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, 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 17,594,355 shares of the Issuer's $.01 par value Common Stock
outstanding at July 31, 1998.
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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 June 30, 1998 and December 31, 1997
Statements of operations and accumulated deficit for the three- and
six- month periods ended June 30, 1998 and 1997, and for the period
from April 9, 1980 (inception) through June 30, 1998
Statements of paid-in capital for the period from January 1, 1996 through
June 30, 1998
Statements of cash flows for the six-month periods ended June 30, 1998
and 1997, and for the period from April 9, 1980 (inception) through
June 30, 1998
Notes to financial statements
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
------------ ------------
Current assets
Cash and equivalents $ 265,608 $ 355,582
Marketable securities, available-
for-sale 204,500 117,200
Accounts receivable, including unbilled
costs and estimated earnings on uncompleted
contracts of $183,750 in 1997 133,396 210,088
Prepaid expenses 26,134 36,284
Loans to officers and employees 26,124 22,500
------------ ------------
Total current assets 655,762 741,654
Patents and technology, net of accumulated
amortization of $57,985 in 1998 and
$50,785 in 1997 234,726 231,742
Property and equipment, net of accumulated
depreciation of $404,173 in 1998 and
$398,173 in 1997 20,634 17,206
------------ ------------
Total assets $ 911,122 $ 990,602
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and other accrued liabilities,
including accrued subcontract costs on
uncompleted contracts of $111,750 in 1997 $ 47,085 $ 147,220
Accrued compensation 721,969 688,292
------------ ------------
Total current liabilities 769,054 835,512
------------ ------------
Stockholders' equity
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: 17,594,355 in 1998 and
17,393,906 in 1997 175,944 173,939
Additional paid-in capital 20,160,089 20,035,060
Unrealized increase in value of
marketable securities 204,500 117,200
Deficit accumulated during development stage (20,413,865) (20,186,509)
------------ ------------
Total stockholders' equity 142,068 155,090
------------ ------------
Total liabilities and stockholders' equity $ 911,122 $ 990,602
============ ============
The accompanying notes are an integral part of the financial statements.
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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,
1998 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
Revenue
Development contracts $ 114,165 $ 104,375 $ 166,370 $ 144,375 $2,130,104
Subcontracts 29,900 50,672 170,092
Other 124,425
---------- ---------- ---------- ---------- ----------
144,065 104,375 217,042 144,375 2,424,621
---------- ---------- ---------- ---------- ----------
Costs and expenses
Research & develop. $ 159,837 $ 130,986 $ 288,125 249,967 12,638,341
Cost of subcontracts 28,400 47,620 159,370
General & administ. 75,793 78,820 148,391 142,568 7,662,638
Interest 286 572 868,094
Write-off of patents 819,036
---------- ---------- ---------- ---------- ----------
264,030 210,092 484,136 393,107 22,147,479
---------- ---------- ---------- ---------- ----------
Net loss from
operations 119,965 105,717 267,094 248,732 19,722,858
Other (income)/expense
Investment income (3,866) (7,759) (7,872) (9,098) (319,788)
Debt issuance and
conversion expense 1,112,350
Gain on sale of marketable
securities (31,866) (8,121) (31,866) (8,121) (101,555)
---------- ---------- ---------- ---------- ----------
Net loss 84,233 89,837 227,356 231,513 20,413,865
Accumulated deficit
Beginning 20,329,632 19,798,189 20,186,509 19,656,513
---------- ---------- ---------- ---------- ----------
End $20,413,865 $19,888,026 $20,413,865 $19,888,026 $20,413,865
========== ========== ========== ========== ==========
Net loss per share $.005 $.005 $.013 $.014
===== ===== ===== =====
Weighted average
number of shares
outstanding 17,581,658 17,174,825 17,528,812 16,816,347
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF PAID-IN CAPITAL
(Unaudited)
Price Preferred stock Common stock Additional
per ($.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 June
option exercises .50 172,500 1,725 84,525
March for services .625 20,000 200 12,300
June - for services .75 7,949 80 5,882
Compensation - stock options 22,322
--------- ------ ---------- ------- ----------
Balance, June 30, 1998 1,540,001$15,400 17,594,355$175,944 $20,160,089
========= ====== ========== ======= ===========
The accompanying notes are an integral part of the financial statements.
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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,
1998 1997 1998
--------- --------- ------------
Cash flows from operating activities
Net loss $(227,356) $(231,513) $(20,413,865)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 6,000 6,750 685,262
Amortization of patents and technology 7,200 32,978 1,456,202
Write-down of patents and technology 819,036
Compensation - stock options 22,322 1,500 1,004,443
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 18,462 1,148,804
Gain on sale of marketable securities (31,866) (8,121) (101,555)
(Increase)decrease in accounts receivable 76,692 50,000 (133,396)
(Increase)decrease in prepaid expenses 10,150 (7,188) (26,134)
Increase (decrease)in accrued liabilities (66,458) (65,443) 681,390
--------- --------- ------------
Net cash used in operating activities (184,854) (221,037) (13,171,602)
--------- --------- ------------
Cash flows from investing activities
Purchase of marketable securities (2,377,256)
Proceeds from sales of marketable securities 31,866 8,121 2,478,811
(Increase) decrease in loans to employees (3,624) 933 (26,124)
Acquisition of property (9,428) (556,409)
Additions to patents and technology (10,184) (57,113) (1,385,514)
--------- --------- ------------
Net cash provided by (used for)
investing activities (8,630) (48,059) (1,866,492)
--------- --------- ------------
Cash flows from financing activities
Issuance of stock 86,250 696,139 15,964,711
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 86,250 696,139 15,303,702
--------- --------- ------------
Increase (decrease) in cash (89,974) 427,043 265,608
Cash
Beginning of period 355,582 89,739
--------- --------- ------------
End of period $ 265,608 $ 516,782 $ 265,608
========= ========= ============
The accompanying notes are an integral part of the financial statements.
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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- and six
month periods ended June 30, 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 for several years have voluntarily deferred receipt of
payment of significant portions of their authorized annual salaries when
requested by the Board of Directors to do so. 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.
Since January 1, 1997, however, there has been no further deferral of salary
requested of the Company's non-executive employees. As of June 30, 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.
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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 June 30, 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.
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SONEX RESEARCH, INC. FORM 10-QSB
Common stock reserved for future issuance
At June 30, 1998, a total of 14,864,273 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 3,116,466
Exercisable at $.75 per share 173,500
Exercisable at $1.00 per share 50,000
----------
3,339,966
----------
Granted options becoming exercisable in the future:
Exercisable at $.50 per share 83,750
Exercisable at $.75 per share 22,500
----------
106,250
Options available under plan for future grants 382,117
Conversion of preferred stock 4,400,003
----------
Total shares reserved 14,864,273
==========
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.
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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") 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
engine testing firms. 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. The Company is also participating with one of these engine
manufacturers, its component suppliers, and an independent engine testing firm,
on an engine application program aimed at substantially upgrading a current
production medium size truck diesel engine to meet future emissions standards.
In addition to diesel truck engine applications, the Company has
successfully applied a proprietary starting system and modified engine design to
the conversion of lightweight, SI gasoline fueled engines of various sizes used
in small, remotely controlled military Unmanned Aerial Vehicles (UAV's) to start
and operate on JP5/JP8 standard military fuels (also referred to as "heavy
fuels"). 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
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SONEX RESEARCH, INC. FORM 10-QSB
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.
In July 1998 the Company signed on as a subcontractor to Northrop Grumman
Corporation (NGC), whose Military Aircraft Systems Division in El Segundo,
California, is currently in the process of developing a UAV as a candidate for
application into various U.S. Government and international programs. Under a
purchase order issued by NGC, Sonex will convert a UAV engine from gasoline to
heavy fuel use.
Also in July 1998, the Company was awarded a Phase I Small Business
Innovation Research (SBIR) Program contract by the U.S. Naval Sea Systems
Command (NAVSEA) to investigate the feasibility of utilizing its proprietary SCS
to meet NAVSEA's objective of designing a low-cost, small, rugged engine capable
of starting and operating on shipboard-safe heavy fuels, for use in a small
aircraft that would be suitable for launch from guns and missiles and for
delivery by airdrop. The aspects of the design ruggedness and other interface
requirements for potential transition opportunities will be performed under
subcontract by Science Applications International Corporation (SAIC) of McLean,
Virginia. SAIC, an advanced technology firm, is one of the world's leading
providers of information technology, network systems, data security, and systems
integration. It has particular expertise in current national defense concepts
such as advanced sensor technology, automatic target recognition, UAV's and
other information technologies. In Phase I, Sonex will select a commercial
gasoline engine and design SCS modifications for conversion of the engine for
reliable heavy fuel use. SAIC will guide all Phase I modifications and testing
so that the technology developed will be able to meet all requirements and
specifications in a possible Phase II development effort. Phase II, the
principal research or development effort, would involve the fabrication and
delivery of a well-defined operational prototype engine, with documentation and
demonstration of its operational performance and ruggedness, while Phase III
would involve transition of the prototype into a viable product for sale in
military and/or private sector markets.
The Company is exploring additional potential uses by the military for
its heavy fuel engine technology, such as in other UAV models and light-weight,
man-portable generator sets used in the field, as well as private sector
opportunities. Operation of a light-weight engine on a high flash point fuel
such as diesel, rather than gasoline, will reduce the hazard associated with
gasoline, making such an engine much more suitable for applications where
gasoline storage is undesirable, such as in diesel fueled utility engines used
in pumps, generator sets, etc., in homes, commercial buildings and boats.
As of June 30, 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 June 30, 1998, the Company had available cash and equivalents of
approximately $265,000, marketable securities valued at approximately $204,500,
and receivables from the U.S. Government of approximately $133,000. 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 and projected spending levels, management believes
that the currently available resources and expected revenue from current and
potential contracts will be sufficient to fund operations at least through June
30, 1999. 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.
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SONEX RESEARCH, INC. FORM 10-QSB
Results of operations
- ---------------------
A net loss from operations of $227,356 was recorded for the first six
months of 1998, as compared to $231,513 for the corresponding period in 1997, a
decrease of $4,157. The decrease in the loss resulted from the fact that
increases of $72,667 in revenue and $22,519 in investment income exceeded the
increase in total expenses of $91,029.
Revenue:
Development Sub-
contracts contracts
1998 $166,370 $ 50,672
1997 $144,375 -
Development contract revenue and revenue from subcontracts consisted of the
following amounts:
o $61,457 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 $7,148 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 $87,215 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 $37,400 for outside
machining services;
o $90,000 in 1997 related to the delivery of prototype Sonex pistons to
a major international OEM;
o $40,000 in 1997 under a demonstration program begun in 1996 to apply
the SCS to a truck diesel engine for another major international OEM;
o $10,550 in 1998 and $14,375 in 1997 related to other small engine
projects.
Research and development (R&D) expenses:
R&D expenses for the first six months of the year increased by $38,158,
or 15%, from $249,967 in 1997 to $288,125 in 1998, as increases in personnel
costs of $40,175, project parts and supplies of $17,839, and other expense
categories of a net of $6,877 were offset in part by a decrease in patent
maintenance fees and amortization of the capitalized costs of patents and
technology of $26,733.
The increase in the largest expense category, personnel costs, from
$156,629 in 1997 to $196,804 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. Through the third quarter of 1997,
this individual was compensated primarily in the form of restricted stock or
stock options for services 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 six months of
1998, this individual received restricted stock valued at $18,462 for services
performed in Europe, earned cash compensation for time spent at Sonex totaling
$12,692, of which $5,077 has been deferred, and was reimbursed $7,631 for
travel, lodging, and other business expenses. Related charges for 1997 totaled
only $1,500. In addition, an increase of $5,120 for temporary help charges
incurred in 1998 was partially offset by a decrease in unemployment taxes and
other employee benefits of $2,731. Total salaries showed a net increase of only
$501.
Project parts and supplies increased from $14,634 in 1997 to $32,473 in
1998 due to the increase in the number of funded contracts, particularly with
respect to the small, two-cycle engine work for the military. Related charges
for the first six months of 1998 totaled $12,562, while there were no similar
charges for the same period in 1997. The Company also incurred charges of $5,552
in 1998 for parts and supplies used in other two-cycle engine research not
performed under contract, but none in 1997.
Patent maintenance fees and amortization of the capitalized costs of
patents and technology decreased from $41,174 in 1997 to $14,441 in 1998
primarily as a result of a reduction in amortization expense of $25,778, as the
capitalized costs of computer simulations became fully amortized during 1997;
thus, there was no corresponding charge in 1998.
- 12 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
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 $35,200 for
outside machining services pursuant to the contract with the USMC to convert an
additional forty UAV gasoline engines to heavy fuel operation. There were no
such charges in the same period in 1997.
General and administrative (G&A) expenses:
G&A expenses for the first half of the year increased by $5,823, or 4%,
from $142,568 in 1997 to $148,391 in 1998, primarily as a result of a net
increase in personnel costs of $6,180, from $72,693 in 1997 to $78,873 in 1998.
The net increase in personnel costs consisted of an increase resulting from the
recording of $22,322 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, offset by a decrease in total
salaries of $14,000, due primarily to a reduction caused by the termination of
the employment as of the end of the third quarter of 1997 of the Company's
former president, who had been employed on a part-time basis.
- 13 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's security holders held on June 16, 1998,
the holders of the Company's Common Stock re-elected Dr. Andrew A. Pouring as a
director for a term expiring at the annual meeting held in the year 2001. No
other matters were submitted to a vote of security holders during the second
quarter of 1998.
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
August 12, 1998
- 14 -
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