Business Context and Reporting Period
This Form 10-Q covers Spherix Incorporated for the quarterly period ended June 30, 2006. The Company operates through two primary segments: InfoSpherix, which provides contact center and reservation services (primarily for government entities), and BioSpherix, which develops proprietary products, notably tagatose (branded as Naturlose) for medical and health applications. On January 1, 2006, the InfoSpherix division was transferred to a new wholly-owned subsidiary, InfoSpherix Incorporated.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 | Six Months Ended June 30, 2006 |
|---|---|---|
| Revenue | $7,582,290 | $13,504,454 |
| Net Income (Loss) | $238,601 | $(294,428) |
| Operating Income (Loss) | $235,808 | $(297,278) |
| Cash and Cash Equivalents | $6,145,295 (as of June 30, 2006) | |
| Working Capital | $6,508,811 (Current Assets $9.9M - Current Liabilities $3.4M) | |
| Debt | $0 outstanding on bank line of credit; Capital lease obligations of $281,104 total. | |
| Net Cash Provided by Operating Activities | $1,153,206 (Six months) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7% ($518,000) for the three months and 8% ($1 million) for the six months ended June 30, 2006, compared to the same periods in 2005. This growth was driven primarily by a new contract with the Pennsylvania Department of Natural Resources.
- Profitability: The Company reported a net income of $238,601 for the quarter, compared to $228,036 in the prior year quarter. However, for the six-month period, the Company reported a net loss of $(294,428), a significant improvement from the $(845,396) loss in the prior year.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 25% ($300,000) for the quarter and 16% ($397,000) for the six months. This increase is attributed to legal fees associated with a Court of Federal Claims suit against the USDA Forest Service regarding the National Recreation Reservation Service (NRRS) contract.
- R&D Spending: Research and development expenses increased significantly (145% for the quarter) due to preparations for the Phase 3 clinical trial of Naturlose for type 2 diabetes.
- Liquidity: Cash and cash equivalents increased from $2.67 million at year-end 2005 to $6.15 million at June 30, 2006, bolstered by proceeds from stock issuances and warrant exercises.
Guidance, Outlook, and Risks
- InfoSpherix Outlook: The Company is engaged in litigation regarding the NRRS contract. While the GAO sustained Spherix's challenge to a competitor's award, the USDA Forest Service is proceeding with the award to the competitor. Spherix has filed suit to enjoin this action. The current National Park Service contract has been extended through September 30, 2006. The Company has secured new contracts in Indiana and Pennsylvania and is expanding call center operations in Indiana.
- BioSpherix Outlook: The focus is on the Phase 3 clinical trial for Naturlose to treat type 2 diabetes, with patient recruitment slated to begin before year-end 2006. The trial could be completed in as little as two years. Royalties from the food/beverage licensee (Arla) remain limited as production has paused pending increased demand.
- Capital Resources: The Company maintains a $1.5 million line of credit for the InfoSpherix subsidiary (currently unutilized) and has $1.7 million remaining available under its Standby Equity Distribution Agreement (SEDA). BioSpherix operations are funded by existing cash and potential stock issuances.
- Risks: Key risks include the outcome of the NRRS litigation, the success of the Phase 3 clinical trial, and the ability to secure future government contracts. Additionally, covenants on the InfoSpherix credit facility may limit cash transfers to the parent company.
Investor Verification Checklist
- Litigation Status: Verify the current status of the Court of Federal Claims suit against the USDA Forest Service regarding the NRRS contract, as this impacts a significant portion of revenue.
- Clinical Trial Progress: Monitor the commencement and progress of the Phase 3 clinical trial for Naturlose, as success is critical for BioSpherix's future revenue potential.
- Contract Renewals: Confirm the renewal status of the National Park Service contract beyond the September 30, 2006 extension.
- Stock Issuance: Review the remaining capacity under the SEDA ($1.7 million) and potential dilution from future equity raises needed to fund BioSpherix R&D.
- Seasonality: Note that reservation revenue is historically higher in spring and summer; verify if Q3 and Q4 results reflect expected seasonal trends.