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, 2000.
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 18,317,299 shares of the Issuer's $.01 par value Common Stock
outstanding at May 1, 2000.
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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 2 to 9:
Report of Independent Accountants
Balance sheets as of March 31, 2000 and December 31, 1999
Statements of operations and accumulated deficit for the three- month
periods ended March 31, 2000 and 1999
Statements of paid-in capital for the period from January 1, 1998 through
March 31, 2000
Statements of cash flows for the three-month periods ended March 31, 2000
and 1999
Notes to financial statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sonex Research, Inc.
We have reviewed the condensed financial statements appearing on pages 3 through
10 of this Form 10Q-SB Quarterly Report of Sonex Research, Inc. (the "Company")
as of March 31, 2000. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the balance sheet as of December 31, 1999, and the related statements of
operations and accumulated deficit and cash flows for the year then ended (the
"audited financial statements", not presented herein), and in our report dated
March 2, 2000, we expressed an unqualified opinion on those financial
statements. We also stated that the audited financial statements were prepared
assuming that the Company will continue as a going concern; however, as
described in Note 3 to the audited financial statements, the Company has
incurred significant net losses since its inception and its ability to commence
generation of significant revenue and ultimately achieve profitable operations
raise substantial doubt about the Company's ability to continue as a going
concern. The audited financial statements and the accompanying condensed
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
C. L. STEWART & COMPANY
Annapolis, Maryland
May 1, 2000
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2000 1999
------------ ------------
Current assets
Cash and equivalents $ 102,197 $ 57,768
Accounts receivable 149,992 77,461
Prepaid expenses 27,153 29,836
Loans to officers and employees 22,500 22,500
------------ ------------
Total current assets 301,842 187,565
Patents and technology, net of accumulated
amortization of $40,576 in 2000 and
$68,746 in 1999 190,516 219,776
Property and equipment, net of accumulated
depreciation of $413,675 in 2000 and
$409,648 in 1999 80,111 83,968
------------ ------------
Total assets $ 572,469 $ 491,309
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities
Accounts payable and other accrued liabilities $ 76,508 $ 49,212
Accrued wages, bonuses and vacation pay 69,000 79,381
------------ ------------
Total current liabilities 145,508 128,593
------------ ------------
Deferred compensation 776,425 763,744
------------ ------------
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: 18,317,299 in 2000 and
18,008,169 in 1999 183,173 180,082
Additional paid-in capital 20,550,942 20,430,476
Accumulated deficit (21,098,979) (21,026,986)
------------ ------------
Total stockholders' equity/(deficit) (349,464) (401,028)
------------ ------------
Total liabilities and stockholders' equity $ 572,469 $ 491,309
============ ============
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 AND ACCUMULATED DEFICIT
(Unaudited)
Three months ended March 31,
----------------------------
2000 1999
---- ----
Development and demonstration revenue
Government $ 195,005 $ 38,800
Commercial 20,000
------------ ------------
215,005 38,800
------------ ------------
Costs and expenses
Cost of revenue 110,289 16,135
Research and development 101,495 140,462
General and administrative 75,816 83,404
------------ ------------
287,600 240,001
------------ ------------
Net loss from operations (72,595) (201,201)
Other income and expense
Investment and other income 602 3,186
Gain on sale of marketable securities
------------ ------------
Net loss (71,993) (198,015)
Accumulated deficit
Beginning of period (21,026,986) (20,456,871)
------------- ------------
End of period $(21,098,979) $(20,654,886)
============ ============
Net loss per share $.004 $.011
===== =====
Weighted average number of common
shares outstanding 18,152,500 17,642,435
============ ============
The accompanying notes are an integral part of the financial statements.
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SONEX RESEARCH, INC. FORM 10-QSB
SONEX RESEARCH, INC.
CONDENSED STATEMENTS OF PAID-IN CAPITAL
(Unaudited)
Price Preferred stock Common stock Additional
per ($.01 par value) ($.01 par value) paid-in
share Shares Amount Shares Amount capital
----- --------- ------ ---------- ------- ----------
Balance, January 1, 1998 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 from grant of
stock options 44,644
--------- ------ ---------- ------- ----------
Balance, December 31, 1998 1,540,001 15,400 17,642,860 176,429 20,209,503
March for services .44 20,975 210 9,098
June for services .46 17,925 179 8,071
September for services .38 36,923 369 13,593
December for services .32 36,803 368 11,478
April and December
option exercises .50 255,000 2,550 124,950
Correction of stock ledger (2,317) (23) 23
Stock option compensation 24,000
Amortization of deferred
compensation from grant of
stock options 29,760
--------- ------ ---------- ------- ----------
Balance, December 31, 1999 1,540,001 15,400 18,008,169 180,082 20,430,476
February exercise of
warrants .35 285,000 2,850 96,900
March for services .40 24,130 241 10,125
Stock option compensation 6,000
Amortization of deferred
compensation from grant of
stock options 7,441
--------- ------ ---------- ------- ----------
Balance, March 31, 2000 1,540,001$15,400 18,317,299$183,173 $20,550,942
========= ====== ========== ======= ===========
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)
Three months ended
March 31,
-------------------------
2000 1999
---- ----
Cash flows from operating activities
Net loss $ (71,993) $ (198,015)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 4,972 2,250
Amortization of patents and technology 29,260 3,150
Amortization of deferred compensation
from stock options 7,441 7,440
Current charges paid in stock or options 16,366 15,308
Gain on sale of marketable securities
(Increase) decrease in accounts receivable (72,531) 9,015
(Increase) decrease in prepaid expenses 2,683 758
Increase (decrease) in current liabilities 16,916 (12,765)
Increase (decrease) in deferred compensation 12,680 13,565
------------ -----------
Net cash used in operating activities (54,206) (159,294)
------------ -----------
Cash flows from investing activities
Proceeds from sales of marketable securities
(Increase) decrease in loans to employees 5,000
Acquisition of property and equipment (1,115) (1,936)
Additions to patents and technology (1,027)
------------ ----------
Net cash provided by (used in) investing activities (1,115) 2,037
------------ ----------
Cash flows from financing activities
Issuance of stock - exercise of warrants 99,750
Issuance of stock - exercise of options
------------ ----------
Net cash provided by financing activities 99,750 0
------------ ----------
Increase (decrease) in cash 44,429 (157,257)
Cash
Beginning of period 57,768 336,458
------------ ----------
End of period $ 102,197 $ 179,201
============ ==========
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 improves the combustion of fuel in internal
combustion engines through modification of the pistons in large engines or the
cylinder heads in small engines. Variations of the Company's technology have
been applied to all types of internal combustion engines, including those used
in personal and commercial vehicles as well as engines used in fixed or portable
utility applications. Sonex concentrates its commercial efforts on the
application of the SCS to the reduction of exhaust emissions in direct injected
turbocharged diesel engines. The Company's objective is to execute broad
agreements with engine manufacturers and their piston suppliers for industrial
production of SCS pistons under license from Sonex.
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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, 1999.
Certain reclassifications have been made to the prior period financial
statements to conform to the classifications used in the current period.
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 written 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.
Deferred compensation outstanding is payable to the following
classifications of personnel:
March 31,
---------
2000 1999
---- ----
Current executive officers $ 443,818 $ 431,137
Current employees and consultants 62,088 62,088
Former employees 270,519 270,519
--------- ---------
$ 776,425 $ 763,744
========= =========
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SONEX RESEARCH, INC. FORM 10-QSB
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, 1999, the Company had net
operating loss ("NOL") and capital loss carryforwards of approximately $16.2
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:
Expiration NOL Capital
---------- ----- -------
2000 $ 1,105,399
2001 1,748,874 $ 201,681
2002 1,837,965 133,400
2003 1,344,816 365,147
2004 1,185,181 14,970
2005 - 2012 7,995,726
2018 - 2019 941,695
------------ ---------
$ 16,159,656 $ 715,198
============ =========
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 investors, including 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 March 31, 2000, a total of
459,999 shares of preferred stock had been converted into 1,314,278 shares of
common stock.
Exercise and expiration of warrants
In February 2000 the Company received cash proceeds of $99,750 from the
exercise of stock warrants to purchase 285,000 shares of its common stock at an
exercise price of $.35 per share. At the same time, warrants to purchase an
additional 286,428 shares at $.35 per share expired unexercised, as did warrants
to purchase 3,098,209 shares at $.75 per share.
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 December 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.
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SONEX RESEARCH, INC. FORM 10-QSB
From January 1, 2000 through March 31, 2000, the Company had the
following activity in options to purchase shares of common stock under the Plan:
Weighted Weighted
average # of average
# of exercise shares exercise
shares price exercisable price
------ ----- ----------- -----
Unexercised at January 1, 2000 4,056,716 $.52 3,426,716 $.52
Granted/becoming exercisable 50,000 .50 25,000 .50
Exercised 0 0
Lapsed (1,500) .50 (1,500) .50
--------- ---------
Unexercised at March 31, 2000 4,105,216 $.52 3,450,216 $.52
========= ==== ========= ====
Common stock reserved for future issuance
At March 31, 2000, a total of 12,382,091 shares of common stock were
reserved by the Company for issuance for the following purposes:
Purpose # of shares
----------------------------- -----------
Currently exercisable warrants:
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
December 2000 340,000
February 2002 167,759
March 2002 220,000
----------
1,917,759
Currently exercisable options 3,450,216
Granted options becoming exercisable in the future 655,000
Options available for future grants 1,959,116
Conversion of preferred stock 4,400,000
----------
Total shares reserved 12,382,091
==========
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 $4,000, 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
Caution regarding 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 forward-
looking 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. Accordingly, readers are cautioned not to
place undue reliance on such forward-looking statements.
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.
Factors that could cause actual results to differ materially include, but
are not limited to, the following:
o ability to generate cash flow from revenue or to secure financing
necessary to fund future operations
o ability to demonstrate commercial viability of SCS technology
o ability to complete technology development and demonstration programs
and execute licensing agreements that produce significant revenue
o ability to attract and retain skilled personnel
o changes in general economic conditions
o competition
The Company and its technology
- ------------------------------
Sonex Research, Inc. ("Sonex" or the "Company"), incorporated in Maryland
in 1980, has developed a patented proprietary technology (the "Sonex Combustion
System", "SCS" or "Ultra Clean BurnTM technology") which improves the combustion
of fuel in engines through design modification of the pistons in large engines
or the cylinder heads in small engines. Variations of the Company's technology
have been applied to all types of internal combustion engines, including those
used in personal and commercial vehicles (automobiles, trucks, buses, boats,
motorcycles) as well as engines used in fixed or portable utility applications
(motor generator sets, pumps, chain saws), whether spark ignited (SI) or
compression ignited (CI), carburetted or fuel injected, using gasoline, diesel,
alcohol and/or other fuels.
Management believes that the Company's piston-based emissions reduction
enabling technology for direct- injected (DI) diesel engines, which changes only
a single engine component while introducing no additional parts, can be an
alternative to exhaust aftertreatment. Evidence to date shows that the SCS is a
significant new engine design variable, and that the synergy of the SCS in
combination with exhaust gas recirculation (EGR) can enable in-cylinder
emissions reduction to meet future regulatory standards.
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.
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SONEX RESEARCH, INC. FORM 10-QSB
The SCS for the reduction of exhaust emissions in DI turbocharged diesel
truck engines is being commercialized through demonstration and development
programs at various stages of completion with some of the world's largest
foreign multi-national diesel engine original equipment manufacturers (OEMs).
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 and tested by the engine manufacturer in its laboratories, to
working with piston suppliers for the fabrication of finished pre-production
pistons that will be used in field trials, and in durability, manufacturing
optimization, and other tests required before the start of full series
production.
In separate demonstration programs, each of these OEMs has verified and
accepted that the SCS can substantially reduce particulate emissions at future
NOx (oxides of nitrogen) levels in a DI diesel engine for medium duty trucks
while maintaining fuel consumption and power. Tests conducted by one of these
manufacturers showed that an engine using SCS-modified pistons along with EGR
could attain future U.S. and European emissions targets when OEM type production
pistons become available. In-house testing of the Company's most recent patented
design innovation for vehicular DI diesel engines, referred to as the "SCS-AD",
yields more impressive results than earlier designs. The SCS-AD, when coupled
with EGR, achieves significant reductions in soot and NOx emissions with no fuel
penalty.
Sonex has now reached the next stage with these programs, that is,
optimization of the piston design for the fabrication of pre-production pistons.
The engine manufacturers have stated that the SCS benefits could be in lower
cost and less complexity. These factors are now being addressed by the Company
and its customers. Continued revision of emissions limits, however, has
challenged Sonex to produce piston designs that reduce both NOx and soot,
leading to a delay in successful commercialization of the SCS.
The Company also has successfully applied a patented SCS starting system
and modified combustion chamber design to the conversion of reliable,
lightweight, SI, 2-stroke, gasoline fueled engines of various sizes used in
small, remotely controlled military unmanned aerial vehicles (UAVs) to start and
operate on JP-5 standard military fuel (also referred to as "heavy fuel"). The
Sonex heavy fuel engines (HFEs) achieve power and fuel consumption substantially
equal to that of the stock gasoline engines and provide dependable performance
over the full engine operating range without "knocking", which has been a major
shortcoming of other heavy fuel conversion technologies.
As heavy fuels are less volatile than gasoline, in addition to the UAV
market, the Company is examining a wide range of sustained commercial utility
engine applications for its heavy fuel conversion technology to reduce the
hazards associated with the storage of gasoline in buildings and on boats. Over
the past few months, Sonex has also been applying its heavy fuel technology to a
4-stroke engine in connection with a contract with the U.S.
military.
Current diesel engine programs
- ------------------------------
Funded development of Sonex pistons for industrial production, using an
earlier SCS design, for one of the foreign engine OEM's proceeded successfully
through verification tests by the engine manufacturer of pre-production,
finished, aluminum pistons using an earlier SCS design. In the first quarter of
this year, Sonex delivered screw-assembled pistons incorporating the SCS-AD to
the engine manufacturer for testing in a complete six-cylinder engine. The
manufacturer's objective is to meet future stringent emissions limits in the
production version of this engine by use of the SCS technology, in combination
with other fuel system improvements, with no exhaust aftertreatment devices such
as catalytic converters or particulate traps. Results of these tests are
expected in the near future. Management is hopeful that successful evaluation of
the Sonex pistons will lead later this year to negotiations for further design
optimization services and a license agreement.
Promising test results at Sonex of the SCS-AD on a turbocharged
six-cylinder DI diesel engine led a second foreign engine OEM to engage its
piston supplier to produce pre-production SCS pistons. Sonex is providing input
into the piston design process and delivery of the pre-production pistons for
further engine testing at the OEM is expected soon.
Sonex has also presented the improved test results demonstrated by the
SCS-AD to U.S. diesel engine OEMs. Last summer 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. Tests
conducted over the past few months at Sonex using SCS pistons in this engine are
progressing, and Sonex expects to provide a preliminary report on results to the
manufacturer later this year.
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SONEX RESEARCH, INC. FORM 10-QSB
Heavy fuel engines (HFEs)
- -------------------------
The Company has successfully converted small, SI, carburetted, two-stroke,
gasoline fueled engines of various sizes used in small, remotely controlled
military unmanned aerial vehicles (UAVs) to start and operate on JP5/JP8
standard military fuels (also referred to as "heavy fuels"). UAVs conduct
short-range tactical reconnaissance while operating virtually unseen and
unheard, taking pictures of battlefields and enemy installations and relaying
them back to ground forces. Existing UAV engines in the military's inventory
operate on gasoline. Because of safety and logistics concerns, however, all
military small engines, such as those powering UAVs, eventually will be required
to operate on less volatile, widely available heavy fuels used by jet aircraft
and most military vehicles.
Under a "best efforts" feasibility demonstration contract from the U.S.
Marine Corps (USMC) Systems Command in Quantico, Virginia, early in 1998 the
Company delivered five prototype UAV heavy fuel engines (HFEs). Sonex
successfully converted the existing single cylinder, two-stroke, gasoline fueled
engine to start and run on heavy fuel, leading the USMC to contract Sonex to
convert an additional forty UAV engines used in the Dragondrone UAV. The USMC is
now deploying tactical UAVs aboard ship for the first time, as the Dragondrone
UAVs with Sonex HFEs are in service in several locations around the world. Other
demonstration programs for the Sonex HFE technology for UAVs have taken place
under contract with the military and defense contractors as well.
The Company is assessing additional potential uses by the military for the
SCS HFE technology, as well as private sector opportunities. Operation of a
light-weight engine on high flash point fuels such as diesel and heavy fuels,
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. Other military applications for two-cycle HFEs
include standby generators, water pumps, chainsaws, earth tampers and outboard
engines.
One such program on an alternative HFE application is already underway.
Under a sub-contract from a prime contractor to the U.S. military, Sonex is now
completing its demonstration of the technical feasibility ofconverting an
existing high performance, 650+ horsepower, 4-stroke, gasoline fueled propulsion
system for marine use to start and operate on heavy fuels. This demonstration of
the SCS 4-stroke HFE technology has been conducted in a laboratory feasibility
demonstrator single-cylinder engine at Sonex. The feasibility demonstrator
engine is starting and operating on JP-5 over a wide range of engine speeds and
loads, with good fuel economy and without knocking. Progress reviews to date by
the prime contractor and the military have been favorable; soon, Sonex hopes to
receive a request for quotation for a follow-up contract for prototype
conversion, design enhancements, and installation and operational assessment.
Employees
- ---------
As of March 31, 2000, the Company had five full-time employees and one
part-time employee, and engages 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 1999 Annual Report on Form
10-KSB.
Financial position and liquidity
- --------------------------------
As of March 31, 2000, the Company had available cash and equivalents of
approximately $102,000 and accounts receivable of approximately $150,000, (which
includes receivables of $130,000 from a prime contractor to the U.S. military).
Based upon available resources, current and projected spending levels, and
expected revenue from current and anticipated contracts, management is
optimistic that the Company will have sufficient capital to fund operations
through December 31, 2000. In the event that the award of anticipated contracts
is delayed or does not materialize, and in the absence of the realization of
significant revenues, additional capital may be necessary to fund operations
through and beyond that date. There is no assurance that such additional capital
will be available or, if available, can be obtained on favorable terms.
Results of operations
- ---------------------
A net loss from operations of $72,595 was recorded for the first three
months of 2000, as compared to $201,201 for the corresponding period in 1999, a
decrease of $128,606, or 64%. The decrease in the loss was due to substantially
higher revenue in 2000 versus 1999.
- 12 -
<PAGE>
SONEX RESEARCH, INC. FORM 10-QSB
Revenue and cost of revenue:
----------------------------
Three months ended March 31,
----------------------------
2000 1999
---- ----
Government $ 195,005 $ 38,800
Commercial 20,000
--------- ---------
$ 215,005 $ 38,800
========= =========
Cost of revenue $ 110,289 $ 16,135
========= =========
Since 1997 the Company has obtained several government contracts for its
heavy fuel engine 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 to heavy fuel
operation. Commercial 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.
All government revenue reported for the first quarter of 2000 relates to
a sub-contract awarded in the fall of 1999 from a prime contractor to the U.S.
military pursuant to which Sonex is demonstrating the technical feasibility of
converting an existing high performance, 650+ horsepower, 4-stroke, gasoline
fueled engine for marine use to start and operate on heavy fuels. The Company
has devoted a significant portion of its available resources to the performance
of this sub-contract since late in 1999. Work under this sub-contract is
expected to be completed in May 2000. The Company is currently in discussion
with the prime contractor and the military for follow-up contracts for prototype
conversion, design enhancements, and installation and operational assessment.
Government revenue for the first quarter of 1999 was entirely related to
a January 1999 contract from the U.S. Naval Research Laboratory (NRL) for an HFE
conversion demonstration on a gasoline UAV engine. Work on this contract, which
required only a small percentage of the Company's available workforce, continued
through the third quarter of 1999.
Cost of revenue primarily consists of direct labor charges and direct
purchases attributable to funded programs. Such amounts were many times higher
in the first quarter of 2000 than in 1999 due to the relative sizes of the
government contracts being performed at the time. A small portion of total cost
of revenue for each period represented charges directly attributable to funded
commercial projects.
Research and development (R&D) expenses:
----------------------------------------
R&D expenses for the first three months of the year decreased by $38,967,
or 28%, from $140,462 in 1999 to $101,495 in 2000. While the number of employees
remained the same and compensation rates increased only slightly, a much higher
percentage of the workforce was devoted to funded projects in 2000 as oppposed
to 1999. Associated charges were therefore classified as "Cost of revenue"
rather than R&D expenses for 2000. The decrease in R&D expenses would have been
larger than reported except that the 2000 total includes approximately $25,500
for the write-off of unamortized costs of patents abandoned while there was no
such charge in 1999.
General and administrative (G&A) expenses:
------------------------------------------
Total G&A expenses for the first three months decreased by $7,588, or 9%,
from $83,404 in 1999 to $75,816 in 2000. Personnel costs declined from $55,787
in 1999 to $51,581 in 2000, or $4,206, primarily as a result of a decrease in
wages for an administrative assistant, which position became vacant early in
1999 and has not since been filled. Net decreases in other expenses amounted to
$3,382.
- 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: 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
May 1, 2000
- 14 -
<PAGE>
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