| SPHERIX INC Item 1A RISK FACTORS Any of the risk factors we describe below could severely harm our business, financial condition and operating results |
| The market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events |
| 8 ______________________________________________________________________ RISKS RELATED TO OUR BUSINESS WE CONTINUE TO BE DEPENDENT ON OUR INFORMATION SERVICES DIVISION FOR NEARLY ALL OF OUR REVENUE We are almost entirely dependent on the information services division for our revenue |
| Despite licensing tagatose in 1996 for food and beverage use, our principal biotechnology product, we have yet to receive any substantial royalties from the sales of tagatose by our licensee |
| Thus, we have incurred substantial and continuing losses in our biotechnology division which have adversely affected our overall financial results and our stock price |
| If we continue to be unsuccessful in commercializing our biotechnology products, our financial results will continue to be adversely affected to the detriment of our stock price |
| OUR LARGEST INFORMATION SERVICES CONTRACT COULD BE AWARDED TO A COMPETITOR In both 2005 and 2004, our NPRS contract accounted for approximately 17prca of our aggregate revenue |
| This contract has been bundled with a National Forest Services contract and rebid as the National Recreation Reservation System (“NRRS”) |
| In 2005, the bundled NRRS contract was awarded to a competitor for the second time; we protested and our protest was again upheld |
| This is the second time that GAO has found the USDA Forest Service’s attempt to award the NRRS contract to our competitor to be flawed |
| The Department of Agriculture has subsequently decided not to follow GAO’s decision and is seeking to proceed with the award of the NRRS contract to our competitor |
| Spherix has filed an appeal of this action with the Court of Federal Claims, but we cannot predict the outcome of the appeal |
| The Department of Agriculture has agreed not to proceed while the Court of Federal Claims hears Spherix’s appeal |
| Meanwhile, the Company’s NPRS contract has been formally extended through September 30, 2006 |
| If we lose this contract, we will need to replace it with other work or scale back our operations to avoid an adverse impact on our financial results |
| OUR INFORMATION SERVICES BUSINESS COULD BE ADVERSELY AFFECTED BY SIGNIFICANT CHANGES IN THE CONTRACTING OR FISCAL POLICIES OF THE US FEDERAL GOVERNMENT We derive substantial revenues from contracts with the US federal government and we believe that the success and development of our business will continue to depend on our successful participation in US federal government contract programs |
| Accordingly, changes in US federal government contracting policies could directly affect our financial performance |
| Among the factors that could have a material adverse affect on our US federal government contracting business are: • budgetary constraints affecting US federal government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or available funding; • technological developments; • US federal governmental shutdowns and other potential delays in the government appropriations process; • delays in the payment of our invoices by government payment offices due to problems with, or upgrades to, government information systems, or for other reasons; • competition and consolidation in the information services industry; and • general economic conditions |
| OUR INFORMATION SERVICES BUSINESS IS RELIANT ON TECHNOLOGY We have devoted significant resources to developing and acquiring specialized hardware and software in our information services business |
| In order to remain competitive, we must continue to select, invest in, acquire and develop new and enhanced technology on a timely basis |
| We may not be successful in these efforts or in anticipating developments in technology |
| In addition, competitors could develop similar applications |
| Third parties could independently develop similar technology, obtain unauthorized access to our proprietary technology or misappropriate technology to which we have granted access |
| Failure to remain current with technology or misappropriation of our technology could adversely affect our ability to compete for information services business and could lead to reduced business and reduced financial results |
| ROYALTIES FROM TAGATOSE SALES ARE UNCERTAIN We have developed tagatose, a full bulk, low calorie sweetener |
| In September 1996, we granted an exclusive, world-wide license to a foreign entity for the manufacture and sale of tagatose for use in foods and beverages |
| To date, tagatose has only been commercially introduced into a limited number of products |
| We initiated an arbitration proceeding against our licensee due to the delay in bringing tagatose to market |
| We subsequently dismissed the arbitration in exchange for various agreements including an extension of the period during which we are entitled to 9 ______________________________________________________________________ receive royalties |
| Our prospects for receiving royalties from tagatose food and beverage sales are uncertain due to numerous factors, most of which are out of our control, including: • our licensee has exclusive control over the commercialization of tagatose for food and beverage uses; • the delay in bringing tagatose to market results in a shortening of the time we are entitled to royalties; • significant royalties are possible only if our licensee constructs a larger tagatose manufacturing facility; at present, our licensee has ceased production at its current facility due to excess inventories; and • we are entitled to royalties only after reimbursing our licensee for the ongoing costs of maintaining patent protection on tagatose throughout the world |
| WE HAVE NOT YET SUCCESSFULLY COMMERCIALIZED NATURLOSE We are in the process of attempting to develop other uses of tagatose, under the brand name Naturlose, in non-food products such as toothpaste, mouthwash, and over-the-counter and pharmaceutical drugs |
| To date, we have yet to secure any substantial revenue from Naturlose sales |
| One of the hurdles we will have to overcome is that our foreign licensee for tagatose (which has the exclusive right to manufacture tagatose) does not currently have sufficient capacity to manufacture enough tagatose to supply both food and nonfood markets if such markets mature and grow |
| Failure to successfully commercialize Naturlose may adversely affect our stock price |
| OTHER BIOTECH PRODUCTS ARE STILL IN THE DEVELOPMENT STAGE We are developing other biotech products |
| None of these have been developed to a stage where any significant revenue has been generated |
| Development of products will require significant additional research and development |
| Such additional effort will require substantial funding which may not be available to us |
| Further, our research and development activities may not result in any saleable products |
| It is also possible that we will license or seek an affiliation with a third party to bring some products to market |
| In such an event, we would likely have minimal control over the manufacture and marketing of such products |
| DEVELOPMENT OF ANY BIOTECH PRODUCTS WILL DEPEND ON OBTAINING FDA AND FOREIGN REGULATORY APPROVALS Development of new products are subject to extensive regulation by governmental regulatory authorities in the United States and other countries |
| These rigorous regulatory approval processes can take five to ten years or more and require the expenditure of substantial resources |
| We may not be able to obtain the necessary approvals for clinical testing or for the marketing of products |
| Continuing failure to commercialize biotechnology products may adversely affect our financial results and stock price |
| OUR SUCCESS WILL DEPEND, IN PART, ON OUR ABILITY TO OBTAIN AND MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS We have several patents for tagatose and other products under development |
| We may not be able to obtain additional patents |
| Further, future patents may not be held valid if subsequently challenged |
| Failure to obtain and maintain patent protection for our biotechnology products may further delay or eliminate our ability to commercialize such products, which may adversely affect our financial results and stock price |
| WE HAVE SUSTAINED LOSSES IN THE PAST AND WE MAY SUSTAIN LOSSES IN THE FUTURE We have incurred losses in prior years, including the last three (3) years |
| Our net losses for the years ended December 31, 2005, December 31, 2004 and December 31, 2003 were dlra2dtta8 million, dlra2dtta8 million and dlra2dtta3 million, respectively |
| Our net accumulated losses from the date of our organization through December 31, 2005 are dlra15dtta2 million |
| We may not return to profitable operations |
| WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE WILL NEED During 2005, our working capital decreased by dlra1dtta1 million, largely as a result of the incurred losses and continued investment in our business |
| In recent years, we have funded our operations through private placements of our common stock and through the exercise of warrants issued in connection with such private placement transactions |
| We believe that we may need to raise additional funding to continue to finance our product development operations |
| We may also need to raise additional money to fund operations if the sale of tagatose as a food and beverage product continues to be delayed or is not as successful as we anticipate |
| We may not be able to obtain additional financing on acceptable terms, or at all |
| Failure to obtain required financing may cause us to curtail or cease our operations |
| None of our key employees have employment agreements |
| Further, our Chief Science Officer, who is principally responsible for 10 ______________________________________________________________________ commercializing our biotechnology products, is 81 years of age |
| The loss of the services of one or more of such employees could have a material adverse effect on us |
| WE FACE INTENSE COMPETITION BY COMPETITORS IN BOTH DIVISIONS Our competitors in the information services business are numerous |
| Many of our competitors have significantly greater financial, marketing and distribution resources than we do |
| Our principal information services competitor, ReserveAmerica, is a division of Ticketmaster which is a subsidiary of IAC/InterActive Corp, a significantly larger public company than Spherix |
| Our competitors may succeed in developing or marketing technologies and biotechnology products that are more effective than ours |
| Alternative sweetener(s) may adversely affect sales of tagatose |
| In the past year or two, the alternate sweetener Splenda has made substantial inroads into markets we expected tagatose to capture |
| RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK THE PRICE OF SPHERIX’S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS WHICH WILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK Our common stock has traded as low as dlra1dtta19 and as high as dlra5dtta85 between January 3, 2005 and December 30, 2005 |
| Some of the factors leading to this volatility include: • relatively small amounts of our stock trading on any given day; • fluctuations in our operating results; • announcements of technological innovations or new products which we or our competitors make; • developments with respect to patents or proprietary rights; and • the status of our licensee’s efforts to market tagatose |
| CORNELL CAPITAL PARTNERS WILL PAY LESS THAN THE MARKET PRICE AND WILL HAVE AN INCENTIVE TO SELL ITS SHARES, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE Cornell Capital Partners will purchase shares of our common stock pursuant to the Standby Equity Distribution Agreement (SEDA) at a purchase price that is less than the then-prevailing market price of our common stock |
| Cornell Capital Partners will have an incentive to immediately sell any shares of our common stock that it purchases pursuant to the SEDA to realize a gain on the difference between the purchase price and the then-prevailing market price of our common stock |
| To the extent Cornell Capital Partners sells its common stock, the common stock price may decrease |
| NEW SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF SHARES UNDER THE SEDA The sale of shares pursuant to the SEDA will have a dilutive impact on our stockholders |
| As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline |
| In addition, the lower our stock price, the more shares of common stock we will have to issue under the SEDA If our stock price is lower, then our existing stockholders would experience greater dilution |
| OUR COMMON STOCK WILL BE DELISTED FROM NASDAQ NATIONAL MARKET SYSTEM IF WE FAIL TO COMPLY WITH CONTINUED LISTING STANDARDS We were previously advised that we were in danger of our common stock being delisted from the NASDAQ National Market due to our stockholders’ equity falling below the dlra10 million minimum requirement |
| At December 31, 2005, the Company’s shareholder’s equity was dlra7cmam879cmam220, or dlra2cmam120cmam780 below the dlra10cmam000cmam000 required by NASDAQ; however, the Company has subsequently raised, as of March 10, 2006, an additional dlra2dtta7 million through the SEDA and warrant transactions so as to bring the Company into compliance with the NASDAQ equity requirement |
| If at some point we are unable to meet the listing standards, we intend to apply to list our common stock on the NASDAQ SmallCap Market |
| DIVIDENDS ON OUR COMMON STOCK ARE NOT LIKELY We intend to retain future earnings, if any, in order to provide funds for use in the operation and expansion of our business and for further research and development |
| Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future |
| Investors must look solely to appreciation in the market price of the shares of our common stock to obtain a return on their investment |
| BECAUSE OF THE RIGHTS AGREEMENT AND “ANTI-TAKEOVER” PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS, A THIRD PARTY MAY BE DISCOURAGED FROM MAKING A TAKEOVER OFFER WHICH COULD BE BENEFICIAL TO OUR STOCKHOLDERS In 2001, we adopted a shareholder rights plan |
| The effect of this rights plan and of certain provisions of our Certificate of Incorporation, By-Laws, and the anti-takeover provisions of the Delaware General Corporation Law, could delay or 11 ______________________________________________________________________ prevent a third party from acquiring us or replacing members of our board of directors, even if the acquisition or the replacements would be beneficial to our stockholders |
| These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions |
| INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR STOCKHOLDERS’ ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS As of December 31, 2005, our officers and directors and their affiliates owned approximately 20prca of the outstanding shares of our common stock |
| As a result, our officers and directors are able to exert considerable influence over the outcome of any matters submitted to a vote of the holders of our common stock, including the election of our Board of Directors |
| The voting power of these stockholders could prevent or frustrate attempts to effect a transaction that is in the best interests of the other stockholders and could also discourage others from seeking to purchase our common stock, which might depress the price of our common stock |
| WE EXPERIENCE QUARTERLY VARIATIONS IN OUR OPERATING RESULTS We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including the seasonality of our information services business, timing of customers’ budget processes and slowdowns or accelerations of work by customers |
| General work economic conditions may result in customer deferral of projects or cancellation in planned expenditures |
| These factors may adversely affect our financial results and our stock price |