UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1996.
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _________________ to _____________.
Commission file number: 0-23862
fonix corporation
...............................................................................
(Name of Small Business Issuer in Its Charter)
Delaware 22-2994719
........................... .....................
(State of Incorporation) (I.R.S. Employer
Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
..................................................
(Address of Principal Executive Offices)
(801) 328-0161
...........................................
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 of Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] or No [ ]
As of August 5, 1996, 38,181,146 shares of the issuer's Common Stock, par
value $.0001 per share, were issued and outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] or No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements required by item 310(b) of Regulation S-B follow
immediately.
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED BALANCE SHEET
[Unaudited]
<TABLE>
<CAPTION>
June 30,
1996
---------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,505,455
Notes Receivable 2,396,894
Interest receivable 133,982
---------------
Total Current Assets 25,036,331
Property & Equipment, net of accumulated
depreciation of $13,962 220,712
Intangible assets, net of accumulated
amortization of $1,912 31,740
---------------
$ 25,288,783
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 14,675,458
Accounts payable 474,235
Accrued expenses 74,766
Unearned interest Revenue 9,000
Convertible debenture 500,000
---------------
Total Current Liabilities 15,733,459
===============
Stockholders' equity:
Preferred stock -
Common stock 3,740
Additional paid-in capital 21,288,481
Accumulated deficit (11,736,897)
---------------
Total stockholders' equity 9,555,324
---------------
$ 25,288,783
===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended Six months ended 1993
June 30, June 30, (inception) to
-------------------------------- -------------------------------- June 30,
1996 1995 1996 1995 1996
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
--------------- --------------- --------------- --------------- ---------------
Expenses:
General and administrative 487,451 279,474 850,653 506,315 4,336,911
Research and development 1,090,877 483,934 1,907,538 1,165,474 8,020,525
--------------- --------------- --------------- --------------- ---------------
Total expense 1,578,328 763,408 2,758,191 1,671,789 12,357,436
--------------- --------------- --------------- --------------- ---------------
Loss from operations (1,578,328) (763,408) (2,758,191) (1,671,789) (12,357,436)
--------------- --------------- --------------- --------------- ---------------
Other income (Expenses):
Interest income 361,695 38,185 488,309 70,772 700,507
Interest (expense) (140,552) (62,423) (244,490) (112,729) (617,390)
--------------- --------------- --------------- --------------- ---------------
Total Other Income (Expenses) 221,143 (24,238) 243,819 (41,957) 83,117
--------------- --------------- --------------- --------------- ---------------
Loss before income taxes and
extraordinary item (1,357,185) (787,646) (2,514,372) (1,713,746) (12,274,319)
Current tax expense - - - - -
Deferred tax expense - - - - -
--------------- --------------- --------------- --------------- ---------------
Loss before extraordinary item (1,357,185) (787,646) (2,514,372) (1,713,746) (12,274,319)
Extraordinary income:
Forgiveness of debt, net of taxes - - - - 537,422
--------------- --------------- --------------- --------------- ---------------
Net Loss $ (1,357,185) $ (787,646) $ (2,514,372) $ (1,713,746) $ (11,736,897)
=============== =============== =============== =============== ===============
Loss per common share:
Loss before extraordinary items $ (0.04) $ (0.04) $ (0.07) $ (0.09) $ (0.62)
Extraordinary item - - - - 0.03
--------------- --------------- --------------- --------------- ---------------
Loss per common share $ (0.04) $ (0.04) $ (0.07) $ (0.09) $ (0.59)
=============== =============== =============== =============== ===============
Weighted average shares 36,311,941 18,959,891 33,710,102 18,645,352 19,941,396
=============== =============== =============== =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
<TABLE>
<CAPTION>
October 1,
1993
Six months ended (inception)
June 30, to June 30,
-------------------------------- ---------------
1996 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,514,372) $ (1,713,746) $ (11,736,897)
Adjustments to reconcile net loss
to net cash used in operations:
Common stock issued for services - - 422,750
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 14,656 354 15,874
Non cash forgiveness of debt income - - (537,422)
Changes in assets and liabilities:
(Increase) in interest receivable (107,758) (4,861) (133,982)
Increase (decrease) in accounts payable (51,819) 617,997 2,109,504
Increase (decrease) in unearned interest revenue 9,000 - 9,000
Increase (decrease) in accrued expenses 43,770 21,941 166,684
--------------- --------------- ---------------
Net cash used in operating activities (2,606,523) (1,078,315) (9,683,208)
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of equipment (185,932) - (234,675)
Investment in intangible assets (9,598) (24,053) (33,651)
Investment in notes receivable (3,160,000) - (3,196,894)
Payment of notes receivable 800,000 - 800,000
--------------- --------------- ---------------
Net cash used in investing activities (2,555,530) (24,053) (2,665,220)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 13,873,915 1,577,078 21,843,104
Payment of notes payable (4,815,979) (382,567) (6,595,785)
Proceeds from debenture - - 500,000
Proceeds from issuance of common stock 10,759,962 1,024,623 19,106,564
--------------- --------------- ---------------
Net cash provided by financing activities 19,817,898 2,219,134 34,853,883
--------------- --------------- ---------------
Net increase in cash and cash equivalents 14,655,845 1,116,766 22,505,455
Cash and cash equivalents at beginning of period 7,849,610 2,145,889 -
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 22,505,455 $ 3,262,655 $ 22,505,455
=============== =============== ===============
</TABLE>
[CONTINUED]
See accompanying notes to condensed consolidated financial statements
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
[CONTINUED]
<TABLE>
<CAPTION>
October 1,
1993
Six months ended (inception)
June 30, to June 30,
-------------------------------- ---------------
1996 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 200,720 $ 90,789 $ 450,884
Income taxes paid $ - $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the six months ended June 30, 1996:
The Company issued 220,000 shares of common stock for finders fees valued at $597,520.
The Company issued 200,000 shares of common stock for finders fees valued at $304,000.
For the Year ended December 31, 1995:
The Company was forgiven of related party notes payable of $286,493 and $135,368 with accrued interest of
$65,715 and $19,298, respectively. The Company was also forgiven of various accounts payable in the amount
of $30,548.
The Company issued 231,630 shares of common stock to cancel $187,621 in accounts payable.
The Company issued 3,700,000 warrants to purchase common stock to a related company controlled by the
majority shareholders of the Company in payment of accrued management fees of $122,100 included in
accounts payable.
The Company issued 3,700,000 shares of common stock upon the conversion of warrants for non-cash
cancellation of $1,295,000 in accounts payable.
The Company issued 285,000 shares of common stock for services rendered valued at $167,750.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which included only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in the accompanying interim
financial statements. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1995 audited financial
statements. The results of operations for the three months and six months
ended June 30, 1996 and 1995 are not necessarily indicative of the operating
results for the full year.
Research and Development - All monies that go to the unaffiliated research and
development entity are considered research and development costs and are
charged to research and development expense as incurred. None of these costs
are capitalized since the Company does not have a product that meets the
capitalization requirements.
NOTE 2 - NOTES RECEIVABLE / PAYABLE
At June 30, 1996 the Company had an unsecured note receivable in the amount of
$1,160,000 which bears interest at 12% per annum and is due on demand. There
was no accrued interest on the note receivable at June 30, 1996. A loan fee
in the amount of $78,700 was received and recorded as interest income.
Subsequent to June 30, 1996 the Company increased this note receivable from
$1,160,000 to $1,900,000 and obtained collateral security for the repayment
thereof.
At June 30, 1996 the Company had a note receivable in the amount of $36,894
which bears interest at 18% per annum and was due March 31, 1996. Subsequent
to June 30, 1996 a principal payment in the amount of $18,000 was received,
reducing the principal balance to $18,894. The Company is taking measures to
have the balance paid in full. Accrued interest on the note receivable
amounted to $180 at June 30, 1996.
At June 30, 1996 the Company had an unsecured note receivable in the amount of
$1,200,000 which bears interest at 12% per annum and is due September 1, 1996
with options to be extended through December 1, 1996. At June 30, 1996
accrued interest on the note receivable amounted to $12,800. Subsequent to
June 30, 1996 the full principal amount and accrued interest on this note
receivable were paid in full.
At June 30, 1996 the Company has a revolving note payable in the amount of
$14,675,458 to a bank at an interest rate of 5.95%. This note payable was due
August 12, 1996, and is secured by a certificate of deposit in the amount of
$20,000,000. On August 12, 1996, similar terms were negotiated, extending the
note to November 7, 1996.
NOTE 3 - CONVERTIBLE DEBENTURES
In connection with a funding agreement entered into during October 1995, the
Company issued a Series A Subordinated Convertible Debenture in consideration
for funds received in the amount of $500,000 on October 23, 1995. The
debenture is due October 23, 1997, has an annual interest rate of 5% and may
be converted to Series A Preferred Stock or into common stock [See Note 4].
NOTE 4 - CAPITAL STOCK
Preferred Stock - Pursuant to entering into a funding agreement, the Company
has agreed to amend its certificate of incorporation to authorize the issuance
of Series A Preferred Stock. As of June 30, 1996 the Company's board of
directors and shareholders had not yet authorized the issuance of preferred
stock or determined the dividend rate, liquidation preferences, participation
rights, or redemption requirements of the Series A Preferred Stock into which
the $500,000 debenture is convertible. The Company has agreed that it will
use its best efforts to cause its shareholders to authorize the issuance of
the preferred stock no later than the first special or annual shareholder's
meeting held after December 31, 1996 [See Note 3].
Funding Agreement - In October 1995, the Company entered into a funding
arrangement with a private investment entity. Under terms of the agreement,
the private investment entity agreed to fund the Company with $6,050,000
("Funding Commitment") over an 11 month period in exchange for the Company's
issuance of a total of 11,562,500 shares of the Company's common stock, and a
$500,000 Series A Subordinated Convertible Debenture (the "Debenture") which
is convertible into 166,167 shares of Series A Preferred Stock (described
above) or into the same number of shares of common stock. The preferred
stock, assuming it is authorized and issued, may be converted to common stock
at the discretion of the investor on a one for one basis. The first $1,540,000
of the Funding Commitment was paid to the Company on October 23, 1995 as
consideration for the issuance of the Debenture and the issuance of 2,166,667
shares of common stock [See Note 3]. The balance of the Funding Commitment,
$4,510,000 is to be paid as consideration for the issuance by the Company of
9,395,833 shares of common stock. As of June 30, 1996 the private investment
entity had paid a total of $3,550,000 in exchange for which the Company has
issued 7,395,833 shares of common stock. On July 25, 1996 an additional
$375,000 was received by the Company in exchange for which the Company issued
781,250 shares of common stock. The remaining balance of the Funding
Commitment of $1,625,000 is payable by the private investment entity through
September 1996 subject to the Company completing certain technology
development milestones. The balance of the shares of common stock (3,385,417)
due the investor, will be issued proportionately upon receipt of the remaining
installment payments made by the investor.
Common Stock Transactions - During the six months ended June 30, 1996, the
Company issued a total of 7,994,575 shares of common stock for net cash
proceeds of $12,373,587 at prices ranging from $.48 to $3.38 per share.
Included in these issuances were 420,000 shares issued as a finders fee,
valued at $901,520 and 4,052,083 shares issued as part of a funding
arrangement [See Note 4, 2nd paragraph].
Stock Options and Warrants - On April 30, 1996 the directors approved a
directors' stock option plan, under which the aggregate number of shares
available for issuance is 5,400,000. The plan is administered by a committee
consisting of two or more directors of the Company. The plan provides that
each director shall receive options to purchase 200,000 shares of common stock
for services rendered as a director for each calendar year or portion of a
calendar year in excess of six months. The exercise price of such options is
100% of the closing market price of the stock on the date the options are
granted. The option term is ten years from the date of grant. On April 30,
1996, 4,400,000 options were granted to the Company's current directors under
the plan. Of that amount, options to acquire 2,000,000 shares were granted to
certain incumbent directors for prior years' service, which options vested on
the date of grant and are exercisable at any time after six months from the
date of grant. The remaining options to purchase 2,400,000 shares granted on
April 30, 1996 shall vest at the rate of 200,000 shares per calendar year or
portion of a calendar year in excess of 6 months during which the option
holder serves as a director, starting with calendar 1996. The vesting date
for such options shall be January 1 following the year during which the
service was rendered commencing on January 1, 1997. The exercise price of the
options granted on the plan adoption date is $4.0625 per share of common
stock, which is equal to the closing market price of the Company's common
stock on April 30, 1996. None of these options have been exercised.
On April 30, 1996 the directors approved an employee stock option plan, under
which, the aggregate number of shares available for issuance is 900,000
shares. The plan is administered by a committee consisting of two or more
disinterested directors of the Company. Employee plan options may be granted
to officers, key employees and to other key individuals at the discretion of
the plan committee. The term of the plan is 10 years. No options will be
granted under this plan after April 30, 2006. As of June 30, 1996 no options
had been granted under the employee plan. On July 30, 1996, certain key
employees were granted an aggregate of 180,700 stock options under the
Company's employee stock option plan. The exercise price for 129,100 of these
stock options was $3.66 per share and the exercise prices for the remaining
51,600 stock options that were granted range from $5.06 to $9.88 per share.
These options are subject to a three year vesting schedule, pursuant to which
one-third of the total number of options granted may be exercised commencing
one year from the grant date, and an additional one-third may be exercised
each year thereafter until three years from the grant date, at which time all
options will be fully vested. These options expire July 30, 2006. None of
these options have been exercised.
On April 10, 1996, the Company granted 100,000 warrants to an individual to
purchase 100,000 shares of the Company's common stock. These warrants were
granted in lieu of cash for services rendered the Company. The 100,000
outstanding warrants have an exercise price of $3.24 per share and expire
April 10, 1999. None of these warrants have been exercised.
On April 3, 1995 three unrelated individuals were offered and purchased
120,000 warrants for restricted common stock in connection with a stock
purchase agreement. The warrants were purchased at $.0033 per share with an
exercise price of $2.00 per share. The warrants are exercisable anytime prior
to April 3, 1998.
In April 1995, all of the disinterested directors of the Company approved the
issuance of warrants to purchase 3,700,000 shares of common stock to an entity
controlled by the majority shareholders of the Company with the right to
convert accrued management fees due from the Company to that entity for the
purchase of 3,700,000 warrants and the exercise price of the warrants. The
warrants were offered in April 1995, purchased on July 31, 1995 for a
purchase price of $.033 per warrant and were then exercised on August 11, 1995
at $.35 per share. The related entity controlled by the majority shareholders
of the Company canceled invoices for $1,417,100 in management fees due from
the Company as consideration for the warrants and the exercise price of the
warrants. The exercise price was less than the market price of the Company's
common stock because, among other reasons, the shares issued upon exercise of
the warrants are restricted shares pursuant to Rule 144 and to assist the
Company in relieving debt and preserving limited cash reserves by converting
payables to restricted common stock.
In November 1994, the Company granted the right to purchase warrants for the
purchase of an aggregate of 155,000 shares of restricted common stock to
certain individuals, including warrants for 30,000 shares to three directors.
In October 1995, certain of these individuals were granted the right to
purchase warrants to purchase an additional 185,000 shares of restricted
common stock. In order to preserve the Company's limited cash , warrants were
granted in lieu of cash for services rendered to the Company. The warrants
can be purchased for $.033 per share of common stock and can be exercised at
$.50 per share of common stock. On October 30, 1995, one of these individuals
exercised 50,000 of these warrants for a price of $.50 per share. None of the
other warrants have been purchased. The warrants, as well as the right to
purchase the warrants, expire April 24, 1998 and October 23, 1998,
respectively.
In October 1994, the Company granted 150,000 warrants to purchase restricted
common stock. Due to the limited cash funds of the Company, these warrants
were granted in lieu of cash for previous and future services. The 150,000
outstanding warrants have an exercise price of $2.00 per share and expire in
December 1997.
As part of a September 30, 1994 restated stock purchase agreement, the Company
granted a shareholder the right to purchase 500,000 warrants for the purchase
of common stock under Regulation S, each warrant entitling the holder thereof
to purchase one share of common stock. The total purchase price for the
500,000 warrants is $50,000, $.10 per warrant. In December 1995 the 500,000
warrants were purchased for $50,000. At the time of the purchase of such
warrants, the warrant holder's rights thereunder were assigned to two foreign
entities which purchased the 500,000 shares of common stock underlying the
warrants, 166,667 and 333,333, respectively. $500,000 was received as
consideration for the exercise of all 500,000 warrants at an exercise price
of $1.00 per share of common stock.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company recorded the following expenses for services rendered and recorded
the following balances which were payable to a company owned by the majority
shareholders for the three months ended, and six months ended, June 30, 1996:
Three months ended Six months ended
June 30, 1996 June 30 1996
------------------ -----------------
Expenses
Management fees expense $ 50,000 $ 200,000
Rent expense 10,952 16,952
Payables:
Accounts payable $ 339,793 $ 339,793
The Company has rented office space from a company owned by the majority
shareholders under a month-to-month lease for $2,000 per month. In May 1996
the month-to-month base lease increased to Approximately $4,476 per month.
In October 1995, a note payable to an officer and shareholder of the Company
in the amount of $286,493 and accrued interest thereon of $65,715, were
forgiven and were accounted for as extraordinary income from forgiveness of
debt to the Company.
In October 1995, a note payable to a company owned by the majority
shareholders in the amount of $135,368 and accrued interest thereon of
$19,298, were forgiven by the related company, and were accounted for as
extraordinary income from forgiveness of debt to the Company.
NOTE 6 - RESEARCH AND DEVELOPMENT
On or about October 16, 1993, the Company entered into an agreement with a
research and development entity ("R&D Entity"), whereby the R&D Entity is
developing certain technology related to the Company's voice-activated
computer hardware and software (the "VoiceBox Technology"). The president of
the Company is one of seven members of the board of directors of the R&D
Entity, and the executive officers and directors of the Company collectively
own less than five percent of the common stock of the R&D Entity. Under the
terms of the agreement, the Company owns the intellectual property rights,
all technology and technology rights that are developed by the entity with
respect to the VoiceBox Technology. The Company agreed to provide all funding
necessary for the R&D Entity to develop a commercially viable product. There
is no minimum requirement or limit with respect to the amount of the funding
to be provided by the Company. However, under the terms of the agreement the
Company is obligated to use its best efforts in raising the necessary funding
for the development, manufacturing and marketing of the VoiceBox Technology.
The Company has not yet completed the research and development of its product,
and consequently, has not recorded any revenues from sales. Under the terms
of the agreement, the Company paid $1,090,877 to the R&D Entity for research
and development for the three months ended June 30, 1996 and $1,907,538 for
the six months ended June 30, 1996. If and when the Company completes the
development of the VoiceBox Technology and develops a commercially viable
product based thereon, and assuming sales of such a product commence, the
Company will be obligated to pay the unaffiliated R&D Entity a royalty fee
amounting to ten percent (10%) of the sales price of each commercial unit
sold.
NOTE 7 - CONTINGENCIES
The Company is involved in various litigation as part of its normal business
operations. In management's opinion, the ultimate resolution of such
litigation, individually and collectively, will not have a material adverse
effect on the Company's financial position.
A former attorney of the Company caused the transfer agent to issue a
certificate for 138,389 shares of common stock. The Company never properly
authorized the issuance of this certificate or the shares represented by the
certificate, nor received consideration for the shares. At the direction of
the Company, the Company's transfer agent has canceled these shares and these
shares are not included as issued and outstanding shares in the accompanying
financial statements.
NOTE 8 - INCOME TAXES
The Company's income taxes are recorded in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes [FASB
109]. FASB 109 requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of temporary
reporting differences between book and tax accounting and any available
operating loss or tax credit carryforwards. At June 30, 1996 the total of all
deferred tax assets is approximately $4,123,000 and the total of the deferred
tax liabilities is approximately $1,000. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined. Because of the uncertainty surrounding the realization of the
loss carryforwards the Company has established a valuation allowance of
approximately $4,122,000 as of June 30, 1996. The net change in the valuation
allowance is $523,000 for the three months ended June 30, 1996 and $880,989
for the six months ended June 30, 1996.
The Company has available at June 30, 1996, unused operating loss
carryforwards of approximately $11,300,000, which may be applied against
future taxable income and which expire in various years beginning in 2000
through 2010.
NOTE 9 - GOING CONCERN
The accompanying consolidated financial statements of fonix (TM) corporation
have been prepared on a going-concern basis, which contemplates profitable
operations and the satisfaction of liabilities in the normal course of
business. There are uncertainties that raise substantial doubt about the
ability of the Company to continue as a going concern. As shown in the
consolidated statements of operations, the Company has not yet achieved
operations and continues to report operating losses including losses of
$1,578,328 for the three months ended June 30, 1996 and $2,758,191 for the six
months ended June 30, 1996. As of June 30, 1996, the Company has working
capital of $9,302,872 which may not be adequate to finish the development of
the technology. These items raise substantial doubt about the ability of the
Company to continue as a going concern.
Although there has been substantial progress in the development of the
Company's voice-activated computer hardware and software, the Company does
not have a viable product, has not had any sales, and there can be no
assurance that the Company will develop a viable product or have any sales.
Management plans to continue financing the development of the Company's
technology through additional loans and/or sales of the Company's equity
securities.
The Company's continuation as a going concern is dependent upon its ability to
satisfactorily meet its debt obligations, meet its product development goals,
secure adequate new financing and generate sufficient cash flows from
operations. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
NOTE 10 - SUBSEQUENT EVENTS
Issuance of Stock and Stock Options - Subsequent to June 30, 1996, an
additional $375,000 was received in connection with the funding arrangement
with a private investment entity, in exchange for which the Company issued
781,250 shares of common stock.
On July 30, 1996, an agreement was entered into whereby certain employees were
granted an aggregate of 35,000 stock options as signing incentives. Of these
35,000 stock options, 25,000 have an exercise price of $2.97 and 10,000 have
an exercise price of $9.31. These options are exercisable at any time
beginning six months after the date of grant and expire July 30, 2006.
On July 30, 1996, certain key employees were granted an aggregate of 170,700
stock options under the Company's employee stock option plan. The exercise
price for 119,100 of these stock options was $3.66 per share and the exercise
price for the remaining 51,600 stock options that were granted range from
$5.06 to $9.88 per share. These options are subject to a three year vesting
schedule, pursuant to which one-third of the total number of options granted
may be exercised commencing one year from the grant date, and an additional
one-third may be exercised each year thereafter until three years from the
grant date, at which time all options will be fully vested. These options
expire July 30, 2006.
Issuance of notes receivable - Subsequent to June 30, 1996 the Company issued
a note receivable in the amount of $1,000,000 which bears interest at 12% per
annum and is due 30 days after demand.
At June 30, 1996 the Company had an unsecured note receivable in the amount of
$1,160,000 which bears interest at 12% per annum and is due on demand.
Subsequent to June 30, 1996 the Company increased this note receivable from
$1,160,000 to $1,900,000 and obtained collateral security for the repayment
thereof.
Operating Lease - On July 17, 1996, the Company entered into a lease agreement
for a 25,600 square foot office facility. The lease commences October 15,
1996 with a lease term of eight years and an option to extend for an
additional five years. The base rent is $2,725,376 over the next eight years,
and is based on 25,600 rentable square feet. The first year's base rent is
$304,640 which is $25,387 monthly. The base rent increases 3.5% annually for
years two through five and 2% annually for years six through eight and for the
five year option period. The Company has the right to terminate the lease
after five years if the Landlord cannot accommodate the Company's expansion
needs, if any.
<PAGE>
Item 2. Management's Plan of Operation
The Company is a development stage business which is involved in the
research and development and production of natural language voice recognition
technologies, using specific-speech knowledge, proprietary modeling, neural
networks and a linguistic process to recognize natural language speech.
Because the Company still is in the development stage of its business, the
Company has not yet marketed or distributed any product based on its
voice-recognition technology. Therefore, the Company has had no revenue from
its operations.
In October 1993 the Company entered into an agreement with an independent
research and development entity ("R&D Entity"), and on March 31, 1995, the
Company and the R&D Entity entered into a Re-Stated Development Agreement
("the Restated Development Agreement"). The terms of the Restated Development
Agreement specify that the research and development of the Company's
technology would be conducted by the R&D Entity but financed by the Company.
The president of the Company is one of seven members of the board of directors
of the R&D Entity, and the executive officers and directors of the Company own
shares of the common stock of the R&D Entity, however, such share ownership
constitutes less than 5% of the total number of the R&D Entity's common stock
issued and outstanding. Under the Re-Stated Development Agreement, the
Company is responsible for providing all of the funding for the development of
the voice recognition technology and any products resulting therefrom. There
is no minimum requirement or limit with respect to the amount of funding the
Company must provide under the Re-Stated Development Agreement. However, the
Company is obligated to use its best efforts in raising all of the necessary
funding for the development, manufacturing and marketing of the voice
recognition technology. The amounts of payments to the R&D Entity pursuant to
the Re-Stated Development Agreement are determined as the R&D Entity submits
weekly pre-authorized work orders and budgets, which are then reviewed and
approved by the Company. Since no product incorporating the voice recognition
technologies has yet been completed all funds paid to the R&D Entity by the
Company are not capitalized, rather, they are accounted for strictly as
research and development expense.
The Company incurred research and development expenses of $1,090,877 and
$483,934 for the three months ended June 30, 1996 and June 30, 1995,
respectively. General and administrative expenses were $487,451 and $279,474,
respectively, for the periods ended June 30, 1996 and June 30, 1995. Due to
these significant research and development and general and administrative
expenses, the Company has incurred losses of $1,357,185 and $787,646 for the
three months ended June 30, 1996 and June 30, 1995, respectively. At June 30,
1996, the Company had an accumulated deficit of ($11,736,897) and
stockholders' equity of $9,555,324. The Company anticipates similar losses in
the future as it continues the development of its voice recognition technology
and expects such losses to continue until such time as a commercially viable
product incorporating the Company's technology is completed and significant
sales revenues are realized. However, there can be no assurance that the
Company will complete a product incorporating its technologies, or that
sufficient revenues will be generated from sales of such product to allow the
Company to operate profitably.
Although the Company previously had anticipated that it would complete a
working prototype incorporating its technology by the end of the second
quarter of 1995 and planned to finish the alpha and beta testing of the
product sometime in the third quarter of 1995, limited amounts of operating
capital prevented development of the Company's technologies according to that
schedule. The Company presently anticipates that it will begin production of
its voice recognition technologies sometime during the second half of 1996.
Assuming and after completion of such alpha and beta testing in that time
frame, the Company presently intends to begin manufacturing and marketing a
product incorporating those technologies through OEM contracts, independent
software vendors and value-added developers and resellers. Significant
amounts of capital will be necessary to complete the alpha testing and to
begin the beta testing of the Company's technologies prior to the
manufacturing and marketing of a product based on those technologies.
Accordingly, the Company expects to incur significant losses at least through
the end of 1996.
From its inception, the Company's principal source of operating capital
has been private and other exempt sales of the Company's equity securities and
borrowing from related parties. At June 30, 1995, the Company had outstanding
debt to related parties in the amount of $702,861. Pursuant to an investment
agreement between the Company and a private investment entity dated October
23, 1995 (the "Private Investment Agreement"), $506,874 of a total of $656,874
of then outstanding debt to related parties was forgiven by the related
parties. This transaction occurred at the request of the private investment
entity to, among other things, alleviate the Company's debt obligations and to
make the arrangement more attractive for the private investment entity. At
June 30, 1996, there was no outstanding debt owed to related parties. Private
and other exempt sales of the Company's securities resulted in net cash
proceeds of $8,166,199 for the three months ended June 30, 1996. Additional
equity securities were issued during that period for service related, non-cash
consideration of $901,520.
The Company has a relationship with a local bank pursuant to which the
Company has entered into an agreement allowing it to borrow against its own
funds on deposit with the bank. At June 30, 1995, the Company had funds on
deposit of $3,568,800 and owed the bank a total of $3,065,000. As of June 30,
1996, the Company had funds on deposit of $20,000,000, and the Company owed
$14,675,458 to the bank, which obligation matures August 12, 1996. The
relationship with the bank is re-negotiated every three months. The interest
rate received for the funds on deposit and the interest rate paid for the
funds borrowed against the Company's funds on deposit was a net difference of
2% for the period ended June 30, 1995. On December 1, 1995 the Company and
the bank negotiated a new interest rate that yielded a net difference between
the rates of interest paid and received by the Company of 1%. Therefore, the
net cost to the Company for this arrangement was 1% for the period ended June
30, 1996. Interest is payable monthly and the principal amount is payable in
full at maturity.
In October 1995, the Company entered into a funding arrangement with a
private investment entity. Under terms of the agreement, the private
investment entity agreed to fund the Company with $6,050,000 ("Funding
Commitment") over an 11 month period in exchange for the Company's issuance of
a total of 11,562,500 shares of the Company's common stock, and a $500,000
Series A Subordinated Convertible Debenture (the "Debenture") which is
convertible into 166,167 shares of Series A Preferred Stock or into the same
number of shares of common stock. The preferred stock, assuming it is
authorized and issued, may be converted to common stock at the discretion of
the investor on a one for one basis. The first $1,540,000 of the Funding
Commitment was paid to the Company on October 23, 1995 as consideration for
the issuance of the Debenture and the issuance of 2,166,667 shares of common
stock. The balance of the Funding Commitment, $4,510,000 is to be paid as
consideration for the issuance by the Company of 9,395,833 shares of common
stock. As of June 30, 1996 the private investment entity had paid a total of
$3,550,000 in exchange for which the Company has issued 7,395,833 shares of
common stock. On July 25, 1996 an additional $375,000 was received by the
Company in exchange for which the Company issued 781,250 shares of common
stock. The remaining balance of the Funding Commitment of $1,625,000 is
payable by the private investment entity through September 1996 subject to the
Company completing certain technology development milestones. The balance of
the shares of common stock (3,385,417) due the investor, will be issued
proportionately upon receipt of the remaining installment payments made by the
investor. Under the terms of the agreement, if the Company does not achieve
the milestones which are specified in the contract, the private investment
entity is not obligated to continue the funding. If the private investment
entity stops funding because of the Company's failure to achieve a specified
milestone, the private investment entity will receive a number of shares
commensurate to the total funding invested.
Presently, as a result of the agreement described above and additional
domestic and offshore sales of its equity and debt securities, and assuming
that the Company is able to achieve the developmental milestones prescribed
under the agreement, the Company anticipates that it will be able to satisfy
its cash requirements during the next 12 months. Nevertheless, the research
and development associated with the completion of the Company's voice
recognition technologies and the manufacturing and marketing of any product
incorporating such technologies will continue to require large amounts of
capital. Since the Company has no revenue from operations, the Company
intends to continue to rely primarily on financing through the sale of its
equity and debt securities to satisfy future capital requirements. If and
when the Company successfully completes the development of a product
incorporating its voice recognition technologies, the Company will seek to
enter into either OEM or licensing agreements pursuant to which royalty or
other payments by third parties could provide a significant amount of the
financing necessary to manufacture and market such a product. Such funds
might alleviate the need for financing through additional sales of the
Company's debt or equity securities. Absent such OEM or licensing agreements,
however, the Company anticipates it will need a significant amount of
additional capital investment to finance the manufacturing, distribution and
marketing of a product incorporating its technologies. There can be no
assurance that the Company will receive the necessary financing to develop and
market its product from either OEM or licensing contracts or by the offer and
sale of the Company's debt or equity securities.
The Company will hire additional engineers as technology milestones are
achieved and additional funding is received. In addition, if and when the
Company completes the testing of its technologies, approximately thirty more
employees will be initially required for sales and marketing and customer
support services.
On July 17, 1996, the Company entered into a lease agreement for a 25,600
square foot office facility. The lease commences October 15, 1996 with a
lease term of eight years and an option to extend for an additional five
years. The base rent is $2,725,376 over the next eight years, and is based on
25,600 rentable square feet. The first year's base rent is $304,640 which is
$25,387 monthly. The base rent increases 3.5% annually for years two through
five and 2% annually for years six through eight and for the five year option
period. The Company anticipates that this building will be adequate office
space for the Company's needs over the next year. In addition, new testing
equipment is required and will be purchased as needed and as sufficient
capital is raised for its acquisition.
When used in this Quarterly Report on Form 10-QSB, the words "believes",
"anticipates", "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward looking statements that may be made to reflect
events or circumstances after the date of this Report or to reflect the
occurrence of unanticipated events.
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for the vote of security holders during the
period covered by this report.
ITEM 5. OTHER EVENTS
a. Modification of stock Purchase Agreement with Beesmark
Investments, L.C.
fonix corporation, a Delaware corporation (the "Company"), has entered
into an agreement with Beesmark Investments, L.C., a Utah limited liability
company affiliated with Dr. Alan C. Ashton which is the Company's single
largest shareholder ("Beesmark"), pursuant to which the Company, Beesmark and
Dr. Ashton agreed to modify the Securities Purchase Agreement dated as of
October 23, 1995 (the "Purchase Agreement"). Under the Purchase Agreement,
Beesmark agreed to provide financing to the Company in return for which the
Company agreed to issue up to 11,562,500 shares of the Company's common stock
and a Series A Convertible Subordinated Debenture ("Debenture") that is
convertible into up to 166,667 shares of common stock or, at the option of
Beesmark, 166,667 shares of the Company's Series A Convertible Preferred
stock, provided that the issuance of suck preferred stock is approved by the
Company's shareholders. The Debenture has a principal amount of $500,000, a
term of 1 year, and bears interest at the rate of 5% per annum.
The modification agreement specifies that the Debenture shall be amended
to extend its term for an additional year until October 23, 1997, and to
require interest payments on each anniversary of the issue date of the
Debenture. Additionally, the modification agreement extends the time period
within which the Company must seek shareholder approval of the issuance of the
preferred stock until the next annual or special meeting of shareholders to be
conducted after December 31, 1996.
b. Modification of Voting Trust Agreement.
The Voting Trust Agreement by and among the Company, Beesmark, Stephen M.
Studdert, Thomas A. Murdock, Roger D. Dudley, Studdert Companies Corp., a Utah
corporation, and Thomas A. Murdock as trustee, last amended on October 23,
1995, was amended by agreement of all parties thereto. Under the Voting Trust
Agreement as last amended, the Voting Trust expired its terms, if, among other
conditions, the Company's common stock traded at $10.00 per share for 15
consecutive trading days. The amendment to the Voting Trust Agreement
provides that the Voting Trust will expire pursuant to such condition only if
the market price of the Company's common stock exceeds $15.00 per share for
the prescribed 15 consecutive trading day period.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
fonix corporation
Date: August 13, 1996 /s/ Thomas R. Murdock
-------------------- ----------------------------
Thomas A. Murdock, President
Date: August 13, 1996 /s/ Roger D. Dudley
-------------------- ----------------------------
Roger D. Dudley,
Executive Vice President
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