<PAGE>
- -------------------------------------------------------------------------------
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, 1999.
[ ] 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
--------------------------------------------
BIOSPHERICS(R) INCORPORATED
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 52-0849320
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12051 INDIAN CREEK COURT, BELTSVILLE, MARYLAND 20705
----------------------------------------------------
(Address of principal executive offices)
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 [ ]
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 April 30, 1999
- ------------------------------- --------------------------------
Common Stock, $0.005 par value 9,237,584 shares
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
- -------------------------------------------------------------------------------
-1-
<PAGE>
BIOSPHERICS INCORPORATED
----------
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
<S> <C> <C>
Statements of Operations for the three-month periods ended
March 31, 1999 and 1998............................................................................3
Balance Sheets as of March 31, 1999 and December 31, 1998..........................................4
Statements of Cash Flows for the three-month periods ended
March 31, 1999 and 1998............................................................................5
Notes to Financial Statements......................................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................10
Signatures ..................................................................................................11
</TABLE>
-2-
<PAGE>
BIOSPHERICS INCORPORATED
----------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
REVENUE $ 2,965,895 $ 3,527,923
----------- -----------
OPERATING EXPENSE
Direct contract and operating costs 2,540,742 2,458,974
Selling, general and administrative expense 880,685 891,542
Research and development expense 68,221 64,184
Depreciation and amortization expense 404,007 201,878
----------- -----------
Total operating expense 3,893,655 3,616,578
----------- -----------
LOSS FROM OPERATIONS (927,760) (88,655)
----------- -----------
Other (expense) income, net
Interest, net (66,054) 10,654
----------- -----------
Loss before taxes (993,814) (78,001)
Income tax benefit -- (28,990)
----------- -----------
NET LOSS $ (993,814) $ (49,011)
----------- -----------
----------- -----------
Net loss per share, basic $ (0.11) $ (0.01)
----------- -----------
----------- -----------
Net loss income per share, diluted $ (0.11) $ (0.01)
----------- -----------
----------- -----------
Weighted average shares outstanding, basic 9,237,584 8,788,584
----------- -----------
----------- -----------
Weighted average shares outstanding, diluted 9,237,584 8,788,584
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
BIOSPHERICS INCORPORATED
----------
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,565,898 $ 2,288,834
Trade accounts receivable, net of allowance for
doubtful accounts of $145,000 and $145,000 1,886,967 1,642,820
Other receivables 198,792 210,188
Deferred income taxes 114,532 114,532
Prepaid expenses and other assets 561,887 558,070
----------- -----------
Total current assets 4,328,076 4,814,444
Property and equipment, net of accumulated depreciation of
depreciation of $3,156,973 and $2,756,472 6,725,118 6,435,581
Deferred income taxes 185,468 185,468
Patents, net of accumulated amortization of $89,012 and $85,506 125,344 128,745
Deposit -- 70,000
----------- -----------
Total assets $11,364,006 $11,634,238
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ 1,048,639 $ 1,148,006
Accounts payable and accrued expenses 1,410,084 1,636,602
Accrued salaries and benefits 772,870 699,781
Notes payable 503,237 513,144
Capital lease obligations 404,224 394,143
Deferred revenue 115,078 144,804
----------- -----------
Total current liabilities 4,254,132 4,536,480
Notes payable 549,322 672,930
Capital lease obligations 544,643 649,447
Deferred rent 120,769 106,923
Deferred revenue 1,000,000 1,000,000
----------- -----------
Total liabilities 6,468,866 6,965,780
----------- -----------
----------- -----------
Commitments and contingencies -- --
Redeemable common stock 325,710 325,710
----------- -----------
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;
9,278,190 issued, 9,237,584 shares outstanding, of which
3,213,506 shares are classified as redeemable common stock 30,323 28,801
Paid-in capital in excess of par value 6,131,718 4,912,744
Treasury stock, 40,606 shares, at cost (267,369) (267,369)
Accumulated deficit (1,325,242) (331,428)
----------- -----------
Total stockholders' equity 4,569,430 4,342,748
----------- -----------
Total liabilities and stockholders' equity $11,364,006 $11,634,238
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
BIOSPHERICS INCORPORATED
----------
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (993,814) $ (49,011)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 404,007 201,878
Changes in assets and liabilities:
Trade accounts receivable (244,147) (706,967)
Provision for uncollectible accounts receivable -- (15,000)
Other receivables 11,396 9,498
Prepaid expenses and other assets (3,817) 26,602
Deferred income taxes -- (28,990)
Accounts payable and accrued expenses (108,221) 597,544
Income taxes payable 73,089 (145,000)
Deferred rent 13,846 (100,394)
Deferred compensation -- 392
Deferred revenue (29,726) 53,457
----------- -----------
Net cash used in operating activities (877,387) (155,991)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (620,038) (1,514,805)
Additions to patent costs (105) --
----------- -----------
Net cash used in investing activities (620,143) (1,514,805)
----------- -----------
SH FLOWS FROM FINANCING ACTIVITIES
Net change on bank line of credit (99,367) 1,000,609
Net change in book overdraft (118,297) (78,958)
Payments on notes payable (133,515) (91,498)
Payments on capital lease obligations (94,723) (31,422)
Proceeds from issuance of common stock 1,220,496 --
Cost of issuance of common stock -- (18,389)
----------- -----------
Net cash provided by financing activities 774,594 780,342
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (722,936) (890,454)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,288,834 5,228,773
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,565,898 $ 4,338,319
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
BIOSPHERICS INCORPORATED
----------
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, 1999, and the results of
its operations and its cash flows for the three-month periods ended March 31,
1999 and 1998. This report should be read in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
2. NET LOSS PER SHARE
Basic earnings per common share have been computed by dividing net loss
by the weighted-average number of common shares outstanding during the year.
Diluted earnings per common share have 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.
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.
4. PRIVATE PLACEMENT
In December 1997, Biospherics Incorporated (the "Company") completed a $3
million private offering of 375,00 units to a single institutional investor (the
"Investor"). Each unit consisted of two (2) shares of Common Stock and two (2)
Warrants, with exercise prices of $4.00 and $4.50 per share, respectively. The
Warrants are exercisable throughout a three (3) year period. Prior to March 31,
1999, the Investor exercised warrants with an exercise price of $4.00 per share
for 125,000 shares of Common Stock. All shares issued in connection with the
December 1997 private placement, including all which may be issued pursuant to
exercise of the Warrants, have been registered by the Company's Registration
Statement on Form S-3 (Registration No. 333-44973).
On March 31, 1999, the Investor agreed to exercise the balance of its
$4.00 per share Warrants (i.e., for 250,000 shares of Common Stock) in
consideration for the Company's grant to the Investor of a new three-year
Warrant for 250,000 shares of Common Stock with an exercise price of $8.00 per
share (the "New Warrant"). As part of the transaction, the Company has agreed to
register the shares of Common Stock underlying the New Warrant.
-6-
<PAGE>
BIOSPHERICS INCORPORATED
----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. See the Company's form 8-K filing dated March 26, 1999 for
a more detailed statement concerning forward looking statements.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The Company is managed
along two business segments, the Information Services Division (ISD) and the
BioTech Programs Unit.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
INFORMATION SERVICES 1999 1998
----------- ------------
<S> <C> <C>
Revenue $ 2,920,000 $ 3,481,000
Operating expense 3,768,000 3,543,000
----------- -----------
Operating loss $ (848,000) $ (62,000)
----------- -----------
----------- -----------
BIOTECH
Revenue $ 46,000 $ 47,000
Operating expense 125,000 74,000
----------- -----------
Operating loss $ (79,000) $ (27,000)
----------- -----------
----------- -----------
</TABLE>
The Company reported a net loss of $994,000 ($0.11 per share, diluted) on
sales of $3 million for the first quarter of 1999 compared with net loss of
$49,011 ($0.01 per share, diluted) on sales of $3.5 million in the same period
of 1998.
The Information Services Division's revenue for the three months ended
March 31, 1999, decreased $561,000 in relation to the same period in 1998,
resulting in a net loss of $848,000 for the quarter. The decrease between years
is the result of two contracts which were completed last year and the
seasonal nature of the National Park Service contract, which is more active in
the second and third quarters. In comparison to the fourth quarter of 1998, ISD
revenues increased $689,000 while expenses decreased $182,000 as a result of
increased operational efficiencies.
On February 18, 1999, the Company was awarded an information center
contract for the Federal Trade Commission, which commenced March 1, 1999.
This is a one-year contract, with provisions for two option years,
aggregating $2,700,000 if all options are exercised. The Company is
negotiating on several new commercial and government contracts which will
utilize the Company's proprietary information products: ReserveSuite,
InfoSuite, HealthSuite, and CTI (Computer Telephony Integration).
First quarter revenues from the BioTech Programs Unit were consistent
between years. The Company is providing technical support to MDFI to effect the
commercialization of D-tagatose. The Company may receive up to approximately
$200,000 this 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 MDFI License Agreement representing a non-refundable advance
against future royalties. This payment is classified as deferred revenue in the
balance sheet.
Selling, general and administrative expense ("S,G&A") for the first
quarter was consistent between years.
Depreciation expense increased $202,000 in the first quarter of 1999
in comparison to the same period in 1998. The increase was due to the
Company's increased investment in technology and product development.
-7-
<PAGE>
BIOSPHERICS INCORPORATED
----------
LIQUIDITY AND CAPITAL RESOURCES
The Company renewed its Loan Agreement (the "Agreement") with NationsBank
N.A. (the "Bank") on May 18, 1998, which provides for borrowing up to
$2 million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $1,048,639 at March 31, 1999, and are
collateralized by the Company's accounts receivable. The interest rate is the
Bank's prime rate plus .75% per annum. The Loan Agreement contains covenants
that require the Company to meet certain tangible net worth and cash flow
coverage ratios. The Company was in violation of the bank covenants as of
December 31, 1998. The violation was waived by the Bank. The line expires on May
31, 1999, but the Company anticipates that the line will be renewed in 1999.
However, if the Company is unable to extend the line of credit and obtain
adequate financing, material adverse consequences could result.
The Company also renewed, on May 18, 1998, a 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 borrowings
under this commitment aggregated $725,160 at March 31, 1999, and that amount
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 $327,399 at
March 31, 1999. 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.
Cash flow for the quarter ended March 31, 1999, reflects a net cash
outflow of $723,000, consisting of $877,000 used in operating activities,
$620,000 used in investing activities, and $775,000 provided by financing
activities. Cash flow from operating activities in the first quarter of 1999
decreased $721,000 from those of the prior year. The decrease in operating
cashflow is the result of two contracts which were completed last year and to
the seasonal nature of the National Park Service contract which is more active
in the second and third quarters. Investment in property and equipment
aggregated $620,000, and represented a $895,000 reduction from that of the prior
year as a result of the completion of the Company's major product development
which includes the CTI system, ReserveSuite, HealthSuite, and the near
completion of InfoSuite. The investment was used in upgrading the Company's
information and telecommunications systems, and in the continued development of
the Company's new software products used by ISD. The Company considers the
development of these products nearly complete and adequate for the near term. It
does not anticipate continued capital investment at this level. The above
investments were financed in part through proceeds from the exercise of stock
warrants and borrowings under the Bank's operating and equipment lines of
credit.
Working capital as of March 31, 1999, was $74,000, which represents a
$2.7 million decrease from working capital of $2.7 million at March 31, 1998.
This decrease was the result of continued investment in telecommunication and
computer systems, the development of computer software products to improve the
Company's long-term competitive position, and the Company's entry into the
healthcare Demand Management business in 1998.
Future capital to start new contracts and maintain existing programs,
while upgrading the Company's information and telecommunication systems, will be
proportionately less. It is also anticipated that royalties on sales by MDFI
could begin in 2001.
-8-
<PAGE>
BIOSPHERICS INCORPORATED
----------
YEAR 2000 COMPLIANCE
GENERAL
Biospherics Incorporated utilizes software, information systems and
infrastructure components that may be affected by Year 2000 issues. During
fiscal year 1998, the Company began to implement plans to ensure those systems
continue to meet its internal and external requirements via its Y2K Project
(Project). During fiscal year 1998, the Company's largest division, ISD,
completed modifications and testing of its primary information systems. These
systems modifications included a complete modernization of the Company's
infrastructure systems, such as its Cisco networks and Unix and NT servers, as
well as testing and modification to all critical and secondary enterprise
systems.
The Company is in the process of developing questionnaires and
obtaining determination documentation from vendors for Year 2000 impact. The
Company will monitor its vendors, suppliers, and clients to evaluate progress
and impact. The Company has started to evaluate its non-information systems
components such as facility systems, telephone services, and the like. To
date, evaluations have yielded marked progress in all third party areas with no
evidence of critical issues.
PROJECT
Biospherics' Project is designed to address internal and external
components to assure Year 2000 readiness. The project is phased, running from
the third quarter of 1998 and concluding in the second quarter of 1999. The
project includes a detailed milestone and project timeline. Biospherics' Project
is on target and schedule, ending the year 1998 with milestones achieved
slightly ahead of its project timeline. Phase one of the Project was completed
with the development of an inventory of all systems internal and external to the
company. Phase two of the project was completed with an assessment of the
inventory of systems internal to the Company. Phase three and phase four ran
parallel in timeline; phase three was completed in the first quarter of 1999 and
produced a plan and schedule for all remediation for systems internal to the
Company. Phase four was completed in the first quarter of 1999 with the
assessment of all systems external to the Company. Phases five and six,
completion of the internal and external phases, respectively, of the Project,
are on schedule for completion by second quarter end 1999.
CONCLUSION AND COSTS
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan development and timeline to complete its
compliance program, the Company does not foresee significant risks associated
with its Year 2000 compliance at this time. As the Company's plan is to address
its significant Year 2000 issues prior to being affected by them, it has
developed a contingency plan consisting of a budgetary set-aside. Projected
expenses of remediation efforts and updates total less than $450,000. However,
if the Company identifies significant risks related to its Year 2000 compliance
or its progress deviates from the anticipated timeline, the Company will develop
more in-depth contingency plans as deemed necessary at that time.
RISKS
The failure to successfully complete the Biospherics Y2K Project,
identifying and remedying all critical potential failures internal and external
to the Company, could result in an interruption in normal business processes or
sub-processes. Such failures could negatively impact the Company's operations
and, as a result, impact the Company's financial condition. The Y2K industry
problem holds inherent uncertainty; due to this it is not possible for
Biospherics to affirm with certainty the level of impact from vendors,
suppliers, and clients. The Project is designed to reduce this level of
uncertainty with regard to Y2K compliance and readiness of internal and external
systems. Biospherics believes that with the continued on schedule progress of
the Project, the possibility of negative impact and operational interruptions
will be significantly reduced.
-9-
<PAGE>
BIOSPHERICS INCORPORATED
----------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On March 26, 1999, the Company filed a cautionary statement for the
purposes of the "Safe Harbor for Forward-Looking Statements" on Form 8-K.
-10-
<PAGE>
BIOSPHERICS INCORPORATED
----------
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
--------------------------
(REGISTRANT)
Date: MAY 17, 1999 By:/S/ GILBERT V. LEVIN
- -------------------------- --------------------------
Gilbert V. Levin
Chair, CEO, President, and
Treasurer
-11-
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,565,898
<SECURITIES> 0
<RECEIVABLES> 2,031,967
<ALLOWANCES> 145,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,328,076
<PP&E> 9,882,091
<DEPRECIATION> 3,156,973
<TOTAL-ASSETS> 11,364,006
<CURRENT-LIABILITIES> 4,254,132
<BONDS> 0
0
0
<COMMON> 30,323
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,364,006
<SALES> 2,965,895
<TOTAL-REVENUES> 2,965,895
<CGS> 3,893,655
<TOTAL-COSTS> 3,893,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,054
<INCOME-PRETAX> (993,814)
<INCOME-TAX> 0
<INCOME-CONTINUING> (993,814)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (993,814)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
