DOMH

Business Context and Reporting Period

This Form 10-Q covers Spherix Incorporated (formerly Biospherics Incorporated) for the quarterly period ended June 30, 2004. The company operates through two principal segments: InfoSpherix, which provides contact center and reservation services (primarily for government clients), and BioSpherix, which develops proprietary products, notably the sweetener tagatose (Naturlose). InfoSpherix generates substantially all of the company's continuing revenue.

Key Financial Metrics

Note: Working capital calculated as Total Current Assets ($12,421,000) minus Total Current Liabilities ($5,506,683).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 41% ($2.0 million) for the three months and 28% ($2.6 million) for the six months ended June 30, 2004, compared to the same periods in 2003. This growth is driven by new government contracts in the InfoSpherix segment.
• Profitability Turnaround: The company reported a net income of $192,257 for the quarter, a significant improvement from a net loss of $453,075 in the prior year quarter. However, the six-month period still reflects a net loss of $355,144, compared to a loss of $1.1 million in the prior year.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased by 6% ($105,000) for the quarter and 10% ($297,000) for the six months, primarily due to reduced legal expenses following the November 2003 arbitration settlement with Arla Foods.
• Acquisition Impact: In March 2004, the company acquired assets of Daksoft, Inc. (ReserveIt business) for $700,000 plus stock. This acquisition contributed $702,000 in revenue for the quarter and $842,000 for the six months.

Guidance, Outlook, and Risks

• Contract Risks: The company was advised that it lost the bid for the National Park Service (NPS) National Park Reservation System, a contract accounting for 18% of revenue in the first half of 2004. The current contract is expected to expire at the end of 2004 unless extended. Management intends to review the award basis and protect its interests.
• Offsetting Revenue: Management anticipates that revenue loss from the NPS contract will be offset by a multi-million dollar Federal Retirement Thrift Investment Board (FRTIB) contract won in March 2004, which began operations in July 2004.
• BioSpherix Outlook: Royalties from tagatose remain modest. Significant revenue growth depends on the licensee (SweetGredients) building a larger manufacturing plant, a decision expected later in the year. The company is also pursuing non-food applications (Naturlose) in toothpaste and pharmaceuticals, with a 12-24 month development timeline.
• Liquidity: The company has a $2 million bank line of credit with $166,000 available. Proceeds from a $3.5 million warrant exercise in February 2004 were used for facility relocation and the Daksoft acquisition.

Investor Verification Checklist

• NPS Contract Status: Verify the final status of the National Park Service contract extension and the outcome of any protests regarding the award to a competitor.
• FRTIB Contract Performance: Monitor the ramp-up and revenue recognition of the new Federal Retirement Thrift Investment Board contract starting July 1, 2004.
• Tagatose Manufacturing Decision: Track the licensee's decision on expanding manufacturing capacity, which is critical for future royalty revenue.
• Debt Covenants: Review the terms of the Bank of America line of credit, noting the collateralization by a restricted $2.0 million certificate of deposit.
• Stock Repurchase Program: Note the active share repurchase program with approximately $898,419 remaining available under the $1 million authorization.