<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
SONEX RESEARCH, INC.
Incorporated in the State of Maryland
23 Hudson Street
Annapolis, Maryland 21401
Telephone Number: (410) 266-5556
IRS Employer Identification No. 52-1188993
Commission file number 0-14465
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
There were 16,200,032 shares of the Issuer's $.01 par value Common Stock
outstanding at August 14, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to unaudited financial statements presented on pages 3 to 11:
Balance sheets as of June 30, 1996 and December 31, 1995
Statements of operations and accumulated deficit for the three- and six-month
periods ended June 30, 1996 and 1995, and for the period from April 9, 1980
(inception) through June 30, 1996
Statements of paid-in capital for the period from January 1, 1993 through
June 30, 1996
Statements of cash flows for the three- and six-month periods ended June 30,
1996 and 1995, and for the period from April 9, 1980 (inception) through June
30, 1996
Notes to financial statements
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
--------- ----------
Current assets
Cash and equivalents $ 261,674 $ 256,139
Marketable securities, available-for-sale 81,100
Cash posted as security for judgment 182,687
Accounts receivable 6,241 63,741
Prepaid expenses 35,153 29,861
Loans to officers and employees - current 34,463 43,376
--------- ----------
Total current assets 418,631 575,804
Loans to officers and employees - non-current 15,449 15,000
Patents and technology 303,526 328,822
Property and equipment 34,581 44,904
--------- ----------
Total assets $ 772,187 $ 964,530
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 7,667
Accrued compensation $ 614,691 580,785
Accounts payable and other accrued liabilities 111,799 110,810
--------- ----------
Total current liabilities 726,490 699,262
--------- ----------
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000
shares issued, 1,565,001 shares outstanding 15,650 18,300
Common stock, $.01 par value, shares issued
and outstanding: 16,157,175 in 1996 and
15,281,535 shares in 1995 161,572 152,815
Additional paid-in capital 19,131,834 19,078,191
Unrealized increase in value of marketable
securities 81,100
Deficit accumulated during development stage (19,344,459) (18,984,038)
----------- -----------
Total stockholders' equity 45,697 265,268
Commitments (Note 11)
----------- -----------
Total liabilities and stockholders' equity $ 772,187 $ 964,530
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
April 9, 1980
Three months ended Six months ended (inception)
June 30, June 30, through
---------------------------- ---------------------------- June 30,
1996 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue
Development contracts $ 64,300 $ 159,400 $ 1,595,566
Other revenue 124,425
------------ ------------ -------------
64,300 159,400 1,719,991
------------ ------------ -------------
Costs and expenses
Research and development $ 135,792 156,065 258,513 281,912 11,526,679
General and administrative 59,968 113,777 126,648 201,538 7,047,208
Interest 137 311 273 759 866,552
Write-off of patents and technology 819,036
------------ ------------ ------------ ------------ ------------
195,897 270,153 385,434 484,209 20,259,475
------------ ------------ ------------ ------------ ------------
Net loss from operations (195,897) (205,853) (385,434) (324,809) (18,539,484)
Other income and expense
Investment and other income 4,024 4,310 8,646 5,382 289,731
Debt issuance and conversion expense (1,112,350)
Gain on sale of marketable securities 16,367 16,367 17,644
------------ ------------ ------------ ------------ ------------
Net loss (175,506) (201,543) (360,421) (319,427) (19,344,459)
Deficit accumulated during development stage
Beginning of period (19,168,953) (18,276,731) (18,984,038) (18,158,847)
------------ ------------ ------------ ------------ ------------
End of period $(19,344,459) $(18,478,274) $(19,344,459) $(18,478,274) $(19,344,459)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss per share $.011 $.016 $.023 $.023
----- ----- ----- -----
----- ----- ----- -----
Weighted average number of common
shares outstanding 16,157,175 13,985,208 15,730,597 13,820,163
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF PAID-IN CAPITAL
FOR THE PERIOD JANUARY 1, 1993 THROUGH JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Preferred stock Common stock
Price ($.01 per share) ($.01 par value) Additional
per -------------------- ---------------------- paid-in
share Shares Amount Shares Amount capital
------- --------- ------- ---------- -------- -----------
(NOTE: RETROACTIVE EFFECT HAS BEEN GIVEN TO ALL PREVIOUSLY DECLARED STOCK SPLITS.)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 1,980,000 $19,800 11,911,930 $119,119 $17,116,177
May through December - exercise of options $ .50 153,038 1,531 74,988
May - exercise of warrants 2.00 833 8 1,658
Issuance of discounted options in payment of:
Accrued compensation 303,611
Note payable to officer 28,000
Stock issuance costs (1,596)
--------- ------- ---------- -------- -----------
Balance, December 31, 1993 1,980,000 19,800 12,065,801 120,658 17,522,838
February through August - exercise of options .50 75,379 754 36,936
April - conversion to common stock .35 (150,000) (1,500) 428,567 4,286 (2,786)
April - conversion of loan and interest payable .75 281,872 2,819 208,585
June and July - private placement .75 766,666 7,666 567,334
October - for services .80 30,000 300 23,700
Stock issuance costs (7,767)
--------- ------- ---------- -------- -----------
Balance, December 31, 1994 1,830,000 18,300 13,648,285 136,483 18,348,840
January through July - for services .58 15,000 150 8,600
June - private placement .25 1,020,000 10,200 244,800
June - payment of accrued compensation .25 170,000 1,700 40,800
June - indemnification by officer 15,000
September through November - exercise of options .50 88,250 882 43,243
December - private placement 1.00 340,000 3,400 336,600
Compensation - grant of stock options 52,500
Stock issuance costs (12,192)
--------- ------- ---------- -------- -----------
Balance, December 31, 1995 1,830,000 18,300 15,281,535 152,815 19,078,191
January - for services 1.00 1,000 10 990
April - conversion to common stock .35 (264,999) (2,650) 757,140 7,572 (4,922)
January through June - exercise of options .50 117,500 1,175 57,575
--------- ------- ---------- -------- -----------
Balance, June 30, 1996 1,565,001 $15,650 16,157,175 $161,572 $19,131,834
--------- ------- ---------- -------- -----------
--------- ------- ---------- -------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
April 9, 1980
Six Months ended June 30, (inception)
---------------------------- through
June 30,
1996 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (360,421) $ (319,427) $(19,344,459)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation 10,323 9,030 654,055
Write-down of patents and technology 819,036
Amortization of patents and technology 31,602 39,000 1,306,240
Compensation - stock options 850,540
Imputed interest expense 551,247
Interest credited to paid-in capital 44,614
Debt issuance and conversion expense 1,112,350
Accrued liabilities and current charges paid in stock 1,000 48,750 1,124,380
Gain on sale of marketable securities (16,367) (17,644)
(Increase) decrease in accounts receivable 57,500 30,800 (6,241)
(Increase) decrease in prepaid expenses (5,292) 4,338 (35,153)
Increase (decrease) in accrued liabilities 34,895 63,507 646,493
----------- ----------- ------------
Net cash used in operating activities (246,760) (124,002) (12,294,542)
----------- ----------- ------------
Cash flows from investing activities
Purchase of marketable securities (2,377,256)
Proceeds from sales of marketable securities 16,367 17,292 2,394,900
(Increase) decrease in cash posted as security for judgment 182,687
(Increase) decrease in loans to employees 8,464 (1,106) (49,912)
Acquisition of property (2,720) (539,149)
Additions to patents and technology (6,306) (14,380) (1,304,352)
----------- ----------- ------------
Net cash used in investing activities 201,212 (914) (1,875,769)
----------- ----------- ------------
Cash flows from financing activities
Issuance of stock 58,750 255,000 15,100,661
Issuance of convertible debt 2,287,500
Indemnification by officer 15,000 15,000
Repayment of convertible debt (92,500)
Stock and debt issuance costs (11,604) (2,038,916)
Distribution to stockholders - other (18,772)
Reduction of technology purchase obligations (797,500)
Proceeds from borrowings 1,592,748
Reduction of borrowings (7,667) (6,837) (1,616,236)
----------- ----------- ------------
Net cash provided by (used for) financing activities 51,083 251,559 14,431,985
----------- ----------- ------------
Increase (decrease) in cash 5,535 126,643 261,674
Cash
Beginning of period 256,139 46,052
----------- ----------- ------------
End of period $ 261,674 $ 172,695 $ 261,674
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - THE COMPANY
Sonex Research, Inc. has developed and acquired technology which controls
the combustion of fuel in engines. The Company is in the process of developing
several commercial applications of its technology, referred to as the Sonex
Combustion System (SCS). Sonex expects to license several commercial
applications of its technology and commercially exploit other applications
itself. Related revenue earned to date has been derived principally from
development contracts, but such revenue offsets only a small portion of the
related development expenditures. Accordingly, Sonex Research, Inc. is
classified as a development stage company.
NOTE 2 - PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, these financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three- and six-
month periods ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, reference is made to the financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
These financial statements include the accounts of the Company and, until
its disposition in October 1995, SonoChem, Inc. All intercompany balances have
been eliminated in consolidation. SonoChem, Inc. has been an inactive company
since 1988, and its recorded expenses since then have not been significant. On
October 9, 1995, following a 1:10 reverse split of all of its issued and
outstanding shares of common stock, SonoChem was merged with and into Digital
Dictation, Inc., a privately held Virginia medical transcription services
company. Pursuant to the merger, SonoChem acquired 100% of the issued and
outstanding shares of common stock of Digital Dictation, Inc. in exchange for
5,944,606 post-split shares of SonoChem's common stock, and SonoChem's name was
changed to Digital Dictation, Inc. Following the merger, the previous holders
of the common stock of SonoChem now hold 5% of the issued and outstanding shares
of the surviving corporation Digital Dictation, Inc.
NOTE 3 - CASH POSTED AS SECURITY FOR JUDGMENT
In connection with a judgment stemming from a lawsuit against the Company
filed by two former officers (the "Plaintiffs") as described in Note 8, on
November 30, 1994, the Company placed $177,088 in cash on deposit with the court
pending the resolution of an appeal. In December 1995 the judgment was reversed
on appeal, and, in April 1996 the Plaintiffs' request for review of the reversal
by a higher appellate court was denied. On May 2, 1996, a total of
approximately $184,000, including interest earned through that date, was
returned to the Company.
NOTE 4 - MARKETABLE SECURITIES
As described in Note 1, in October 1995 the Company's inactive, public shell
subsidiary, SonoChem, Inc., was merged with and into Digital Dictation, Inc.
("Digital"), a privately held Virginia medical transcription services company.
In connection with the merger, the Company exchanged all of its shares in
SonoChem for 125,133 shares of the common stock of Digital, representing 2% of
the issued and outstanding shares of Digital. A total of 5% of the issued and
outstanding shares of Digital, including those shares held by Sonex, began
trading in the over-the-counter market in April 1996. In a number of
transactions during May 1996, the Company sold a total of
<PAGE>
17,000 shares of its Digital stock and realized aggregate net proceeds of
$16,367, or $.96 per share. In late July 1996 the Company sold an additional
10,000 shares, realizing net proceeds of $13,746, or $1.375 per share.
At the time of this exchange in October 1995, the fair value of neither the
SonoChem stock nor the Digital stock was reasonably estimable. As a result, the
Company's carrying basis in the SonoChem stock of zero was considered to be its
cost basis in the Digital stock, and no gain or loss was recorded in the 1995
financial statements with respect to this transaction. Since public trading
began in April 1996 and a readily determinable fair value for the Digital stock
has become available, the investment is now accounted for in accordance with
Statement of Financial Accounting Standards No. 115 and classified as a current
asset as a security that is available-for-sale. Accordingly, the Company's
investment in the 108,133 shares held as of June 30, 1996 is recorded in the
accompanying financial statements at its fair value at that date of $.75 per
share, or an aggregate of $81,100. A corresponding amount, representing the
aggregate unrealized gain in the fair value of this investment in excess of its
original cost basis, is reported as a separate component of shareholders'
equity. Subsequent changes in its aggregate market value will be similarly
recorded.
NOTE 5 - LOANS TO OFFICERS AND EMPLOYEES
Loans totaling $37,180 were made early in 1993 to four of the Company's
officers and one non-officer employee for the payment of income tax liabilities
incurred by these individuals upon their receipt of shares of common stock in
payment of deferred wages. The loans are secured by deferred salaries payable
to each of the borrowers, and bear interest at the rate of six percent per
annum. No payments were made until March 1996, with principal payments totaling
$8,450 and interest payments totaling $1,452 having been made since then. As of
June 30, 1996, aggregate loan principal of $28,730 remained outstanding, while
accrued interest on the loans aggregated $5,733.
One of these loans in the principal amount of $14,500 was made to the
Company's vice-president of operations, whose employment was later terminated.
The former officer, however, instituted legal action against the Company in
November 1993, as described in Note 8, to collect additional amounts of deferred
salary, net of the loan balance. While the maturity date for the loan principal
and interest due from current employees has been extended through December 31,
1996, the amounts receivable from the former officer are past due, and the
Company's demands for payment have not been met. The Company has recently
instituted legal action for collection of this amount.
Loans totaling $15,000 were made at the end of December 1995 to one of the
Company's officers and two non-officer employees for the payment of income tax
liabilities incurred by these individuals upon their receipt in 1995 of shares
of common stock in payment of bonus compensation. These loans, which are
secured by deferred salaries payable to each borrower and bear interest at the
rate of six percent per annum, become due in 1998. As of June 30, 1996, accrued
interest on the loans aggregated $449.
NOTE 6 - PATENTS AND TECHNOLOGY
Following an extensive evaluation in 1994 of the factors affecting the
economic value of all of the Company's proprietary technology, the carrying
values of certain technology developed internally, other technology acquired
from a third party, and related technology purchase obligations, were reduced to
their net realizable values. Such write-offs reflected in the accompanying
financial statements, aggregating $819,036, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Unamortized capitalized cost of the technology, beginning $ 80,000 $ 912,589
Total recorded balance of technology purchase obligations - (253,553)
Assumed net realizable value of technology, ending - 80,000
---------- ----------
Net write-down of patent costs charged to operations $ 80,000 $ 739,036
---------- ----------
---------- ----------
</TABLE>
<PAGE>
The Company has conducted and continues to conduct its own research and
development activities which have resulted in additional proprietary technology
and patents. Development of commercial applications of certain elements of the
SCS has commenced and management believes the capitalized cost of patents and
technology will be recovered through revenue derived from the licensing of such
technology. Management closely monitors the patent application process and
other factors which may affect the economic value of the Company's technology,
and will further reduce the capitalized cost of patents and technology should
the recovery of such cost no longer be sustainable.
The capitalized cost of patents and technology at June 30, 1996 consists of
the following:
Patent application fees and related legal costs $ 242,943
Computer models and simulations 237,164
----------
480,107
Accumulated amortization (176,581)
----------
$ 303,526
----------
----------
NOTE 7 - ACCRUED COMPENSATION
In order to help conserve the Company's limited cash resources, all of the
Company's salaried employees for several years have been voluntarily deferring
significant portions of the salaries due them under the terms of previous
employment agreements or as otherwise established by the Board of Directors. As
of June 30, 1996, an aggregate of $577,627 of wages so deferred, including
$163,365 payable to two former officers who sought repayment through the legal
action described in Note 8, is included in accrued compensation on the Company's
balance sheet.
As a condition of the Company's receiving an indispensable capital infusion
in February 1992, the investors required that the voluntary deferral of salaries
be documented formally. Accordingly, all salaried employees executed an
agreement referred to as the "Consent to Deferral" in which they consented to
the past and future deferral of portions of their annual salaries, and agreed to
defer payment of amounts so accumulated until the Company has received licensing
revenue of at least $2 million or at such earlier date as the Board of Directors
determines that the Company's cash flow is sufficient to allow such payment.
In June 1993 the Company eliminated the positions of three full-time vice-
presidents. One of these individuals accepted the Company's separation offer of
six months severance compensation and payment of all deferred salaries owed,
with such payments to be made in the form of equity securities of the Company,
in exchange for his agreement to meet certain conditions such as limiting sales
of the Company's stock for one year and waiving any future claims against the
Company. The other two former officers rejected the Company's separation offer
and chose to seek repayment through the legal action described in Note 8.
NOTE 8 - LITIGATION
Two former officers of the Company whose employment was terminated in
June 1993, Mr. Charles C. Failla and Mr. Theodore P. Naydan, rejected the
separation offer described in Note 7 and demanded immediate full payment of
their unpaid salaries less the amount of a loan payable to the Company by Mr.
Naydan. Following the Company's rejection of this demand, Mr. Failla and
Mr. Naydan (referred to as the "Plaintiffs") instituted legal action in
November 1993. Their Complaint alleged that the Company breached contractual
obligations by failing to pay salary due under previous employment agreements
and violated Maryland labor laws by failing to pay wages due upon termination of
employment. The Complaint sought immediate full repayment of deferred salaries
and damages of up to three times the amount owed, plus prejudgment interest,
attorney's fees and costs. The Company denied the allegations and filed a
counterclaim against the Plaintiffs for breach of contract with respect to the
Consent to Deferral.
Following a hearing in the trial court in June 1994 on various motions for
dismissal and summary judgment filed by the parties, the hearing judge denied
the Plaintiffs claims for treble damages and recovery of attorneys' fees
<PAGE>
and costs, dismissed most of the other motions, and ordered that a trial be
held on the issue of whether the Plaintiffs received consideration in
exchange for executing the Consent to Deferral.
At a trial held in November 1994 before a different judge, the Plaintiffs
were awarded judgment in the amount of $163,140 that included pre-judgment
interest from the date of termination of employment through the date of the
trial and reflected an offset for the amount of the loan payable to the Company
by Mr. Naydan. Following the trial, the Company filed an appeal, and the
Plaintiffs filed a motion to revise the judgment by seeking to reverse the prior
ruling of the hearing judge denying the claim for treble damages. In order to
stay the Plaintiffs from initiating steps to collect on the judgment prior to a
ruling on the appeal, on November 30, 1994 the Company posted cash security with
the court in the amount of $177,088, which figure included interest over the
estimated period of the appeal process.
In February 1995 the trial judge denied the Plaintiffs' motion to revise the
judgment, following which the Company refiled its appeal and the Plaintiffs
filed an appeal of the decision to deny treble damages. Both parties then filed
extensive briefs, and oral arguments before a panel of three judges of the
Maryland Court of Special Appeals were presented in November 1995. In
December 1995 the Court of Special Appeals reversed the judgment awarded to the
Plaintiffs by the trial court. In January 1996 the Plaintiffs filed a Petition
for Writ of Certiorari with the Court of Appeals of Maryland seeking a review of
the reversal of the judgment by the Court of Special Appeals.
On April 15, 1996, the Petition was denied and, on May 2, 1996, a total of
approximately $184,000, including interest earned through that date, was
returned by the court to the Company.
NOTE 9 - INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards,
expiring at various dates from 1996 through 2010, aggregating approximately
$16.8 million available to offset future taxable income. If certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of the carryforwards which can be utilized. The
potential income tax benefit of these carryforwards and temporary differences of
approximately $6.5 million has not been recorded in the financial statements due
to the uncertainty of realization based on the Company's financial performance
to date.
NOTE 10 - AUTHORIZED CAPITAL STOCK
The Company is presently authorized to issue 48 million shares of $.01 par
value common stock and 2 million shares of $.01 par value convertible preferred
stock. All 2 million shares of the preferred stock, along with five-year
warrants to purchase up to 6,857,142 shares of common stock at prices of $.35,
$1.00, and $1.50, were issued in a private transaction in February 1992 for
aggregate consideration of $2 million.
The preferred stock has priority in liquidation over the common stock, but
it carries no stated dividend. The holders of the preferred stock, voting as a
separate class, have the right to elect that number of directors of the Company
which represents a majority of the total number of directors.
The preferred stock is convertible at any time at the option of the holder
into common stock at the rate of $.35 per share of common stock, although no
fractional shares are to be issued. As of June 30, 1996, a total of 434,999
shares of preferred stock had been converted into 1,242,850 shares of common
stock.
The Company maintains a non-qualified stock option plan which has made
available for issuance a total of five million shares of common stock, following
an increase approved in June 1995 of two million shares. All directors,
full-time employees and consultants to the Company are eligible for
participation. Option awards are determined at the discretion of the board of
directors. Upon a change in control of the Company, all outstanding options
become vested with respect to those options which have not already vested.
Options granted to date expire at various dates through December 2005.
<PAGE>
At June 30, 1996, a total of 18,272,242 shares of common stock were reserved
for issuance for the following purposes:
Conversion of preferred stock 4,471,431
Currently exercisable warrants 9,414,251
Currently exercisable options 3,145,472
Granted options becoming exercisable in the future 765,000
Options available under plan for future grants 478,088
----------
Total shares reserved 18,272,242
----------
----------
NOTE 11 - COMMITMENTS
The Company occupies its office and laboratory facilities on a month-to-
month basis under the terms of an operating lease agreement that has expired.
The lease provides for monthly rent of $4,500, and requires the Company to pay
all property related expenses.
The Company has been unsuccessful in its attempts to negotiate a new long-
term lease for its current office and laboratory facility at a lower monthly
rate. Absent the execution of a new lease, the Company will continue to occupy
these premises on a month-to-month basis under the terms of the previous lease,
pursuant to which the property owner is required to provide thirty days notice
if he wants the Company to vacate the premises. Management, however, is also in
the process of searching for an alternative location in the event that an
agreement cannot be reached for the existing premises. Management believes that
the resolution of the uncertainty with respect to the facility will not result
in a significant interruption in the operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
FINANCIAL POSITION
Since its inception in 1980, the Company has generated net losses in excess
of $19 million. Operating funds have been raised primarily through the sale of
equity securities in both public and private offerings, while revenues to date
have not been significant. Accordingly, Sonex continues to be classified as a
development stage company.
At June 30, 1996, the Company held cash and equivalents of $261,674, and
marketable securities valued at $81,100. The fair value of such securities,
however, may be subject to significant fluctuation due to, among other factors,
limited trading volume and a small public float.
Based upon current spending levels, management believes that the cash on
hand will cover operating costs through the end of 1996. Management is
currently in negotiations for technology transfer and licensing agreements which
would provide substantial operating funds, but execution of such agreements is
not assured. In the absence of the realization of significant revenues,
additional capital will be necessary to fund operations beyond 1996. The
Company currently has no plans for securing such funding. In order to maximize
available funds, the Company will continue to minimize its operating
expenditures through a number of measures, including the continued deferral by
all employees of significant portions of their salaries.
<PAGE>
RESULTS OF OPERATIONS
A net loss from operations of $385,434 was recorded for the first six months
of 1996, as compared to $324,809 for the corresponding period in 1995, an
increase of $60,625. The increase in the loss resulted from the decrease in
development contract revenue from $159,400 for the first six months of 1995 to
zero for the comparable period in 1996, while total expenses decreased by
$98,775.
Revenue in 1995 consisted of $112,500 earned in connection with the
development contract begun in August 1994 on a diesel-fueled truck engine for a
major European manufacturer, and $46,900 from the July 1994 contract with the
National Renewable Energy Laboratory Division (NREL) of the Midwest Research
Institute, which is the field manager for the U.S. Department of Energy
Alternative Fuels Utilization Program, for a methanol-fueled diesel engine
demonstration. Work under both contracts was concluded during 1995, while
follow-on work on these and other projects in 1996 to date has not been funded
by the customers.
Research and development (R&D) expenses for the first six months of the year
decreased by $23,299, or 8.3%, from $281,912 in 1995 to $258,513 in 1996, as a
decrease in personnel costs from $176,657 in 1995 to $152,260 in 1996, or
$24,397, was only partially offset by a net increase in other expense categories
of $1,098. In the second quarter of 1995 the Company awarded bonuses to three
non-officer employees totaling $31,625, of which amount $17,500 was paid in
common stock and warrants, $7,061 was paid in cash and $7,064 was deferred,
while in the second quarter of 1996, the only bonus awarded was that for $10,000
to the Company's chief executive officer. The remaining net decrease in
personnel costs resulted from the termination of the employment of a technician,
whose position was not filled, early in 1995, offset by a slight increase in the
pay rate of the Company's director of research and an increase in health
insurance premiums.
Charges for the two next largest R&D expense categories remained relatively
the same from 1995 to 1996, as the total charges relating to the capitalized
costs of patents and technology (i.e., amortization expense and patent
maintenance fees) decreased only slightly, from $39,000 in 1995 to $37,369 in
1996, while occupancy expenses increased only slightly, from $28,692 in 1995 to
$29,264 in 1996. Increases in several other R&D expense categories were
approximately offset by a reduction in consulting charges. For the first six
months of 1995 the Company recorded a charge of $6,250 in consulting fees paid
in stock to the Company's former vice-president - international who now serves
as a consultant. As of the fourth quarter of 1995, the payments were changed
from shares of restricted stock to below-market stock options. There was no
related charge to operations for the first six months of 1996.
General and administrative (G&A) expenses for the first six months of the
year decreased by $74,890, or 37%, from $201,538 in 1995 to $126,648 in 1996, as
personnel costs decreased from $128,283 in 1995 to $58,896 in 1996, or $69,387,
and other expense categories realized an aggregate net decrease of $5,503. Part
of the decline in personnel costs is due to the fact that the prior year's
period includes a bonus award to the Company's chief financial officer of
$35,000, of which amount $25,000 was paid in common stock and warrants, $5,000
was paid in cash and $5,000 was deferred, while no such bonus was awarded during
the first six months of the current year. The remaining decrease of $34,387 was
almost entirely due to the change for 1996 in the compensation and employment
commitment of the Company's president from full-time to part-time, with a
corresponding reduction in salary from $100,000 per year, 40% of which amount
was deferred, to $2,000 per month with no portion deferred.
The next largest G&A expense category, legal and auditing fees, decreased by
$9,442, from $21,106 in 1995 to $11,664 in 1996, as fewer legal fees related to
the lawsuit filed by two former officers of the Company, fees for corporate
legal services, and services by the Company's patent attorney, were recorded in
1996. The fees for services by the Company's patent attorney decreased by
$4,117, from $4,930 in 1995 to $813 in 1996, as fees of approximately $4,000 in
1995 related to services in connection with the Company's abandonment of much of
its older technology and related patents. The decreases in personnel costs and
legal fees were offset in part by an increase in the premiums for workers
compensation insurance and the charges for the services of a public relations
firm hired in January 1996 to undertake a publicity campaign for the Company.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders (contained in the
Articles of Incorporation and By-laws, as amended, filed with the 1992
Annual Report on Form 10-KSB)
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SONEX RESEARCH, INC.
(Registrant)
George E. Ponticas
----------------------------------------------
by: George E. Ponticas
Chief Financial Officer
August 14, 1996
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