Business Context and Reporting Period
This Form 10-Q covers Spherix Incorporated (formerly Biospherics Incorporated) for the quarterly period ended September 30, 2001. The company operates three segments: InfoSpherix Government, InfoSpherix Commercial, and BioSpherix. The filing notes that the events of September 11, 2001, had no material impact on operations during the third quarter.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2001 | Nine Months Ended Sept 30, 2001 |
|---|---|---|
| Revenue | $6,794,926 | $16,853,031 |
| Net Income | $1,436,635 | $1,568,846 |
| EPS (Diluted) | $0.13 | $0.14 |
| Operating Cash Flow | N/A | $68,798 |
| Cash and Equivalents | $4,531,672 (Sept 30, 2001) | N/A |
| Working Capital | $7,824,000 (Sept 30, 2001) | N/A |
| Debt (Bank Line of Credit) | $374,006 outstanding | N/A |
Segment Performance (Nine Months 2001):
- InfoSpherix Government: Revenue $13.5M; Operating Income $1.0M.
- InfoSpherix Commercial: Revenue $3.3M; Operating Income $0.99M.
- BioSpherix: Revenue $50k; Operating Loss $(0.52M).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 54% year-over-year for the three months ended Sept 30, 2001 ($6.8M vs $4.4M) and 17% for the nine-month period ($16.9M vs $14.4M).
- Profitability: Net income for the three months rose significantly to $1.4M from $0.44M in the prior year. However, nine-month net income decreased to $1.57M from $1.84M in 2000.
- Cash Flow: Net cash provided by operating activities dropped sharply to $69k for the nine months ended Sept 30, 2001, compared to $2.4M in the prior year. This was primarily due to a $2.5M increase in trade accounts receivable, attributed to the seasonal nature of the ReserveSuite business.
- Segment Shifts: InfoSpherix Government revenue grew 59% (nine months) driven by new contracts and a Federal Trade Commission contract modification. InfoSpherix Commercial revenue declined 43% (nine months) due to the conclusion of significant short-term pharmaceutical contracts in early 2000.
Outlook, Risks, and Management Commentary
- Fourth Quarter Outlook: Management anticipates operating at a loss in Q4 2001 due to the traditional year-end slowdown in the reservation/tourism business. The magnitude of the loss depends on securing additional commercial business.
- Liquidity: The company maintains a $1.5M bank line of credit with Bank of America, with $1.13M available as of Sept 30, 2001. Management believes cash on hand is sufficient for near-term capital needs.
- Future Revenue: Royalties from the D-tagatose licensing agreement with Arla Foods (formerly MDFI) are anticipated to begin in 2002. A $1M non-refundable advance is currently recorded as deferred revenue.
- Risks: The company relies heavily on government contracts with options extending beyond 2001. Commercial contracts are shorter-term and subject to substantial variation. The company has significant tax loss carryforwards, resulting in no income tax expense for 2001.
Investor Verification Checklist
- Receivables Quality: Verify the collectability of the $4.67M in trade accounts receivable, which increased significantly and drove the decline in operating cash flow.
- Contract Renewals: Confirm the exercise of options on major government contracts (excluding the FTC contract ending Q4 2001) to sustain revenue levels.
- BioSpherix Viability: Assess the timeline for profitability in the BioSpherix segment, which continues to generate operating losses despite increased FlyCracker sales.
- Q4 Performance: Monitor Q4 results to validate management's expectation of a seasonal operating loss.
- Debt Covenants: Ensure continued compliance with tangible net worth and cash flow coverage ratios required by the Bank of America credit agreement.