D-tagatose.  TheCompany’s focus is on the non-food uses of D-tagatose.  Our efforts have been to explore whetherD-tagatose is an effective treatment for Type 2 diabetes, as a prospectivefirst-in-class drug candidate. D-tagatose is believed to depress elevations of blood sugar levels indiabetic patients by increasing glycogen synthesis while decreasing glycogenutilization, resulting in an improvement of blood sugar control and modulationof HbA1c.

 

The Company intends tocontinue to develop D-tagatose and simultaneously search for a sale, license,partner, or other strategic alliance to fully take D-tagatose through the FDAapproval process and to bring D-tagatose to market.  We are hopeful that as we proceed with ourdevelopment efforts, incremental successes may afford us the opportunity toachieve such a strategic alliance.

 

The Company is conductingtwo clinical trials under an FDA Investigational New Drug (“IND”) applicationprocess:  a Phase 3 trial to determinesafety and efficacy of D-tagatose as a treatment for Type 2 diabetes; and aPhase 2 Dose Range trial to evaluate the effectiveness of lower doses ofD-tagatose in treating Type 2 diabetes. The Dose Range trial and the efficacy portion of the Phase 3 trial areexpected to be completed in mid- to late-2010, and the safety portion of thePhase 3 trial is expected to be completed in early 2011.

 

The Company expects toincur substantial development costs, without substantial correspondingrevenue.  The Company intends to financeits development activities through the remaining proceeds received from the2007 sale of InfoSpherix and the November 2009 stock placement, as well asadditional funds it may seek to raise through the sale of additional stock.

 

**Results of Operations—2009 Comparedwith 2008**

 

**Revenue and Direct Costs**

 

Revenue and directcontract costs are primarily related to the Company’s Health Sciences business,which started in July 2007 and has experienced a steady growth in businesswith new clients representing 52% of the growth between years.  The consulting business generally providesservices on either a fixed-price basis or a “time and expenses” basis, charginghourly rates for each staff member involved in a project, based on his or herskills and experience.  Engagementagreements typically provide for monthly billing and payment within thirty (30)days of receipt, and permit clients to terminate engagements at any time.

 

No substantial revenue isexpected from the Biospherics segment until the Company is successful in selling orlicensing its technology.

 

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**Research and Development**

 

Researchand development expenditures relate solely to the Biospherics segment andconsist primarily of salaries and related personnel costs, fees paid toconsultants and outside service providers, and other expenses related to ourefforts to commercialize D-tagatose.  Weexpense our research and development costs as they are incurred.

 

Theclinical trials in the use of D-tagatose for the treatmentof Type 2 diabetes are the primary focus of the Biospherics segment.  The R&D expenditures for 2009 and 2008consisted of both the Phase 3 clinical trial and a related Phase 2 Dose Rangestudy. The increase between years is related to the expansion of the Phase 3trial to India and the related increase in the number of subjects participatingin the trials.  A minimum of 332participants must complete the Phase 3 trial in accord with the currentprotocol.

 

TheDose Range trial and the efficacy portion of the Phase 3 trial will likely becompleted in mid- to late-2010, and the safety portion of the Phase 3 trialwill likely be completed in early 2011, based on current enrollment andretention numbers.  The New DrugApplication (“NDA”) could be filed as early as mid-2011.  The FDA review process typically takesbetween one and two years to complete. Approval of an NDA is at the discretion of the FDA.

 

In June 2009, theCompany received the first batch of FDA current Good Manufacturing Practice (“cGMP”)D-tagatose, U.S. Pharmacopeia (“USP”) grade. The D-tagatose will be used to satisfy the Chemistry, Manufacturing andControl (“CMC”) requirements of its NDA to the FDA.  A Drug Master File (“DMF”) has been submittedto the FDA and Spherix has a Letter of Authorization to refer to the DMF in itsNDA.  This and subsequent batches arebeing used in the ongoing clinical trials.

 

In December 2009,the Company entered into a Manufacturing Support and Supply Agreement withInalco S.p.A of Italy.  Under theagreement the Company committed to the purchase of 25 metric tons ofD-tagatose.  The entire purchasecommitment of $1,100,000 was realized an expense in 2009.  Of this amount $500,000 was paid in 2009,with the remaining balance payable in 2010. An additional $300,000 of D-tagatose, separate from the aboveManufacturing Support and Supply Agreement, was also purchased in 2009 from Inalco.

 

**Selling, General andAdministrative**

 

Our selling, general andadministrative expenses consist primarily of salaries and related expenses forexecutive finance and other administrative personnel, professional fees andother corporate expenses, including facilities-related expenses.  The increase in selling, general andadministrative costs between 2009 and 2008 are primarily related to theexpansion of the Company’s commercialization efforts of D-tagatose as a treatmentfor Type 2 diabetes.  These plans includethe formation of regional Advisory Boards, with the first one held in October 2009.

 

**Interest**

 

Interest revenue in 2009and 2008 was primarily derived from interest earned on the net proceeds of thesale of the InfoSpherix subsidiary in August 2007 and from the netproceeds of our November 2009 equity offering.  Interest income between years has decreasedwith the decrease in funds available for investing and the lower rates ofreturn available in the market.

 

**Income Tax**

 

The 2008 income taxexpense is related to the release of the $2 million escrow balance in November 2008in connection with the sale of the InfoSpherix subsidiary in 2007.

 

**Discontinued Operations**

 

On August 15, 2007,the Company completed the sale of InfoSpherix for $17 million ($15 million atclosing and $2 million following a 15-month escrow period), pursuant to theStock Purchase Agreement dated June 25, 2007.  The $2 million escrow balance was recorded asa gain on sale of the discontinued segment when it was realized in November 2008.  The sale was conducted to allow Spherix tofocus substantially all of its efforts on Biospherics.

 

The results of operationsof the discontinued InfoSpherix segment, including the costs to sell thesegment, are as follows:

 

17

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| ** **                                               | ** ** | **2008**  | ** ** |
|----------------------------------------------------------|------------|-----------|------------|
| Interest  revenue                                        |       | $         | 70,000     |   |
| Gain  on sale of segment                                 |       | 2,000,000 |       |
| **Income from discontinued operations****before  taxes** |       | $         | 2,070,000  |   |

 

# **Sales Backlog**

# ** **

The Company’s backlog asof December 31, 2009 and 2008 (consisting solely of backlog from theHealth Sciences business) was approximately $770,000 and $1.2 million,respectively.  The Company bills for itsconsulting services primarily on a time and expense basis and these amounts representestimated contract values.  Further, theCompany’s consulting contracts are generally terminable or subject topostponement or delay at any time by clients. As a result, backlog at any particular time is not a reliable indicatorof revenues for any future periods.

 

# **Critical Accounting Estimates**

# ** **

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of the contingent assets and liabilities at the date of thefinancial statements and revenue and expenses for the period reported.  Estimates are based upon historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances.  These estimatesare evaluated periodically and form the basis for making judgments regardingthe carrying values of assets and liabilities and the reported amount ofrevenue and expenses.  Actual results maydiffer substantially from these estimates.

 

Spherix’s criticalaccounting policies are those it believes are the most important in determiningits financial condition and results, and require significant subjectivejudgment by management as a result of inherent uncertainties.  A summary of the Company’s significantaccounting policies is set out in the notes to the consolidated financialstatements.  Such policies are discussedbelow.

 

# ***Accountingfor Taxes and Valuation Allowances***

# ** **

We currently havesignificant deferred tax assets, resulting from net operating loss carryforwards.  These deferred tax assets mayreduce taxable income in future periods. Based on the Company’s losses and its accumulated deficit, the Companyhas provided a full valuation allowance against the net deferred taxasset.  Cumulative losses weigh heavilyin the overall assessment of valuation allowances.

 

We expect to continue tomaintain a full valuation allowance on future tax benefits until an appropriatelevel of profitability is sustained, or we are able to develop tax strategiesthat would enable us to conclude that it is more likely than not that a portionof our deferred tax assets would be realizable.

 

**NewAccounting Pronouncements**

** **

InJune 2009, the Financial Accounting Standards Board (“FASB”) establishedthe FASB Accounting Standards Codification (Codification) as the source ofauthoritative U.S. generally accepted accounting principles (“GAAP”) recognizedby the FASB to be applied to nongovernmental entities and rules andinterpretive releases of the SEC as authoritative GAAP for SEC registrants. TheCodification supersedes all the existing non-SEC accounting and reportingstandards upon its effective date and subsequently, the FASB will not issue newstandards in the form of Statements, FASB Staff Positions or Emerging IssuesTask Force Abstracts. This guidance is effective for interim periods endingafter September 15, 2009. We adopted this guidance for the period ended September 30,2009, with no effect on our consolidated results of operations and financialcondition for the three and nine months ended September 30, 2009.

 

InOctober 2009, the FASB issued ASC Update No. 2009-13, which amendsthe Revenue Recognition topic of the Codification. This update providesamendments to the criteria in Subtopic 605-25 of the Codification forseparating consideration in multiple-deliverable arrangements. As a result ofthose amendments, multiple-deliverable arrangements will be separated in morecircumstances than under existing U.S. GAAP. The amendments establish a sellingprice 

 

18

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hierarchyfor determining the selling price of a deliverable and will replace the term *fair value* in the revenue allocationguidance with *selling price*toclarify that the allocation of revenue is based on entity-specific assumptionsrather than assumptions of a marketplace participant. The amendments will alsoeliminate the residual method of allocation and require that arrangement considerationbe allocated at the inception of the arrangement to all deliverables using therelative selling price method and will require that a vendor determine its bestestimate of selling price in a manner that is consistent with that used todetermine the price to sell the deliverable on a stand-alone basis. Theseamendments will be effective prospectively for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010, with early adoption permitted. We are currently evaluating the impact theadoption of this update might have on our results of operations and financialposition.

 

InOctober 2009, the FASB issued ASC Update No. 2009-14, which amendsthe Software topic of the Codification. The amendments in this update changethe accounting model for revenue arrangements that include both tangibleproducts and software elements. Tangible products containing softwarecomponents and nonsoftware components that function together to deliver thetangible product’s essential functionality are no longer within the scope ofthe software revenue guidance in Subtopic 985-605 of the Codification. Inaddition, the amendments in this update require that hardware components of atangible product containing software components always be excluded from thesoftware revenue guidance. In that regard, the amendments provide additionalguidance on how to determine which software, if any, relating to the tangibleproduct also would be excluded from the scope of the software revenue guidance.The amendments also provide guidance on how a vendor should allocatearrangement consideration to deliverables in an arrangement that includes bothtangible products and software. The amendments also provide further guidance onhow to allocate arrangement consideration when an arrangement includesdeliverables both included and excluded from the scope of the software revenueguidance. These amendments will be effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010, with early adoption permitted. We are currentlyevaluating the impact the adoption of this update might have on our results ofoperations and financial position.

 

InDecember 2007, the FASB revised the authoritative guidance for businesscombinations, which establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, liabilities assumed, and any noncontrolling interest in the acquireein a business combination. The guidance establishes principles stipulating howgoodwill acquired in a business combination or a gain from a bargain purchaseshould be recognized and measured under a method established by the guidancereferred to as the acquisition method. The guidance also expands the disclosurerequirements related to the nature and financial impact of businesscombinations. We adopted this guidance as of January 1, 2009 and theadoption did not have a material impact on our financial position, results ofoperations or cash flows.

 

InDecember 2007, the FASB revised the authoritative guidance forconsolidation, which establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The guidance clarifies that a noncontrolling interest in asubsidiary is an ownership interest in the consolidated entity that should bereported as equity in the consolidated financial statements. The guidance alsorequires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Italso requires disclosure, on the face of the consolidated statement of income,of the amounts of consolidated net income attributable to the parent and to thenoncontrolling interest. It also provides guidance when a subsidiary isdeconsolidated and requires expanded disclosures in the consolidated financialstatements that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners of a subsidiary. Weadopted this guidance as of January 1, 2009 and the adoption did not havea material impact on our financial position, results of operations or cashflows.

 

InJune 2008, the FASB revised the authoritative guidance for earnings pershare, which establishes that unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method. In contrast, the right to receive dividendsor dividend equivalents that the holder will forfeit if the award does notvest, does not constitute a participation right and such an award does not meetthe definition of a participating security in its current form (that is, priorto the requisite service having been rendered for the award). We adopted thisguidance as of January 1, 2009 and the adoption did not have a materialimpact on our financial position, results of operations or cash flows.

 

InApril 2009, the FASB revised the authoritative guidance for financialinstruments. The guidance requires disclosures about fair value of financialinstruments in interim financial statements as well as in annual financial 

 

19

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statements.This guidance is effective for interim periods ending after June 15, 2009.We adopted this guidance in the second quarter of 2009, and the adoption didnot have a material impact on our financial position, results of operations orcash flows.

 

InApril 2009, the FASB revised the authoritative guidance for fair valuemeasurements and disclosures to provide additional guidance in determiningwhether a market for a financial asset is not active and a transaction is notdistressed for fair value measurement purposes. This guidance is effective forinterim periods ending after June 15, 2009. We adopted this guidance forthe period ending June 30, 2009. The adoption of this guidance did nothave a material impact on our financial position, results of operations or cashflows.

 

InApril 2009, the FASB revised the authoritative guidance for investments indebt and equity securities to provide guidance in determining whether impairmentsin debt securities are other-than-temporary, and modifies the presentation anddisclosures surrounding such instruments. This guidance is effective forinterim periods ending after June 15, 2009. We adopted the provisions ofthis guidance for the period ending June 30, 2009. The adoption of thisguidance had no material impact on our financial position, results ofoperations or cash flows.

 

InMay 2009, the FASB revised the authoritative guidance for subsequentevents, which establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. This guidance is effective forfinancial statements issued for interim and annual reporting periods endingafter June 15, 2009. We adopted this guidance for the period ended June 30,2009, and the Company is not aware of any subsequent events that would requirerecognition or disclosure in the consolidated financial statements.

 

**Liquidity and Capital Resources**

 

The Company’s workingcapital was $7.7 million as of December 31, 2009.  Over the next 12 months, the Company expectsthat it will need to expend between $9 million and $11 million to complete thePhase 2 and Phase 3 trials and to fund its increased market development andcommercialization activities.  The totalcost of completing the trials is difficult to determine and can be affected byany number of factors including, but not limited to, the time to complete thetrials.

 

The Company will need toraise additional funds in 2010 to continue its operations.  Any such fundraising will likely require theissuance of additional Company equity securities and a purchaser of suchsecurities will likely insist that such securities be registered securities.

 

In November 2009,the Company obtained net proceeds of approximately $6 million in a registereddirect primary offering.  The commonstock issued in the offering and the common stock which may be issued uponexercise of warrants issued in the offering have been registered under a Form S-3registration statement declared effective by the Securities and ExchangeCommission (“SEC”) in October 2009.

 

Pursuant to SEC rules,the Company may not be in a position to issue additional shares of its commonstock in another registered direct primary offering under a Form S-3registration statement until mid-November 2010.  Thus, if the Company wishes to conductanother registered direct primary offering before mid-November 2010, itwill likely have to do so in whole or in part under a Form S-1registration statement.

 

Further, NASDAQ rules requirestockholder approval for certain stock issuances constituting 20% or more of aCompany’s issued and outstanding stock.

 

The Company cannot beassured that it will be able to attract a purchaser of securities to raise theadditional funds it will likely require in 2010; that the Company will be ableto obtain any required stockholder approval; or that the Company will be ableto have a Form S-1 registration statement declared effective to completesuch an offering.

 

20

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**Item8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Financialstatements and supplementary data required by this Item 8 follow.

 
| **Index  to Financial Statements**                                                                                   | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                 |       |     |
| Report  of Independent Registered Public Accounting Firm                                                             |       | 22       |
|                                                                                                                 |       |     |
| Consolidated  Statements of Operations for the years ended December 31, 2009 and 2008                           |       | 23       |
|                                                                                                                 |       |     |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                                   |       | 24       |
|                                                                                                                 |       |     |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2009 and 2008 |       | 25       |
|                                                                                                                 |       |     |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009 and 2008                           |       | 26       |
|                                                                                                                 |       |     |
| Notes to Consolidated Financial Statements                                                                           |       | 27       |

 

21

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** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors andShareholders

Spherix Incorporated

 

We have audited theaccompanying consolidated balance sheets of Spherix Incorporated (a Delawarecorporation) and subsidiaries as of December 31, 2009 and 2008, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the two years in the period ended December 31,2009.**These financial statementsare the responsibility of the Company’s management.**Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).**Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.**The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.**Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.**Accordingly, we express no such opinion.**An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.**We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Spherix Incorporated as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the two years in the period ended December 31, 2009 in conformitywith accounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1, the Company incurreda net loss of $9,148,631 during the year ended December 31, 2009, and, asof that date, the Company had $9,026,002 in cash, and used $7,832,625 in cashfor operations for the year ended December 31, 2009.  These factors, among others, as discussed inNote 1 to the financial statements, raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to thesematters are also described in Note 1. The financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

 

/s/  Grant Thornton LLP

 

Baltimore, MD

March 30, 2010

 

22

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**Spherix Incorporated**

**ConsolidatedStatements of Operations**

**For the years ended December 31,2009 and 2008**

 
| ** **                                    | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
|                                          |       |       |       |       |       |
| **Revenue**                                   |       | $          | 1,359,110  |       | $          | 1,025,961 |   |
|                                          |       |       |       |       |       |
| Operating  expense                            |       |       |       |       |       |
| Direct  costs                                 |       | 449,293    |       | 397,645    |       |
| Research  and development expense             |       | 6,830,957  |       | 4,004,565  |       |
| Selling,  general and administrative expense  |       | 3,265,137  |       | 3,135,310  |       |
|                                          |       |       |       |       |       |
| Total  operating expense                      |       | 10,545,387 |       | 7,537,520  |       |
|                                          |       |       |       |       |       |
| Loss  from operations                         |       | (9,186,277 | )          | (6,511,559 | )          |
|                                          |       |       |       |       |       |
| Interest  income                              |       | 37,646     |       | 348,443    |       |
| Interest  expense                             |       | —     |       | (2,220     | )          |
| Other  expense                                |       | —     |       | (5,994     | )          |
|                                          |       |       |       |       |       |
| Loss  from continuing operations before taxes |       | (9,148,631 | )          | (6,171,330 | )          |
| Income  tax benefit                           |       | —     |       | 552,803    |       |
|                                          |       |       |       |       |       |
| **Loss from continuing operations**           |       | (9,148,631 | )          | (5,618,527 | )          |
|                                          |       |       |       |       |       |
| Discontinued  operations                      |       |       |       |       |       |
| Income  from discontinued operations          |       | —     |       | 2,070,091  |       |
| Income  tax expense                           |       | —     |       | (587,098   | )          |
| Income  from discontinued operations          |       | —     |       | 1,482,993  |       |
|                                          |       |       |       |       |       |
| **Net loss**                                  |       | $          | (9,148,631 | )          | $          | (4,135,534 | ) |
|                                          |       |       |       |       |       |
| Net  (loss) income per share, basic           |       |       |       |       |       |
| Continuing  operations                        |       | $          | (0.62      | )          | $          | (0.39 | ) |
| Discontinued  operations                      |       | $          | —     |       | $          | 0.10 |   |
| Net  (loss) income per share, basic           |       | $          | (0.62      | )          | $          | (0.29 | ) |
|                                          |       |       |       |       |       |
| Net  (loss) income per share, diluted         |       |       |       |       |       |
| Continuing  operations                        |       | $          | (0.62      | )          | $          | (0.39 | ) |
| Discontinued  operations                      |       | $          | —     |       | $          | 0.10 |   |
| Net  (loss) income per share, diluted         |       | $          | (0.62      | )          | $          | (0.29 | ) |
|                                          |       |       |       |       |       |
| Weighted  average shares outstanding, basic   |       | 14,713,473 |       | 14,342,953 |       |
| Weighted  average shares outstanding, diluted |       | 14,713,473 |       | 14,342,953 |       |

 

The accompanyingnotes to financial statements are an integral part of these financial statements.

 

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**Spherix Incorporated**

**ConsolidatedBalance Sheets**

**As of December 31, 2009 and 2008**

 
| ** **                                                                                                                                                                                      | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                      |       |        |       |        |       |
| Current  assets                                                                                                                                                                                 |       |        |       |        |       |
| Cash  and cash equivalents                                                                                                                                                                      |       | $           | 9,026,002  |        | $          | 9,404,843 |   |
| Short-term  investments, held to maturity                                                                                                                                                       |       | 375,003     |       | 1,894,434   |       |
| Trade  accounts receivable                                                                                                                                                                      |       | 274,153     |       | 281,342     |       |
| Other  receivables                                                                                                                                                                              |       | 948         |       | 37,223      |       |
| Prepaid  expenses and other assets                                                                                                                                                              |       | 209,255     |       | 282,971     |       |
| Total  current assets                                                                                                                                                                           |       | 9,885,361   |       | 11,900,813  |       |
|                                                                                                                                                                                            |       |        |       |        |       |
| Property  and equipment, net                                                                                                                                                                    |       | 225,958     |       | 310,365     |       |
| Patents,  net of accumulated amortization of $38,588 and $110,599                                                                                                                               |       | 8,364       |       | 14,433      |       |
| Deposit                                                                                                                                                                                         |       | 35,625      |       | 35,625      |       |
| Total  assets                                                                                                                                                                                   |       | $           | 10,155,308 |        | $          | 12,261,236 |   |
|                                                                                                                                                                                            |       |        |       |        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   |       |        |       |        |       |
| Current  liabilities                                                                                                                                                                            |       |        |       |        |       |
| Accounts  payable and accrued expenses                                                                                                                                                          |       | $           | 1,714,140  |        | $          | 710,881 |   |
| Accrued  salaries and benefits                                                                                                                                                                  |       | 388,665     |       | 304,756     |       |
| Deferred  revenue                                                                                                                                                                               |       | 90,915      |       | 39,347      |       |
| Total  current liabilities                                                                                                                                                                      |       | 2,193,720   |       | 1,054,984   |       |
|                                                                                                                                                                                            |       |        |       |        |       |
| Deferred  compensation                                                                                                                                                                          |       | 580,000     |       | 660,000     |       |
| Deferred  rent                                                                                                                                                                                  |       | 109,712     |       | 136,736     |       |
| Total  liabilities                                                                                                                                                                              |       | 2,883,432   |       | 1,851,720   |       |
|                                                                                                                                                                                            |       |        |       |        |       |
| Commitments  and contingencies                                                                                                                                                                  |       | —      |       | —      |       |
|                                                                                                                                                                                            |       |        |       |        |       |
| Stockholders’  equity                                                                                                                                                                      |       |        |       |        |       |
| Preferred  stock, $0.01 par value, 2,000,000 shares authorized; none issued and  outstanding                                                                                                    |       | —      |       | —      |       |
| Common  stock, $0.005 par value, 50,000,000 shares authorized; 17,231,086 and  14,437,600 issued,  17,150,648 and  14,357,162 outstanding at December 31, 2009 and 2008, respectively |       | 86,155      |       | 72,188      |       |
| Paid-in  capital in excess of par value                                                                                                                                                         |       | 33,599,510  |       | 27,602,486  |       |
| Treasury  stock, 80,438 shares, at cost at December 31, 2009 and 2008,  respectively                                                                                                       |       | (464,786    | )          | (464,786    | )          |
| Accumulated  deficit                                                                                                                                                                            |       | (25,949,003 | )          | (16,800,372 | )          |
| Total  stockholders’ equity                                                                                                                                                                |       | 7,271,876   |       | 10,409,516  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                |       | $           | 10,155,308 |        | $          | 12,261,236 |   |

 

The accompanying notes tofinancial statements are an integral part of these financial statements.

 

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**Spherix Incorporated**

**Consolidated Statements of Changesin Stockholders’ Equity**

**For the years ended December 31, 2009 and 2008**

 
| ** **                                    | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital in** | ** ** | ** Treasury Stock** | ** ** | **Retained    Earnings  (Accumulated** | ** ** | **Stockholders’** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------------------|------------|----------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **Excess  of Par**       | ** ** | **Shares**                             | ** ** | **Amount**             | ** ** | **Deficit)** | ** ** | **Equity** | ** ** |
| ** **                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  January 1, 2008                |       | 14,399,140        |       | $                       | 71,996     |                     | $          | 27,508,418                             |       | 80,438                 |       | $ | (464,786 | ) | $ | (12,664,838 | ) | $ | 14,450,790 |   |
| ** **                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  compensation                     |       | 38,460            |       | 192                     |       | 94,068                   |       | —                                 |       | —                 |       | — |   | 94,260 |   |
| Net  loss                                     |       | —            |       | —                  |       | —                   |       | —                                 |       | —                 |       | (4,135,534 | ) | (4,135,534 | ) |
| ** **                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  December 31, 2008              |       | 14,437,600        |       | $                       | 72,188     |                     | $          | 27,602,486                             |       | 80,438                 |       | $ | (464,786 | ) | $ | (16,800,372 | ) | $ | 10,409,516 |   |
| ** **                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance  of common stock                     |       |              |       |                    |       |                     |       |                                   |       |                   |       |   |   |   |   |
| Sale  of common stock - registery direct, net |       | 2,760,870         |       | 13,804                  |       | 6,336,196                |       | —                                 |       | —                 |       | — |   | 6,350,000 |   |
| Cost  of stock issuance                       |       | —            |       | —                  |       | (416,347                 | )          | —                                 |       | —                 |       | — |   | (416,347 | ) |
| Stock-based  compensation                     |       | 32,616            |       | 163                     |       | 77,175                   |       | —                                 |       | —                 |       | — |   | 77,338 |   |
| Net  loss                                     |       | —            |       | —                  |       | —                   |       | —                                 |       | —                 |       | (9,148,631 | ) | (9,148,631 | ) |
| ** **                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  December 31, 2009              |       | 17,231,086        |       | $                       | 86,155     |                     | $          | 33,599,510                             |       | 80,438                 |       | $ | (464,786 | ) | $ | (25,949,003 | ) | $ | 7,271,876 |   |

 

The accompanyingnotes to financial statements are an integral part of these financialstatements.

 

25

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**Spherix Incorporated**

**ConsolidatedStatements of Cash Flows**

**For the years ended December 31,2009 and 2008**

 
| ** **                                                                    | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating  activities**                                     |       |       |       |       |       |
| Net loss                                                                      |       | $          | (9,148,631 | )          | $          | (4,135,534 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:  |       |       |       |       |       |
| Income from discontinued operations                                           |       | —     |       | (1,482,993 | )          |
| Income tax benefit                                                            |       | —     |       | (552,803   | )          |
| Depreciation and amortization                                                 |       | 84,377     |       | 85,718     |       |
| Loss (gain) on sale of fixed assets                                           |       | 5,399      |       | (14,701    | )          |
| Patent write-off                                                              |       | —     |       | 9,860      |       |
| Stock-based compensation                                                      |       | 77,338     |       | 94,260     |       |
| Changes in assets and liabilities:                                            |       |       |       |       |       |
| Receivables                                                                   |       | 43,464     |       | (112,755   | )          |
| Prepaid expenses and other assets                                             |       | 73,716     |       | 89,271     |       |
| Accounts payable and accrued expenses                                         |       | 1,087,168  |       | (410,670   | )          |
| Deferred rent                                                                 |       | (27,024    | )          | (19,795    | )          |
| Deferred compensation                                                         |       | (80,000    | )          | 51,000     |       |
| Deferred revenue                                                              |       | 51,568     |       | 24,182     |       |
| Net cash used in activities of continuing  operations                         |       | (7,832,625 | )          | (6,374,960 | )          |
| Net cash used in activities of discontinued operations                        |       | —     |       | (34,295    | )          |
| Net cash used in operating activities                                         |       | (7,832,625 | )          | (6,409,255 | )          |
|                                                                          |       |       |       |       |       |
| **Cash flows from investing  activities**                                     |       |       |       |       |       |
| Proceeds from the sale of subsidiary                                          |       | —     |       | 2,070,091  |       |
| Purchase of short-term investments                                            |       | —     |       | (1,894,434 | )          |
| Proceeds from the sale of short-term investments                              |       | 1,519,431  |       | —     |       |
| Purchase of property and equipment                                            |       | —     |       | (183,403   | )          |
| Proceeds from the sales of fixed assets                                       |       | 700        |       | 15,187     |       |
| Net cash provided by investing activities of  continuing operations           |       | 1,520,131  |       | 7,441      |       |
| Net cash used in investing activities of  discontinued operations             |       | —     |       | —     |       |
| Net cash provided by investing activities                                     |       | 1,520,131  |       | 7,441      |       |
|                                                                          |       |       |       |       |       |
| **Cash flows from financing  activities**                                     |       |       |       |       |       |
| Net change in book overdraft                                                  |       | —     |       | (33,302    | )          |
| Proceeds from issuance of common stock, net                                   |       | 5,933,653  |       | —     |       |
| Net cash provided by (used in) financial activities  of continuing operations |       | 5,933,653  |       | (33,302    | )          |
| Net cash used in financing activities of  discontinued operations             |       | —     |       | —     |       |
| Net cash provided by (used in) financing activities                           |       | 5,933,653  |       | (33,302    | )          |
|                                                                          |       |       |       |       |       |
| **Net decrease in cash and cash  equivalents**                                |       | (378,841   | )          | (6,435,116 | )          |
| **Cash and cash equivalents,  beginning of year**                             |       | 9,404,843  |       | 15,839,959 |       |
|                                                                          |       |       |       |       |       |
| **Cash and cash equivalents, end of  year**                                   |       | $          | 9,026,002  |       | $          | 9,404,843 |   |
|                                                                          |       |       |       |       |       |
| **Supplemental cash flow information**                                        |       |       |       |       |       |
| Interest paid                                                                 |       | $          | —     |       | $          | 2,220 |   |

 

The accompanying notes tofinancial statements are an integral part of these financial statements.

 

26

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** **

**Spherix Incorporated**

**Notes toConsolidated Financial Statements**

 

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**1.****            ****Summary of Significant AccountingPolicies**

 

# ***Nature ofBusiness and Basis of Presentation***

# ** **

The Company’s principal segments are Biospherics, our biotechnologyresearch and development business, and Health Sciences, a technical and regulatoryconsulting business.  The Health Sciencessegment was created in July 2007 when Claire L. Kruger, CEO and COO,joined the Company in advance of the anticipated sale of the Company’swholly-owned subsidiary, InfoSpherix Incorporated.  The Health Sciences business providestechnical and regulatory consulting services to biotechnology andpharmaceutical companies, as well as providing technical support for theCompany’s own R&D activities.  TheCompany generally provides its services on either a fixed price basis or on a “timeand expenses” basis, charging hourly rates for each staff member involved in aproject, based on his or her skills and experience.  InfoSpherix was the Company’s informationservices segment and was sold on August 15, 2007 in a move to allow theCompany to devote its resources to the activities of the Biospherics segment.

 

The Company has createdtwo wholly-owned subsidiaries, Biospherics Incorporated and Spherix Consulting, Inc.,for its two operating segments.  TheCompany’s Health Sciences contracts are now in the name of Spherix Consulting, Inc.and the Company’s patents and other assets and operations have been transferredinto the name of Biospherics Incorporated. The subsidiaries began operations on January 1, 2009.  Spherix now provides management, strategicguidance, business development, marketing and other services to itssubsidiaries.

 

The consolidatedfinancial statements have been prepared on a going concern basis, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.  However,as discussed in Note 2, the Company incurred a net loss of $9.1 million for theperiod ended December 31, 2009 and as of December 31, 2009, had $9 millionin cash and investments to fund operations, but anticipates expending between$9 million and $11 million of cash flows from operations during 2010.  In the absence of the Company being able toraise additional funds, this factor raises substantial doubt as to the Company’sability to continue as a going concern. The Company is currently pursuing opportunities to raise additionalcapital to support ongoing operations; however, the Company can provide noassurance that it will be able to secure these funds.  The financial statements do not include anyadjustments relating to the recoverability and classifications or recordedasset amounts or the amounts and classifications of liabilities or any otheradjustments that may be necessary if the Company is unable to continue as agoing concern.

 

The consolidatedfinancial statements include the accounts of Spherix Incorporated, BiosphericsIncorporated and Spherix Consulting, Inc. (collectively, the “Company”).  All intercompany balances and transactionshave been eliminated in consolidation.

 

On August 15,2007, the Company sold InfoSpherix. Accordingly, the final payment received in 2008 from the sale ofInfoSpherix is reported in the accompanying financial statements asdiscontinued operations in the Consolidated Statement of Operations.

 

***Useof Estimates and Assumptions***

 

The accompanyingconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America.  This requires management to make estimatesand assumptions that affect certain reported amounts of assets and liabilitiesand disclosures of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenue and expenses duringthe period.  Significant estimatesinclude amortization and depreciation. Accordingly, actual results could differ from those estimates andassumptions.

 

***Cash and Cash Equivalents***

 

The Company considers allhighly liquid investments with original maturities of three months or less whenpurchased to be cash and cash equivalents. At December 31, 2009, the Company had approximately $8.9 millioninvested in funds with a maturity of three months or less, which are includedas cash and cash equivalents.  TheCompany maintains cash balances at several banks.  Accounts at each institution are insured bythe Federal Deposit Insurance Corporation up to $250,000.  At December 31, 2009, the Company’s cashand cash equivalent in excess of the FDIC

 

27

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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limits was $8.7million.  The Company has not experiencedany losses in such accounts and believes it is not exposed to any significantcredit risk on cash.

 

***Short-termInvestments***

 

The Company’s short-terminvestments consist of investments in debt securities, which mature in one yearor less, and are valued at amortized cost, which approximates fair value.

 

***Concentrations***

 

During 2009 and 2008,revenue from five and three Health Sciences clients accounted for 72% and 66%of the Company’s total revenue, respectively.

 

***Property and Equipment and Depreciation***

 

Property and equipmentare stated at cost and consist of office furniture and equipment, computerhardware and software, and leasehold improvements.  The Company computes depreciation andamortization under the straight-line method and typically over the followingestimated useful lives of the related assets:

 

| Office furniture and  equipment |   | 3 to 10 years |
|---------------------------------|--------|---------------|
| Computer hardware and  software |   | 3 to 5 years  |

 

Leasehold improvementsare depreciated or amortized over the lesser of the term of the related leaseor the estimated useful lives of the assets (generally 5 to 10 years).  Major additions, improvements and renewals arecapitalized at cost and ordinary repairs, maintenance, and renewals areexpensed in the year incurred.  Gains orlosses from the sale or retirement of property and equipment result from thedifference between sales proceeds (if any) and the assets’ net book value, andare recorded in the consolidated Statement of Operations.

 

***Impairment of Long-Lived Assets***

 

Wheneverevents or changes in circumstances indicate that the carrying amount oflong-lived assets, including patents and property and equipment, may not befully recoverable, the Company evaluates the probability that the futureundiscounted net cash flows, without interest charges, will be less than thecarrying amount of the assets.  If anyimpairment is indicated as a result of this review, the Company would recognizea loss based on the amount by which the carrying amount exceeds the estimatedundiscounsted future cash flows.  No suchimpairment was noted.

 

***Patent Costs***

 

Legal costsincurred in connection with patent applications and costs of acquiring patentsare capitalized when incurred.  Whenpatents are granted, costs are amortized over a term representing the lesser ofthe life of the patent or the projected sales period of the product or process.

 

***Revenue Recognition***

 

Revenue is recognizedwhen persuasive evidence of an arrangement exists, services have been rendered,the contract price is fixed or determinable and collectability is reasonablyassured.  On time and expense contractsrevenue is recognized at contractually agreed-upon rates based upon directlabor hours expended and other direct costs incurred.  Revenue for fixed-price contracts isrecognized as deliverables or milestones are completed.  Losses, if any, on contracts are recordedduring the period when first determined.

 

***Direct Costs***

 

The Company’s directcosts consist primarily of labor costs.

 

28

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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***Selling, General and Administrative Expense***

 

The Company’s selling,general and administrative expenses consist primarily of executive managementsalaries and fringe benefits, sales and marketing costs, finance andaccounting, human resources, as well as general corporate costs and costsrelated to being a public company.

 

***Researchand Development Costs***

 

Researchand development costs are charged to operations as incurred.  Included in the 2009 research and developmentcosts is $1.4 million in losses related to purchases of D-tagatose used fortrial purposes.

 

***Income Taxes***

 

Deferred income taxes arerecognized for the tax consequences in future years of differences between thetax bases of assets and liabilities and their financial reporting amounts ateach year end, based on enacted tax laws and statutory tax rates applicable tothe periods in which the differences are expected to affect taxableincome.  A valuation allowance isestablished based upon periodic assessments made by management to reducedeferred tax assets to the amount expected to be realized.  Income tax expense is the current taxprovision for the period and the change during the period in deferred taxassets and liabilities.

 

The Company’s policy isto recognize interest and penalties on tax liabilities as interestexpense.  At December 31, 2009 and2008, the Company had no unrecognized income tax benefits and recognized nointerest or penalties on income tax liabilities.

 

***Discontinued Operations***

 

On August 15, 2007,the Company completed the sale of InfoSpherix for $17 million ($15 million atclosing and $2 million following a 15-month escrow period), pursuant to theStock Purchase Agreement dated June 25, 2007.  The $15 million sale proceeds were reportedas gain on sale of the discontinued segment in 2007.  The $2 million escrow balance was recorded asa gain on sale of the discontinued segment and realized in November 2008.  The sale was conducted to allow Spherix tofocus substantially all of its efforts on Biospherics, with the principal focuson the commercialization of D-tagatose.

 

The results of operationsof the discontinued InfoSpherix segment, including the costs to sell thesegment, are as follows:

 
| ** **                                           | ** ** | **2008**  | ** ** |
|------------------------------------------------------|------------|-----------|------------|
| Interest  revenue                                    |       | $         | 70,000     |   |
| Gain  on sale of segment                             |       | 2,000,000 |       |
| **Income from discontinued operations before taxes** |       | $         | 2,070,000  |   |

 

***Fair Value Information***

 

The estimated fair valueof the Company’s financial instruments, which include cash, receivables, andaccounts payable reported in the Consolidated Balance Sheet, approximate theircarrying value given their short maturities.

 

29

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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***Accounting for Stock-Based Compensation***

 

The Company applies thefair value method, which requires that the measurement of all employeeshare-based payments to employees, including grants of employee stock options,be expensed over their vesting period based on their value at the grant dateusing their fair value, determined using a prescribed option-pricingmodel.  The Company uses a Black-Scholes optionpricing model to value stock options. For each of the years ended December 31, 2009 and 2008, the Companyrecognized $13,000 in stock based compensation expense relating to 59,000 stockoptions awarded in February 2006 and $64,000 and $81,000 respectively,related to the issuance of restricted stock (see Note 8, “Stockholders’ Equity”).

 

***Net Loss Per Share***

 

Basic net loss per commonshare has been computed by dividing net loss by the weighted-average number ofcommon shares outstanding during the year. Diluted net loss per common share has been computed by dividing net lossby the weighted-average number of common shares outstanding without an assumedincrease in common shares outstanding for common stock equivalents, as commonstock equivalents are antidilutive.  At December 31,2009, none of the Company’s 40,500 outstanding options or 1,104,348 warrantswere considered common stock equivalents as the exercise prices were all abovethe average market price of the Company’s common stock for the period.

 

**New Accounting Pronouncements**

** **

InJune 2009, the Financial Accounting Standards Board (FASB) established theFASB Accounting Standards Codification (Codification) as the source ofauthoritative U.S. generally accepted accounting principles (GAAP) recognizedby the FASB to be applied to nongovernmental entities and rules andinterpretive releases of the SEC as authoritative GAAP for SEC registrants. TheCodification supersedes all the existing non-SEC accounting and reportingstandards upon its effective date and subsequently, the FASB will not issue newstandards in the form of Statements, FASB Staff Positions or Emerging IssuesTask Force Abstracts. This guidance is effective for interim periods endingafter September 15, 2009. We adopted this guidance for the period ended September 30,2009, with no effect on our consolidated results of operations and financialcondition for the three and nine months ended September 30, 2009.

 

InDecember 2007, the FASB revised the authoritative guidance for businesscombinations, which establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, liabilities assumed, and any noncontrolling interest in the acquireein a business combination. The guidance establishes principles stipulating howgoodwill acquired in a business combination or a gain from a bargain purchaseshould be recognized and measured under a method established by the guidancereferred to as the acquisition method. The guidance also expands the disclosurerequirements related to the nature and financial impact of businesscombinations. We adopted this guidance as of January 1, 2009 and theadoption did not have an impact on our financial position, results ofoperations or cash flows.

 

InDecember 2007, the FASB revised the authoritative guidance forconsolidation, which establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The guidance clarifies that a noncontrolling interest in asubsidiary is an ownership interest in the consolidated entity that should bereported as equity in the consolidated financial statements. The guidance alsorequires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Italso requires disclosure, on the face of the consolidated statement of income,of the amounts of consolidated net income attributable to the parent and to thenoncontrolling interest. It also provides guidance when a subsidiary isdeconsolidated and requires expanded disclosures in the consolidated financialstatements that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners of a subsidiary. Weadopted this guidance as of January 1, 2009 and the adoption did not havean impact on our financial position, results of operations or cash flows.

 

InJune 2008, the FASB revised the authoritative guidance for earnings pershare, which establishes that unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method. In contrast, the right to receive dividendsor dividend equivalents that the holder will forfeit if the award does notvest, does not constitute a participation right and such an award does not meetthe definition of a participating security in its 

 

30

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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currentform (that is, prior to the requisite service having been rendered for theaward). We adopted this guidance as of January 1, 2009 and the adoptiondid not have an impact on our financial position, results of operations or cashflows.

 

InApril 2009, the FASB revised the authoritative guidance for financialinstruments. The guidance requires disclosures about fair value of financialinstruments in interim financial statements as well as in annual financialstatements. This guidance is effective for interim periods ending after June 15,2009. We adopted this guidance in the second quarter of 2009, and the adoptiondid not have a material impact on our financial position, results of operationsor cash flows.

 

InApril 2009, the FASB revised the authoritative guidance for fair valuemeasurements and disclosures to provide additional guidance in determiningwhether a market for a financial asset is not active and a transaction is notdistressed for fair value measurement purposes. This guidance is effective forinterim periods ending after June 15, 2009. We adopted this guidance forthe period ending June 30, 2009. The adoption of this guidance did nothave an impact on our financial position, results of operations or cash flows.

 

InApril 2009, the FASB revised the authoritative guidance for investments indebt and equity securities to provide guidance in determining whetherimpairments in debt securities are other-than-temporary, and modifies thepresentation and disclosures surrounding such instruments. This guidance iseffective for interim periods ending after June 15, 2009. We adopted theprovisions of this guidance for the period ending June 30, 2009. The adoptionof this guidance had no material impact on our financial position, results ofoperations or cash flows.

 

InMay 2009, the FASB revised the authoritative guidance for subsequentevents, which establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. This guidance is effective forfinancial statements issued for interim and annual reporting periods endingafter June 15, 2009. We adopted this guidance for the period ended June 30,2009, and the Company is not aware of any subsequent events which would requirerecognition or disclosure in the consolidated financial statements.

 

InOctober 2009, the FASB issued ASC Update No. 2009-13, which amendsthe Revenue Recognition topic of the Codification. This update providesamendments to the criteria in Subtopic 605-25 of the Codification forseparating consideration in multiple-deliverable arrangements. As a result ofthose amendments, multiple-deliverable arrangements will be separated in morecircumstances than under existing U.S. GAAP. The amendments establish a sellingprice hierarchy for determining the selling price of a deliverable and willreplace the term *fair value* inthe revenue allocation guidance with *sellingprice*to clarify that the allocation of revenue is based onentity-specific assumptions rather than assumptions of a marketplaceparticipant. The amendments will also eliminate the residual method ofallocation and require that arrangement consideration be allocated at theinception of the arrangement to all deliverables using the relative sellingprice method and will require that a vendor determine its best estimate ofselling price in a manner that is consistent with that used to determine theprice to sell the deliverable on a stand-alone basis. These amendments will beeffective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010, with earlyadoption permitted. We are currently evaluating the impact the adoption of thisupdate might have on our results of operations and financial position.

 

InOctober 2009, the FASB issued ASC Update No. 2009-14, which amendsthe Software topic of the Codification. The amendments in this update changethe accounting model for revenue arrangements that include both tangibleproducts and software elements. Tangible products containing softwarecomponents and nonsoftware components that function together to deliver thetangible product’s essential functionality are no longer within the scope ofthe software revenue guidance in Subtopic 985-605 of the Codification. Inaddition, the amendments in this update require that hardware components of atangible product containing software components always be excluded from thesoftware revenue guidance. In that regard, the amendments provide additionalguidance on how to determine which software, if any, relating to the tangibleproduct also would be excluded from the scope of the software revenue guidance.The amendments also provide guidance on how a vendor should allocatearrangement consideration to deliverables in an arrangement that includes bothtangible products and software. The amendments also provide further guidance onhow to allocate arrangement consideration when an arrangement includesdeliverables both included and excluded from the scope of the software revenueguidance. These amendments will be effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010, with early 

 

31

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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adoptionpermitted. We are currently evaluating the impact the adoption of this updatemight have on our results of operations and financial position.

 

**2.****            ****Liquidity**

 

The Company’s workingcapital was $7.7 million as of December 31, 2009.  Over the next 12 months, the Company expectsthat it will need to expend between $9 million and $11 million to complete thePhase 2 and Phase 3 trials and to fund its increased market development andcommercialization activities.  The totalcost of completing the trials is difficult to determine and can be affected byany number of factors including, but not limited to, the time to complete thetrials.

 

The Company will need toraise additional funds in 2010 to continue its operations.  Any such fundraising will likely require theissuance of additional Company equity securities and a purchaser of suchsecurities will likely insist that such securities be registered securities.

 

In November 2009,the Company obtained net proceeds of approximately $6 million in a registereddirect primary offering.  The commonstock issued in the offering and the common stock which may be issued uponexercise of warrants issued in the offering have been registered under a Form S-3registration statement declared effective by the Securities and ExchangeCommission (“SEC”) in October 2009.

 

Pursuant to SEC rules,the Company may not be in a position to issue additional shares of its commonstock in another registered direct primary offering under a Form S-3registration statement until mid-November 2010.  Thus, if the Company wishes to conduct anotherregistered direct primary offering before mid-November, 2010, it will likelyhave do so in whole or in part under a Form S-1 registration statement.

 

Futher, NASDAQ rules requirestockholder approval for any certain stock issuances constituting 20% or moreof a Company’s issued and outstanding stock.

 

The Company cannot beassured that it will be able to attract a purchaser of securities to raise theadditional funds it will likely require in 2010; that the Company will be ableto obtain any required stockholder approval; or that the Company will be ableto have a Form S-1 registration statement declared effective to completesuch an offering.

 

**3.****            ****Fair Value Measurement**

 

The Company has electednot to apply the fair value option to measure any of the financial assets andliabilities on its balance sheet not already valued at fair value under otheraccounting pronouncements. These other financial assets and liabilities areprimarily short-term investments, accounts receivable, accounts payable and debt,which are reported at historical value. The fair value of these financialassets and liabilities approximate their fair value because of their shortduration.

 

**4.****            ****Allowance for Doubtful Accounts**

 

Management regularlyreviews accounts receivable for uncollectible and potentially uncollectibleaccounts, and when necessary establishes an allowance for doubtfulaccounts.  An allowance for doubtfulaccounts from continuing operations was not deemed necessary at December 31,2009 and 2008.

 

**5.****            ****Property and Equipment**

 

During 2008, the Companyrelocated its headquarters to a smaller facility.  The decrease in office furniture andequipment and the decrease in leasehold improvements are a direct result ofthis move.  The components of propertyand equipment as of December 31, at cost are:

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Computers                                  |       | $        | 14,000     |     | $          | 14,000 |   |
| Office  furniture and equipment            |       | 109,000  |       | 187,000  |       |
| Leasehold  improvements                    |       | 229,000  |       | 283,000  |       |
| Total  cost                                |       | 352,000  |       | 484,000  |       |
| Accumulated  depreciation and amortization |       | (126,000 | )          | (174,000 | )          |
| Property  and equipment, net               |       | $        | 226,000    |     | $          | 310,000 |   |

 

32

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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The Company’sdepreciation expense for the years ended December 31, 2009 and 2008 was$78,000 and $78,000, respectively.  In2008, lease incentives under the Bethesda facility lease provided $150,000 inleasehold improvements, which is recognized on a straight line basis over thelife of the lease.

 

**6.****            ****Patents and Intangible Assets**

 

The Company’samortization expense for the years ended December 31, 2009 and 2008 was$6,000 and $8,000, respectively.  TheCompany’s future amortization based on its patents and intangible assets at December 31,2009 is as follows:

 
| **Year** | ** ** | **Amortization  Expense** | ** ** |
|----------|------------|---------------------------|------------|
| 2010     |       | $                         | 7,000      |   |
| 2011     |       | 7,000                     |       |
| Total    |       | $                         | 14,000     |   |

 

**7.****            ****Accounts Payable and AccruedExpenses**

 

Accounts payable andaccrued expenses consisted of the following at December 31:

 
| ** **             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| ** **             |       |     |       |     |       |
| Accounts  payable      |       | $        | 961,000    |     | $          | 524,000 |   |
| Purchase  commitment   |       | 600,000  |       | 0        |       |
| Deferred  Compensation |       | 140,000  |       | 113,000  |       |
| Accrued  expenses      |       | 13,000   |       | 74,000   |       |
|                   |       | $        | 1,714,000  |     | $          | 711,000 |   |

 

**8.**             Stockholders’Equity

** **

***RegisteredDirect***

** **

On November 16,2009, the Company entered into a securities purchase agreement with certaininvestors to sell an aggregate of 2,760,870 shares of its common stock andwarrants to purchase up to an additional 1,104,348 shares of its common stockto such investors for gross proceeds of approximately $6.3 million.  The common stock and warrants were sold inunits, with each unit consisting of one share of common stock and a warrant topurchase 0.40 of a share of common stock. The purchase price per unit was $ 2.30. Subject to certain ownership limitations, the warrants are exercisableat any time on or after the initial issue date and on or prior to November 16,2014, but not thereafter, at an exercise price of $ 3.25.  The exercise price of the warrants is subjectto adjustment in the case of stock splits, stock dividends, combinations ofshares and similar recapitalization transactions.  The warrants are classified as equityinstruments and are accounted for in additional-paid-in capital.

 

On November 6, 2009,in connection with the closing of our registered direct offering of convertiblepreferred stock and warrants to purchase common stock, the Company issued toRodman & Renshaw, LLC, as partial consideration for its services asplacement agent, warrants to purchase up to 82,826 shares of our common stockat an exercise price of $2.875 per share. The warrants are exercisable at the option of the holder at any timebeginning on November 16, 2009 through and including November 16,2011.  These warrants were offered andsold by us in reliance upon exemptions from the registration statement requirementsby Section 4(2) of the Securities Act of 1933, as amended, astransactions by an issuer not involving a public offering.

 

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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The net proceeds to theCompany from the registered direct offering, after deducting placement agentfees and the Company’s offering expenses, and excluding the proceeds, if any,from the exercise of the warrants issued in the offering, were approximately $6million.

 

***RestrictedStock***

 

In August 2009 and2008, the Company issued 26,664 and 38,460 shares, respectively, of restrictedstock with a fair value of $40,000 in each year to its independent BoardMembers, which was recognized as compensation expense at the time ofissue.  The fair value of the above stockawards was based on the closing market price on the date of grant.

 

In August 2007, theCompany granted 30,000 and 15,000 shares in restricted stock as part of theemployment agreements for the Company’s Chief Executive Officer andPresident.  The fair value of the stockwas $55,800 and $30,000, which was recognized as compensation expense over therespective vesting periods of two and one years.

 

***Stock Option Plan***

 

The Company has anEmployees’ Stock Option Plan (the “Plan”) which permits issuance of bothIncentive Stock Options (ISO) and Non-Qualified Stock Options, whereby optionsmay be granted to officers, Directors and other key employees to purchase up to1,000,000 shares of common stock in amounts determined by the CompensationCommittee of the Board of Directors through December 31, 2010.  During 2009 and 2008, no stock options weregranted under the Plan.  At December 31,2009, 857,700 options were available for grant under the Plan.  Options issued to employees typically vestover a four-year period and options issued to non-employee directors vestedimmediately upon being granted.

 

Activity for the twoyears ended December 31, 2009, for all option grants is shown below:

 
| ** **                                                      | ** ** | **2009********Shares**                                                                | ** ** | **2009********Weighted********Average********Exercise********Price** | ** ** | **2008********Shares**                                                                | ** ** | **2008********Weighted********Average********Exercise********Price** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding  at beginning of year                               |       | 40,500                                                                                |       | $                                                                    | 2.57       |                                                                                  | 216,800    |                                                                 | $          | 7.36 |   |
| Granted                                                         |       | —                                                                                |       | $                                                                    | —     |                                                                                  | —     |                                                                 | $          | — |   |
| Exercised                                                       |       | —                                                                                |       | $                                                                    | —     |                                                                                  | —     |                                                                 | $          | — |   |
| Expired  or forfeited                                           |       | —                                                                                |       | $                                                                    | —     |                                                                                  | (176,300   | )                                                                    | $          | 8.46 |   |
| Outstanding  at end of year                                     |       | 40,500                                                                                |       | $                                                                    | 2.57       |                                                                                  | 40,500     |                                                                 | $          | 2.57 |   |
|                                                            |       |                                                                                  |       |                                                                 |       |                                                                                  |       |                                                                 |       |
| Options  exercisable at end of year                             |       | 39,750                                                                                |       |                                                                 |       | 39,000                                                                                |       |                                                                 |       |
| Weighted-average  fair value of options granted during the year |       | $                                                                                     | —     |                                                                 |       |                                                                                  | $          | —                                                               |       |   |   |
|                                                            |       |                                                                                  |       |                                                                 |       |                                                                                  |       |                                                                 |       |
| Price  range of options                                         |       |                                                                                  |       |                                                                 |       |                                                                                  |       |                                                                 |       |
| Outstanding                                                     |       | $2.20-$3.41                                                                           |       |                                                                 |       | $2.20-$3.41                                                                           |       |                                                                 |       |
| Exercised                                                       |       | $             — |       |                                                                 |       | $             — |       |                                                                 |       |
| Expired  or forfeited                                           |       | $             — |       |                                                                 |       | $6.35-$8.67                                                                           |       |                                                                 |       |
|                                                                 |            |                                                                                       |            |                                                                      |            |                                                                                       |            |                                                                      |            |  |  |  |  |

 

Thefollowing table summarizes information with respect to stock optionsoutstanding at December 31, 2009:

 

34

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**SpherixIncorporated**

**Notes toConsolidated Financial Statements**

 

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| **Range of   Exercise Price** | ** ** | **Number of   Options   Outstanding   at 12/31/09** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Remaining   Contractual Life** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|
| $                             | 2.20       |                                                | 28,000     |                                    | $          | 2.20                                                  |       | 1.1 |   |
| $                             | 3.41       |                                                | 12,500     |                                    | $          | 3.41                                                  |       | 0.1 |   |
|                          |       | 40,500                                              |       |                                    |       |                                                  |       |

 

The followingtable summarizes information with respect to stock options exercisable at December 31,2009:

 
| **Year of Option   Expiration** | ** ** | **Number of   Options** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Price Range** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|-----------------|------------|
| 2010                            |       | 12,500                  |       | $                                       | 3.41       |            | $          | 3.41 |   |
| 2011                            |       | 27,250                  |       | $                                       | 2.20       |            | $          | 2.20 |   |
| All Years                       |       | 39,750                  |       |                                    |       |            |       |

 

The Company usedthe following assumptions in the Black-Scholes calculation used to measure thefair value of stock-based compensation in accordance with SFAS 123R for stock optionsgranted in 2006.  No stock options weregranted in 2009 or 2008.

 
| ** **               | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|
| Risk-free  interest rate |       | 4.59     | %          |
| Expected  life (years)   |       | 4        |       |
| Volatility               |       | 140.9    | %          |
| Dividend  yield          |       | 0        | %          |

** **

**9.****            ****Income Taxes**

 

Income tax fromcontinuing operations for 2009 and 2008 was as follows:

 
| ** **                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| U.S.  Federal income tax benefit    |       | $        | —     |     | $          | 465,000 |   |
| State  and local income tax benefit |       | $        | —     |     | $          | 88,000 |   |
| Total  income tax benefit           |       | $        | —     |     | $          | 553,000 |   |

 
|                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Current  income tax benefit  |       | $        | —     |     | $          | 553,000 |   |
| Deferred  income tax expense |       | $        | —     |     | $          | — |   |
| Total  income tax benefit    |       | $        | —     |     | $          | 553,000 |   |

 

The tax effects ofsignificant temporary differences representing deferred tax assets as of December 31,2009 and 2008 are as follows:

 

35

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

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| ** **                       | ** ** | **2009**    | ** ** | **2008**   | ** ** |
|----------------------------------|------------|-------------|------------|------------|------------|
| Property  and equipment          |       | $           | (48,000    | )          | $          | (70,000 | ) |
| Deferred  rent                   |       | 43,000      |       | 54,000     |       |
| Accrued  vacation                |       | 28,000      |       | 19,000     |       |
| Tax  credit                      |       | 82,000      |       | 82,000     |       |
| Deferred  compensation           |       | 282,000     |       | 305,000    |       |
| Net  operating loss carryforward |       | 10,941,000  |       | 8,001,000  |       |
| Accrued  bonus                   |       | 103,000     |       | —     |       |
| Stock  based compensation        |       | 31,000      |       | 27,000     |       |
| Inventory  adjustments           |       | 434,000     |       |       |       |
| Other                            |       | 1,000       |       | 1,000      |       |
|                             |       | 11,897,000  |       | 8,419,000  |       |
| Valuation  allowance             |       | (11,897,000 | )          | (8,419,000 | )          |
| Deferred  tax asset              |       | $           | —     |       | $          | — |   |

 

At December 31, 2009and 2008, the Company had net operating loss carry forwards for U.S. federalincome tax purposes of approximately $27.4 million and $18.7 million, respectively,which will begin to expire in 2019.  At December 31,2009 and 2008, the Company had net operating loss carry forwards for stateincome tax purposes of approximately $37.3 million and $30.5 million,respectively, which will begin to expire in 2018.  Based on the Company’s historical losses andits accumulated deficit, the Company has provided a full valuation allowanceagainst the net deferred tax asset.

 

Utilization of the netoperating loss carryforwards and credit may be subject to a substantial annuallimitation due to the ownership change limitations provided by the InternalRevenue Code of 1986, as amended, and similar state provisions.  The Company has not performed a detailedanalysis to determine whether an ownership change under Section 382 of theInternal Revenue Code occurred.  Theeffect of an ownership change would be the imposition of an annual limitationon the use of net operating loss carryforwards attributable to periods beforethe change and could result in a reduction in the total net operating lossesand research credits available.

 

Reconciliation betweenactual tax expenses and taxes computed at the statutory Federal rate of 34percent for 2009 and 2008 are as follows:

 
| ** **                                                        | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|
| U.S.  Federal income tax benefit at the statutory rate of 34%     |       | $          | 3,110,000  |       | $          | 2,432,000 |   |
| Effect  of permanent differences                                  |       | $          | (7,000     | )          | $          | (25,000 | ) |
| State  income taxes benefit (expense), net of federal tax benefit |       | 494,000    |       | (39,000    | )          |
| Other                                                             |       | (119,000   | )          | 112,000    |       |
| Change  in valuation allowance                                    |       | (3,478,000 | )          | (1,928,000 | )          |
| Income  tax benefit                                               |       | $          | —     |       | $          | 552,000 |   |

 

*Tax Uncertainties*

 

The Company recognizes atax benefit associated with an uncertain tax position when, in management’sjudgment, it is more likely than not that the position will be sustained upon examinationby a taxing authority.  For a taxposition that meets the more-likely-than-not recognition threshold, the Companyinitially and subsequently measures the tax benefit as the largest amount thatit judges to have a greater than 50% likelihood of being realized upon ultimatesettlement with a taxing authority.  Theliability associated with unrecognized tax benefits is adjusted periodicallydue to changing circumstances, such as the progress of tax audits, case lawdevelopments and new or emerging legislation. The effective tax rate includes the net impact of changes in theliability for unrecognized tax benefits and subsequent adjustments asconsidered appropriate by management. The Company has not recognized any suchadjustments.  At December 31, 2009and 2008, the Company had no material unrecognized income tax benefits andrecognized no interest or penalties on income tax liabilities.

 

36

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

----

 

The Company is subject to U.S.federal income tax and state and local income tax in multiplejurisdictions.  The statute oflimitations for the consolidated U.S. federal income tax return is closed forall tax years up to and including 2005, except for pre-2005 tax returns thatgenerated net operating loss carry forwards that could be adjusted onaudit.   During 2009, an IRS audit of taxyear 2006 was completed and no adjustments were proposed.   Currently, no federal or state and localincome tax returns are under examination by the respective taxing authorities.

 

**10.****         ****Commitments and Contingencies**

 

***Government Contracts***

 

Following the sale of InfoSpherix, the Company is no longerengaged in the performance of government contracts.

 

***Purchase Commitments***

 

During 2009, the Company entered into a purchase commitmentwith a supplier of the Company’s D-Tagatose product.  The agreement committed the Company topurchase 25 metric tons of D-Tagatose. The Company utilizes the D-Tagatose as a part of the Phase 3 trial ofthe Food and Drug Administration (“FDA”) study. This phase is necessary for the Company to be able to commercialize theproduct and as the products were not going to be available for sale, theCompany wrote off the entire product value into Research and DevelopmentCosts.  The amounts written off duringthe year from the agreement were $1.1 million.

 

***Leases***

 

The Company has commitments under an operating leasethrough 2013 relating to its administrative office in Bethesda, Maryland.

 

Future minimum rental payments required as of December 31,2009, under the non-cancelable lease are as follows:

 
| **Year Ending December 31,** | ** ** | **Operating********Lease** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
|                              |       |                       |       |
| 2010                              |       | 150,000                    |       |
| 2011                              |       | 155,000                    |       |
| 2012                              |       | 159,000                    |       |
| 2013                              |       | 40,000                     |       |
|                              |       | $                          | 504,000    |   |
|                                   |            |                            |            |  |

 

The Company’s building lease contains step rent provisions,capital improvement funding, or other tenant allowances.  Minimum rental payments including allowanceson this lease is recognized on a straight-line basis over the term of the lease.  In 2008, lease incentives under the Bethesda facilitylease provided for $150,000 of leasehold improvements.  The Companyincurred net operating lease rental expenses of approximately $165,000 and$244,000 for the years 2009 and 2008, respectively.

 

***Related Party Transactions***

 

*Employment, Deferred Compensation, andConsulting Agreements for Principal Stockholders*

 

Under employment agreements with Dr. Gilbert V. Levinand Mrs. M. Karen Levin, the Company’s founders, the Company has agreed toprovide Dr. and Mrs. Levin each with lifetime payments of $12,500each quarter and to fund long-term lifetime healthcare and health insurancepolicies following their retirements from the Company on August 14, 2008and January 4, 2006, respectively. At December 31, 2009, the Company’s liability for both Dr. andMrs. Levin was estimated to be $480,000 for the lifetime payments and$240,000 for funding the long-term lifetime healthcare and health insurancepolicies based on actuarially determined amounts.  The non-current portion of these

 

37

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

----

 

amounts is reported on the accompanying balance sheet asdeferred compensation.  During 2009 and2008, the Company paid Dr. and Mrs. Levin a combined total of$135,000 and $123,000 in post-retirement benefits.

 

Dr. and Mrs. Levin have agreed to serve asconsultants to the Company on an as-needed basis, at a specified dailyrate.  No consulting payments were madeto the Levins during 2009 or 2008.

 

**11.****         ****EmployeeBenefit Plans**

 

Effective January 1, 1990, the Company established theSpherix Incorporated 401(k) Retirement Plan.  The Plan is a discretionary definedcontribution plan and covers substantially all employees who have attained theage of 21, have completed one year of service, and have worked a minimum of1,000 hours in the past Plan or anniversary year.

 

Under provisions of the Plan, the Company, for any planyear, has contributed an amount equal to 50% of the participant’s contributionor 21⁄2% of the participant’s eligible compensation, whichever is less.  The Company may, at its own discretion, makeadditional matching contributions to participants.  Company contributions, net of forfeitures,amounted to $15,000 and $9,000 in 2009 and 2008, respectively.

 

**12.****         ****Information byBusiness Segment**

 

Operating segments are components of an enterprise aboutwhich separate financial information is available that is evaluated regularlyby the chief operating decision maker, or decision-making group, in decidinghow to allocate resources and in assessing performance.  The Company’s principal segments are Biospherics, ourbiotechnology research and development business, and Health Sciences, atechnical and regulatory consulting business.

 

Financial information by business segment for the yearsended December 31, 2009 and 2008 is summarized below:

 

38

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

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| ** **                                               | ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                               | ** **                                           | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **Revenues**                                             | Health  Sciences                                     |       | $                           | 1,350,000  |   | $ | 1,012,000 |   |
|                                                     | Biospherics                                          |       | 9,000                       |       | 14,000 |   |
|                                                     | Total  revenues                                      |       | $                           | 1,359,000  |   | $ | 1,026,000 |   |
|                                                     |                                                 |       |                        |       |   |   |
| **Operating Income (Loss) and Loss Before Income Taxes** | Health  Sciences                                     |       | $                           | 691,000    |   | $ | 433,000 |   |
|                                                     | Biospherics                                          |       | (7,523,000                  | )          | (4,164,000 | ) |
|                                                     | General  and administration                          |       | (2,354,000                  | )          | (2,780,000 | ) |
|                                                     | Total  operating loss                                |       | (9,186,000                  | )          | (6,511,000 | ) |
|                                                     | Interest  income                                     |       | 37,000                      |       | 348,000 |   |
|                                                     | Interest  expense                                    |       | —                      |       | (2,000 | ) |
|                                                     | Other  expense                                       |       | —                      |       | (6,000 | ) |
|                                                     | Loss  from continuing operations before income taxes |       | $                           | (9,149,000 | ) | $ | (6,171,000 | ) |
|                                                     |                                                 |       |                        |       |   |   |
| **Identifiable  Assets**                                 | Health  Sciences                                     |       | $                           | 274,000    |   | $ | 296,000 |   |
|                                                     | Biospherics                                          |       | 8,000                       |       | 21,000 |   |
|                                                     | General  corporate assets                            |       | 9,873,000                   |       | 11,944,000 |   |
|                                                     | Total  assets                                        |       | $                           | 10,155,000 |   | $ | 12,261,000 |   |
|                                                     |                                                 |       |                        |       |   |   |
| **Capital  Expenditures**                                | Health  Sciences                                     |       | $                           | —     |   | $ | — |   |
|                                                     | Biospherics                                          |       | —                      |       | — |   |
|                                                     | General  corporate assets                            |       | —                      |       | 333,000 |   |
|                                                     | Total  capital expenditures                          |       | $                           | —     |   | $ | 333,000 |   |
|                                                     |                                                 |       |                        |       |   |   |
| **Depreciation and Amortization**                        | Health  Sciences                                     |       | $                           | —     |   | $ | — |   |
|                                                     | Biospherics                                          |       | 6,000                       |       | 5,000 |   |
|                                                     | General  corporate assets                            |       | 78,000                      |       | 81,000 |   |
|                                                     | Total  depreciation and amortization                 |       | $                           | 84,000     |   | $ | 86,000 |   |

 

Operating income (loss) from continuing operations consistsof revenue less operating expenses.  Incomputing operating loss, interest expense and income taxes were not considered.  The operating income for the Health Sciencessegment was 51% and 43% of that segment’s revenue for 2009 and 2008.

 

Biospherics is concentrating all of its efforts on thePhase 3 clinical trial of its most promising product, D-tagatose as a treatmentof Type 2 diabetes in humans.  Thisproduct is in the development stage and will require substantial additionalinvestment to bring to market.

 

Identifiable assets by business segment are those assetsused in the Company’s operations in each segment, such as accounts receivable,inventories, fixed assets, and patent costs. Corporate assets are principally cash and certain other assets notrelated to a particular segment’s operations.

 

39

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

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**13.****         ****SubsequentEvents**

 

The Company evaluated all events or transactions after December 31,2009 through the date the financial statements were issued.  During this period, the Company did not haveany significant subsequent events.

 

**Item 9.****   ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**Item 9A(T). CONTROLS AND PROCEDURES**

 

*InherentLimitations on the Effectiveness of Controls*

 

Management, including our Chief Executive Officer and ChiefFinancial Officer, do not expect that our disclosure controls and procedureswill prevent all errors and fraud.  Indesigning and evaluating the disclosure controls and procedures, management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance of achieving the desiredcontrol objectives.  Further, the designof a control system must reflect the fact that there are resource constraints,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement’s override of the control. The design of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.  Over time,controls may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

*Disclosure Controls and Procedures*

 

We maintain disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in our ExchangeAct reports, such as this report on Form 10-K, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Thesecontrols and procedures are based closely on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) promulgated under theExchange Act.  Rules adopted by theSEC require that we present the conclusions of the Chief Executive Officer andChief Financial Officer about the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.

 

The Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures to provide reasonable assurance of achieving their objectivepursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective at a reasonable assurance level, as of December 31,2009.

 

*Management’s Annual Report on Internal Control over Financial Reporting*

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework set forth in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  

 

40

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**SpherixIncorporated**

**Notes to Consolidated FinancialStatements**

 

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Based on our evaluation, management has concluded that itsinternal control over financial reporting was effective as of December 31,2009.

 

This Annual Report does not include an attestation reportof the Company’s registered public accounting firm regarding internal controlover financial reporting. Management’s report was not subject to attestation bythe Company’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this Annual Report on Form 10-K.

 

*Changes in Internal Control over Financial Reporting*

 

There have been no changes in the Company’s internalcontrol over financial reporting during the quarter ended December 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item 9B.  OTHER INFORMATION**

 

An Annual Meeting of Stockholders was heldon November 17, 2009, where the following actions were taken:

 

The following slate of Directors was elected for the 2009-2010term:

 
| **DIRECTOR**                         | ** ** | **VOTES FOR** | ** ** | **VOTES WITHHELD** | ** ** | **% VOTES FOR** | ** ** |
|--------------------------------------|------------|---------------|------------|--------------------|------------|-----------------|------------|
| Mr. Douglas  T. Brown           |       | 11,889,893    |       | 549,862            |       | 82.43           |       |
| Dr. Claire  L. Kruger           |       | 11,912,733    |       | 527,022            |       | 82.59           |       |
| Dr. Gilbert  V. Levin           |       | 11,837,973    |       | 601,782            |       | 82.07           |       |
| Dr. Robert  A. Lodder, Jr. |       | 11,892,529    |       | 547,226            |       | 82.45           |       |
| Mr. Aristides  Melissaratos     |       | 11,902,054    |       | 537,701            |       | 82.51           |       |
| Mr. Thomas  B. Peter            |       | 11,901,764    |       | 537,991            |       | 82.51           |       |
| Dr. Robert  J. Vander Zanden    |       | 11,900,518    |       | 539,237            |       | 82.50           |       |

 

Grant Thornton was reappointed as the Company’s independentaccountants for 2009-2010 with 12,176,976 shares voted in favor, 141,867 sharesvoted against, 120,911 shares abstaining.

 

TheBoard of Directors was granted the authority at any time during the followingeighteen (18) months to effect a reverse stock split of the Company’s issued andoutstanding common stock at a ratio to be designated by the Board of Directorswithin a range of 1:5 to 1:20 and to reduce the number of authorized shares ofcommon stock at a corresponding ratio (the “Reverse Stock Split”).  The Reverse Stock Split was ratified, with8,395,021 shares voted in favor, 3,920,689 shares voted against, and 124,038shares abstaining.

 

41

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**PART III**

 

**Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

The following table sets forth information concerning theSpherix Board of Directors.

** **
| ** **                 | ** ** | ** ** | ** ** | ** **                            | ** ** | **Director** | ** ** |
|----------------------------|------------|------------|------------|---------------------------------------|------------|--------------|------------|
| **Name**                   | ** ** | **Age**    | ** ** | **Position**                          | ** ** | **Since**    | ** ** |
| Douglas T. Brown           |       | 56         |       | Director                              |       | 2004         |       |
| Claire L. Kruger           |       | 51         |       | Director, and Chief Executive Officer |       | 2007         |       |
| Gilbert V. Levin           |       | 85         |       | Director, and Chairman Emeritus       |       | 1967         |       |
| Aris Melissaratos          |       | 65         |       | Director                              |       | 2008         |       |
| Thomas B. Peter            |       | 56         |       | Director                              |       | 2009         |       |
| Robert A. Lodder, Jr. |       | 50         |       | Director, and President               |       | 2005         |       |
| Robert J. Vander Zanden    |       | 64         |       | Director, and Chairman of the Board   |       | 2004         |       |

 

Mr. Douglas T.Brown, a Board Member since 2004, brings to the Board a broad understanding ofthe financial and other business aspects of the Company.  He is currently Senior Vice President andManager of the Corporate Banking Government Contracting Group for PNC BankN.A., Washington, DC.  Mr. Brown hasbeen with PNC and its predecessor bank, Riggs Bank, since 2001 and previouslyworked for Bank of America, N.A. and its predecessor banks for 16 years as aLoan Officer, as well as a manager of Loan Officers in the Mid-Atlanticregion.  Subsequent to 1990, the majorityof Mr. Brown’s customers are companies that provided services to theFederal Government and State governments. Mr. Brown holds a B.A. degree in Political Science from AmericanUniversity and a graduate degree from The Stonier Graduate School of Banking atthe University of Delaware.  He is notnow, nor has he been for the past five years, a director of a public,for-profit company other than Spherix.

 

Dr. Claire L. Kruger,elected to the Spherix Incorporated Board of Directors in August 2007, andalso elected Chief Executive Officer and Director of Health Sciences at thattime, brings vast scientific and regulatory guidance expertise to theBoard.  Dr. Kruger received herPh.D. in Toxicology from Albany Medical College, and her B.S. in Biology fromClarkson College.  With more than 20years of consulting experience, her primary areas of expertise are in foods,consumer products and pharmaceuticals, where she provides scientific,regulatory, and strategic support to clients in both the US and internationalregulatory arenas.  Dr. Kruger hasconducted toxicity evaluations of foods and food contaminants, as well ashealth risk assessments and exposure assessments of drugs, cosmetics, andpesticides.  Her clients include food,drug, and dietary supplement manufacturers, agricultural producers,biotechnology companies, trade associations, and law firms.  In her role as a consultant, Dr. Krugerhas been involved in the safety evaluation of a variety of consumer products,providing oversight of product compliance with current and emerging scientificand regulatory guidance. She is not now, nor has she been for the past fiveyears, a director of a public, for-profit company other than Spherix.

 

Dr. Gilbert V. Levinfounded Spherix Incorporated in 1967 and served the Company in a variety ofcapacities from incorporation until his retirement in August 2008.  In addition to his senior managementexperience, Dr. Levin brings to the Board the perspective of a majorCompany stockholder.  He is currentlyAdjunct Professor in the Beyond Center of the College of Liberal Sciences,Arizona State University, and is an Honorary Professor at Cardiff University,Wales, UK.  Dr. Levin previously servedin the public health departments of Maryland, California, and the District ofColumbia and, subsequently, as a research scientist and corporateofficial.  Among his inventions arelow-caloric sweeteners; biological nutrient removal (BNR) for municipalwastewater, rapid detection and identification of microorganisms; and theLabeled Release life detection experiment that landed on Mars in 1976 aboardNASA’s Viking Mission.  He holds aBachelor’s, Master’s, and a Ph.D., all from The Johns Hopkins University, wherehe also served on its Board of Trustees and presently serves on its NationalAdvisory Council for the Whiting School of Engineering. He is not now, nor hashe been for the past five years, a director of a public, for-profit companyother than Spherix.

 

Dr. Robert A.Lodder, Spherix Incorporated Board Member since 2005, and elected President in August 2007,brings his immeasurable scientific expertise to the Board.  He served as a Professor of PharmaceuticalSciences at the College of Pharmacy, University of Kentucky Medical Center, andholds joint appointments in the Department of Electrical and ComputerEngineering and the Division of Analytical Chemistry of the Department ofChemistry at Kentucky.  Dr. Lodderreceived his B.S. degree cum laude in Natural Science in 1981, and his M.S. inChemistry in

 

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1983 from XavierUniversity, Cincinnati, Ohio.  Hereceived his Ph.D. in Analytical Chemistry in 1988 from IndianaUniversity.  He was a founder ofInfraReDx, Inc. in 1998 and Prescient Medical, Inc. in 2004.  Neither of these companies are public, and theydo not engage in business with Spherix. He is not now, nor has he been for the past five years, a director of apublic, for-profit company other than Spherix.

 

Mr. ArisMelissaratos, elected to the Spherix Board of Directors in February 2008,brings to the Board his immense business development and managementexperience.  He currently serves asSenior Advisor to the President of The Johns Hopkins University withresponsibilities for technology transfer, corporate partnerships, andenterprise development.  From 2003 to2007, he served as Secretary of Business and Economic Development for the Stateof Maryland, driving the state’s unemployment figures to an impressive 3.6% andpositioning Maryland for leadership in the emerging “knowledge economy.”  He worked for Westinghouse ElectricCorporation for 32 years, culminating as the corporation’s Chief TechnologyOfficer and Vice President for Science and Technology, responsible for runningWestinghouse’s research and development functions.  He also served as the Chief OperationsOfficer for the company’s Defense Electronics Group, where he was responsiblefor managing 16,000 employees (9,000 engineers) and $3.2 billion dollars ofsales.  After Westinghouse, he becameVice President of Thermo Electron Corporation and CEO of its Coleman ResearchCorporation and Thermo Information Solutions subsidiaries.  He formed Armel Scientifics, LLC, whichinvested in over 30 start-up companies in Life Sciences and AdvancedTechnology.  He holds a B.E.S. inelectrical engineering from The Johns Hopkins University, a Master of Sciencein engineering management from George Washington University, and has completedthe program for Management Development at the Harvard University School ofBusiness.  He completed the course workfor a Ph.D. in International Politics at the Catholic University of America butdid not complete the dissertation.  Mr. Melissaratoscurrently serves as a member of the Board of Directors of Avatech Solutions, Inc.in Owings Mills, Maryland, a software and technology firm; and as a member ofthe Advisory Board of Stronghold Advisors, a middle-market advisory firm in theMid-Atlantic region, in Columbia, MD. Neither of these companies engage in business with Spherix.

 

Mr. Thomas B. Peter,elected to the Spherix Board of Directors in May 2009, brings his vastpharmaceutical and clinical trial expertise to the Board.  He spent his entire 33-year career in thepharmaceutical industry.  Most recently,he served as a Regional Vice President for GlaxoSmithKline (GSK).  Prior to that, Mr. Peter had significantexperience dealing with managed care organizations, serving as Director ofNational Accounts Sales at GSK, and before that position, worked as a GroupMarketing Director.  Mr. Peter is abiology major graduate of Gettysburg College and a Master’s graduate of St.Joseph’s University in Philadelphia.  Heis not now, nor has he been for the past five years, a director of a public,for-profit company other than Spherix.

 

Dr. Robert J. VanderZanden, Board Member since 2004, having served as a Vice President of R&Dwith Kraft Foods International, brings a long and distinguished career inapplied technology, product commercialization, and business knowledge of thefood science industry to Spherix.  Dr. VanderZanden holds a Ph.D. in Food Science and an M.S. in Inorganic Chemistry fromKansas State University, and a B.S. in Chemistry from the University ofWisconsin — Platteville, where he was named a Distinguished Alumnus in2002.  In his 30-year career, he has beenwith ITT Continental Baking Company as a Product Development Scientist; withRalston Purina’s Protein Technology Division as Manager Dietary Foods R&D;with Keebler as Group Director, Product and Process Development (withresponsibility for all corporate R&D and quality); with Grupo Gamesa, aFrito-Lay Company, as Vice President, Technology; and with Nabisco as VicePresident of R&D for their International Division.  With the acquisition of Nabisco by KraftFoods, he became the Vice President of R&D for Kraft’s Latin AmericanDivision.  Dr. Vander Zanden retiredfrom Kraft Foods in 2004.  He currentlyholds the title of Adjunct Professor and Lecturer in the Department of FoodScience and Human Nutrition at Clemson University, where he also is a member oftheir Industry Advisory Board.  His focuson achieving product and process innovation through training, team building andcreating positive working environments has resulted in his being recognizedwith many awards for product and packaging innovation.  Dr. Vander Zanden is not now, nor has hebeen for the past five years, a director of a public, for-profit company otherthan Spherix.

 

**Corporate Governance**

 

The AuditCommittee members are Mr. Brown, Chair; Mr. Melissaratos, and Dr. VanderZanden.  The Audit Committee Charter isavailable on the Company’s website at www.spherix.com.  Each member of the Audit Committee satisfiesthe independence requirements and other established criteria of NASDAQ and theSecurities and Exchange Commission.  TheBoard of Directors believes that, while the members of its Audit Committee havesubstantial financial and management experience and are fully qualified tocarry out the functions of the Audit Committee, none of

 

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its members meets therequirements of an audit committee financial expert as defined in theSecurities and Exchange Commission rules.

 

**Executive Officers**

 

The Executive Officers of the Company are elected annually by theBoard of Directors and are listed in the following table.

 
| **Name**          | ** ** | **Age** | ** ** | **Position**                                        |
|-------------------|------------|---------|------------|-----------------------------------------------------|
| Robert L. Clayton |       | 46      |       | Interim CFO and Treasurer                           |
| Claire L. Kruger  |       | 51      |       | Chief Executive Officer and Chief Operating Officer |
| Robert A. Lodder  |       | 50      |       | President                                           |

 

Drs. Kruger and Lodder’s professional experience are discussedabove.

 

Mr. Robert L.Clayton was elected to the Office of Interim CFO in August 2007, and  was elected Director of Finance and Treasurerin May 2005.  Mr. Claytonpreviously served as Controller.  Priorto joining Spherix, he was a Senior Auditor for the public accounting firmRubino & McGeehin Chartered.  Mr. Claytonholds a B.S. in business and management from the University of Maryland and aC.P.A. from the District of Columbia.  Heis not now, nor has he been for the past five years, a director of a public,for-profit company other than Spherix.

 

**Compliance with Section 16(a) of theExchange Act**

 

**Section 16(a) BeneficialOwnership Regarding Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), requires the Company’s Directors and ExecutiveOfficers, and anyone who beneficially owns ten percent (10%) or more of theCompany’s common stock, to file with the Securities and Exchange Commissioninitial reports of beneficial ownership and reports of changes in beneficialownership of common stock.  Such personsare required by regulations of the Securities and Exchange Commission tofurnish the Company with copies of all Section 16(a) forms they file.

 

Based solely upon a review of (i) copies of the Section 16(a) filingsreceived by the Company during or with respect to 2009 and (ii) certainwritten representations of its Officers and Directors, the Company believesthat each filing required to be made pursuant to Section 16(a) of theExchange Act during and with respect to 2008 and 2009 to date was filed in atimely manner.

 

**Code of Ethics**

 

The Company has adopted a worldwide Code of Ethics, which is availableon the Company’s website at www.spherix.com.

 

**EXECUTIVECOMPENSATION**

 

We strive to pay our named executive officers at or near themedian paid by comparable companies.  In2007, the Compensation Committee hired an outside company, Equilar, Inc.,to compare the total compensation of the Spherix Executives to the totalcompensation of fourteen (14) companies identified by Equilar, Inc. to bepeer companies to Spherix.  The EquilarReport on Executive Compensation showed that Spherix Executives are notcompensated at the same level as colleagues in peer companies.  Based upon the fiscal health of Spherix,however, it was determined by the Compensation Committee that in 2008 and 2009no special efforts should be made to bring Executive total compensation toequivalent levels of those in peer companies. The Compensation Committee recommended to the Board the salary adjustmentsfor the Executive Officers of Spherix.

 

The following Summary of Compensation table sets forth thecompensation paid by the Company during the two years ended December 31,2009, to all Executive Officers earning in excess of $100,000 during any year.

 

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**Summary of Compensation**

** **
| ** **             | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | **Change in**     | ** ** | ** **       | ** ** | ** **    | ** ** |
|------------------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|--------------------|------------|-------------------|------------|------------------|------------|---------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | **Pension Value** | ** ** | ** **       | ** ** | ** **    | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | **and Non-**      | ** ** | ** **       | ** ** | ** **    | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**     | ** ** | **Qualified**     | ** ** | ** **       | ** ** | ** **    | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Deferred**      | ** ** | **All Other**    | ** ** | ** **    | ** ** |
| **Name and**           | ** ** | ** ** | ** ** | ** **     | ** ** | **Bonus**  | ** ** | **Award**  | ** ** | **Award**  | ** ** | **Compensation**   | ** ** | **Compensation**  | ** ** | **Compensation** | ** ** | ** **    | ** ** |
| **Principal Position** | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **($)**    | ** ** | **($)(1)** | ** ** | **($)(2)** | ** ** | **($)(3)**         | ** ** | **Earnings ($)**  | ** ** | **($)**          | ** ** | **Total ($)** | ** ** |
| C.  Kruger             |       | 2009       |       | 190,000        |       | —     |       | 10,850     |       | —     |       | 95,000             |       | —            |       | —           |       | 295,850       |       |
| CEO  and COO           |       | 2008       |       | 186,667        |       | —     |       | 18,600     |       | —     |       | 76,000             |       | —            |       | —           |       | 281,267       |       |
|                   |       |       |       |           |       |       |       |       |       |       |       |               |       |              |       |             |       |          |       |
| R.  Lodder             |       | 2009       |       | 170,000        |       | —     |       | —     |       | —     |       | 59,500             |       | —            |       | —           |       | 229,500       |       |
| President              |       | 2008       |       | 166,667        |       | —     |       | 22,500     |       | —     |       | 68,000             |       | —            |       | —           |       | 257,167       |       |
|                   |       |       |       |           |       |       |       |       |       |       |       |               |       |              |       |             |       |          |       |
| R.  Clayton            |       | 2009       |       | 228,031        |       | —     |       | —     |       | 940        |       | —             |       | —            |       | —           |       | 228,971       |       |
| CFO  and Treasurer     |       | 2008       |       | 224,625        |       | —     |       | —     |       | 940        |       | —             |       | —            |       | —           |       | 225,565       |       |

 

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| (1) | On August 1, 2007, C. Kruger  was granted 30,000 shares in restricted stock with a market price on the date  of grant of $1.86. The restricted stock vested in equal amounts of 10,000  shares on August 1, 2007, August 1, 2008 and August 1, 2009.  On August 16, 2007, R. Lodder was granted 15,000 shares in restricted  stock with a market price of the date of grant of $2.00. The restricted stock  vested in equal amounts of 7,500 shares on March 1, 2008 and  September 1, 2008. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | On February 17, 2006, R.  Clayton was granted stock options for 2,000 shares, respectively. Information  regarding forfeiture and assumptions made in the valuation are disclosed in  Note 7.                                                                                                                                                                                                                                                                                                                              |
| (3) | Awards pursuant to the  May 12, 2005 Spherix Incorporated Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

**Outstanding EquityAwards at Fiscal Year-End**

 
| ** **     | ** ** | **Option Awards** | ** ** | ** Stock Awards** | ** ** |
|----------------|------------|-------------------|------------|------------------------|------------|
| ** **     | ** ** | ** **        | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | **Number** | ** ** | **Market** | ** ** |
| ** **     | ** ** | **Number of**     | ** ** | **Number of**          | ** ** | ** ** | ** ** | ** ** | ** ** | **of Shares** | ** ** | **Value of** | ** ** |
| ** **     | ** ** | **Securities**    | ** ** | **Securities**         | ** ** | ** ** | ** ** | ** ** | ** ** | **or Units** | ** ** | **Shares or** | ** ** |
| ** **     | ** ** | **Underlying**    | ** ** | **Underlying**         | ** ** | ** ** | ** ** | ** ** | ** ** | **of Stock** | ** ** | **Units of** | ** ** |
| ** **     | ** ** | **Unexercised**   | ** ** | **Unexercised**        | ** ** | **Option** | ** ** | **Option** | ** ** | **that have** | ** ** | **Stock that** | ** ** |
| ** **     | ** ** | **Options (#)**   | ** ** | **Options (#)**        | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **not Vested** | ** ** | **have not** | ** ** |
| ** Name** | ** ** | **Exercisable**   | ** ** | **Unexercisable**      | ** ** | **Price ($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **Vested ($)** | ** ** |
| C.  Kruger     |       | —            |       | —                 |       | — |   | — |   | — |   | — |   |
| R.  Lodder     |       | —            |       | —                 |       | — |   | — |   | — |   | — |   |
| R.  Clayton    |       | 1,000             |       | 500                    | (1)        | $ | 2.20 |   | 2/15/2011 |   | — |   | — |   |
|                |            |                   |            |                        |            |  |  |  |  |  |  |  |  |  |

 

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(1)          Vested on 2/16/2010.

 

**Potential PaymentUpon Termination or Change in Control**

 

The Company has agreed to pay its officers one year salary andhealth and welfare (COBRA) benefits upon termination by the Company orfollowing a change of control.

 

Unless otherwise agreedby the Board of Directors, the named Executive Officers would be entitled toseverance upon termination of employment pursuant to the Company’s severancepolicy.  The policy provides:

 
| **Completed Service Years** | ** ** | **Severance Pay** |
|-----------------------------|------------|-------------------|
| > 1 year                 |       | 10 days           |
| 1 but less than 2 years     |       | 15 days           |
| 2 but less than 3 years     |       | 20 days           |
| 3 but less than 4 years     |       | 25 days           |
| 4 or more years             |       | 30 days           |

 

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**Director Compensation**

 

The following table summarizes thecompensation paid to non-employee directors during the year ended December 31,2009.

 
| **Name**                 | ** ** | **Fees Earned  Paid in Cash ($)** | ** ** | **Stock Awards ($)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total  ($)** | ** ** |
|--------------------------|------------|-----------------------------------|------------|----------------------|------------|---------------------------------|------------|----------------|------------|
| Douglas T. Brown         |       | 22,900                            |       | 10,000               |       | —                          |       | 32,900         |       |
| A. Paul Cox              |       | 4,900                             |       | —               |       | —                          |       | 4,900          |       |
| Gilbert V. Levin         |       | —                            |       | —               |       | *                               |       | *              |       |
| Aris  Melissaratos       |       | 21,300                            |       | 10,000               |       | —                          |       | 31,300         |       |
| Thomas B. Peter          |       | 10,300                            |       | —               |       | —                          |       | 10,300         |       |
| Robert J. Vander  Zanden |       | 23,500                            |       | 10,000               |       | —                          |       | 33,500         |       |

 

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| * | Under employment agreements with  Dr. Gilbert V. Levin and Mrs. M. Karen Levin, the Company’s founders, the Company has agreed to  provide Dr. and Mrs. Levin each with lifetime payments of $12,500  each quarter and to fund long-term lifetime healthcare and health insurance  policies following their retirements from the Company on August 14, 2008  and January 4, 2006, respectively. At December 31, 2009, the  Company’s liability for both Dr. and Mrs. Levin was estimated to be  $480,000 for the lifetime payments and $240,000 for funding the long-term  lifetime healthcare and health insurance policies based on actuarially  determined amounts. The non-current portion of these amounts is reported on  the accompanying balance sheet as deferred compensation. During 2009 and  2008, the Company paid Dr. and Mrs. Levin a combined total of  $135,000 and $123,000 in post-retirement benefits. In addition,  Dr. Levin also received $87,000 in salaries during 2008. Dr. Levin  continues to serve as a member of the Board of Directors. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Non-employee directors of Spherix Incorporated (“Spherix”)receive the following annual compensation for service as a member of Spherix:

 
| Annual Retainer        |   | $ | 5,000  |   | To be paid in cash at May Board Meeting annually.                                                                                                                                                                                                                                                                                                                                          |
|------------------------|--------|---|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Stock Awards           |   | $ | 10,000 |   | To be calculated by dividing $10,000 by the closing stock  price the day of the May Board Meeting. The shares will be granted upon  approval of the Board; however, the shares will be restricted and  instructions will be given to the stock transfer agent that the shares may  not be transferred until the one year anniversary of the Board Member’s  departure from the Board. |
| Board Meeting Fees     |   | $ | 2,500  |   | To be paid for all in-person Board Meetings. Members must  be present to be paid.                                                                                                                                                                                                                                                                                                               |
| Committee Meeting Fees |   | $ | 800    |   | To be paid for all in-person Committee Meetings. Members  must be present to be paid.                                                                                                                                                                                                                                                                                                           |
| Teleconference Fees    |   | $ | 300    |   | To be paid for all teleconferences called by either the  Chairman of the Board, the President, or by the Chairman of the relevant  Committee. Members must be on-line to be paid.                                                                                                                                                                                                               |
| Additional Retainer    |   | $ | 1,000  |   | To be paid to the Chairman of the Audit Committee.                                                                                                                                                                                                                                                                                                                                              |

 

**Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, ANDRELATED STOCKHOLDERS**

 

The following table setsforth the shares of Common Stock beneficially owned by all Executive Officersand Directors as a group as of December 31, 2009.  Except for Dr. Levin and his wife, noperson is known by the Company to own beneficially more than 5% of theoutstanding Common Stock.  The ownershipof Dr. Levin is detailed below.

 

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**BeneficialOwnership of Common Stock by Executive Officers and Directors**

 
| **Title  of Class** | ** ** | **Name of Beneficial Owner**                     | ** ** | **Amount and Nature of   Ownership** | ** ** | ** ** | **Percent Of   Class** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|------------|------------------------|------------|
| Common              |       | Douglas T. Brown                                 |       | 46,318                               | (2)        |       | *                      |       |
| Common              |       | Robert L. Clayton                                |       | 1,500                                | (2)        |       | *                      |       |
| Common              |       | Claire L. Kruger                                 |       | 30,000                               | (2)        |       | *                      |       |
| Common              |       | Gilbert V. Levin                                 |       | 2,419,307                            | (1)(2)     |       | 14.1                   | %          |
| Common              |       | Robert A.  Lodder, Jr.                      |       | 27,852                               | (2)        |       | *                      |       |
| Common              |       | Aris Melissaratos                                |       | 16,281                               | (2)        |       | *                      |       |
| Common              |       | Thomas B. Peter                                  |       | 6,666                                | (2)        |       | *                      |       |
| Common              |       | Robert J. Vander Zanden                          |       | 37,318                               | (2)        |       | *                      |       |
| Common              |       | All Executive Officers  and Directors as a Group |       | 2,585,242                            | (2)        |       | 15.1                   | %          |

 

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| *   | Less  than 1% of the outstanding shares of Common Stock of the Company.                                                                                                                                                                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includes  shares owned by M. Karen Levin.                                                                                                                                                                                                                                                                                                                                                        |
| (2) | Included  in the number of shares beneficially owned by D.T. Brown, R.L. Clayton, C.L.  Kruger, G.V. Levin, R.A. Lodder, A. Melissaratos, T.B. Peter, R.J. Vander  Zanden and All Executive Officers and Directors as a Group are 7,500, 1,500,  0, 0, 5,000, 0, 0, 7,500 and 21,500 shares, respectively, which such persons  have a right to acquire within 60 days pursuant to stock options. |

 

As of December 31,2009, Dr. Levin, 3170 S. Ocean Boulevard, #602S, Palm Beach, FL 33480,beneficially owned in the aggregate 2,419,307 shares of Common Stock (14.1% ofthe 17,150,648 outstanding shares).  Asprincipal Stockholders of the Company, Dr. Levin and his wife areconsidered control persons with respect to the Company.

 

All Directors andExecutive Officers as a group, beneficial owners of 2,585,242 shares of CommonStock, owned 15.1% of the 17,150,648 outstanding shares. With the exception ofCede & Co., the holder of record for certain brokerage firms andbanks, no other person is known by the Company to own beneficially more than 5%of the outstanding Common Stock of the Company.

 

In February 2001,the Board of Directors adopted the Rights Agreement (the “Agreement”).  The Agreement provides each Stockholder ofrecord a dividend distribution of one “right” for each outstanding share of theCompany’s Common Stock.  Rights becomeexercisable at the earlier of ten days following:  (1) a public announcement that anacquirer has purchased or has the right to acquire 10% or more of the Company’sCommon Stock, or (2) the commencement of a tender offer which would resultin an offeror beneficially owning 10% or more of the outstanding Common Stockof the Company.  All rights held by anacquirer or offeror expire on the announced acquisition date, and all rightsexpire at the close of business on December 31, 2010.  Each right entitles a Stockholder to acquire,at a stated purchase price, 1/100 of a share of the Company’s preferred stock,which carries voting and dividend rights similar to one share of its CommonStock.  Alternatively, a right holder mayelect to purchase for the stated price an equivalent number of shares of the Company’sCommon Stock at a price per share equal to one-half of the average market pricefor a specified period.  In lieu of thestated purchase price, a right holder may elect to acquire one-half of theCommon Stock available under the second option. The purchase price of the preferred stock fractional amount is subjectto adjustment for certain events as described in the Agreement.  At the discretion of a majority of the Boardand within a specified time period, the Company may redeem all of the rights ata price of $0.001 per right.  The Boardmay also amend any provisions of the Agreement prior to exercise.

 

**Item13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

*Related Transactions*

 

Under employment agreements with Dr. Gilbert V. Levinand Mrs. M. Karen Levin, the Company’s founders, the Company has agreed toprovide Dr. and Mrs. Levin each with lifetime payments of $12,500each quarter and to fund long-term lifetime healthcare and health insurancepolicies following their retirements from the Company on August 14, 2008and January 4, 2006, respectively. At December 31, 2009, the Company’s liability for both Dr. andMrs. Levin was estimated to be $480,000 for the lifetime payments and$240,000 for funding the long-term lifetime

 

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healthcare and health insurance policies based onactuarially determined amounts.  Thenon-current portion of these amounts is reported on the accompanying balancesheet as deferred compensation.  During2009 and 2008, the Company paid Dr. and Mrs. Levin a combined totalof $135,000 and $123,000 in post-retirement benefits.  In addition, Dr. Levin also received$87,000 in salary during 2008.  Dr. Levincontinues to serve as a member of the Board of Directors.

 

*Director Independence*

 

The current Board ofDirectors consists of Mr. Douglas T. Brown, Dr. Claire L. Kruger, Dr. GilbertV. Levin, Dr. Robert A. Lodder, Jr., Mr. Aris Melissaratos, Mr. ThomasB. Peter, and Dr. Robert J. Vander Zanden. The Board of Directors has determined that a majority of its members,being Messrs. Brown, Melissaratos, Peter, and Vander Zanden, areindependent Directors within the meaning of the applicable NASDAQ rules.  The Company’s Audit, Compensation, andNominating Committees consist solely of independent Directors.

 

**Item14.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

**GrantThornton LLP Fees For Fiscal 2009**

 

The following table sets forth thefees paid by the Company to Grant Thornton LLP for audit and other services in2009 and 2008:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Audit fees |       | $        | 140,000    |     | $          | 131,000 |   |
| Tax fees   |       | —   |       | —   |       |
| Total      |       | $        | 140,000    |     | $          | 131,000 |   |

 

The Audit Committeeconsidered whether the provision of services referenced above is compatiblewith maintaining Grant Thornton’s independence. The Audit Committee’s policy isto pre-approve all audit and permissible non-audit services provided by theindependent auditors.  These services mayinclude audit services, audit-related services, tax services and otherservices.  Pre-approval is generallyprovided for up to one year.  The AuditCommittee may also pre-approve particular services on a case-by-case basis.

 

**PART IV**

 

**Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES**

 

**(a)  Exhibits**

** **
| (3)    |   | Certificate of Incorporation and Bylaws of the Company  (incorporated by reference to the Company’s Annual Proxy Statement for  meeting held on May 15, 1992, as filed with the Commission)          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.1)  |   | Articles of Amendment of the Company (incorporated by reference  to the Company’s Proxy Statement for its May 1996, May 2000, and  May 2001 annual meetings, as filed with the Commission) |
| (3.2)  |   | Amended and Restated By-Laws of Spherix Incorporated  (incorporated by reference to Form 8-K dated November 23, 2009)                                                                                |
| (10.1) |   | Summary of Annual Compensation of Members of the Board of  Directors of Spherix Incorporated (incorporated by reference to Form 8-K  dated February 29, 2008)                                        |
| (10.2) |   | Employment Agreement dated as of August 15, 2007, by and  between Claire L. Kruger and the Company (incorporated by reference to  Form 10-Q dated September 30, 2007)                           |
| (10.3) |   | Employment Agreement dated as of August 16, 2007, by and  between Robert A. Lodder and the Company (incorporated by reference to  Form 10-Q dated September 30, 2007)                           |
| (10.4) |   | Employment Agreement dated as of August 16, 2007, by and  between Robert L. Clayton and the Company (incorporated by reference to  Form 10-Q dated September 30, 2007)                          |
| (10.5) |   | Employment Agreement dated as of August 31, 2009, by and  between Ram Nimmagudda and the Company (incorporated by reference to  Form 8-K filed September 3, 2009)                               |

 

48

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| (10.6)  |   | Letter Agreement dated as of July 2, 2008, by and between  Gilbert V. Levin, M. Karen Levin and the Company (incorporated by reference  to Form 8-K filed July 8, 2008)                                                                  |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.7)  |   | Restated Consulting Agreement dated as of November 29,  2005, by and between M. Karen Levin and the Company (incorporated by  reference to Form 8-K filed December 1, 2005)                                                              |
| (10.8)  |   | Restated Consulting Agreement dated as of March 23, 2004,  by and between Gilbert V. Levin and the Company (incorporated by reference to  Form 10-K filed March 30, 2004)                                                                |
| (10.9)  |   | 1997 Stock Option Plan (incorporated by reference from the  Company’s Proxy Statements for its May 1998, May 2001 and  May 2005 annual meetings, as filed with the Commission)                                                      |
| (10.10) |   | Rights Agreement dated as of February 16, 2001, between  Spherix Incorporated and American Stock Transfer and Trust Company  (incorporated by reference to Form 8-K filed March 6, 2001)                                                 |
| (10.11) |   | Stock Purchase Agreement by and among the Company, InfoSpherix  and Active dated as of June 25, 2007 (incorporated by reference from the  Company’s Schedule 14A as filed with the Securities and Exchange Commission  on July 16, 2007) |
| (10.12) |   | Lease termination agreement dated August 1, 2007, between  Indian Creek Investors, LLC and the Company (incorporated by reference to  Form 10-Q dated September 30, 2007)                                                                |
| (10.13) |   | Lease agreement dated October 4, 2007, between Elizabethean  Court Associates III Limited Partnership and the Company (incorporated by  reference to Form 10-Q dated September 30, 2007)                                                 |
| (10.14) |   | Securities Purchase Agreement dated November 16, 2009,  between the Company and certain investors (incorporated by reference to  Form 8-K dated November 18, 2009)                                                                       |
| (10.15) |   | Manufacturing Support And Supply Agreement dated  December 15, 2009, between the Company and Inalco S.p.A (incorporated by  reference to Form 8-K filed December 18, 2009)                                                               |
| (23)    |   | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                |
| (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                                                                                                                        |

 

49

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   | **Spherix Incorporated** |
|--------|--------------------------|
|   | **(Registrant)**         |
|   | ** **               |
|   |                     |
| Date:  | March 30, 2010      |   | By: | /s/ Claire L. Kruger |
|   |                     |   |   | Claire L. Kruger |
|   |                     |   |   | Chief Executive Officer and Chief |
|   |                     |   |   | Operating Officer |
|   |                     |   |   |   |
|   |                     |   |   |   |
| Date:  | March 30, 2010      |   | By: | /s/ Robert L. Clayton |
|   |                     |   |   | Robert L. Clayton |
|   |                     |   |   | Chief Financial Officer and Treasurer |

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe Registrant and in the capacities and on the dates indicated.

 

 
| /s/ Douglas T. Brown           |   | Director                    | March 30, 2010 |
|--------------------------------|--------|-----------------------------|---------------------|
| Douglas T. Brown               |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Robert L. Clayton          |   | CFO and Treasurer           | March 30, 2010 |
| Robert L. Clayton              |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Claire L. Kruger           |   | Chief Executive Officer     | March 30, 2010 |
| Claire L. Kruger               |   | and Chief Operating Officer |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Gilbert V. Levin           |   | Director                    | March 30, 2010 |
| Gilbert V. Levin               |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Robert A. Lodder, Jr. |   | Director and President      | March 30, 2010 |
| Robert A. Lodder, Jr.     |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Thomas B. Peter            |   | Director                    | March 30, 2010 |
| Thomas B. Peter                |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Aris Melissaratos          |   | Director                    | March 30, 2010 |
| Aris Melissaratos              |   |                        |                |
|                           |   |                        |                |
|                           |   |                        |                |
| /s/ Robert J. Vander Zanden    |   | Chairman of the Board       | March 30, 2010 |
| Robert J. Vander Zanden        |   |                        |                |

 

50

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