UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

(Mark one)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2006.
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

(Exact name of Registrant as specified in its charter)

 

 

 

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 x     No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o  Accelerated Filer o  Non-accelerated Filer x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

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 September 30, 2006
Common Stock, $0.005 par value		13,812,204 shares

 

 

 

 

Spherix Incorporated

Form 10-Q
For the Quarter Ended September 30, 2006

Index

				Page No.
Part I. Financial Information
Item 1.		Financial Statements (Unaudited)
		Consolidated Statements of Operations for the three-month and
		nine-month periods ended September 30, 2006 and 2005		3
		Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		4
		Consolidated Statements of Cash Flows for the nine-month periods
		ended September 30, 2006 and 2005		5
		Notes to Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial
		Condition and Results of Operations		8
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		13
Item 4.		Controls and Procedures		13
Part II. Other Information
Item 1a.		Risk Factors		14
Item 6.		Exhibits		14
Signatures				14

 

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Spherix Incorporated

 

Part I.  Financial Information

Item 1.    Financial Statements

Consolidated Statements of Operations
(Unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Revenue		$	7,252,642		$	6,705,302		$	20,757,096		$	19,204,071
Operating expense
Direct contract and operating costs		5,530,628			5,126,396			16,132,813			15,791,453
Selling, general and administrative expense		1,294,909			1,248,848			4,212,717			3,769,314
Research and development expense		440,915			41,284			722,654			211,806
Total operating expense		7,266,452			6,416,528			21,068,184			19,772,573
Income (loss) from operations		(13,810		)	288,774			(311,088		)	(568,502		)
Interest (expense) income, net		19,270			(3,836		)	42,120			8,044
Income (loss) before taxes		5,460			284,938			(268,968		)	(560,458		)
Income tax expense		15,000			—			35,000			—
Net income (loss)		$	(9,540	)	$	284,938		$	(303,968	)	$	(560,458	)
Net income (loss) per share, basic		$	—		$	0.02		$	(0.02	)	$	(0.05	)
Net income (loss) per share, diluted		$	—		$	0.02		$	(0.02	)	$	(0.05	)
Weighted average shares outstanding, basic		13,789,379			12,032,740			13,499,896			11,979,665
Weighted average shares outstanding, diluted		13,789,379			12,032,740			13,499,896			11,979,665

 

See accompanying notes to financial statements.

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Spherix Incorporated

 

Consolidated Balance Sheets

 

		Sept. 30, 2006 (Unaudited)			December 31, 2005
ASSETS
Current assets
Cash and cash equivalents		$	5,757,468		$	2,667,733
Short-term investments, Restricted		—			2,000,000
Trade accounts receivable, net of allowance for doubtful accounts of $15,000		2,869,809			2,139,061
Other receivables		25,499			271,287
Prepaid expenses and other assets		523,038			582,279
Total current assets		9,175,814			7,660,360
Property and equipment, net of accumulated depreciation of $7,125,293 and $6,077,074		3,866,780			4,603,032
Patents and other intangible assets, net of accumulated amortization of $521,704 and $402,026		735,193			854,871
Total assets		$	13,777,787		$	13,118,263
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Bank line of credit		$	—		$	1,449,318
Accounts payable and accrued expenses		1,096,791			1,950,584
Accrued salaries and benefits		904,088			1,104,102
Capital lease obligations		138,064			16,645
Income taxes payable		35,000			—
Total current liabilities		$	2,173,943		$	4,520,649
Capital lease obligations		109,602			10,810
Deferred compensation		515,602			511,325
Deferred rent		251,825			196,259
Total liabilities		3,050,972			5,239,043
Commitments and contingencies		—			—
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; 13,892,642 and 12,448,456 issued and 13,812,204 and 12,368,018 shares outstanding at September 30, 2006 and December 31, 2005, respectively		69,463			62,242
Paid-in capital in excess of par value		26,665,451			23,521,109
Treasury stock, 80,438 shares at cost, at September 30, 2006 and December 31, 2005		(464,786		)	(464,786		)
Accumulated deficit		(15,543,313		)	(15,239,345		)
Total stockholders’ equity		10,726,815			7,879,220
Total liabilities and stockholders’ equity		$	13,777,787		$	13,118,263

 

See accompanying notes to financial statements.

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Spherix Incorporated

 

Consolidated Statements of Cash Flows
(Unaudited)

 

		Nine Months Ended  September 30,
		2006			2005
Cash flows from operating activities
Net loss		$	(303,968	)	$	(560,458	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,938,678			1,959,615
Loss on disposal of assets		8,384			1,499
Stock-based compensation		77,682			23,288
Changes in assets and liabilities:
Trade accounts receivable		(730,748		)	(778,241		)
Other receivables		245,788			117,376
Prepaid expenses and other assets		59,241			118,781
Accounts payable and accrued expenses		(319,506		)	(356,843		)
Taxes payable		35,000			—
Deferred rent		55,566			(38,180		)
Deferred compensation		4,277			—
Deferred revenue		—			(34,632		)
Net cash provided by operating activities		1,070,394			452,205
Cash flow from investing activities
Purchases of property and equipment		(1,022,026		)	(813,643		)
Restricted investments		—			700,000
Proceeds from maturity of certificate of deposit		2,000,000			—
Net cash provided by (used in) investing activities		977,974			(113,643		)
Cash flow from financing activities
Net change in bank line of credit		(1,449,318		)	(170,926		)
Net change in book overdraft		(519,580		)	265,471
Payments on capital lease obligations		(63,616		)	(14,257		)
Proceeds from issuance of common stock		3,073,881			—
Net cash provided by financing activities		1,041,367			80,288
Net increase in cash and cash equivalents		3,089,735			418,850
Cash and cash equivalents, beginning of period		2,667,733			3,475,846
Cash and cash equivalents, end of period		$	5,757,468		$	3,894,696

 

See accompanying notes to financial statements.

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Spherix Incorporated

 

 

Notes to Consolidated Financial Statements
(Unaudited)

1.             Basis of Presentation

On January 1, 2006, Spherix transferred the assets of its InfoSpherix division to a new wholly-owned subsidiary, InfoSpherix Incorporated (“InfoSpherix”).  The activities of the “BioSpherix” Division continue to operate through Spherix Incorporated.  The consolidated financial statements include the accounts of both Spherix Incorporated and InfoSpherix Incorporated (collectively, the “Company”).  All intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements of the Company are unaudited and do not include all of the information and disclosures generally required for annual financial statements.  In the opinion of management, the statements contain all material adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2006, the results of its operations for the three-month and nine-month periods ended September 30, 2006 and 2005, and its cash flows for the nine-month periods ended September 30, 2006 and 2005.  This report should be read in conjunction with the Company’s Annual Report on Form 10-K, which does contain the complete information and disclosure for the year ended December 31, 2005.

2.             Use of Estimates and Assumptions

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period.  Accordingly, actual results could differ from those estimates and assumptions.

3.             Net Income Per Share

Basic net income (loss) per common share has been computed by dividing net income by the weighted-average number of common shares outstanding during the year.  Diluted net 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.  Diluted net loss per common share has been computed by dividing net loss by the weighted-average number of common shares outstanding without an assumed increase in common shares outstanding for common stock equivalents, as common stock equivalents are antidilutive.  Common stock equivalents, which consist of stock options and warrants that are assumed likely to be exercised, were 0  for the three and nine months ended September 30, 2006, and 0 and 706 for the three and nine months ended September 30, 2005, respectively.  Total options and warrants outstanding at September 30, 2006 and 2005, were 533,200 and 1,102,273, respectively.

4.             Stockholders Equity

On March 9, 2006, in exchange for the Company’s agreement to reduce the exercise price to $2.04 per share, an institutional investor (“the Investor”) agreed to exercise the remainder of its warrants for the purchase of 585,973 shares of common stock for total proceeds of approximately $1.2 million.  In connection with these warrants, the Investor agreed that it would 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, nor would it knowingly sell shares to anyone to the extent that their holdings in the Company would exceed 4.9% of the outstanding Common Stock.  The warrants and shares of Common Stock were issued in transactions exempt from Registration pursuant to Section 4(2) of the Securities Act.  The Company has registered the shares issuable upon exercise of the warrants for resale by the institutional Investor.

During the nine months ended September 30, 2006, the Company sold 819,453 shares for an additional $1.9 million in proceeds under the July 22, 2005, Standby Equity Distribution Agreement (“SEDA”).  At September 30, 2006, the remaining maximum amount available for future draws under the SEDA was $1.7 million.

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5.             Accounting for Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (FAS 123R), which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in the consolidated statements of operations and comprehensive loss.  The Company uses a Black-Scholes option pricing model and has elected to use the modified prospective transition method and, therefore, has not restated results for prior periods.  At the time the Company adopted FAS 123R, there were no unvested options outstanding.  For the three and nine months ended September 30, 2006, the Company realized $6,933 and $17,332 in stock based compensation expense relating to 59,000 stock options awarded in February 2006.  The effect of adopting FAS 123R increased the loss from operations, the loss before taxes, and the net loss by $6,933 and $17,332 for the three and nine months ended September 30, 2006, and had no effect on basic and diluted earnings per share, net cash flow from operations, or net cash flow from financing activities.

For the years prior to January 1, 2006, the Company elected the “disclosure only” presentation under Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation” (FAS 123) and, consequently, did not record compensation expense relating to employee option grants provided that the exercise prices were at or above fair value of the Company’s common stock on the grant date.  The following table summarizes the pro-forma net loss and net loss per share resulting from applying FAS 123.

				For the Three			For the Nine
				Months Ended			Months Ended
				September 30,			September 30,
				2005			2005
Net income (loss), as reported				$	284,938		$	(560,458	)
Add: stock-based employee compensation expense included in reported net income (loss)				7,763			23,288
Less: total stock-based employee compensation expense determined under fair-value based method for all awards, net of tax effects				(69,640		)	(219,959		)
Pro forma net income (loss)				$	223,061		$	(757,129	)
Net income (loss) per share - basic		As Reported		$	0.02		$	(0.05	)
		Proforma		$	0.02		$	(0.07	)
Net income (loss) per share - diluted		As Reported		$	0.02		$	(0.05	)
		Proforma		$	0.02		$	(0.07	)

 

A summary of option activity under the Company’s employee stock option plan for the nine months ended September 30, 2006, is presented below:

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Options		Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		507,200		$	7.82
Granted		59,000		$	2.20
Exercised		—		$	—
Expired or forfeited		(33,000	)	$	5.38
Outstanding at end of year		533,200		$	7.26		2.5		$	—
Exercisable at September 30, 2006		499,200		$	7.61		2.4		$	—

 

As of September 30, 2006, there were approximately 34,000 unvested options to purchase common stock under the plans.  The aggregate intrinsic value of outstanding stock options at September 30, 2006 was $0 as the exercise price of stock options was in excess of the fair value of the Company’s common stock.  An estimated compensation cost of $100,000 is expected to be recognized over four years.

The Company used the following assumptions in the Black-Scholes calculation used to measure the fair value of stock-based compensation in accordance with FAS 123R.

 

6.             Reclassification

The Company no longer presents depreciation and amortization as a separate line item in its consolidated statement of operations.  Such amounts are now classified as “direct contract and operation costs” and as “selling, general and administrative expense.”  Prior period amounts have been reclassified to conform to the current presentation.

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, 2005, and the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31 and June 30, 2006, 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 Forms 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 statement concerning forward-looking statements.

Overview

The Company operates via two principal segments, InfoSpherix and BioSpherix.  InfoSpherix provides contact center information and reservations services for government and industry.  BioSpherix develops proprietary products for commercial applications.  On January 1, 2006, Spherix transferred the assets of its InfoSpherix Division to a new

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wholly-own subsidiary, InfoSpherix Incorporated (“InfoSpherix”).  The activities of the “BioSpherix” Division continue to operate through Spherix Incorporated.  Substantially all of the consolidated revenue is generated from InfoSpherix.

Substantially all of InfoSpherix revenue is generated from government customers.  InfoSpherix has developed a niche in providing campground and other reservation services via its ReserveWorld business line.  Reservation contracts made up more than 60% of the Company’s revenue in 2005 and for the nine months ended September 30, 2006, and InfoSpherix is now one of only two major suppliers of campground reservation services in the U.S.  The reservation services contracts have revenue streams that are historically greater in the spring and summer months when vacation planning is more prevalent.  These reservation contracts have certain fixed costs that continue throughout the year such as depreciation, telephone and computer related service and maintenance contracts, as well as minimum staffing requirements.  These contracts also incur certain costs in advance of the peak seasons in order to staff up and train the work force that will be needed during the peak seasons.

In October the Company agreed to a $6 million settlement to end its longstanding legal dispute with the U.S. Department of Agriculture over the government’s award of the National Recreation Reservation Service (NRRS) contract to ReserveAmerica, a Ticketmaster subsidiary.  The Company’s National Park Service contract is scheduled to end December 31, 2006.  The National Park Service contract contributed $4.0 million and $3.4 million in revenue for the year ended December 31, 2005 and for the nine months ended September 30, 2006, respectively.

BioSpherix engages in product development, notably tagatose.  The exclusive rights to manufacture tagatose have been licensed to Arla Foods Ingredients amba (“Arla”) (formerly MD Foods Ingredients amba, “MDFI”) of Denmark, along with the exclusive rights to sell tagatose for food and beverage uses.  To date, the Company has received no significant royalties.  Future royalties depend on sales of this product by the licensee, which are outside of the control of the Company.  Arla believes it has produced a sufficient backlog of inventory to satisfy its needs, and ours, based on current demand, and accordingly has stopped production.  Spherix is pursuing other production options.

The Company retains rights to sales of the non-food uses of tagatose, for which purposes the Company created the brand name “Naturlose®”.  The Company has patented a variety of health and medical uses for its product.  It presently is developing two such potential uses: 1) treatment of type 2 diabetes, and 2) anti-plaque toothpaste.  The Company has expended and will continue to expend significant sums on testing Naturlose as a potential drug for treatment of type 2 diabetes.

Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2005

Revenue and Direct Contract and Operating Costs

Revenue for the three and nine months ended September 30, 2006, increased $547,000 (8%) and $1.6 million (8%), respectively, in relation to the same periods in 2005.  The increase was primarily related to the new Pennsylvania Department of Natural Resources contract, which began operations in January 2006.  In comparison, direct contract and operating costs increased by $404,000 (8%) and $341,000 (2%), respectively, in relation to those of the prior year.  The additional costs from the new Pennsylvania contract were partly offset in the first half of the year by unrelated cost reductions from other contracts.

Selling, General and Administrative

Selling, general and administrative expense for the quarter were consistent with those of the prior year and increased $443,000 (12%) for the nine months ended September 30, 2006, in relation to the same periods in 2005.  Legal fees related to the Company’s Court of Federal Claims suit against the USDA Forest Service concerning the NRRS contract were a significant part of the increase between years.  See “Trends and Outlooks”.

Research and Development

See “BioSpherix” below.

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InfoSpherix

 

InfoSpherix revenue for the three and nine months ended September 30, 2006, increased $549,000 (8%) and $1.6 million (8%), while direct cost and operating expense remain relatively consistent with those of the prior year.  As noted above, the revenue increase was primarily related to the new Pennsylvania Department of Natural Resources contract, which began operations in January 2006.  The additional costs from the new Pennsylvania contract were partly offset by unrelated cost reductions on other contracts.

BioSpherix

 

The BioSpherix Division is centering its efforts on the development of tagatose as a drug to treat type 2 diabetes.  Other health and medical uses demonstrated by BioSpherix are also under development, for which purposes the product has been branded Naturlose®.  The exclusive rights to sell tagatose for use in foods, and to manufacture it have been licensed to Arla Foods Ingredients amba (“Arla”) (formerly MD Foods Ingredients amba, “MDFI”) of Denmark.  Future royalties depend on sales of this product for food use by the licensee, which are outside of the control of the Company.

The Company has patented a variety of health and medical uses for its product.  It presently is developing two such potential uses: 1) treatment of type 2 diabetes, and 2) anti-plaque toothpaste.

The decrease in BioSpherix revenue between years was the result of a one-time sale of Naturlose in 2005 for investigational purposes.

In late 2005, the FDA approved BioSpherix’s Phase 1 and Phase 2 trials for Naturlose as a drug to treat diabetes.  It also permitted the Phase 3 clinical trial for the product.  Since then, BioSpherix’s research and development (R&D) activity has been focused primarily on planning and instituting the Phase 3 trial. The Phase 3 clinical trial is the last major test, if successful, before requesting drug approval.  The Company has negotiated two agreements with contract research organizations (CRO) to conduct the trial, and has retained Environ International, an FDA regulatory consultant, to guide the trial.

Following a visit to the overseas headquarters of a CRO, a contract was signed for the Phase 3 trial.  Preliminary work for the trial began in July 2006, and the Company has completed the dose range-finding study and will now proceed with recruiting patients for the trial, which will take place in Australia and the United States.  The first participants are expected to begin the Phase 3 clinical trial by April 2007.  The trial could be completed in as little as two years if successful.  More than 300 subjects from the United States and abroad, representing the demographic mix in the U.S., will receive oral doses of Naturlose to test its ability to treat type 2 diabetes.  A Phase 3 clinical trial, which gathers evidence regarding effectiveness and safety, is needed to evaluate the overall benefit-risk relationship of new drugs proposed to the FDA.  The Company believes its chances for a successful outcome are enhanced by the widely demonstrated safety of the product; lack of safety being the primary cause for failure of most drug candidates.

The $400,000 and $511,000 increase in research and development costs during the 2006 three-month and nine-month periods are largely due to the above described efforts to obtain approval for Naturlose as a drug to treat diabetes. 

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Spherix Incorporated intends to support the BioSpherix Division’s R&D programs through its existing cash and cash equivalents, as well as potential partnerships and, if needed, proceeds from the issuance of additional stock.

Liquidity and Capital Resources

Working capital as of September 30, 2006 was $7 million, an increase of $3.9 million from December 31, 2005.  The increase included $3.1 million from the proceeds raised by the Company through the issuance of common stock.  As of September 30, 2006, $2.5 million of the working capital was at Spherix and $4.5 million of the working capital was at InfoSpherix.

On March 31, 2006, the Company entered into a new agreement with Bank of America (“the Bank”) to establish a line-of-credit (“New Agreement”) for its subsidiary, InfoSpherix Incorporated, with the outstanding borrowings under the old line of credit transferred to the new agreement.  Management considers the establishment of this credit facility for the subsidiary necessary to ensure timely cash flow for the subsidiary’s operations.  The New Agreement, which matures March 31, 2007, provides for borrowings up to $1.5 million, is collateralized by the subsidiary’s accounts receivables and equipment, and contains covenants on tangible net worth and funded debt to EBITDA ratios.  Such covenants could have a limiting effect on the amount of cash that the subsidiary can advance to Spherix.  The interest rate under the Agreement is based on the LIBOR daily floating rate plus 3% (approximately 8.4% at September 30, 2006).  The Company had no outstanding borrowings under the Agreement at September 30, 2006.  The total amount available for future advance to the subsidiary was $1.5 million under the Agreement at September 30, 2006.

As the BioSpherix Division has no ongoing revenue stream and expects to expend significant sums in an effort to bring commercial products to market, Spherix Incorporated intends to support the BioSpherix Division’s R&D programs through its existing cash and cash equivalents, as well as potential partnerships and/or proceeds from the issuance of additional stock.  In addition, subject to Bank restrictions as described above, InfoSpherix may provide financial support for BioSpherix’s development efforts.

Where practicable, InfoSpherix Incorporated intends to finance its furniture and equipment needs related to the start-up costs of new contracts through financing or leasing arrangements.

Cash flow for the nine months ended September 30, 2006, reflects a net cash inflow of $3.1 million, consisting of $1.1 million from operating activities, $1 million from investing activities, and $1 million from financing activities.  The $618,000 increase in cash provided by operating activities in 2006 from that of the prior year is the result of continued growth of the Company’s reservation business line in combination with major cost reductions that have taken effect on other contracts.  The transfer of funds from the maturity of a CD to a money market fund resulted in the increase in cash provided by investing activities between years.  The change in financing activities between years was a direct result of the proceeds received from the issuance of stock through the SEDA, the exercise of warrants during the nine months ended September 30, 2006 and the subsequent reduction of the line of credit balance.

At September 30, 2006, the remaining maximum amount available for future draws under the SEDA was $1.7 million.  The Company must file a post-effective amendment to its registration statement to make any further draws on this SEDA.

Trends and Outlooks

InfoSpherix

·                  In October 2006 the Company agreed to a $6 million settlement to end its longstanding legal dispute with the U.S. Department of Agriculture over the government’s award of the National Recreation Reservation Service contract to ReserveAmerica, a Ticketmaster subsidiary.  The Company’s National Park Service contract is scheduled to end December 31, 2006.  The National Park Service contract contributed $4.0 million and $3.4 million in revenue for the year ended December 31, 2005 and for the nine months ended September 30, 2006, respectively.  Accordingly, the Company is looking to either replace this revenue or scale back its costs to account for this loss of revenue.

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·                  In January 2006, the InfoSpherix business started operating as a wholly-owned subsidiary of Spherix Incorporated under the name “InfoSpherix Incorporated”.

·                  In 2006, the Company won the re-compete on its park reservation services to the State of Indiana for an additional four years and recently won two new state park reservation contracts and will be a subcontractor on another.  In 2005, the Company won a new five-year contract with the State of Pennsylvania for park reservations, which began operation in January 2006.

·                  InfoSpherix was successful in increasing its sales backlog between December 31, 2004 and December 31, 2005, to a record level of $72 million.  The increase was from the award of new government contracts, including the renewal of the Michigan reservation contract and the contracts acquired from Daksoft, Inc.

·                  Since 1998, InfoSpherix has grown its government park reservation business from one contract to 20 government reservation contracts.  InfoSpherix’s reservation business accounted for over 60% of the Company’s revenue in 2005 and for the nine months ended September 30, 2006.  InfoSpherix is now one of only two major suppliers of Government campground reservation services in the U.S.

·                  In October 2005, the operations of the State of Maryland contract were moved from the Beltsville facility to the Cumberland facility, where the Company has been able to operate the contract more cost-efficiently.  The Company is currently in negotiations to relocate its Cumberland operations to another facility in the area.

·                  On February 8, 2006, the Company signed an agreement to lease 12,805 square feet of facility space in Indiana effective March 15, 2006, with an additional 5,796 square feet to be leased beginning January 1, 2007, for use as a call center to replace the current operations in South Dakota and to provide InfoSpherix with additional space for growth.  The facility lease in South Dakota has been extended through December 31, 2006, to provide a transition during the Company’s peak reservation months.

·                  The newly-formed InfoSpherix Incorporated subsidiary has entered into its own bank line of credit.  The line contains covenants on tangible net worth and funded debt to EBITDA ratios.  Such covenants could have a limiting effect on the amount of cash that can be transferred to Spherix.  The InfoSpherix subsidiary also intends to finance its furniture and equipment needs related to the start-up costs of new contracts through financing or leasing arrangements.

BioSpherix

·                  The BioSpherix Division’s emphasis is on clinical trials to promote Naturlose to treat type 2 diabetes.  The Phase 3 clinical trial for use of Naturlose to treat type 2 diabetes could be completed in as little as two years if successful.  The Company has completed the dose range-finding study and will now proceed with recruiting patients for the trial, which will take place in Australia and the United States.  The first participants are expected to begin the Phase 3 clinical trial by April 2007.  With its established safety record and its acceptance as Generally Recognized As Safe (GRAS) by the FDA, the product starts its trial in an advantageous position since most candidate drugs that fail do so because of safety problems.

·                  Work continues on the use of Naturlose as an anti-plaque agent in toothpaste.

·                  The Division’s outsourced project seeking to establish the use of Naturlose to extend the shelf-life of blood fractions and various other medical products is undergoing re-evaluation to determine its future direction.

·                  Prototypes of Naturlose-based mouthwash, cough syrup, and a fiber digestive aid have been developed by BioSpherix.

·                  Other projects are in the conceptual stage.

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·                  The Company is negotiating with the University of Maryland School of Dentistry to conduct a trial of Naturlose toothpaste formulated by the Company in an attempt to establish an anti-plaque claim for the toothpaste.  The clinical trial is expected to start in 2007.

·                  Our entitlement to royalties for tagatose food and beverage use is presently dependent on the success of Arla, our licensee.  Arla believes it has produced a sufficient backlog of inventory to satisfy its needs, and ours, based on current demand, and accordingly has stopped production.  Spherix is pursuing other production options.

·                  BioSpherix has purchased sufficient quantities of tagatose from Arla for use in the trials.

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 September 30, 2006, the Company did not have any borrowings on its variable rate debt and has no fixed rate indebtedness.  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 funds, which generally mature in 30 days, or money-market 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 September 30, 2006, cash and cash equivalents available for investment, a one-percent change in interest rates would impact net interest income by approximately $30,000.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosure.  These controls and procedures are based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act.  Rules adopted by the SEC require that we present the conclusions of the Chief Executive Officer/Chief Financial Officer about the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report.

Limitations on the Effectiveness of Controls.  Management, including our Chief Executive Officer/Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and fraud.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.  Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Periodic Evaluation and Conclusion.   The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving their objective pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer/Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.  There were no significant changes in internal controls during the latest quarter over financial reporting that materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

Part II.  Other Information

Item 1a.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A Risk Factors” in our Form 10-K for the year ending December 31, 2005, which could materially affect our business, financial condition, and results of operations.  The risks described in our Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6.  Exhibits

(a)                      Exhibits

 

Signatures

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
	(Registrant)
Date:  November 10, 2006		By:		/s/ Richard C. Levin
				Richard C. Levin
				Chief Executive Officer, President, and Chief Financial Officer

 

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