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, 1997.
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 17,212,539 shares of the Issuer's $.01 par value Common Stock
outstanding at July 31, 1997.
- 1 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Index to unaudited financial statements presented on pages 3 to 10:
Balance sheets as of June 30, 1997 and December 31, 1996
Statements of operations and accumulated deficit for the three- and six-
month periods ended June 30, 1997 and 1996, and for the period from
April 9, 1980 (inception) through June 30, 1997
Statements of cash flows for the six-month periods ended June 30, 1997
and 1996, and for the period from April 9, 1980 (inception) through
June 30, 1997
Notes to financial statements
- 2 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
------------ -----------
Current assets
Cash and equivalents $ 516,782 $ 89,739
Marketable securities, available-for-sale 93,133 36,800
Accounts receivable 50,000
Prepaid expenses 45,880 38,692
Loans to officers and employees 15,973 16,906
------------ -----------
Total current assets 671,768 232,137
Loans to officers and employees - non-current 15,000 15,000
Patents and technology, net of accumulated amorti-
zation of $277,592 in 1997 and $246,949 in 1996 263,443 239,308
Property and equipment, net of accumulated depre-
ciation of $408,783 in 1997 and $402,033 in 1996 21,258 28,008
------------ -----------
Total assets $ 971,469 $ 514,453
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued compensation $ 655,486 $ 620,620
Accounts payable and other accrued liabilities 70,062 170,371
------------ -----------
Total current liabilities 725,548 790,991
------------ -----------
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000
shares issued, 1,550,001 shares outstanding 15,500 15,500
Common stock, $.01 par value, shares issued
and outstanding: 17,212,539 in 1997 and
16,214,020 shares in 1996 172,125 162,140
Additional paid-in capital 19,853,189 19,165,535
Unrealized increase in value of
marketable securities 93,133 36,800
Deficit accumulated during development stage (19,888,026) (19,656,513)
------------ -----------
Total stockholders' equity 245,921 (276,538)
Commitments (Note 9)
------------ -----------
Total liabilities and stockholders' equity $ 971,469 $ 514,453
============ ===========
The accompanying notes are an integral part of the financial statements.
- 3 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
April 9, 1980
(inception)
Three months ended Six months ended through
June 30, June 30, June 30,
1997 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
Revenue
Development contracts $ 104,375 $ 144,375 $1,809,941
Other revenue 124,425
---------- ---------- ---------- ---------- ----------
104,375 144,375 1,934,366
---------- ---------- ---------- ---------- ----------
Costs and expenses
Research & develop. $ 130,986 $ 135,792 $ 249,967 258,513 12,041,657
General & administ. 78,820 59,968 142,568 126,648 7,323,571
Interest 286 137 572 273 867,521
Write-off of patents 819,036
---------- ---------- ---------- ---------- ----------
210,092 195,897 393,107 385,434 21,051,785
---------- ---------- ---------- ---------- ----------
Net loss from
operations 105,717 195,897 248,732 385,434 19,117,419
Other (income)/expense
Investment income (7,759) (4,024) (9,098) (8,646) (302,232)
Debt issuance and
conversion expense 1,112,350
Gain on sale of marketable
securities (8,121) (16,367) (8,121) (16,367) (39,511)
---------- ---------- ---------- ---------- ----------
Net loss 89,837 175,506 231,513 360,421 19,888,026
Accumulated deficit
Beginning 19,798,189 19,168,953 19,656,513 18,984,038
---------- ---------- ---------- ---------- ----------
End $19,888,026 $19,344,459 $19,888,026 $19,344,459 $19,888,026
========== ========== ========== ========== ==========
Net loss per share $.005 $.011 $.014 $.023
===== ===== ===== =====
Weighted average
number of shares
outstanding 17,174,825 16,157,175 16,816,347 15,730,597
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
April 9, 1980
(inception)
Six months ended through
June 30, June 30,
1997 1996 1997
--------- --------- ------------
Cash flows from operating activities
Net loss $(231,513) $(360,421) $(19,888,026)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 6,750 10,323 672,265
Amortization 32,978 31,602 1,409,586
Write-down of patents 819,036
Compensation - stock options 1,500 879,165
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 1,124,380
Gain on sale of marketable securities (8,121) (16,367) (39,511)
(Increase)decrease in accounts receivable 50,000 57,500
(Increase)decrease in prepaid expenses (7,188) (5,292) (45,880)
Increase (decrease)in accrued liabilities (65,443) 34,895 637,884
--------- --------- ------------
Net cash used in operating activities (221,037) (246,760) (12,722,890)
--------- --------- ------------
Cash flows from investing activities
Purchase of marketable securities (2,377,256)
Proceeds from sales of marketable securities 8,121 16,367 2,414,767
(Increase) decrease in cash posted as
security for judgment 182,687
(Increase) decrease in loans to employees 933 8,464 (30,973)
Acquisition of property (544,036)
Additions to patents and technology (57,113) (6,306) (1,367,615)
--------- --------- ------------
Net cash provided by (used for)
investing activities (48,059) 201,212 (1,903,113)
--------- --------- ------------
Cash flows from financing activities
Issuance of stock 696,139 58,750 15,803,794
Issuance of convertible debt 2,287,500
Indemnification by officer 15,000
Repayment of convertible debt (92,500)
Stock and debt issuance costs (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) (1,608,569)
--------- --------- ------------
Net cash provided by (used for)
financing activities 696,139 51,083 15,142,785
--------- --------- ------------
Increase (decrease) in cash 427,043 5,535 516,782
Cash
Beginning of period 89,739 256,139
--------- --------- ------------
End of period $ 516,782 $ 261,674 $ 516,782
========= ========= ============
The accompanying notes are an integral part of the financial statements.
- 5 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
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 historically has offset only a 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, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
These financial statements include the accounts of the Company and, until
its disposition in October 1995, the accounts of its former 40%-owned, inactive,
consolidated subsidiary, SonoChem, Inc. In October 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. through the issuance of 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
became the holders of 5%, or 312,874 shares, of the issued and outstanding
shares of the surviving corporation Digital Dictation, Inc. ("Digital").
Note 3 - Marketable Securities
- ------------------------------
In connection with the merger described in Note 2, 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
the Company, began public trading in the over-the-counter market in April 1996.
Through June 30, 1997, the Company has sold a total of 32,000 shares of its
Digital stock and realized aggregate net proceeds of $38,234.
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. Since public trading began in April 1996
and a readily determinable fair value for the Digital stock has since 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 93,133 shares held as of June 30, 1997 is recorded in the accompanying
financial statements at its aggregate fair value of $93,133. A corresponding
amount, representing the aggregate unrealized gain in the fair value of this
investment in excess of its cost basis, is reported as a separate component of
stockholders' equity. Subsequent changes in the aggregate market value of this
investment will be similarly recorded.
- 6 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Note 4 - Loans to Officers and Employees
- ----------------------------------------
Loans totaling $37,180, bearing interest at six percent per annum, 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 in 1992 of shares of common stock in payment of deferred
wages. Outstanding loan principal and accrued interest balances are secured by
deferred salaries payable to each of the borrowers. 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. During 1996 this amount and
accrued interest were satisfied through offset against deferred salary payable
to the former officer. The maturity date for the remaining unpaid loan principal
and interest due from current employees has been extended through December 31,
1997. As of June 30, 1997, aggregate loan principal of $12,055 remained
outstanding, while accrued interest on the loans aggregated $3,780.
Loans totaling $15,000 were made in 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 accrued bonus compensation. The loans are secured by
deferred salaries payable to each of the borrowers, and become due within ninety
days of the date that the shares of common stock received by the borrowers in
1995 first become saleable. The loans originally bore a stated interest rate of
six percent per annum, but were amended later by the Board of Directors to
eliminate the accrual of interest.
Note 5 - Patents and Technology
- -------------------------------
The costs associated with the filing of patent applications, computer
models and simulations developed by third parties, and the acquisition of
patents and technology from third parties are deferred. Amortization is recorded
on a straight-line basis over the remaining legal life of patents, commencing in
the year in which the patent is granted, and over a five-year period for the
capitalized costs of computer models and simulations. Costs related to patent
applications which ultimately fail to result in the grant of a patent, either
through rejection by patent authorities or through abandonment by the Company,
are charged to operations at the time such determination is made.
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 estimated recoverable amounts. Related charges to operations aggregated
$739,036 in 1994 and $80,000 in 1995.
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.
Note 6 - 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, 1997, an aggregate of $620,486 of wages so deferred
remained unpaid and has been recorded as 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, Proactive Partners, L.P. and certain
of its affiliates ("Proactive"), who became the Company's largest shareholder by
virtue of their purchase of convertible preferred stock and common stock
purchase warrants, 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
- 7 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
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.
Note 7 - Income Taxes
- ---------------------
The Company has not incurred any federal or state income taxes since its
inception due to operating losses. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $16.5 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 Company's net operating loss
carryforwards expire at various dates from 1997 through 2011, as follows:
Expiring in 1997 $ 289,000
Expiring in 1998 658,000
Expiring in 1999 - 2000 2,005,000
Expiring in 2001 - 2002 3,907,000
Expiring in 2003 - 2011 9,667,000
-----------
$16,526,000
===========
The difference between the net operating loss carryforwards for income
tax reporting purposes and the accumulated deficit reported in these financial
statements results principally from temporary differences relating to the timing
of the recording of deferred salaries and compensation related to the grant of
stock options for income tax and financial reporting purposes, the differences
in the accounting for the Company's investment in its former consolidated
subsidiary for income tax and financial reporting purposes, and as a result of
the non-deductibility for income tax purposes of a prior year's charge to
operations for debt conversion expense. The potential income tax benefit of
these carryforwards and temporary differences of approximately $6.4 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 8 - Stockholders' Equity
- -----------------------------
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. 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. As of June 30,
1997, a total of 449,999 shares of preferred stock had been converted into
1,285,707 shares of common stock.
Private placements of common equity
On February 28, 1997, the Company notified the holders of all of its
outstanding warrants to purchase shares its common stock of proposed amendments
to such warrants. These amendments were offered because the Company was unable
to complete a planned registration during 1996 of the common stock issuable upon
the exercise of the warrants. The warrants, all of which had original expiration
dates five years from the respective acquisition date, were issued in private
financings that took place in February 1992, June 1994, June 1995 and December
1995. The proposed amendments included, in various combinations, extensions of
the expiration dates, reductions in the exercise prices, provisions for cashless
exercise, and provisions for "piggy-back" registration rights.
The amendments proposed for the warrants issued in February 1992 (the
"February 1992 Warrants") were also offered in connection with a $250,000 equity
investment proposal from Proactive accepted by the Company on February 24, 1997.
In exchange for this cash investment, Proactive received 333,333 shares of
common stock
- 8 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
and five-year warrants to purchase 166,666 shares of common stock at an exercise
price of $.75 per share, along with a number of amendments to February 1992
Warrants issued by the Company to Proactive and other investors in connection
with the sale of $2 million of convertible preferred stock in February 1992 (the
"Preferred Stock Investment"). One other participant in the Preferred Stock
Investment, a director of the Company, also received the amendments to February
1992 Warrants in exchange for his cash investment of $1,639, pursuant to which
he also received 2,186 shares of common stock and five-year warrants to purchase
1,093 shares of common stock at an exercise price of $.75 per share.
On March 31, 1997, the Company completed a private financing in which it
raised $330,000 from a small number of the Company's shareholders who
participated in previous private financings of the Company. A total of 440,000
shares of the Company's common stock and five-year warrants to purchase an
additional 220,000 shares of common stock at $.75 per share were issued in
connection with this transaction.
The offer and sale of a total of 775,519 shares of common stock and
five-year warrants to purchase a total of 387,759 shares of common stock in
connection with the two transactions described above satisfied the conditions of
Rule 506 of Regulation D of the Securities Act of 1933, as amended (the "Act")
and, as such, were exempt from the reqistration requirements of Section 5 of the
Act as transactions not involving any public offering within the meaning of
Section 4(2) of the Act. All of the purchasers of these securities qualified as
"accredited investors" pursuant to Rule 501 of Regulation D of the Act.
Presented below is a schedule summarizing the number, exercise prices and
expiration dates of the warrants outstanding as of June 30, 1997, both as
originally issued and as amended as described above.
Before amendments After amendments
----------------------------- -----------------------------
Month issued $ # of shares Expiration $ # of shares Expiration
------------ ---- ----------- ---------- ---- ----------- ----------
February 1992 0.35 571,428 Feb. 1997 0.35 571,428 Feb. 2000
February 1992 1.00 3,121,428 Feb. 1997 0.75 1,858,928 Feb. 2000
1.00 428,571 Dec. 1997
February 1992 1.50 3,142,857 Feb. 1997 0.75 1,239,286 Feb. 2000
1.50 428,572 Dec. 1997
June 1994 1.125 524,268 June 1999 0.75 524,268 June 1999
June 1994 1.50 524,268 June 1999 0.75 524,268 June 1999
June 1995 0.375 595,000 June 2000 0.375 595,000 June 2000
June 1995 0.50 595,000 June 2000 0.50 595,000 June 2000
December 1995 1.25 340,000 Dec. 2000 0.75 340,000 Dec. 2000
March 1997 0.75 387,759 Mar. 2002 0.75 387,759 Mar. 2002
----------- -----------
Totals 9,802,008 7,493,080
========= =========
Stock options
The Company maintains a non-qualified stock option plan which has made
available for issuance a total of five million shares of common stock. 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 August 2006.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25.
Under APB No. 25, compensation cost is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price of the option granted. Compensation cost for stock options, if
any, is recognized ratably over the vesting period. In its complete annual
financial statements presented in its Form 10-KSB, the Company provides
additional pro forma disclosures as required under SFAS No. 123 - "Accounting
for Stock-Based Compensation" as if the fair value based method of accounting
had been applied to the Company's stock option grants made subsequent to 1994.
- 9 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Common stock reserved for future issuance
At June 30, 1997, a total of 16,069,320 shares of common stock were
reserved for issuance for the following purposes:
Purpose # of shares
----------------------------- -----------
Currently exercisable warrants:
Exercisable at $.35 per share, expiring in February 2000 571,428
Exercisable at $.375 per share, expiring in June 2000 595,000
Exercisable at $.50 per share, expiring in June 2000 595,000
Exercisable at $.75 per share, expiring on various dates
from June 1999 through March 2002 4,874,509
Exercisable at $1.00 per share, expiring in December 1997 428,571
Exercisable at $1.50 per share, expiring in December 1997 428,572
----------
7,493,080
----------
Currently exercisable options:
Exercisable at $.50 per share 3,162,484
Exercisable at $.75 per share 65,250
Exercisable at $1.00 per share 140,000
----------
3,367,734
----------
Granted options becoming exercisable in the future:
Exercisable at $.50 per share 379,000
Exercisable at $.75 per share 33,750
----------
412,750
Options available under plan for future grants 367,182
Conversion of preferred stock 4,428,574
----------
Total shares reserved 16,069,320
==========
Note 9 - Commitments
- --------------------
The Company does not have employment agreements with any of its officers;
however, as detailed in Note 6, all salaried employees have been deferring
significant portions of their authorized salaries under the terms of the Consent
to Deferral in order to help conserve cash.
The Company occupies its office and laboratory facilities pursuant to an
extension through November 1997 under the terms of an operating lease agreement
that has expired. The lease, as amended, provides for monthly rent of $3,500,
and requires the Company to pay all property related expenses. The Company will
either attempt to negotiate a new long-term lease for its current office and
laboratory facility once the current extension expires, or continue to occupy
the 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 may also search 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.
- 10 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
Description of the business
- ---------------------------
Sonex Research, Inc. ("Sonex" or the "Company"), incorporated in Maryland
in 1980, is engaged in the research, development and commercialization of a
patented technology (the "Sonex Combustion System", "SCS" or "Ultra Clean
Burn(TM) technology") which controls the combustion of fuel in engines,
primarily through modification of the piston. The Company has shown through
tests in manufacturers' engines and in computer models that its technology has
the ability to control combustion and allow fuel to be used more efficiently,
and that engines using the Company's technology have performance superior to
conventional engines and emit fewer harmful exhaust emissions.
Management believes that the Company's technology can be applied to all
types of internal combustion engines, including those used in personal and
commercial vehicles (automobiles, trucks, buses, boats and motorcycles) as well
as engines used in fixed or portable utility applications (motor generator sets,
pumps, and chain saws), whether spark ignited (SI) or compression ignited (CI),
carburetted or fuel injected, using either gasoline, diesel, alcohol and/or
other fuels.
The Company's competition comes from the extensive research departments
of the world's major vehicle and engine manufacturers as well as independent
research organizations. Although the experience and financial resources of its
competitors far exceed those of the Company, management believes that the SCS
can provide significant advantages over the competition on price and
performance. Due to the highly competitive nature of the world's automotive and
truck industries, in connection with its contracts and/or demonstration programs
with such manufacturers the Company is required to execute joint secrecy and
disclosure agreements that expressly prohibit the public disclosure of the
customers' names and other significant information. Failure by Sonex to maintain
this strict level of confidentiality would jeopardize the relationship of the
Company with its customers.
Sonex is concentrating its efforts on the application of its technology
to direct injected (DI) turbocharged diesel engines. Demonstration and
development programs at various stages of completion are underway with some of
the largest multi-national diesel engine manufacturers in the world. The goal of
such programs is to execute broad agreements with the diesel engine
manufacturers and their piston suppliers for industrial production of Sonex
pistons under license from the Company. The demonstration process involves many
stages, from proof of concept using screw-assembled prototype pistons fabricated
in-house by Sonex, to working with piston suppliers for the fabrication of
finished pre-production pistons that will be used in field trials and
durability, manufacturing optimization, and other tests required before the
start of full series production.
To date, the Company has completed separate demonstration programs with
two of these manufacturers, and each has verified and accepted that the SCS can
substantially reduce particulate emissions in a DI turbocharged diesel engine
for medium duty trucks while maintaining fuel consumption and power.
Negotiations are underway with one of the world's largest piston suppliers and
with these manufacturers for licensing, technology transfer and further
development programs. In the fourth quarter of 1996, a third major international
engine manufacturer executed a funded agreement with the Company for a similar
demonstration program.
In addition to diesel truck engine applications, the Company has
successfully applied its proprietary combustion technology to the conversion of
a small, lightweight, SI gasoline fueled engine to start and operate on JP5/JP8
standard military fuel while also improving fuel consumption. The advantages of
this converted SI engine, which also include low cylinder head temperatures,
have been demonstrated successfully in a public demonstration of a small,
remotely controlled Unmanned Aerial Vehicle (UAV). As a result of this
demonstration, the Company recently executed contracts with two U.S.
manufacturers of small engines to investigate the feasibility of applying the
Sonex UAV design to production SI engines: one contract applies to a two-stroke
gasoline fueled engine, while the other contract applies to a four-stroke engine
using diesel fuel.
As of June 30, 1997, the Company had five employees: its three executive
officers and two other individuals who provide technical services. Additional
information on the Company's business, its technology, and its management can be
found in the Company's 1996 Annual Report on Form 10-KSB.
- 11 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Financial position
- ------------------
Since its inception in 1980, the Company has generated net losses of
nearly $20 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, the Sonex continues to be
classified as a development stage company.
At June 30, 1997, the Company held cash and equivalents of $516,782, and
marketable securities valued at $93,133. The marketable securities represent
holdings in the common stock of the corporation which in October 1995 was merged
with and into the Company's inactive subsidiary, as further described in Notes 2
& 3 to the accompanying financial statements. 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 and expected revenue from currently executed contracts will be sufficient
to fund operations at least through the end of the first quarter of 1998. The
Company is currently in negotiations for technology transfer and licensing
agreements which would provide substantial operating funds in the future, but
execution of such agreements is not assured. In the absence of the realization
of significant revenues, additional capital may be necessary to fund operations
beyond the first quarter of 1998.
Results of operations
- ---------------------
A net loss from operations of $231,513 was recorded for the first six
months of 1997, as compared to $360,421 for the corresponding period in 1996, a
decrease of $128,908 The decrease in the loss resulted primarily from the
increase in development contract revenue to $144,375 for the first six months of
1997 from zero for the comparable period in 1996, while total expenses increased
by $7,673 and other income decreased by $7,794.
Revenue in 1997 includes $90,000 related to the delivery of prototype
Sonex pistons to one of the large multi-national diesel engine manufacturers
with which the Company is conducting demonstration and development programs,
$40,000 earned under a demonstration program begun in October 1996 to apply the
SCS to a truck diesel engine for another of these diesel engine manufacturers,
and $14,375 under contracts with two U.S. manufacturers of small engines to
investigate the feasibility of applying the Sonex UAV design to production SI
engines
Research and development (R&D) expenses for the first six months of the
year decreased by $8,546, or 3%, from $258,513 in 1996 to $249,967 in 1997, as
an increase in personnel costs of $4,369, from $152,260 in 1996 to $156,629 in
1997, was more than offset by a net decrease in other expense categories of
$12,915. The increase in personnel costs resulted from the following factors: an
increase effective January 1, 1997 in the wage rates for the Company's
non-executive employees; an increase in the accrual for unused vacation pay
recorded in the second quarter of 1997; and decreases in total salaries
resulting from the resignation at the end of May 1997 of the Company's manager
of research and the payment of cash bonuses in 1996 while none was paid in 1997.
The largest decrease for other R&D expenses was $7,884, from $29,264 in 1996 to
$21,380 in 1997, for occupancy costs, primarily because the Company negotiated a
reduction in its monthly rent late in 1996. The Company also experienced
declines in testing supplies and depreciation expense.
General and administrative (G&A) expenses for the first six months of the
year increased by $15,920 or 13%, from $126,648 in 1996 to $142,568 in 1997,
primarily as a result of an increase in personnel costs of $13,797, from $58,896
in 1996 to $72,693 in 1997. The increase in personnel costs resulted from an
increase effective January 1, 1997 in the salary for the Company's chief
financial officer and an increase in the accrual for unused vacation pay
recorded in the second quarter of 1997. As to other G&A expenses, increases in
travel costs, legal and auditing fees were offset by decreases in occupancy
expenses, insurance, public relations fees, and other expenses.
- 12 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders (contained
in the Articles of Incorporation and By-laws, as amended,
filed with the 1992 Annual Report on Form 10-KSB)
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SONEX RESEARCH, INC.
(Registrant)
/s/ George E. Ponticas
----------------------------
by: George E. Ponticas
Chief Financial Officer
July 31, 1997
- 13 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 516,782
<SECURITIES> 93,133
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 671,768
<PP&E> 430,041
<DEPRECIATION> 408,783
<TOTAL-ASSETS> 971,469
<CURRENT-LIABILITIES> 725,548
<BONDS> 0
0
15,500
<COMMON> 172,125
<OTHER-SE> 93,133
<TOTAL-LIABILITY-AND-EQUITY> 971,469
<SALES> 144,375
<TOTAL-REVENUES> 144,375
<CGS> 0
<TOTAL-COSTS> 393,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (231,513)
<INCOME-TAX> 0
<INCOME-CONTINUING> (231,513)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (231,513)
<EPS-PRIMARY> ($.01)
<EPS-DILUTED> ($.01)
</TABLE>
