<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] 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
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BIOSPHERICS-Registered Trademark- INCORPORATED
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(Exact name of Registrant as specified in its charter)
Delaware 52-0849320
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12051 Indian Creek Court, Beltsville, Maryland 20705
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(Address of principal executive offices)
301-419-3900
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(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 [ ]
Indicate the number of shares outstanding of each of the Registrant's class of
Common Stock, as of the latest practicable date.
Class Outstanding as of March 31, 1998
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Common Stock, $0.005 par value 8,788,584 shares
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
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Biospherics Incorporated
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Form 10-QSB
For the Quarter Ended March 31, 1998
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
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<S> <C>
Item 1. Financial Statements (Unaudited)
Statements of Operations for the three-month periods ended
March 31, 1998 and 1997............................................................................ 3
Balance Sheets as of March 31, 1998 and December 31, 1997.......................................... 4
Statements of Cash Flows for the three-month periods ended
March 31, 1998 and 1997............................................................................ 5
Notes to Financial Statements...................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................... 10
Signatures .................................................................................................. 11
</TABLE>
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<PAGE>
Biospherics Incorporated
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Part I. Financial Information
Item 1. Financial Statements
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue
Contract revenue $3,527,923 $3,519,774
Licensing fee revenue - 750,000
---------- ----------
Total revenue 3,527,923 4,269,774
---------- ----------
Operating expense
Direct contract and operating costs 2,458,974 2,532,843
Selling, general and administrative expense 891,542 823,490
Research and development expense 64,184 93,892
Depreciation and amortization expense 201,878 184,312
---------- ----------
Total operating expense 3,616,578 3,634,537
---------- ----------
(Loss) income from operations (68,655) 635,237
---------- ----------
Other income
Interest, net 10,654 2,218
Other, net - 200
---------- ----------
10,654 2,418
---------- ----------
(Loss) income before income taxes (78,001) 637,655
Income tax (benefit) expense (28,990) 223,179
---------- ----------
Net (loss) income $ (49,011) $ 414,476
---------- ----------
---------- ----------
Net (loss) income per share - basic $ (0.01) $ 0.05
---------- ----------
---------- ----------
Net (loss) income per share - diluted $ (0.01) $ 0.04
---------- ----------
---------- ----------
Weighted average shares outstanding - basic 8,788,584 7,930,956
---------- ----------
---------- ----------
Weighted average shares outstanding - diluted 8,788,584 9,918,160
---------- ----------
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</TABLE>
See accompanying notes to financial statements.
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Biospherics Incorporated
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Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
ASSETS (Unaudited)
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<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,338,319 $ 5,228,773
Trade accounts receivable, net of allowance for doubtful
accounts of $70,000 and $85,000 2,109,821 1,425,597
Costs and estimated earnings in excess of billings on contracts 48,493 10,750
Other receivables 100,815 110,313
Deferred income taxes 131,059 107,996
Prepaid expenses and other assets 399,927 426,529
----------- -----------
Total current assets 7,128,434 7,309,958
Property and equipment, net of accumulated depreciation of
$1,866,749 and $1,668,189 4,823,713 3,417,173
Deferred income taxes 373,457 367,530
Patents, net of accumulated amortization of $75,753 and $72,435 133,688 137,006
Restricted cash-security deposits 27,408 27,408
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Total assets $12,486,700 $11,259,075
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ 1,010,609 $ 10,000
Accounts payable and accrued expenses 1,875,106 1,486,035
Accrued salaries and benefits 709,183 579,668
Notes payable 338,882 353,442
Capital lease obligations 150,744 131,743
Income taxes payable 70,226 215,226
Deferred rent 16,865 117,259
Deferred revenue 228,732 175,275
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Total current liabilities 4,400,347 3,068,648
Notes payable 551,940 628,878
Capital lease obligations 443,763 403,891
Deferred compensation 19,261 18,869
Deferred revenue 1,000,000 1,000,000
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Total liabilities 6,415,311 5,120,286
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Commitments and contingencies
Redeemable common stock 325,710 325,710
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Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.005 par value, 18,000,000 shares authorized;
8,829,190 issued, 8,788,584 shares outstanding, of which
3,213,506 shares are classified as redeemable common stock 28,078 28,078
Paid-in capital in excess of par value 4,384,815 4,403,204
Treasury stock, 40,606 shares, at cost (267,369) (267,369)
Retained earnings 1,600,155 1,649,166
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Total stockholders' equity 5,745,679 5,813,079
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Total liabilities and stockholders' equity $12,486,700 $11,259,075
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</TABLE>
See accompanying notes to financial statements.
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Biospherics Incorporated
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Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $ (49,011) $ 414,476
Adjustment to reconcile net (loss) income to net cash (used for)
provided by operating activities:
Depreciation and amortization 201,878 184,312
Loss on sale or writedown of assets - 120,716
Provision for uncollectible accounts receivable (15,000) 5,067
Changes in assets and liabilities:
Trade accounts receivable (669,224) (595,818)
Costs and estimated earnings in excess of billings on contracts (37,743) (91,478)
Other receivables 9,498 28,594
Deferred income tax asset (28,990) -
Prepaid expenses and other assets 26,602 12,152
Accounts payable and accrued expenses 468,029 81,868
Accrued salaries and benefits 129,515 87,408
Income taxes payable (145,000) 180,679
Deferred rent (100,394) (32,847)
Deferred revenue 53,457 1,148,102
Deferred compensation 392 -
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Net cash (used for) provided by operating activities (155,991) 1,543,231
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Cash flows from investing activities
Purchases of property and equipment (1,514,805) (54,961)
Additions to patent costs - (1,446)
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Net cash used for investing activities (1,514,805) (56,407)
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Cash flows from financing activities
Net change on bank line of credit 1,000,609 275,000
Net change in book overdraft (78,958) 66,730
Payments on notes payable (91,498) (26,321)
Payments on capital lease obligations (31,422) -
Proceeds from issuance of common stock - 112,288
Cost of issuance of common stock (18,389) -
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Net cash provided by financing activities 780,342 427,697
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Net (decrease) increase in cash and cash equivalents (890,454) 1,914,521
Cash and cash equivalents, beginning of period 5,228,773 796,113
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Cash and cash equivalents, end of period $ 4,338,319 $2,710,634
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</TABLE>
See accompanying notes to financial statements.
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Biospherics Incorporated
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Notes to Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim financial statements of Biospherics Incorporated
(the "Company") do not include all of the information and disclosures generally
required for annual financial statements and are unaudited. In the opinion of
management, the accompanying unaudited financial statements contain all material
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's financial position as of March 31, 1998, and the results of
its operations and its cash flows for the three-month periods ended March 31,
1998 and 1997. This report should be read in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
2. Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share. Basic
earnings (loss) per common share have been computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
year. Diluted earnings (loss) per common share have been computed by dividing
net income (loss) by the weighted-average number of common shares outstanding
plus an assumed increase in common shares outstanding for dilutive securities.
Common stock equivalents are omitted from the calculation when their inclusion
would have an anti-dilutive effect. Net income (loss) as reported is available
to common stockholders. Dilutive securities consist of options and warrants to
acquire common stock for a specified price and their dilutive effect is measured
using the treasury method. Earnings per share for all other periods presented
have been restated to conform to SFAS No. 128.
The following table reconciles the weighted average number of common
shares outstanding during each period for basic earnings (loss) per share with
the comparable amount for diluted earnings (loss) per share.
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Weighted average shares outstanding for basic earnings (loss) per share 8,788,584 7,930,956
Weighted average dilutive common stock equivalents - 1,987,204
--------- ---------
Weighted average shares and common stock equivalents
outstanding for dilutive earnings (loss) per share 8,788,584 9,918,160
--------- ---------
--------- ---------
</TABLE>
3. Deferred Revenue
Deferred revenue includes a $1,000,000 non-refundable advance against
future royalties from the D-tagatose licensing agreement with MD Foods
Ingredients amba of Denmark. The advance will be recoverable at 50% of such
annual royalties. As commercialization of D-tagatose is not anticipated prior to
the year 2000, the deferred revenue has accordingly been classified as
noncurrent.
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Biospherics Incorporated
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Notes to Financial Statements
(Unaudited)
4. Private Placement
On December 12, 1997, the Company sold 375,000 units for $3 million (each
unit consisted of two shares of common stock and two warrants with exercise
prices of $4.00 and $4.50, respectively) in a private offering to a single
institutional investor. Net of offering costs of $330,687 ($18,389 of which was
recorded in 1998), the sale resulted in proceeds to the Company of $2,669,313.
The transaction was effected in reliance upon the exemption from securities
registration afforded by the provisions of Regulation D, as established by the
U.S. Securities and Exchange Commission ("SEC") and the Securities Act of 1933.
The warrants are exercisable for a three-year period after the date of closing.
The Company filed a Registration Statement on Form S-3 with the SEC (effective
date March 30, 1998) for the resale of all registrable securities covered by
this transaction.
5. Reclassification
Certain costs of sales, previously reported as direct contract and
operating costs, have been reclassified to selling, general and administrative
expense in order to conform with the current year presentation. The effect of
this reclassification was an increase in selling, general and administrative
expense of $146,250 and a corresponding decrease in direct contract and
operating costs for the three months ended March 31, 1997.
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<PAGE>
Biospherics Incorporated
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended March 31, 1998 and 1997
Certain statements in this Quarterly Report on Form 10-QSB 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 risk
and uncertainties, the Company's actual results could differ materially.
The Company reported a net loss of $49,011 ($0.01 per share, diluted) on
sales of $3.5 million for the first quarter of 1998 compared with net income of
$414,476 ($0.04 per share, diluted) on sales of $4.3 million in the same period
of 1997. Results for 1997 included a $750,000 payment from MD Foods Ingredients
amba of Denmark ("MD Foods") under the terms of the September 1996 Licensing
Agreement ("Licensing Agreement").
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Information Services Division 1998 1997
- ------------------------------------- ---------- ----------
<S> <C> <C>
Revenue $3,481,000 $3,480,000
Operating expense 3,543,000 3,535,000
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(Loss) from operations $ (62,000) $ (55,000)
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BioTech Division
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Revenue $ 47,000 $ 790,000
Operating expense 74,000 100,000
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(Loss) income from operations $ (27,000) $ 690,000
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</TABLE>
The Information Services Division's results of operations for the first
quarter of 1998 were consistent with the corresponding prior year period. A
first quarter decrease in revenue from commercial contracts was offset by a
corresponding increase in revenue from government programs. Decreases in direct
contract and operating costs from 72% of sales in 1997 to 70% of sales in the
current quarter were due in part to efficiencies gained through the Company's
investment in upgrading its information and telecommunication systems. The cost
of the equipment will be reflected in increased depreciation expense over the
remainder of the current year and continuing over the estimated useful life of
the related systems. The increase in revenue from government programs is
expected to continue, including the Company's initiation of service on March 15,
1998, under its National Park Reservation Service contract with the Department
of the Interior. While the Company expects a further, temporary reduction in
revenue from its commercial business as a result of the wind-up of a contract
from a major pharmaceutical company, the Company has several new commercial
contracts under negotiation.
First quarter revenue from the BioTech Division decreased $743,000 in
1998 from that of 1997. Results for 1997 included the second of two $750,000
payments from MD Foods under the terms of the Licensing Agreement. The Company
continues to provide technical support to MD Foods to effect the
commercialization of D-tagatose. The Company will receive approximately $200,000
per year for these technical support services. The Company also received an
additional payment aggregating $1,000,000 in the first quarter of 1997 under the
Licensing Agreement representing a non-refundable advance against future
royalties. This payment is classified as noncurrent deferred revenue in the
balance sheet. Research and development costs for the first quarter of 1998
decreased from those of the prior year as a result of lower levels of
development costs and expenditures associated with D-tagatose. All costs
associated with the FDA approval for commercialization of D-tagatose will be
borne by MD Foods.
General and administrative expenses ("G&A") for the first quarter
increased $68,052 from $823,490 in 1997 to $891,542 in 1998. This 8 percent
increase was due to start-up costs associated with the expansion of the
healthcare information services business and increased sales and marketing
efforts. As mentioned earlier, the Company anticipates increased revenues from
government contracts as well as commercial/healthcare related programs over the
remainder of the year.
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<PAGE>
Biospherics Incorporated
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Liquidity and Capital Resources
During 1997, the Company renewed its Loan Agreement (the "Agreement")
with NationsBank N.A. (the "Bank"). The Agreement, which expires on May 31,
1998, provides for borrowing up to $2 million, subject to advance rates as
defined in the Agreement. Outstanding borrowing under the Agreement aggregated
$1,010,609 at March 31, 1998, and is collateralized by the Company's accounts
receivable. The interest rate is the Bank's prime rate plus .75% per annum. The
Company anticipates that it will be able to extend the Agreement for an
additional twelve (12) month period; further, the Company may seek to convert
some of the aggregate amount outstanding under the Agreement to a term loan
basis.
Also during 1997, the Company secured an additional commitment from the
Bank to assist in financing equipment purchases related to potential new
contracts. This arrangement consists of a series of loans for the acquisition of
computer systems and related telecommunication equipment not to exceed a maximum
aggregate of $1 million. Additional terms include repayment of each loan in
thirty-six (36) equal monthly installments at a fixed interest rate equal to the
Treasury Index plus 275 basis points. Outstanding borrowing under this
commitment aggregated $438,838 at March 31, 1998, and is collateralized by the
equipment purchased.
In October 1997, the Company signed a $500,000 Promissory Note (the
"Note") with ORIX USA Corporation ("ORIX") to finance the acquisition of
telecommunication software to be used in the Company's call center operations.
Repayment of the Note will consist of thirty-five (35) equal monthly principal
and interest payments of $14,012 with a final payment of $114,012 due on October
15, 2000. Outstanding borrowings under this Note aggregated $451,984 at March
31, 1998. The Note is collateralized by certain telemanagement software licensed
to the Company by Genesys Telecommunications Laboratories, Inc. and has an
interest rate of 11% per annum.
The Company has taken steps to expand its traditional information
services business to provide demand management information services ("Demand
Management"). As of March 31, 1998, the Company has expended approximately
$686,000 in pursuit of this opportunity. Efforts are moving ahead with plans to
establish CQHealth, Biospherics' newly-formed healthcare division, as a
wholly-owned subsidiary of the Company. At present, the Company has decided not
to issue an equity interest in such subsidiary to an outside physicians group.
Demand Management services are currently being marketed by the Company and, on
April 1, 1998, initial services commenced under its first Demand Management
program for certain employees of Citibank. The Company is committed to continue
its pursuit of Demand Management and is analyzing its options with respect to
the best means of maximizing this opportunity. Efforts to secure permanent
financing for this business are also continuing.
Cash flow for the three-month period ended March 31, 1998, reflects a net
cash outflow of $890,454. A substantial portion of this net cash outflow is
attributable to expenditures made in connection with entry into the Demand
Management business. Cash flow from operating activities in 1998 decreased $1.7
million due in large part to the one-time payments of $750,000 and $1,000,000
received from MD Foods in the first quarter of 1997 under the Licensing
Agreement for D-tagatose. Investment in property and equipment aggregated
$1,514,805, which was financed in part through the private placement of common
stock in 1997 and borrowings under the Bank's operating and equipment lines of
credit.
Working capital as of March 31, 1998, was $2.7 million, which represents
a $1.5 million decrease from working capital of $4.2 million at December 31,
1997. This decrease was the result of continued investment in telecommunication
and computer systems, the development of computer software products to improve
the Company's competitive position, and the Company's entry into the Demand
Management business.
The Company will have continuing capital needs over the next several
years to fund its traditional ISD business. In order to effectively compete for
new contracts and maintain and expand existing programs, the Company must
continuously upgrade its information and telecommunication systems. The Company
will finance these expenditures by utilizing cash proceeds from license fees
received from MD Foods in 1996 and 1997 and from the private equity offering in
1997. The Company will continue to seek additional intermediate and long-term
financing alternatives to underwrite the capital expenditures needed to keep
pace with its long-range business plan. There can be no assurances that the
Company will obtain any or all such necessary funding. No dividends were paid in
1997 and none are anticipated in 1998.
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Biospherics Incorporated
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
There were no Reports on Form 8-K filed by the Registrant during the
three months ended March 31, 1998.
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Biospherics Incorporated
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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.
Biospherics Incorporated
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(Registrant)
Date: May 14, 1998 By: /s/ Gilbert V. Levin
---------------- -----------------------------
Gilbert V. Levin
Chairman of the Board, President, and
Treasurer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 4,338,319 2,710,634
<SECURITIES> 0 0
<RECEIVABLES> 2,329,129 3,042,848
<ALLOWANCES> (70,000) (59,875)
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,128,434 6,169,841
<PP&E> 6,690,462 3,159,054
<DEPRECIATION> (1,866,749) (1,595,008)
<TOTAL-ASSETS> 12,486,700 7,908,294
<CURRENT-LIABILITIES> 4,400,347 4,159,811
<BONDS> 0 0
0 0
0 0
<COMMON> 28,078 23,846
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 12,486,700 7,908,294
<SALES> 3,527,923 3,515,645
<TOTAL-REVENUES> 3,527,923 4,269,774
<CGS> 2,458,974 2,532,843
<TOTAL-COSTS> 3,616,578 3,634,537
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 54,485 25,172
<INCOME-PRETAX> (78,001) 637,655
<INCOME-TAX> (28,990) 223,179
<INCOME-CONTINUING> (49,011) 414,476
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (49,011) 414,476
<EPS-PRIMARY> (.01) .05
<EPS-DILUTED> (.01) .04
</TABLE>
