UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[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
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fonix corporation
- -----------------------------------------------------------------------------
(Exact 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, Utah 84111
- -----------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(801) 328-0161
-----------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or Section 15(d) of the Exchange Act during the past 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.
2
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED BALANCE SHEET
[Unaudited]
ASSETS
June 30,
1996
--------------
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 24,078,255
Accumulated deficit (14,526,671)
--------------
Total stockholders' equity 9,555,324
--------------
$ 25,288,783
==============
See accompanying notes to condensed consolidated financial statements
3
<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 6,619,811
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 14,640,336
-------------- -------------- -------------- -------------- --------------
Loss from operations (1,578,328) (763,408) (2,758,191) (1,671,789) (14,640,336)
-------------- -------------- -------------- -------------- --------------
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) (14,557,219)
Current tax expense - - - - -
Deferred tax expense - - - - -
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary item (1,357,185) (787,646) (2,514,372) (1,713,746) (14,557,219)
Extraordinary income:
Forgiveness of debt, net of taxes - - - - 30,548
-------------- -------------- -------------- -------------- --------------
Net Loss $ (1,357,185) $ (787,646) $ (2,514,372) $ (1,713,746) $ (14,526,671)
============== ============== ============== ============== ==============
Loss per common share:
Loss before extraordinary items $ (0.04) $ (0.04) $ (0.07) $ (0.09) $ (0.73)
Extraordinary item - - - - 0.00
-------------- -------------- -------------- -------------- --------------
Loss per common share $ (0.04) $ (0.04) $ (0.07) $ (0.09) $ (0.73)
============== ============== ============== ============== ==============
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.
4
<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,
Six months ended 1993
June 30, (inception) to
-------------------------------- June 30,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,514,372) $ (1,713,746) $ (14,526,671)
Adjustments to reconcile net loss
to net cash used in operations:
Common stock issued for services - - 2,705,650
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 14,656 354 15,874
Non cash forgiveness of debt income - - (30,548)
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 9,057,936 1,577,078 17,027,125
Payment of notes payable - (382,567) (1,779,806)
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]
5
<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,
Six months ended 1993
June 30, (inception) 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. These items have been accounted for as capital contributions
to additional paid in capital in the amount of $506,874. 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 consolidated financial statements.
6
<PAGE>
fonix 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
7
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - NOTES RECEIVABLE / PAYABLE(Continued)
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
8
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK(Continued)
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 $10,759,962 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
9
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK(Continued)
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 130,000 stock options under the Company's employee stock
option plan. The exercise price for 119,000 of these stock options was
$3.66 per share and the exercise prices for the remaining 11,000 stock
options that were granted range from $5.06 to $8.50 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
10
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK(Continued)
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.
11
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a contribution to additional paid
in capital.
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
a contribution to additional paid in capital.
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
12
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RESEARCH AND DEVELOPMENT (Continued)
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 $5,400,000 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
13
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (Continued)
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 $5,400,000
as of June 30, 1996. The net change in the valuation allowance is
approximately $500,000 for the three months ended June 30, 1996 and
approximately $2,800,000 for the six months ended June 30, 1996.
The Company has available at June 30, 1996, unused operating loss
carryforwards of approximately $14,500,000, 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 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.
14
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 46,000 stock options as signing incentives.
Of these 46,000 stock options, 25,000 have an exercise price of $2.97,
11,000 an exercise price of $3.66 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
130,000 stock options under the Company's employee stock option plan. The
exercise price for 119,000 of these stock options was $3.66 per share and
the exercise price for the remaining 11,000 stock options that were
granted range from $5.06 to $8.50 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.
15
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note 4, the company issued 3,700,000 shares of common
stock to an affiliated corporation upon exercise of stock warrants. The
exercise price was paid for through the cancellation of debt which had
previously been accrued for management fees by the corporation. In
retrospect, Management believes that the provisions of APB Opinion No. 25,
which applies to stock issued to employees for services, should be
extended to cover this transaction. Accordingly, the Company has recorded
an additional compensation expense of $2,282,900 and adjusted additional
paid in capital on the financial statements for 1995. The affiliated
company also forgave debt and related interest in the amount of $506,874
which has been accounted for as a contribution to additional paid in
capital. Management believes these adjustments are necessary to be
consistent with current attitudes and policies in effect in subsequent
years. These adjustments have no effect on total stockholders' equity but
do result in an increase to net loss in 1995.
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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 $14,526,671 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
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
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.
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.
19
<PAGE>
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.
20
<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: April 10, 1997 /s/ Roger D. Dudley
-------------------------- ----------------------------------
Roger D. Dudley
Chief Financial Officer
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