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 September 30, 1995.
[ ] 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
- ------------------------------------------------------------------------------
(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 November 13, 1995, 26,589,355 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
September 30,
1995
--------------
Current assets:
Cash $ 3,568,804
Interest receivable 12,906
--------------
Total Current Assets 3,581,710
Intangible assets, net 23,346
--------------
$ 3,605,056
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 4,190,498
Accounts payable 1,424,947
Accrued expenses 124,976
--------------
Total Current Liabilities 5,740,421
--------------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock -
Common stock 2,359
Additional paid-in capital 8,773,633
Accumulated deficit (10,911,357)
--------------
Total stockholders' deficit (2,135,365)
$ 3,605,055
==============
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 Nine months ended 1993
September 30, September 30, (Inception) to
------------------------------- ------------------------------- September 30,
1995 1994 1995 1994 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
-------------- -------------- -------------- -------------- --------------
Expenses:
General and administrative 2,781,041 313,378 3,287,356 991,803 5,502,849
Research and development 691,055 776,000 1,856,529 1,534,000 5,265,350
-------------- -------------- -------------- -------------- --------------
Total expense 3,472,096 1,089,378 5,143,885 2,525,803 10,768,199
-------------- -------------- -------------- -------------- --------------
Loss from operations (3,472,096) (1,089,378) (5,143,885) (2,525,803) (10,768,199)
-------------- -------------- -------------- -------------- --------------
Other income (expense):
Interest income 49,991 837 120,763 837 141,032
Interest (expense) (78,556) (14,467) (191,286) (41,217) (284,190)
-------------- -------------- -------------- -------------- --------------
Total other income (expense) (28,565) (13,630) (70,523) (40,380) (143,158)
Loss before income taxes (3,500,661) (1,103,008) (5,214,408) (2,566,183) (10,911,357)
Current tax expense - - - - -
Deferred tax expense - - - - -
-------------- -------------- -------------- -------------- --------------
Net Loss $ (3,500,661) $ (1,103,008) $ (5,214,408) $ (2,566,183) $ (10,911,357)
-------------- -------------- -------------- -------------- --------------
Loss per share $ (0.16) $ (0.06) $ (0.27) $ (0.20) $ (0.70)
-------------- -------------- -------------- -------------- --------------
Weighted average shares 21,580,689 17,064,631 19,638,187 12,741,186 15,696,700
============== ============== ============== ============== ==============
</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,
Nine months ended 1993
September 30, (Inception) to
--------------------------------- September 30,
1995 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,214,407) $ (2,566,183) (10,911,357)
Adjustments to reconcile net loss
to net cash used in operations:
Common stock issued for non-cash 2,442,900 255,000 2,697,900
Write-off of assets received in
acquisition - - 1,281
Depreciation 708 - 708
Changes in assets and liabilities:
(Increase) in interest receivable (8,509) (837) (12,906)
Increase (decrease) in accounts payable 1,363,274 477,851 2,842,046
Increase in accrued expenses 59,103 31,364 131,881
(Decrease) in cash overdraft - (6) -
-------------- -------------- --------------
Net cash used in operating activities (1,356,931) (1,802,811) (5,250,447)
-------------- -------------- --------------
Cash flows from investing activities
(Increase) in intangible assets (24,053) - (24,053)
-------------- -------------- --------------
Net cash used in investing activities (24,053) - (24,053)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 2,131,416 1,159,610 5,656,754
(Repayment) of notes payable (514,268) (801,989) (1,316,257)
Proceeds from issuance of
common stock 1,186,751 2,210,175 4,502,806
-------------- -------------- --------------
Net cash provided by
financing activities 2,803,899 2,567,796 8,843,304
-------------- -------------- --------------
Net Increase in cash 1,422,915 764,985 3,568,804
Cash at beginning of period 2,145,889 - -
-------------- -------------- --------------
Cash at End of Period $ 3,568,804 $ 764,985 3,568,804
============== ============== ==============
</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,
Nine months ended 1993
September 30, (Inception) to
--------------------------------- September 30,
1995 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 132,183 $ - $ 152,309
Income taxes paid $ - $ - $ -
Supplemental Schedule of Non-cash Investing and
Financing Activities:
For the Nine Months Ended September 30, 1995:
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.
For the Nine Months Ended September 30, 1994:
During July, 1994 the Company converted $150,000 of notes payable and $6,905 of accrued interest
payable to restricted common stock.
On June 17, 1994, Taris, Inc., issued 10,395,249 shares of common stock in exchange for all of the
issued stock of Phonic Technologies, Inc. Inasmuch as the 10,395,249 shares of common stock is deemed
to have acquired Taris, Inc. Taris, Inc. had the following assets and liabilities at the transaction date:
Total assets $ 1,281
-----------
Net assets purchased 1,281
-----------
Fair value of common stock issued $ 1,281
-----------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED 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, 1994 audited financial statements. The results of operations for the
periods ended September 30, 1995 and 1994 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 PAYABLE
The Company has the following notes payable at September 30, 1995:
Revolving Note, $3,568,637 to a
bank at an interest rate of 7.50% due
December 1, 1995, secured by certificate
of deposit in the amount of $3,568,800. $ 3,568,637
Note payable to an officer/shareholder
at an interest rate of 6%, due
December 31, 1995, unsecured. 286,493
Note payable to a related company at an
interest rate of 6%, due December 31, 1995,
unsecured. 285,368
7
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - NOTES PAYABLE (Continued)
Note payable to an unrelated party at an
interest rate of 10%, due December 1, 1995. 50,000
------------
$ 4,190,498
============
NOTE 3 - RELATED PARTIES
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 nine months
ended, September 30, 1995
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1995 September 30, 1995
------------------ ------------------
<S> <C> <C>
Expenses:
Management fees expense $ 150,000 $ 450,000
Interest expense 4,860 8,427
Rent expense 6,000 18,000
Payables:
Accounts payable $ 581,920 $ 581,920
Accrued interest payable 19,298 19,298
Notes payable 285,368 285,368
</TABLE>
The Company rents office space from a company owned by the majority
shareholders under a month-to-month lease for $2,000 per month.
The Company had a note payable at September 30, 1995 to an officer and
shareholder of the Company totaling $286,493. Interest expense for the
three months ended September 30, 1995 totaled $5,273, and year to date
interest expense was $17,098. Accrued interest payable at September 30,
1995 totaled $65,715. Subsequent to September 30, 1995, the note payable
of $286,493 along with the accrued interest of $65,715, were forgiven by
the officer and shareholder of the Company, and accounted for as a
contribution to additional paid in capital. See Note 9.
The Company had a note payable to a company owned by the majority
shareholders at September 30, 1995 of $285,368. Interest expense totaled
$4,860 for the three months ended September 30, 1995, and year to date
interest expense totaled $8,427. Accrued interest totaled $19,298 at
September 30, 1995. Subsequent to September 30, 1995, $135,368 of the
8
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTIES (Continued)
$285,368 note payable, along with the accrued interest of $19,298, were
forgiven by a majority shareholder of the Company, and accounted for as a
contribution to additional paid in capital. See Note 9.
NOTE 4 - RESEARCH AND DEVELOPMENT
On or about October 16, 1993, the Company entered into an agreement with
a research and development entity whereby the entity is developing certain
technology related to 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 research and development entity,
and the majority shareholders of the Company own less than five percent of
the common stock of the research and development entity. Under the terms
of the agreement, the Company owns all technology and technology rights
that are developed by the entity. The Company agreed to provide all
funding necessary for the 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
$691,055 to the research and development entity for research and
development for the three months ended September 30, 1995, and $1,856,529
for the nine months ended September 30, 1995.
The Company presently anticipates that it will complete alpha testing and
begin beta testing of its voice-activated computer hardware and software
sometime during the second quarter of 1996. Following sufficient time for
beta testing results to be collected and appropriate adjustments made, the
Company presently projects that a viable product will be ready for market
introduction by the end of 1996. If and when sales of such a product
commence, the Company will pay the unaffiliated research and development
entity a royalty fee amounting to ten percent (10%) of the sales price of
each unit sold.
NOTE 5 - STOCK OPTIONS AND WARRANTS
As part of the September 30, 1994 restated stock purchase agreement, the
Company granted a shareholder (Rolcan Finance, Ltd.) the right to purchase
500,000 warrants for the purchase
9
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTIONS AND WARRANTS (Continued)
of Reg-S common stock, 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. If the 500,000 warrants are purchased, they
can be exercised at any time after purchase at $1.00 per share of
restricted common stock. The warrants, as well as the right to purchase
the warrants, expire in December 1995.
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 option price of $2.00
per share and expire in December 1997.
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 purchased and exercised 50,000 of these
warrants for an exercise 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 in December, 1997.
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 that entity's accrued management fees due from the
Company 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. In addition, the exercise price was
offered as an incentive to help the Company in relieving debt and
preserving limited cash by converting payables to common stock.
10
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTIONS AND WARRANTS (Continued)
On April 3, 1995 three non-related 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, 1996.
NOTE 6 - INCOME TAXES
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes [FASB 109]. In
accordance with FASB 109, the Company recognizes a liability or asset for
the deferred tax consequences of all temporary differences between the tax
bases of assets or liabilities and their reported amounts in the
financial statements.
The Company has available at September 30, 1995, unused operating loss
carryforwards of approximately $8,700,000 which may be applied
against future taxable income and which expire in various years beginning
in 2000 through 2010. The amount of and ultimate realization of the
benefit from the operating loss carryforwards for income tax purposes is
dependent, in part, upon the tax laws in effect, the future earnings of
the Company, 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 $2,100,000 which is equal to the tax effect of the loss
carryforwards and,therefore, no deferred tax asset has been recognized.
NOTE 7 - GOING CONCERN
The accompanying consolidated financial statements of fonix corporation
have been prepared on a going-concern basis, which contemplated 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 reported a loss of
$3,500,661 for the three months ended September 30, 1995, and $5,214,407
for the nine months ended September 30, 1995. As of September 30, 1995,
the Company has a working capital deficit of $2,158,711.
Management presently believes that the Company is in the final development
stage of its voice-activated computer software and hardware. Although
there has been substantial
11
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - GOING CONCERN (Continued)
progress in the development of this technology, the Company does not have
a viable product, and 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 8 - CONTINGENCIES
Prior to the merger in June 1994, the former attorney of the Company
caused the transfer agent to issue a certificate for 138,389 shares of
common stock. The Company did not approve or properly authorized the
issuance of this certificate or the shares represented by the
certificate, nor did the Company receive consideration from the attorney.
These shares are not included as issued and outstanding shares in the
accompanying financial statements.
NOTE 9 - SUBSEQUENT EVENTS
Issuance of Stock and Debenture - In October 1995, the Company entered
into a funding arrangement with a private investment entity. Under terms
of the agreement, the investor agreed to fund the Company with $6,050,000
over an 11 month period. $500,000 of the $6,050,000 was paid to the
Company on October 23, 1995 as consideration for the issuance of a Series
A Subordinated Convertible Debenture, due on October 23, 1996, with an
annual interest rate of 5%. This debenture may be converted to Series A
Preferred Stock at $3.00 per share any time after the Company's
shareholders and board of directors authorize the issuance of the
Company's Series A Preferred Stock but before the maturity date of the
Debenture. The remaining $5,550,000 will be paid as consideration for a
total of 11,562,500 shares of the Company's common stock. Of that
$5,550,000 amount, $1,040,000 was paid by the investment entity on October
23, 1995, in exchange for which the Company issued 2,166,667 shares of
common stock. The remainder of the purchase price for the common stock is
payable over a period of 11 months as the Company meets certain
development achievements. Shares of common stock will be issued in
amounts corresponding to the dollar amount of payments made to the Company
during that 11 month payment period.
12
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SUBSEQUENT EVENTS (Continued)
Also, subsequent to September 30, 1995, the Company issued an additional
566,039 shares of common stock to a private investor pursuant to a stock
purchase agreement for total proceeds of $300,000.
Forgiveness of Debt - In October, 1995 two related parties forgave debts
owed by the Company totaling $506,874. Such debt was payable in full on
or before December 31, 1995. (See Note 3 - Related Parties)
NOTE 10 - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note 5, 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. Management believes
this adjustment is necessary to be consistent with current attitudes and
policies in effect in subsequent years. This adjustment has no effect on
total stockholders' equity but does result in an increase to net loss for
the three months ended September 30, 1995.
13
<PAGE>
Item 2. Management's Plan of Operation.
The Company is a development stage business which has been involved in the
research and development of proprietary computer natural language voice
recognition hardware, software and firmware technology. Because the Company
still is in the research and development stage of its business, the Company has
not yet marketed or distributed its voice recognition product. Therefore, the
Company has had no revenue from its operations and has not had revenue from
operations during the past two fiscal years.
In October 1993, the Company entered into an agreement with a research and
development entity. The president of the Company is one of seven members of the
board of directors of the research and development entity, and the majority
shareholders of the Company own less than five percent of the common stock of
the research and development entity. Under the terms of this agreement, the
entity is wholly responsible for the development of the computer voice
recognition technology. If and when the product is completed and sold, the
entity will receive a royalty of 10% of total sales. The Company owns all the
technology and all the rights associated with the technology that is developed
by the entity. The Company is responsible for providing the funding for the
development of the product. There is no minimum requirement or limit with
respect to the amount of funding. However, the Company is obligated to use its
best efforts in raising the necessary funding for the development, manufacturing
and marketing of the fonix technologies, hereafter referred to as "VoiceBox."
The amounts of payments sent to the entity pursuant to the agreement are
determined as it submits weekly work orders and required budgets, which are then
reviewed and approved by the Company. All monies sent to the entity are
accounted for strictly as research and development expense, since the product
has not yet been completed.
The Company has incurred research and development expenses of $691,055 and
$776,000 for the three months ended, September 30, 1995 and 1994 respectively.
General and administrative expenses (which consist primarily of management fees
and legal fees), for the same three month periods were $2,781,041 and $313,378
in 1995 and 1994 respectively. Due to these significant research and
development and general and administrative expenses, with no revenue, the
Company incurred losses of $3,500,661 and $1,103,008 for the three months ended
September 30, 1995 and 1994 respectively. At September 30, 1995, the Company
had an accumulated deficit of $10,911,357 and a stockholders' deficit of
$2,135,365. The Company anticipates similar losses in the future as it
continues the development of VoiceBox and expects such losses to continue until
the Company's product is completed and significant sales revenues are realized.
There can be no assurance, however, that the Company will successfully complete
the development of a product incorporating its voice recognition technology or
that such product, if completed, can be successfully marketed.
The Company presently expects to finish the alpha testing and to begin beta
testing of the voice recognition technology sometime during the second quarter
of 1996. Upon completion of the alpha and beta testing, the Company intends to
begin manufacturing and marketing of VoiceBox through OEM contracts and directly
14
<PAGE>
to distributors. However, significant amounts of capital will be necessary to
complete the alpha testing and to begin beta testing prior to the manufacturing
and distribution of the product. In addition, increased expenditures for sales
and marketing and other administrative areas will also be necessary for the
expansion of the Company's business. Accordingly, the Company expects that it
will continue to incur significant losses.
From its inception, the Company's principal source of operating capital has
been borrowing from related parties and private sales of the Company's equity
securities. Outstanding debt and accrued interest from related parties totaled
$656,874 at September 30, 1995. This debt consists of two revolving promissory
notes which accrue interest at an annual rate of 6%. As part of an investment
agreement between the Company and a private investment entity, in October, 1995,
$506,874 of the $656,874 outstanding related-party debt was forgiven by the
related parties. This transaction took place 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 investor.
Private sales of the Company's equity securities resulted in net proceeds of
$162,128 for the third quarter of 1995.
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 September 30, 1994, the Company had funds on
deposit of $818,000 and owed the bank a total of $775,860. As of September 30,
1995, the Company has funds on deposit of $3,568,800 and the Company owes
$3,568,637 to the bank, which obligation matures December 1, 1995. This
agreement is negotiated every three months, and at maturity, (December 1, 1995),
the Company will attempt to arrange for an additional three month term at a
similar, competitive interest rate. The annual interest rate presently
applicable to this banking arrangement is 7.50%. 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. The terms of this agreement provide for $6,050,000
in funding over an eleven month term. $500,000 of the $6,050,000 was received
on October 23, 1995 from the investment entity as consideration for the issuance
of a Series A Subordinated Convertible Debenture that is convertible into Series
A Preferred Stock at $3.00 per share any time after the Company's shareholders
and board of directors authorize the issuance of the Company's Series A
Preferred Stock but before the maturity date of the Debenture. The preferred
stock may be converted to common shares on a one-for-one basis. The Debenture
is also presently convertible into shares of the Company's common stock at the
rate of $3.00 per share. The remaining $5,550,000 will be for the purchase of
a total of 11,562,500 shares of the Company's common stock. To date, $1,540,000
of the $6,050,000 has been received by the Company. Of the $1,540,000 received
to date, $500,000, was for the purchase of the Series A Subordinated Convertible
Debenture and $1,040,000 was for the issuance of 2,166,667 shares of the
Company's common stock. The remaining $4,510,000 of funding will be received on
a monthly basis over the an eleven month period as the Company achieves certain
milestones which
15
<PAGE>
were agreed upon in the funding arrangement. The remaining 9,395,833 shares of
the Company's common stock will be issued to the investor as the remaining
$4,510,000 is received. Under the terms of the contract, if the Company does
not achieve the milestones which are specified in the contract, the investor is
not obligated to continue the funding. In the event the investor stops funding,
the investor will receive an equal number of shares commensurate to the total
funding invested. Provided, however, that the Company timely achieves the
developmental milestones set forth in the contract, the Company presently
anticipates that it will be able to satisfy its cash requirements over the next
12 months.
Presently, since the Company has no operating revenue, the Company intends
to rely primarily on financing through the sale of its equity and debt
securities. For so long as the Company continues to pursue the alpha and beta
testing, including additional research and development which may be required to
complete its voice recognition technology, the Company will continue to require
such debt and equity financing on a regular and continuing basis. If and when
the Company successfully completes the development of the VoiceBox product, 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 the VoiceBox
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,the Company anticipates it will need a significant amount of
additional capital investment to finance the manufacturing, distribution and
marketing of its VoiceBox product. 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 presently has a need for twelve additional engineers with
specific expertise in linguistic processing and neural net development. These
persons will be hired as technology milestones are achieved which results in the
release of the additional funding from the private investment entity. In
addition, if and when the product completes the alpha and beta testing,
approximately thirty more employees will be required for sales and marketing and
customer support services.
The Company has no plans to purchase any new plants or expand any existing
facilities. However, new testing equipment is required and will be purchased as
sufficient capital is raised for its acquisition.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B.
Exhibit No Description Page
---------- ----------- ----
(10) Securities Purchase Agreement Incorporated by reference
by and among the Company. (Exhibit 99 to Current
Beesmark Investments, L.C., Report on Form 8-K
a Utah limited liability dated as of October
company and Alan C. Ashton, 23, 1995)
dated as of October 23, 1995
(b) Reports on Form 8-K
During the quarter ended September 30, 1995, the Company filed no
Current Report on Form 8-K.
17
<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
18
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