UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2001.
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-5576
| SPHERIX INCORPORATED |
| (formerly Biospherics Incorporated) |
| (Exact name of Registrant as specified in its charter) |
| Delaware | 52-0849320 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 12051 Indian Creek Court, Beltsville, Maryland 20705 |
| (Address of principal executive offices) |
| 301-419-3900 |
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.
| Class | Outstanding as of June 30, 2001 | |
| Common Stock, $0.005 par value | 10,736,193 shares |
Transitional Small Business Disclosure Format (Check One): Yes o No ý
Spherix Incorporated
Form 10-Q
For the Quarter Ended June 30, 2001
Index
Item 1. Financial Statements
Statements of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||
| Revenue | $ | 4,840,378 | $ | 4,682,531 | $ | 10,058,105 | $ | 9,936,048 | |||||
| Operating expense | |||||||||||||
| Direct contract and operating costs | 3,129,343 | 2,892,358 | 7,104,010 | 5,864,215 | |||||||||
| Selling, general and administrative expense | 1,017,361 | 1,037,496 | 2,057,336 | 1,905,294 | |||||||||
| Research and development expense | 86,246 | 65,673 | 172,672 | 108,687 | |||||||||
| Depreciation and amortization expense | 349,016 | 342,694 | 684,623 | 692,532 | |||||||||
| Total operating expense | 4,581,966 | 4,338,221 | 10,018,641 | 8,570,728 | |||||||||
| Income from operations | 258,412 | 344,310 | 39,464 | 1,365,320 | |||||||||
| Interest, net | 30,876 | 42,651 | 92,747 | 40,018 | |||||||||
| Income before taxes | 289,288 | 386,961 | 132,211 | 1,405,338 | |||||||||
| Income tax expense | - | - | - | - | |||||||||
| Net income | $ | 289,288 | $ | 386,961 | $ | 132,211 | $ | 1,405,338 | |||||
| Net income per share, basic | $ | 0.03 | $ | 0.04 | $ | 0.01 | $ | 0.14 | |||||
| Net income per share, diluted | $ | 0.03 | $ | 0.03 | $ | 0.01 | $ | 0.12 | |||||
| Weighted average shares outstanding, basic | 10,736,103 | 10,602,673 | 10,735,921 | 10,353,883 | |||||||||
| Weighted average shares outstanding, diluted | 11,227,468 | 11,286,252 | 10,953,094 | 11,272,026 | |||||||||
See accompanying notes to financial statements.
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 4,586,241 | $ | 5,549,866 | ||||
| Restricted cash | 500,000 | 500,000 | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $100,000 and $75,000 | 4,002,371 | 2,121,747 | ||||||
| Other receivables | 257,349 | 220,855 | ||||||
| Prepaid expenses and other assets | 637,108 | 450,982 | ||||||
| Total current assets | 9,983,069 | 8,843,450 | ||||||
| Property and equipment, net of accumulated depreciation of $4,321,312 and $3,647,404 | 4,599,962 | 4,457,841 | ||||||
| Patents, net of accumulated amortization of $126,358 and $115,643 | 216,608 | 149,967 | ||||||
| Total assets | $ | 14,799,639 | $ | 13,451,258 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Bank line of credit | $ | 1,351,394 | $ | 386,274 | ||||
| Accounts payable and accrued expenses | 1,217,342 | 742,830 | ||||||
| Accrued salaries and benefits | 911,829 | 974,844 | ||||||
| Notes payable | 62,202 | 200,177 | ||||||
| Capital lease obligations | 50,664 | 70,570 | ||||||
| Deferred revenue | 111,161 | 111,161 | ||||||
| Total current liabilities | 3,704,592 | 2,485,856 | ||||||
| Notes payable | 19,298 | 33,082 | ||||||
| Capital lease obligations | 43,307 | 54,582 | ||||||
| Deferred rent | 179,018 | 161,483 | ||||||
| Deferred compensation | 136,308 | 136,308 | ||||||
| Deferred revenue | 1,000,000 | 1,000,000 | ||||||
| Total liabilities | 5,082,523 | 3,871,311 | ||||||
| Redeemable common stock, 3,076,307 shares | 679,208 | 679,208 | ||||||
| Stockholders' equity | ||||||||
| Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued and outstanding | - | - | ||||||
| Common stock, $.005 par value, 50,000,000 shares authorized; 10,784,795 and 10,784,045 issued, 10,736,193 and 10,735,331 shares outstanding, of which 3,076,307 shares are classified as redeemable common stock at June 30, 2001, and December 31, 2000, respectively | 38,542 | 38,539 | ||||||
| Paid-in capital in excess of par value | 14,151,955 | 14,147,749 | ||||||
| Treasury stock, 48,714 and 48,602 shares at cost, at June 30, 2001 and December 31, 2000, respectively | (327,122 | ) | (327,976 | ) | ||||
| Accumulated deficit | (4,825,467 | ) | (4,957,573 | ) | ||||
| Total stockholders' equity | 9,037,908 | 8,900,739 | ||||||
| Total liabilities and stockholders' equity | $ | 14,799,639 | $ | 13,451,258 | ||||
See accompanying notes to financial statements.
Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 132,211 | $ | 1,405,338 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 684,623 | 692,532 | ||||||
| Treasury stock issued in payment of expense | 749 | 14,000 | ||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | (1,880,624 | ) | (1,069,137 | ) | ||||
| Other receivables | (36,494 | ) | 58,600 | |||||
| Prepaid expenses and other assets | (186,126 | ) | 61,553 | |||||
| Deferred income taxes | - | - | ||||||
| Accounts payable and accrued expenses | 183,747 | 17,542 | ||||||
| Deferred rent | 17,535 | 23,670 | ||||||
| Deferred revenue | - | - | ||||||
| Net cash (used in) provided by operating activities | (1,084,379 | ) | 1,204,098 | |||||
| Cash flow from investing activities | ||||||||
| Purchases of property and equipment | (716,287 | ) | (1,589,483 | ) | ||||
| Additions to patent and intangible costs | (77,356 | ) | (10,373 | ) | ||||
| Net cash used in investing activities | (793,643 | ) | (1,599,856 | ) | ||||
| Cash flows from financing activities | ||||||||
| Net change on bank line of credit | 965,120 | (1,081,379 | ) | |||||
| Net change in book overdraft | 264,751 | 52,137 | ||||||
| Payments on notes payable | (151,759 | ) | (261,759 | ) | ||||
| Payments on capital lease obligations | (167,924 | ) | (142,681 | ) | ||||
| Proceeds from issuance of common stock | 10,209 | 5,674,327 | ||||||
| Cost of issuance of common stock | (6,000 | ) | (35,808 | ) | ||||
| Net cash provided by financing activities | 914,397 | 4,204,837 | ||||||
| Net (decrease) increase in cash and cash equivalents | (963,625 | ) | 3,809,079 | |||||
| Cash and cash equivalents, beginning of period | 5,549,866 | 1,437,280 | ||||||
| Cash and cash equivalents, end of period | $ | 4,586,241 | $ | 5,246,359 | ||||
See accompanying notes to financial statements.
Notes to Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim financial statements of Spherix Incorporated (formerly Biospherics Incorporated) (the “Company”) do not include all of the information and disclosures generally required for annual financial statements and are unaudited. In the opinion of management, the accompanying unaudited financial statements contain all material adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2001, and the results of its operations for the three-month and six-month periods ended June 30, 2001 and 2000 and its cash flows for the six-month periods ended June 30, 2001 and 2000. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
2. Net Income Per Share
Basic income per common share has been computed by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted income per common share has been computed by dividing net income by the weighted-average number of common shares outstanding with an assumed increase in common shares outstanding for common stock equivalents.
3. Deferred Revenue
Deferred revenue includes a $1,000,000 non-refundable advance against future royalties from the D-tagatose licensing agreement with MD Foods Ingredients amba of Denmark (“MDFI”) (subsequently merged into Arla to become Arla Foods). The advance will be recognized as revenue at a rate of 50% of annual royalties generated from future sales.
4. Private Placement
In February 2000, the Company completed a $5 million private offering of 723,982 units to a single institutional investor (the “Investor”). Each unit consisted of one share of Common Stock and one and one-half (1½) warrants, with an exercise price of $6.91 per share. The warrants are exercisable throughout a four-year period. All shares issued in connection with the February 2000 private placement, including all which may be issued pursuant to exercise of the warrants, have been registered by the Company.
In connection with the above-described private placement, the Investor has agreed that it will not exercise any of the warrants to the extent that it would acquire shares of Common Stock exceeding 9.9% of the outstanding Common Stock and it will not knowingly sell shares to anyone to the extent that their holding in the Company would exceed 4.9% of the outstanding Common Stock.
5. Treasury Stock Transaction
During February 2001, the Company issued 112 shares of Common Stock previously held in the treasury in payment of expenses. The excess of the purchase price of the treasury stock over the value of the stock on the date of issuance has been charged to retained earnings in the amount of $105.
During January 2000, the Company issued 2,500 shares of Common Stock previously held in the treasury in payment of expenses. The excess of the purchase price of the treasury stock over the value of the stock on the date of issuance has been charged to retained earnings in the amount of $5,075.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is intended to update the information contained in the Company’s Annual Report as filed on Form 10-K for the year ended December 31, 2000, and the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2001, and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Form 10-K and Form 10-Q.
Certain statements in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are identified by the use of forward-looking words or phrases such as “believes,” “expects,” is or are “expected,” “anticipates,” “anticipated,” “should” and words of similar impact. These forward-looking statements are based on the Company’s current expectations. Because forward looking statements involve risks and uncertainties, the Company’s actual results could differ materially. See the Company’s Form 8-K filing dated March 26, 1999, for a more detailed report on forward-looking statements.
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and assess performance. The Company is managed along three business segments: InfoSpherix Government, InfoSpherix Commercial, and BioSpherix.
Results of Operations for the Three and Six Months Ended June 30, 2001 and 2000
The Company reported net income of $289,000 ($0.03 per share, diluted) on sales of $4.8 million, and net income of $132,000 ($0.01 per share, diluted) on sales of $10.1 million for the three months and six months ended June 30, 2001, respectively, compared to a net income of $387,000 ($0.03 per share, diluted) on sales of $4.7 million, and net income of $1.4 million ($0.12 per share, diluted) on sales of $9.9 million for the three months and six months ended June 30, 2000, respectively.
| InfoSpherix Government | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||
| Revenue | $ | 4,020,000 | $ | 3,140,000 | $ | 8,499,000 | $ | 5,377,000 | ||||||
| Operating expense | 3,810,000 | 2,960,000 | 8,511,000 | 5,442,000 | ||||||||||
| Operating income (loss) | $ | 210,000 | $ | 180,000 | $ | (12,000 | ) | $ | (65,000 | ) | ||||
InfoSpherix Government’s revenue for the three and six months ended June 30, 2001, increased $880,000 (28%) and $3,122,000 (58%), respectively, in relation to the same periods in 2000, resulting in an operating income of $210,000 and an operating loss of $12,000 for the three-month and six-month periods ended June 30, 2001 compared to an operating income of $180,000 and an operating loss of $65,000 for the same respective periods in 2000. On March 30, 2001, the Company received approximately $1.3 million in revenue and recognized a related expense of $1.7 million, in settlement of a U.S. Department of Labor Administrative Review Board (“ARB”) decision concerning the Company’s liability for wages and fringe benefits under two contracts that the Company was awarded by the General Services Administration (“GSA”), a Federal Government agency. Under the settlement agreement, GSA reimbursed the Company $1.3 million for wages and fringe benefits (other related costs are not reimbursable), and the Company agreed to pay retroactive wages and benefits to certain labor categories in accordance with the Service Contract Act. These funds were disbursed on April 18, 2001, to the affected employees.
InfoSpherix Government also produced an increase in revenue of approximately $1.7 million between years as a result of the new Michigan and Delaware reservation contracts and new business under the Maryland Information Center contract, net of the loss of the Federal Information Center contract, which concluded in October 2000. Revenues from reservation and tourism services tend to be greater in the spring and summer due to vacation planning. All of the Company’s major government contracts have options that will extend the contracts beyond 2001, and the Company anticipates that the options will all be exercised.
| InfoSpherix Commercial | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||
| Revenue | $ | 778,000 | $ | 1,530,000 | $ | 1,515,000 | $ | 4,545,000 | ||||||
| Operating expense | 568,000 | 1,241,000 | 1,145,000 | 2,824,000 | ||||||||||
| Operating income | $ | 210,000 | $ | 289,000 | $ | 370,000 | $ | 1,721,000 | ||||||
InfoSpherix Commercial’s revenue for the three and six months ended June 30, 2001, decreased $752,000 (49%) and $3,030,000 (67%), respectively, in relation to the same periods in 2000, resulting in operating incomes of $210,000 and $370,000 for the periods ended June 30, 2001 compared to operating incomes of $289,000 and $1,721,000 for the same respective periods in 2000. The prior year operations benefited from a significant short-term pharmaceutical contract, which was conducted primarily in the first quarter of 2000 and concluded shortly thereafter and two long-term contracts, which concluded in the first quarter of 2001. Commercial contracts are typically for shorter terms than Government contracts and that can result in substantial variations in Commercial revenues.
| BioSpherix | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||
| Revenue | $ | 42,000 | $ | 13,000 | $ | 44,000 | $ | 14,000 | ||||||
| Operating expense | 204,000 | 138,000 | 363,000 | 304,000 | ||||||||||
| Operating loss | $ | (162,000 | ) | $ | (125,000 | ) | $ | (319,000 | ) | $ | (290,000 | ) | ||
BioSpherix revenue for the three and six months ended June 30, 2001, increased $29,000 (223%) and $30,000 (214%), respectively, in relation to the same periods in 2000. Operating loss increased $37,000 (30%) and $29,000 (10%) between years, for the three and six months ended June 30, 2001, respectively. The increase in revenue is related to sales of FlyCracker, the Company’s safe-for-humans pesticide, during the second quarter of 2001. The current year’s operating expense included an increase in R&D costs related to the non-food uses of tagatose. Also included in operating expense were marketing costs related to promoting FlyCracker.
Selling, general and administrative expenses (“S,G&A”) for the three months ended June 30, 2001, were consistent with those of the prior year, and increased $152,000 for the six months ended June 30, 2001. The increases between years are all part of the Company’s business plan to intensify the business development focus on its proven InfoSpherix business lines and to aggressively penetrate the pesticide market with FlyCracker.
Depreciation expenses for the three and six months ended June 30, 2001, were consistent with those of the same periods in 2000.
Interest income exceeded interest expense for each of the three and six months ended June 30, 2001, as a result of interest received on treasury funds and money market accounts.
The Company has recognized no income tax expense in connection with its 2001 profits due to tax loss carryforwards.
Liquidity and Capital Resources
The Company’s Loan Agreement (the “Agreement”) with Bank of America (the “Bank”) provides for borrowing up to $1.5 million, subject to advance rates as defined in the Agreement. Borrowings under the Agreement are collateralized by the Company’s accounts receivable and $500,000 from the Company’s NationsFund account. The interest rate under the Agreement is the Bank’s prime rate. As of June 30, 2001, outstanding borrowings under the Agreement aggregated $1,351,394 and the total unused balance available to the Company under the line of credit was $148,606. The Agreement contains covenants that require the Company to meet certain tangible net worth and cash flow coverage ratios. The Company was in compliance with the bank covenants as of June 30, 2001. The line expires on August 31, 2001, but the Company anticipates that the line will be renewed. However, if the Company is unable to extend the line of credit, the Company believes that it has adequate funds to meet all of its current obligations for the balance of 2001.
Cash flow for the six months ended June 30, 2001, reflects a net cash outflow of $964,000, consisting of $1.1 million used in operating activities, $794,000 used in investing activities, and $914,000 provided by financing activities. Cash flow from operating activities in 2001 decreased $2.3 million from those of the prior year as a result of the decreased net income and increased accounts receivable. The increased accounts receivable at June 30, 2001, reflects the seasonal nature of the growing ReserveSuite business. Cash used in investing activities decreased by $806,000 as a result of a one-time $1.3 million purchase of telephone equipment in the prior year that was previously under capital and operating leases. Cash flow from financing activities decreased $3.3 million between years. In the first quarter of 2000, $5,638,000 was received from a private placement of common stock and warrants in a Regulation D sale; there were no new issuances of stock in 2001. The Company’s line of credit was used to finance the cash used in operations.
Working capital as of June 30, 2001, was $6,278,000, which represents a $80,000 (1%) decrease from working capital of $6,358,000 at December 31, 2000.
The Company considers the upgrading of its information and telecommunications systems complete and adequate for the near term. Sufficient cash flow from operating activities during 2001 to cover continuing capital needs is anticipated. It is also anticipated that royalties on sales by Arla could begin in early 2003.
No dividends were paid in 2000 and none are anticipated in 2001.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company manages its debt and its available cash considering available investment opportunities and risks, tax consequences and overall financing strategies.
At June 30, 2001, the Company had approximately $82,000 of fixed-rate indebtedness and $1.4 million in variable rate indebtedness in the form of the bank line of credit. The Company has not entered into any interest rate swaps or other derivatives with respect to its indebtedness.
Cash available for investment is typically invested in short term treasury funds. In general, such funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. The carrying amounts approximate market value. It is the Company’s practice to hold these investments to maturity.
Assuming the June 30, 2001, variable rate debt and cash available for investment, a one percent change in interest rates would impact net interest income by less than $37,000.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 15, 2001, where the following actions were taken:
(1) David H. Affeldt, Lionel V. Baldwin, Thomas W. Gantt, Gilbert V. Levin, M. Karen Levin, Anne S. MacLeod, Thomas G. Moore, and Deborah S. Streb were elected as directors to serve until the next Annual Meeting pursuant to the following vote tabulation:
| Shares | Shares | Shares | ||||
| Name | Votes For | Votes Against | Votes Abstained | |||
| David H. Affeldt | 10,226,878 | 106,549 | 0 | |||
| Lionel V. Baldwin | 10,227,043 | 106,384 | 0 | |||
| Thomas W. Gantt | 10,226,878 | 106,549 | 0 | |||
| Gilbert V. Levin | 10,226,035 | 107,392 | 0 | |||
| M. Karen Levin | 10,226,035 | 107,392 | 0 | |||
| Anne S. MacLeod | 10,226,043 | 107,384 | 0 | |||
| Thomas G. Moore | 10,226,043 | 107,384 | 0 | |||
| Deborah S. Streb | 10,225,878 | 107,549 | 0 |
(2) The Company’s Certificate of Incorporation, as amended, to change the name of the Company from Biospherics Incorporated to Spherix Incorporated, was ratified, with 10,178,462 shares voted in favor, 117,279 shares voted against, and 37,686 shares abstaining.
(3) The proposed Amendment of the 1997 Stock Option Plan to increase the number of shares reserved for issuance thereunder from 400,000 to 1,000,000, was ratified, with 6,053,855 shares voted in favor, 409,649 shares voted against, 99,235 shares abstaining, and 3,770,688 shares unvoted.
(4) The selection of Grant Thornton LLP as independent accountants of the Company for the year ending December 31, 2001, was ratified, with 10,258,918 shares voted in favor, 33,334 shares voted against, and 41,175 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the three months ended June 30, 2001.
Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Spherix Incorporated (formerly Biospherics Incorporated) | |||||
| (Registrant) | |||||
| Date: | August 8, 2001 | By: | /s/ Gilbert V. Levin | ||
| Gilbert V. Levin | |||||
| Chair, Chief Executive Officer, and | |||||
| Treasurer | |||||
