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 March 31, 1998.
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 17,576,406 shares of the Issuer's $.01 par value Common Stock
outstanding at April 30, 1998.
- 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 9:
Balance sheets as of March 31, 1998 and December 31, 1997
Statements of operations and accumulated deficit for the three-month
periods ended March 31, 1998 and 1997, and for the period from April 9,
1980 (inception) through March 31, 1998
Statements of paid-in capital for the period from January 1, 1996 through
March 31, 1998
Statements of cash flows for the three-month periods ended March 31, 1998
and 1997, and for the period from April 9, 1980 (inception) through
March 31, 1998
Notes to financial statements
- 2 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
------------ ------------
Current assets
Cash and equivalents $ 399,040 $ 355,582
Marketable securities, available-
for-sale 117,200 117,200
Accounts receivable, including unbilled
costs and estimated earnings on uncompleted
contracts of $12,500 in 1998 and $183,750
in 1997 39,388 210,088
Prepaid expenses 31,845 36,284
Loans to officers and employees 22,500 22,500
------------ ------------
Total current assets 609,973 741,654
Patents and technology, net of accumulated
amortization of $54,385 in 1998 and
$50,785 in 1997 228,240 231,742
Property and equipment, net of accumulated
depreciation of $401,173 in 1998 and
$398,173 in 1997 19,857 17,206
------------ ------------
Total assets $ 858,070 $ 990,602
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accrued compensation $ 701,492 $ 688,292
Accounts payable and other accrued liabilities,
including accrued subcontract costs on uncompleted
contracts of $111,750 in 1997 39,700 147,220
------------ ------------
Total current liabilities 741,192 835,512
------------ ------------
Stockholders' equity (Note 10)
Preferred stock, $.01 par value - 2,000,000
shares issued; 1,540,001 shares outstanding 15,400 15,400
Common stock, $.01 par value - shares issued
and outstanding: 17,576,406 in 1998 and
17,393,906 in 1997 175,764 173,939
Additional paid-in capital 20,138,146 20,035,060
Unrealized increase in value of
marketable securities 117,200 117,200
Deficit accumulated during development stage (20,329,632) (20,186,509)
------------ ------------
Total stockholders' equity 116,878 155,090
------------ ------------
Total liabilities and stockholders' equity $ 858,070 $ 990,602
============ ============
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 March 31, through
March 31,
1998 1997 1998
------------ ------------ ------------
Revenue
Development contracts $ 52,205 $ 40,000 $ 2,015,939
Subcontracts 20,772 140,192
Other 124,425
------------ ------------ ------------
72,977 40,000 2,280,556
------------ ------------ ------------
Costs and expenses
Research and development 128,288 118,981 12,478,504
Cost of subcontracts 19,220 130,970
General and administrative 72,598 63,748 7,586,845
Interest 286 868,094
Write-off of patents
and technology 819,036
------------ ------------ ------------
220,106 183,015 21,883,449
------------ ------------ ------------
Net loss from operations (147,129) (143,015) (19,602,893)
Other income and expense
Investment and other income 4,006 1,339 315,922
Debt conversion expense (1,112,350)
Gain on sale of marketable
securities 69,689
------------ ------------ ------------
Net loss (143,123) (141,676) (20,329,632)
Deficit accumulated during
development stage
Beginning of period (20,186,509) (19,656,513)
------------ ------------ ------------
End of period $(20,329,632) $(19,798,189) $(20,329,632)
============ ============ ============
Net loss per share $.01 $.01
==== ====
Weighted average number of
common shares outstanding 17,475,378 16,453,886
============ ============
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF PAID-IN CAPITAL
(Unaudited)
Price Preferred stock Common stock Additional
per ($.01 par value) ($.01 par value) paid-in
share Shares Amount Shares Amount capital
----- --------- ------ ---------- ------- ----------
Note: Retroactive effect has been given to all previously declared stock splits.
Balance, January 1, 1996 1,830,000$18,300 15,281,535$152,815 $19,078,191
January for services 1.00 1,000 10 990
January through August -
option exercises .50 131,488 1,315 64,429
April and July -
conversion (.35 to 1) (279,999)(2,800) 799,997 8,000 (5,200)
Compensation - stock options 27,125
--------- ------ ---------- ------- ----------
Balance, December 31, 1996 1,550,001 15,500 16,214,020 162,140 19,165,535
January through December
option exercises .50 352,834 3,528 172,889
January through June
option exercises .75 17,000 170 12,580
March for cash .75 775,519 7,755 573,884
October -
conversion (.35 to 1) (10,000) (100) 28,571 286 (186)
December for services 1.00 5,962 60 5,902
Compensation - stock options 104,456
--------- ------ ---------- ------- ----------
Balance, December 31, 1997 1,540,001 15,400 17,393,906 173,939 20,035,060
January through March
option exercises .50 162,500 1,625 79,625
March for services .625 20,000 200 12,300
Compensation - stock options 11,161
--------- ------ ---------- ------- ----------
Balance, March 31, 1998 1,540,001$15,400 17,576,406$175,764 $20,138,146
========= ====== ========== ======= ===========
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)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
April 9, 1980
(inception)
Three months ended through
March 31, March 31,
1998 1997 1998
--------- --------- ------------
Cash flows from operating activities
Net loss $(143,123) $(184,915) $(20,329,632)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 3,000 3,375 682,262
Amortization 3,600 15,801 1,452,602
Write-down of patents 819,036
Compensation - stock options 11,161 993,282
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 12,500 1,142,842
Gain on sale of marketable securities (69,689)
(Increase)decrease in accounts receivable 170,000 50,000 (39,388)
(Increase)decrease in prepaid expenses 4,439 (1,229) (31,845)
Increase (decrease)in accrued liabilities (94,320) 23,180 653,528
--------- --------- ------------
Net cash used in operating activities (32,043) (50,549) (13,018,791)
--------- --------- ------------
Cash flows from investing activities
Purchase of marketable securities (2,377,256)
Proceeds from sales of marketable securities 2,446,945
(Increase) decrease in loans to employees 101 (22,500)
Acquisition of property (5,651) (552,632)
Additions to patents and technology (98) (49,075) (1,375,428)
--------- --------- ------------
Net cash provided by (used for)
investing activities (5,749) (48,974) (1,880,871)
--------- --------- ------------
Cash flows from financing activities
Issuance of stock 81,250 654,139 15,959,711
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 (1,608,569)
--------- --------- ------------
Net cash provided by (used for)
financing activities 81,250 654,139 15,298,702
--------- --------- ------------
Increase (decrease) in cash 43,458 554,616 399,040
Cash
Beginning of period 355,582 89,739
--------- --------- ------------
End of period $ 399,040 $ 644,355 $ 399,040
========= ========= ============
The accompanying notes are an integral part of the financial statements.
- 6 -
<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 a proprietary technology, known as the
Sonex Combustion System (SCS), which controls the combustion of fuel in engines.
The Company expects to license several 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 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-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. 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, 1997.
Note 3 - Patents and Technology
- -------------------------------
The costs associated with the filing of patent applications 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. 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.
The Company 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 4 - Accrued Compensation
- -----------------------------
In order to help conserve the Company's limited cash resources, all of
the Company's employees, at the request of the Board of Directors, for several
years have been voluntarily deferring receipt of payment of significant portions
of their authorized annual salaries. From time to time, portions of such
deferred amounts have been paid through the issuance to the employees of shares,
or discounted options to purchase shares, of the Company's Common Stock. As of
March 31, 1998, an aggregate of $661,492 of wages so deferred by current and
former employees remained unpaid and has been recorded as accrued compensation
on the Company's balance sheet.
- 7 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
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 largest beneficial owner of the
Company's common stock by virtue of the purchase of convertible preferred stock
and common stock purchase warrants, required that the voluntary deferral of
salaries be documented formally. Accordingly, all 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. The
conditions of the Consent to Deferral that would allow repayment of deferred
salaries have yet to occur.
Note 5 - Income Taxes
- ---------------------
The Company has not incurred any federal or state income taxes since its
inception due to operating losses. At December 31, 1997, the Company had net
operating loss carryforwards of 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 Company's net operating loss
carryforwards expire at various dates from 1998 through 2012, as follows:
Expiring in 1998 $ 658,000
Expiring in 1999 900,000
Expiring in 2000 1,105,000
Expiring in 2001 1,749,000
Expiring in 2002 1,838,000
Expiring in 2003 - 2012 10,526,000
------------
$ 16,776,000
Note 6 - 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 March 31,
1998, a total of 459,999 shares of preferred stock had been converted into
1,314,278 shares of common stock.
Stock options
The Company maintains a non-qualified stock option plan (the "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 granted to employees and directors become vested with respect to those
options which have not already vested. Options outstanding expire at various
dates through December 2007.
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 Statement of Financial
Accounting Standards 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.
- 8 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Common stock reserved for future issuance
At March 31, 1998, a total of 14,874,273 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
----------
6,635,937
----------
Currently exercisable options:
Exercisable at $.50 per share 2,914,966
Exercisable at $.75 per share 173,500
Exercisable at $1.00 per share 50,000
----------
3,138,466
----------
Granted options becoming exercisable in the future:
Exercisable at $.50 per share 289,250
Exercisable at $.75 per share 22,500
----------
311,750
Options available under plan for future grants 388,117
Conversion of preferred stock 4,400,003
----------
Total shares reserved 14,874,273
==========
Note 7 - Commitments
- --------------------
The Company occupies its office and laboratory facility on a
month-to-month basis under the terms of an operating lease agreement that
expired in April 1994 and was subsequently extended twice, most recently through
November 1997. No new long-term lease has been negotiated since this last
extension expired, and the Company once again is occupying 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. The lease provides for monthly rent of $3,500,
and requires the Company to pay all property related expenses. The Company will
seek to negotiate a new long-term lease for its facility or 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.
- 9 -
<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
proprietary technology (the "Sonex Combustion System", "SCS" or "Ultra Clean
Burn(TM) technology") which controls the combustion of fuel in engines through
modification of the pistons in large engines or the cylinder heads in small
engines. 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. The SCS process, which has no moving parts, produces
lower overall emissions at all engine speeds, particularly soot in diesel
engines, and is self-driven by the combustion process.
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.
Over the past few years, Sonex has concentrated 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
three of these manufacturers, and each has verified and accepted that the SCS
can substantially reduce particulate emissions at future NO (nitrous oxide)
levels in a DI turbocharged diesel engine for medium duty trucks while
maintaining fuel consumption and power. The most recent tests conducted by one
of these manufacturers showed that an engine using Sonex-modified pistons along
with EGR (exhaust gas recirculation) would attain future U.S. and European
emissions targets when OEM type production pistons become available.
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 addition to diesel truck engine applications, the Company has
successfully applied a proprietary starting system and modified engine design to
the conversion of a small, lightweight, SI gasoline fueled engine to start and
operate on JP5/JP8 standard military fuels (also referred to as "heavy fuels").
The advantages of this converted SI engine have been demonstrated successfully
in a small, remotely controlled military Unmanned Aerial Vehicle (UAV). In
January 1998 the Company delivered to the United States Marine Corps (USMC)
Systems Command in Quantico, Virginia, five protoytpe UAV engines that Sonex
successfully converted from gasoline to heavy fuel operation, and, in February
1998 Sonex received an order from the USMC Systems Command to convert an
additional forty UAV gasoline engines to heavy fuel operation. The Company is
also performing a UAV heavy fuel engine conversion under a demonstration
contract awarded in October 1997 by the U.S. Naval Air Warfare Center, Aircraft
Division, in Patuxent River, Maryland.
- 10 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
As of March 31, 1998, the Company had five employees: its two executive
officers and three individuals who provide engineering and technical services.
Additional information on the Company's business, its technology, and its
management can be found in the Company's 1997 Annual Report on Form 10-KSB.
Financial position
- ------------------
Since its inception in 1980, the Company has generated cumulative net
losses in excess of $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, Sonex continues
to be classified as a development stage company.
As of March 31, 1998, the Company had available cash and equivalents of
approximately $399,000 and marketable securities valued at approximately
$117,200. 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. 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 current and potential contracts will be
sufficient to fund operations at least through the end of 1998. The Company 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 may be necessary to fund operations for 1999 and beyond.
Results of operations
- ---------------------
A net loss from operations of $143,122 was recorded for the first three
months of 1998, as compared to $141,676 for the corresponding period in 1997, an
increase of $1,446 The increase in the loss resulted from the fact that
increases of $32,977 in revenue and $2,668 in investment income were not
sufficient to completely offset the increase in total expenses of $37,091.
Revenue:
Development Sub-
contracts contracts
1998 $ 52,205 $ 20,772
1997 $ 40,000 -
Development contract revenue and revenue from subcontracts consisted of the
following amounts:
o $39,507 in 1998 pursuant to the continuing contract with the U.S. Naval Air
Warfare Center to convert a gasoline fueled UAV engine to use heavy fuels;
o $7,698 in 1998 pursuant to the contract with the USMC completed in the
first quarter to convert a gasoline fueled small UAV engine to use heavy
fuels and, through a subcontract for which related revenue of $13,272
has been recorded in 1998, to upgrade the electronics in the UAV;
o $5,000 in 1998 pursuant to the recently executed contract with the USMC
to convert an additional forty UAV gasoline engines to heavy fuel
operation, as well as related subcontract revenue of $7,500 for outside
machining services;
o $40,000 in 1997 under a demonstration program begun in 1996 to apply the
SCS to a truck diesel engine for a major international OEM.
Research and development (R&D) expenses:
R&D expenses for the first three months of the year increased by $9,307,
or 8%, from $118,980 in 1997 to $128,287 in 1998, as increases in personnel
costs of $15,205, software engineering fees of $5,000, and project parts and
supplies of $4,267 were offset in part by a decrease in patent maintenance fees
and amortization of the capitalized costs of patents and technology of $13,288
and a net decrease in other expense categories of $1,877.
The increase in the largest expense category, personnel costs, from
$71,217 in 1997 to $86,422 in 1998 relates almost entirely to the compensation
and expenses of a consultant who serves as the Company's R&D supervisor and
corporate liaison in Europe. Until recently, this individual was compensated
primarily in the form of restricted stock or stock options for services
- 11 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
performed in Europe. In the fourth quarter of 1997, a new agreement was executed
whereby for time spent in Annapolis he receives cash compensation, a portion of
which is deferred, and for services performed in Europe he is paid in the form
of restricted stock. For the first quarter of 1998, this individual received
restricted stock valued at $12,500 for services performed in Europe prior to his
arriving in Annapolis at the end of March 1998, and was reimbursed for travel
and other expenses of $2,838. There were no such charges in the first quarter of
1997.
Cost of sub-contracts:
The Company's demonstration contract with the USMC to convert a gasoline
fueled UAV engine to use heavy fuels also included a subcontract to another
vendor for the upgrade of the electronics in the UAV. "Cost of subcontracts" in
1998 includes $12,420 in connection with this work, as well as $6,800 for
outside machining services pursuant to the new contract with the USMC to convert
an additional forty UAV gasoline engines to heavy fuel operation. There were no
such charges in the first quarter of 1997.
General and administrative (G&A) expenses:
G&A expenses for the first three months of the year increased by $8,850,
or 14%, from $63,748 in 1997 to $72,598 in 1998, as a result of an increase in
personnel costs of $13,970, from $28,013 in 1997 to $41,983 in 1998, that was
partially offset by a net decrease in other G&A expenses of $5,120. The majority
of the increase in personnel costs resulted from the recording of $11,161 in
1998 for compensation cost for the current vesting of stock options granted in
the fourth quarter of 1997 by the Company's principal shareholder to the new
president of the Company.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders (contained
in the Articles of Incorporation and By-laws, as amended,
filed with the 1992 Annual Report on Form 10-KSB)
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SONEX RESEARCH, INC.
(Registrant)
/s/ George E. Ponticas
----------------------------
by: George E. Ponticas
Chief Financial Officer
April 30, 1998
- 12 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 399,040
<SECURITIES> 117,200
<RECEIVABLES> 39,388
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 609,973
<PP&E> 421,030
<DEPRECIATION> 401,173
<TOTAL-ASSETS> 858,070
<CURRENT-LIABILITIES> 741,192
<BONDS> 0
0
15,400
<COMMON> 175,764
<OTHER-SE> (74,286)
<TOTAL-LIABILITY-AND-EQUITY> 858,070
<SALES> 72,977
<TOTAL-REVENUES> 72,977
<CGS> 19,220
<TOTAL-COSTS> 220,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (143,123)
<INCOME-TAX> 0
<INCOME-CONTINUING> (143,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143,123)
<EPS-PRIMARY> ($.01)
<EPS-DILUTED> ($.01)
</TABLE>
