DOMH

Business Context and Reporting Period

This Form 10-Q covers Spherix Incorporated (formerly Biospherics Incorporated) for the quarterly and six-month periods ended June 30, 2005. The company operates two principal segments: InfoSpherix, which provides contact center and reservation services primarily for government entities, and BioSpherix, which develops proprietary products including tagatose (a low-calorie sweetener) and related medical applications. As of August 5, 2005, there were 12,057,942 shares of common stock outstanding.

Key Financial Metrics

Note: Gross margin for the six months ended June 30, 2005, was approximately 25% ($3.1M gross profit / $12.5M revenue), down from the prior year due to lower contribution margins on new contracts.

Material Changes Versus Prior Period

• Revenue Growth: Revenue increased 4% ($303,000) for the quarter and 6% ($685,000) for the six months compared to the same periods in 2004, driven by growth in the government contact center business.
• Profitability Shift: While the company reported a net profit of $228,036 for the quarter, it reported a net loss of $845,396 for the six months ended June 30, 2005, compared to a loss of $355,144 in the prior year. The six-month loss widened due to increased operating expenses.
• Expense Increases: Direct contract and operating costs rose 13% year-over-year for the six months, outpacing revenue growth. This was primarily due to lower contribution margins on the renewed Maryland state contract and increased depreciation from facility relocations.
• Segment Performance: InfoSpherix operating income decreased by $399,000 for the six-month period despite revenue growth, largely attributed to the 20% lower contribution rate on the new Maryland contract. BioSpherix revenue declined 41% year-over-year as the company discontinued marketing efforts for its "FlyCracker" pesticide.
• Cash Flow Improvement: Net cash provided by operating activities improved significantly to $193,011 in the first half of 2005, compared to a use of $847,262 in the same period of 2004.

Guidance, Outlook, Risks, and Unusual Items

• NASDAQ Compliance Risk: As of June 30, 2005, the company was $454,248 short of the $10 million stockholders' equity requirement for NASDAQ National Market listing. The company has until September 1, 2005, to comply. Failure to do so could result in delisting.
• Standby Equity Distribution Agreement (SEDA): On July 22, 2005, the company entered into a SEDA with Cornell Capital Partners to sell up to $4 million of common stock over two years to meet equity requirements. The registration statement was not yet effective at the time of filing.
• Contract Protests: The company filed an official protest regarding the U.S. Department of Agriculture's award of the National Recreation Reservation System (NRRS) contract to a competitor. The company's current National Park Service contract is extended through September 30, 2005, with a belief that it may be further extended during the transition.
• BioSpherix Development: Clinical trials for Naturlose (tagatose) as an anti-plaque agent did not show the desired effect in human studies, though the company is pursuing corrective suggestions. Research continues on extending the shelf life of blood products.
• Corporate Restructuring: Shareholders approved the incorporation of InfoSpherix as a wholly-owned subsidiary, expected to be completed by year-end.
• Accounting Changes: The company expects the adoption of FAS 123R in the first quarter of 2006 to have an adverse impact on future statements of operations due to the fair-value measurement of stock-based compensation.

Investor Verification Checklist

• NASDAQ Compliance Status: Verify if the company successfully raised the required equity by September 1, 2005, to avoid delisting from the NASDAQ National Market.
• SEDA Effectiveness: Confirm the status of the registration statement for the Standby Equity Distribution Agreement and whether shares have been sold under the facility.
• NRRS Contract Protest Outcome: Monitor the resolution of the protest against the USDA's award of the National Recreation Reservation System contract to ReserveAmerica.
• InfoSpherix Margin Recovery: Assess whether the company can improve contribution margins on the Maryland contract through volume expansion or cost efficiencies as management anticipates.
• BioSpherix Clinical Results: Review updates on the Naturlose clinical trials, particularly regarding the anti-plaque efficacy and blood shelf-life research.