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 September 30, 1999.
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 17,828,866 shares of the Issuer's $.01 par value Common Stock
outstanding at October 29, 1999.
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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 September 30, 1999 and December 31, 1998
Statements of operations, accumulated deficit and comprehensive
income/(loss) for the three- and nine-month periods ended September 30,
1999 and 1998
Statements of paid-in capital for the period from January 1, 1997 through
September 30, 1999
Statements of cash flows for the nine-month periods ended September 30,
1999 and 1998
Notes to financial statements
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
------------ ------------
Current assets
Cash and equivalents $ 52,350 $ 336,458
Marketable securities, available-
for-sale 29,460
Accounts receivable, including unbilled
costs and estimated earnings on uncompleted
contracts of $14,173 in 1999 and $25,690 in 1998 41,837 102,485
Prepaid expenses 27,357 28,837
Loans to officers and employees 26,500 27,500
------------ ------------
Total current assets 148,044 524,740
Patents and technology, net of accumulated
amortization of $73,168 in 1999 and
$63,718 in 1998 241,678 243,600
Property and equipment, net of accumulated
depreciation of $402,825 in 1999 and
$407,128 in 1998 88,371 34,532
------------ ------------
Total assets $ 478,093 $ 802,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities
Accounts payable and other accrued liabilities $ 55,340 $ 46,979
Accrued subcontract costs on uncompleted contracts 16,456
Deferred compensation 796,727 765,516
------------ ------------
Total current liabilities 852,067 828,951
------------ ------------
Stockholders' equity/(deficit)
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: 17,828,866 in 1999 and
17,642,860 in 1998 178,289 176,429
Additional paid-in capital 20,335,733 20,209,503
Accumulated other comprehensive income,
representing unrealized increase in value of
marketable securities 29,460
Accumulated deficit (20,903,396) (20,456,871)
------------ ------------
Total stockholders' equity/(deficit) (373,974) (26,079)
------------ ------------
Total liabilities and stockholders' equity $ 478,093 $ 802,872
============ ============
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
CONDENSED STATEMENTS OF OPERATIONS, ACCUMULATED DEFICIT
AND COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue
Development contracts $ 45,593 $ 47,124 $ 164,393 $ 213,494
Subcontracts 50,672
---------- ---------- ---------- ----------
45,593 47,124 164,393 264,166
---------- ---------- ---------- ----------
Costs and expenses
Research & development 132,353 136,583 422,623 424,708
Cost of subcontracts 47,620
General & administrative 70,927 59,954 241,365 208,345
---------- ---------- ---------- ----------
203,280 196,537 663,988 680,673
---------- ---------- ---------- ----------
Net loss from operations (157,687) (149,413) (499,595) (416,507)
Other (income)/expense
Investment and other income 4,767 4,123 9,562 11,995
Gain on sale of marketable
securities 43,508 215,278 43,508 247,144
---------- ---------- ---------- ----------
Net loss (109,412) 69,988 (446,525) (157,368)
Accumulated deficit
Beginning 20,793,984 20,413,865 20,456,871 20,186,509
---------- ---------- ---------- ----------
End $20,903,396 $20,343,877 $20,903,396 $20,343,877
========== ========== ========== ==========
Net loss per share $.006 ($.004) $.025 $.009
===== ===== ===== =====
Weighted average
number of shares
outstanding 17,792,344 17,599,244 17,730,754 17,552,547
========== ========== ========== ==========
Comprehensive income/(loss):
Net loss $ (109,412) $ 69,988 $ (446,525) $ (157,368)
Other comprehensive income -
unrealized gains on marketable
securities:
Arising during the period 77 10,404
Reclassification of gains
reported in income (29,460) (184,055) (29,460) (106,982)
---------- ---------- ---------- ----------
Total comprehensive income/(loss)$ (138,872) $ (113,990) $ (475,985) $ (253,946)
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
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, 1997 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 December -
option exercises .50 181,500 1,815 88,935
March - for services .625 20,000 200 12,300
June - for services .75 7,949 80 5,882
September - for services .44 26,813 268 11,463
December - for services .50 12,692 127 6,219
Stock option compensation 5,000
Amortization of deferred
compensation 44,644
--------- ------ ---------- ------- ----------
Balance, December 31, 1998 1,540,001 15,400 17,642,860 176,429 20,209,503
March - for services .44 20,975 209 9,099
April - exercise of options .50 112,500 1,125 55,125
June - for services .46 17,925 179 8,071
September - for services .38 36,923 369 13,593
Correction of stock ledger (2,317) (23) 23
Stock option compensation 18,000
Amortization of deferred
compensation 22,320
--------- ------ ---------- ------- ----------
Balance, September 30, 1999 1,540,001$15,400 17,828,866$178,289 $20,335,733
========= ====== ========== ======= ===========
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-------------------------
1999 1998
---- ----
Cash flows from operating activities
Net loss $ (446,925) $ (157,368)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 6,750 9,000
Amortization of patents 9,450 10,800
Amortization of deferred compensation 22,320 33,483
Current charges paid in stock or options 49,520 30,193
Gain on sale of marketable securities (43,508) (247,144)
(Increase) decrease in accounts receivable 60,648 164,183
(Increase) decrease in prepaid expenses 1,480 5,222
Increase (decrease) in accrued liabilities 23,116 (61,322)
----------- ----------
Net cash used in operating activities (316,749) (212,953)
----------- ----------
Cash flows from investing activities
Proceeds from sales of marketable securities 43,508 247,144
(Increase) decrease in loans to employees 1,000 (2,646)
Acquisition of property and equipment (60,588) (9,428)
Additions to patents (7,529) (15,591)
----------- ----------
Net cash provided by (used in)
investing activities (23,609) 219,479
----------- ----------
Cash flows from financing activities
Issuance of stock - private placement
Issuance of stock - exercise of options 56,250 90,750
----------- ----------
Net cash provided by financing activities 56,250 90,750
----------- ----------
Increase (decrease) in cash (284,108) 97,276
Cash
Beginning of period 336,458 355,582
----------- -----------
End of period $ 52,350 $ 452,858
=========== ===========
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
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
nine-month periods ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. 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, 1998.
Note 3 - Patents
- ----------------
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.
Note 4 - Deferred Compensation
- ------------------------------
In order to help conserve the Company's limited cash resources, certain
of the Company's employees for several years have voluntarily deferred receipt
of payment of significant portions of their authorized annual salaries upon
request by the Board of Directors. By agreement with the Company, these
individuals have consented to the deferral of 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. Since January 1, 1997, however, there
has been no further deferral of salary requested of the Company's non-executive
employees. The conditions that would require repayment of deferred amounts have
yet to occur. From time to time, however, 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 September 30, 1999, an
aggregate of $751,727 of wages so deferred by current and former employees
remained unpaid and has been recorded as deferred compensation on the Company's
balance sheet.
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, 1998, the Company had net
operating loss ("NOL") and capital loss carryforwards of approximately $17.2
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 tax loss carryforwards are summarized as follows:
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SONEX RESEARCH, INC. FORM 10-QSB
Expiration NOL's Capital
---------- ----- -------
1999 $ 900,078
2000 1,105,399
2001 1,748,874 $ 201,681
2002 1,837,965 133,400
2003 1,344,816 365,147
2004 - 2012 9,180,907
2018 433,915
------------ ---------
$ 16,551,954 $ 700,228
============ =========
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. All of the authorized shares of preferred stock, along with
common stock purchase warrants, were issued for $2 million in February 1992 (the
"Preferred Stock Investment") to a small number of individuals who qualified as
"accredited investors" pursuant to Rule 501 of Regulation D of the Securities
Act of 1933 (the "Act") and to 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 acquisition of the convertible preferred
stock and common stock purchase warrants.
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 September 30,
1999, 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 7.5 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 September 2009.
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.
Common stock reserved for future issuance
At September 30, 1999, a total of 16,194,236 shares of common stock were
reserved by the Company for issuance for the following purposes:
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SONEX RESEARCH, INC. FORM 10-QSB
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 in
February 2000 3,098,214
December 2000 340,000
February 2002 167,759
March 2002 220,000
----------
5,587,401
Currently exercisable options, average exercise price
of $.52 per share 3,403,216
Granted options becoming exercisable in the future 687,500
Options available for future grants 2,116,116
Conversion of preferred stock 4,400,003
----------
Total shares reserved 16,194,236
==========
In June 1999 warrants for the purchase of 1,048,536 shares of common stock,
issued in June 1994 and having a current exercise price of $.75 per share,
expired unexercised. From January 1, 1999 through September 30, 1999, the
Company had the following activity in options to purchase shares of common stock
under the Plan:
Weighted Weighted
average average
# of exercise # of shares exercise
shares price exercisable price
--------- -------- ----------- --------
Unexercised at January 1, 1999 3,856,716 $.52 3,391,966 $.52
Granted/becoming exercisable 396,000 .50 173,250 .50
Exercised (112,500) .50 (112,500) .50
Lapsed (49,500) .50 (49,500) .50
--------- -----------
Unexercised at September 30, 1999 4,090,716 $.52 3,403,216 $.52
========= ======== ========== ========
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 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
Forward-looking statements
- --------------------------
Sections of this Report, as well as all publicly disseminated material
about the Company, contain information in the form of "forward-looking"
statements within the meaning of the Private Securities Litigation Act of 1995
(the "Act"). Such statements are based on current expectations, estimates,
projections and assumptions by management with respect to, among other things,
trends affecting the Company's financial condition or results of operations and
the impact of competition. Words such as "expects", "anticipates", "plans",
"believes", "estimates", variations of such words, and similar expressions are
intended to identify such statements that include, but are not limited to,
projections of revenues, earnings, cash flows and contract awards. Such
statements are not guarantees of future performance and involve risks and
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. In order to obtain the benefits of the "safe
harbor" provisions of the Act for any such forward-looking statements, the
Company cautions shareholders, investors and prospective investors about
significant factors which, among other things, have in some cases affected the
Company's actual results and are in the future likely to affect the Company's
actual results and cause them to differ materially from those expressed in any
such forward-looking statements. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements.
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
improves the combustion of fuel in engines through modification of the pistons
in large engines or the cylinder heads in small engines. 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.
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.
The SCS for direct-injected (DI) turbocharged diesel truck engines is
being commercialized through cooperative programs with some of the largest
foreign 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.
In separate demonstration programs, three of these manufacturers have
verified and accepted that the SCS can substantially reduce particulate
emissions at future NOx (oxides of nitrogen) levels in a DI turbocharged diesel
engine for medium duty trucks while maintaining fuel consumption and power. A
joint engine application program involving one of these foreign engine
manufacturers, its component suppliers, and an independent engine testing firm,
has been ongoing since last year. In this program, the Company's most recent
advanced design innovation for DI diesel engines, referred to as the "SCS-AD",
is being evaluated with the stated objective of meeting future stringent
emissions limits in a production engine in combination with other fuel system
improvements, with no exhaust aftertreatment devices such as catalytic
converters or particulate traps. Initial testing of the SCS pistons has not
taken place as expected due to delays in the testing schedule related
todifficulties encountered by the engine testing firm with the very advanced,
non-Sonex components being evaluated.
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SONEX RESEARCH, INC. FORM 10-QSB
Testing at Sonex of the SCS-AD on an engine for a second foreign engine
manufacturer has moved forward following a recent visit from representatives of
the engine manufacturer. They were satisfied with the progress made by Sonex
toward several targets in transferring the experimental single-cylinder,
naturally aspirated diesel SCS-AD design to the turbocharged six-cylinder engine
supplied by the engine manufacturer, but also noted that further demonstrations
of improvements towards other targets were needed. It was recently agreed that
this testing will be done with electron-beam welded pre-production pistons to be
made by the piston supplier. Delivery of the pre-production pistons is expected
within the next few months and a new engine demonstration will be scheduled at
that time. Progress with a third international engine manufacturer, however, has
slowed as a result of unfavorable economic and business conditions abroad.
In recent weeks the Company has initiated discussions with an overseas
manufacturer of diesel engines used in off-road applications. Management hopes
to reach agreement in the near future on a testing program for the evaluation of
the SCS in one of these engines. Emissions standards for off-road engines are
not as strict as those for commercial truck engines and lag several years behind
as well; however, these requirements are being strengthened and Sonex intends to
show that off-road diesel engines equipped with SCS technology will not require
the use of various kinds of electronic controls that are currently being used in
commercial truck engines to meet emissions requirements.
The Company's interaction with the U.S. diesel engine industry has
increased following the November 1998 $1 billion settlement with the
Environmental Protection Agency (EPA) and the Department of Justice to settle
allegations that the companies used "defeat devices" that allowed their engines
to emit more pollution on the road than in certification tests in order to
achieve performance benefits. Sonex is awaiting an official response to its
proposal submitted earlier this year to the EPA, the Justice Department, and the
diesel engine manufacturers, calling for a cooperative effort to demonstrate
that a new engine design variable exists in the piston-based SCS, complementary
to modern diesel technology, allowing in-cylinder reduction of emissions as an
alternative to exhaust aftertreatment. Sonex met with the EPA in September to
discuss its proposal and present improved emissions data from recent tests of
the SCS-AD. Since then, the Company has submitted individually tailored and
updated versions of its proposal to three of the engine manufacturers. The
Consent Decrees against each manufacturer were formally ordered entered by the
Federal District Court on July 1, 1999, giving the manufacturers until the end
of October 1999 to submit a list of projects for approval by the EPA and the
Department of Justice. A response from the government on the engine
manufacturers' submissions is expected before year-end.
Throughout this year, Sonex visited several U.S. diesel engine
manufacturers to present the improved test results demonstrated by the SCS-AD,
with the objective of accelerating the start of cooperative programs for
application of the SCS to medium- and heavy-duty diesel truck engines as well as
to other diesel engines for future production models of light trucks and sport
utility vehicles. In June one of these U.S. manufacturers delivered to Sonex an
engine used in current production sport utility vehicles and pick-up trucks for
a demonstration of the SCS in that engine. This category of vehicle expands the
potential market for the SCS DI diesel piston technology beyond the medium- and
heavy-duty truck arena.
Discussions are ongoing with other U.S. engine manufacturers; however, no
specific programs have been defined as yet. The timing and nature of potential
programs may depend on the outcome of the government's review of the public
projects proposed by the manufacturers under the Consent Decrees.
In addition to diesel truck engine applications, the Company also has
successfully applied a patented starting system and modified combustion chamber
design to the conversion of reliable, lightweight, spark-ignited (SI),
two-stroke, gasoline fueled engines of various sizes used in small, remotely
controlled unmanned aerial vehicles (UAV's) by the military, to start and
operate on JP5/JP8 standard military fuels (also referred to as "heavy fuels").
Sonex-modified single-cylinder engines ("HFE's") are now being deployed by the
United States Marine Corps (USMC). Following the delivery early in 1998 of five
prototype UAV engines that Sonex successfully converted from gasoline to heavy
fuel operation for the USMC Systems Command in Quantico, Virginia, the Company
received an order from the USMC to convert an additional forty gasoline engines
used in the Dragondrone UAV. Sonex delivered these HFE's in the summer of 1998,
and the USMC is now deploying tactical UAV's aboard ship for the first time, as
the Dragondrone UAV's with Sonex HFE's are in service in several locations
around the world.
The Company is exploring additional potential uses by the military for
its HFE technology, as well as private sector opportunities. Operation of a
lightweight engine on a high flash point fuel such as diesel, rather than
gasoline, reduces 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 aboard boats.
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SONEX RESEARCH, INC. FORM 10-QSB
In September 1999 Sonex completed a UAV two-cylinder HFE conversion
demonstration under contract with the U.S. Naval Research Laboratory. The Navy
is supportive of UAV technology and the integration of UAV's into shipboard
operations. A supply of heavy fuel is readily available onboard ships, and the
deployment of UAV's would not be hindered by the amount or type of fuel
available. The Company also has provided preliminary proposals for the SCS HFE
technology for UAV's to several defense contractors who planned to bid for the
U.S. Army's current Tactical UAV procurement.
Early in October 1999 the Company announced that it had been awarded a
six-month, cost-plus fixed fee sub-contract, expected to be worth in excess of
$300,000, by Innovation Marine Corp. of Sarasota, Florida, to convert an
existing high performance gasoline engine for marine use to start and operate on
heavy fuels. Successful conclusion of this feasibility demonstration, the
submission of an engineering plan, and a critical design review could lead to
follow-on projects for prototype conversion, design enhancements, and
installation and operational assessment.
As of September 30, 1999, the Company had five full-time employees and
engaged the part-time services of two consultants on a regular basis. Additional
information on the Company's business, its technology, and its management can be
found in the Company's 1998 Annual Report on Form 10-KSB.
Financial position and liquidity
- --------------------------------
As of September 30, 1999, the Company had available cash and equivalents
of approximately $52,000 and receivables from government contracts of
approximately $42,000. Early in October 1999 the Company announced that it had
been awarded a six-month, cost-plus fixed fee contract, expected to be worth in
excess of $300,000, to convert an existing high performance gasoline engine for
marine use to start and operate on heavy fuels.
Management cannot predict whether the Company will be successful in
obtaining market acceptance of its technology and/or in negotiations with
respect to licenses and royalty revenues. Based upon current and projected
spending levels, however, management believes that available resources and
expected revenue from current and potential contracts and other expected cash
receipts will be sufficient to fund operations at least through March 31, 2000.
In the absence of the realization of significant revenues, additional capital
may be necessary to fund operations beyond that date. There can be no assurance,
however, that additional financing, if required, will be available when needed
or, if available, that its terms will be favorable or acceptable to the Company.
Results of operations
- ---------------------
A net loss from operations of $499,595 was recorded for the first nine
months of 1999, as compared to $416,507 for the corresponding period in 1998, an
increase of $83,088, or 20%. The increase in the loss was due to lower revenue
in 1999 versus 1998, coupled with an increase in personnel costs from 1998 to
1999 resulting primarily from an increase in the wage rates of non-executive
personnel beginning in 1999 and greater use of the services of consultants.
Revenue and cost of subcontracts:
Nine months ended September 30
----------------------------
1999 1998
---- ----
Government/defense prime contracts $ 114,393 $ 193,494
Commercial contracts 50,000 10,000
--------- ----------
164,393 203,494
Revenue from government/defense sub-contracts 0 50,672
--------- ----------
Total revenue $ 164,393 $ 264,166
========= ==========
Cost of government/defense sub-contracts $ 0 $ 47,620
========= ==========
- 12 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Since 1997 the Company has obtained several military contracts for its
small engine, heavy fuel technology, an application that has been developed only
in the last few years. All contracts to date in this area have involved the
conversion of commercial gasoline fueled engines used in UAV's and the like.
Revenue earned in connection with the Company's DI diesel engine piston
technology is subject to the negotiated amount, if any, that an engine
manufacturer is willing to provide in funding to partially offset the
development costs incurred by the Company in applying its technology to one of
the manufacturer's engines.
Management is unable to predict future changes to development and
demonstration contract revenue because the amounts earned to date under previous
contracts have been determined through negotiations with individual
manufacturers based upon the level of effort required and the level of funding,
if any, that each manufacturer has been willing to commit. Management
anticipates, however, that future revenue may also include consulting fees
earned while working together with manufacturers to optimize the results
achieved on a particular manufacturer's engine, and, ultimately, license fees
and royalty revenue once the Company's technology is placed into production
engines by manufacturers. The future amounts of such other types of revenue,
however, cannot be reasonably estimated.
Research and development (R&D) expenses:
R&D expenses for the first nine months of the year decreased by $2,085,
or 1%, from $424,708 in 1998 to $422,623 in 1999, as an increase in personnel
costs was offset by a decrease in parts, supplies and project costs and lower
charges for depreciation and amortization of patents.
The increase in the largest expense category, personnel costs, from
$300,846 in 1998 to $318,935 in 1999, resulted from an increase in the wage
rates of technical personnel beginning in 1999 and a higher amount of overtime
pay, as well as from an increase in the compensation and expenses of the
consultant who serves as the Company's R&D supervisor and corporate liaison in
Europe. This individual, a former officer of the Company, is compensated
primarily in the form of restricted stock for services performed in Europe based
on part-time service, while for time spent in Annapolis he receives cash
compensation, a portion of which is deferred, for full-time service. He was
asked to spend more time in Annapolis in the first nine months of 1999 as
opposed to 1998. Related charges totaled $62,658 in 1999 and $57,556 in 1998.
Parts, supplies and project costs for the first nine months of the year
decreased from $44,347 in 1998 to $34,402 in 1999. Project costs were
significantly higher in 1998 due to a major production contract with the USMC in
the second quarter of 1998. This decrease was offset in part by greater
expenditures in 1999 for research not performed under contract, particularly
with respect to the Company's heavy fuel engine work, as well as a result of a
major purchase of testing fuel in the first quarter of 1999. In addition to
fuel, parts and supplies include engine parts and other items used or consumed
in engine testing and in the machine shop. Related costs fluctuate by period
depending on the number and type of engines being tested and the timing of
purchases of certain items.
General and administrative (G&A) expenses:
G&A expenses for the first nine months increased by $33,020, or 16%, from
$208,345 in 1998 to $241,365 in 1999, as an increase in personnel costs, which
rose from $122,024 in 1998 to $157,877 in 1999, or $35,853, was only partially
offset by decreases in other expenses. The increase in personnel costs related
almost entirely to an increase in the use of consulting services, particularly
those of an individual who has been assisting the Company since late in 1998 in
regard to business opportunities for the SCS heavy fuel engine technology, and
to the execution in the first quarter of 1999 of a consulting agreement with the
president of the Company, who is engaged on a part-time basis, to reflect an
increase in the level of services provided.
Gain on sale of marketable securities:
The marketable securities previously held represented holdings in the
common stock of the corporation which in October 1995 was merged with and into
the Company's inactive subsidiary. Gains on the sale of these securities
decreased from $247,144 for the first nine months of 1998 to $43,508 for the
corresponding period in 1999, a decrease of $203,636, as the majority of the
Company's holdings were liquidated during 1998. The remaining holdings were sold
during the third quarter of 1999. Overall, from 1996 through 1999, the Company
realized gains (net proceeds) from the sale of these securities of $359,064.
- 13 -
<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:
On October 8, 1999 the Registrant filed a Current Report on Form 8-K to
disclose that it has been awarded a six-month, cost-plus fixed fee
sub-contract, expected to be worth in excess of $300,000, by Innovation
Marine Corp. of Sarasota, Florida, to convert an existing high performance
gasoline engine for marine use to start and operate on heavy fuels.
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
October 29, 1999
- 14 -
<PAGE>
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<PERIOD-END> SEP-30-1999
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