UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 3)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 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 November 13, 1996, 41,566,563 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,
1996
--------------
Current assets:
Cash and cash equivalents $ 24,871,235
Notes Receivable 1,270,000
Interest receivable 142,634
Prepaid Expenses 98,789
--------------
Total Current Assets 26,382,658
Property & Equipment, net of accumulated
depreciation of $30,943 534,439
Intangible assets, net of accumulated
amortization of $2,410 31,241
--------------
$ 26,948,338
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,843,553
Accounts payable 643,481
Accrued expenses 100,888
Convertible debenture 500,000
--------------
Total Current Liabilities 17,087,922
--------------
Stockholders' equity:
Preferred stock -
Common stock 4,157
Additional paid-in capital 26,077,838
Accumulated deficit (16,221,579)
--------------
Total stockholders' equity 9,860,416
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$ 26,948,338
==============
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,
1996 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
-------------- -------------- -------------- -------------- --------------
Expenses:
General and administrative 595,717 2,781,041 1,446,369 3,287,356 7,215,527
Research and development 1,226,559 691,055 3,134,097 1,856,529 9,247,084
-------------- -------------- -------------- -------------- --------------
Total expense 1,822,276 3,472,096 4,580,466 5,143,885 16,462,611
-------------- -------------- -------------- -------------- --------------
Loss from operations (1,822,276) (3,472,096) (4,580,466) (5,143,885) (16,462,611)
-------------- -------------- -------------- -------------- --------------
Other income (Expenses):
Interest income 370,637 49,991 858,946 120,763 1,071,144
Interest (expense) (243,270) (78,556) (487,760) (191,286) (860,660)
-------------- -------------- -------------- -------------- --------------
Total Other Income (Expenses) 127,367 (28,565) 371,186 (70,523) 210,484
-------------- -------------- -------------- -------------- --------------
Loss before income taxes and
extraordinary item (1,694,909) (3,500,661) (4,209,280) (5,214,408) (16,252,127)
Current tax expense - - - - -
Deferred tax expense - - - - -
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary item (1,694,909) (3,500,661) (4,209,280) (5,214,408) (16,252,127)
Extraordinary income:
Forgiveness of debt, net of taxes - - - - 30,548
-------------- -------------- -------------- -------------- --------------
Net Loss $ (1,694,909) $ (3,500,661) $ (4,209,280) $ (5,214,408) $ (16,221,579)
============== ============== ============== ============== ==============
Loss per common share:
Loss before extraordinary items $ (0.04) $ (0.16) $ (0.12) $ (0.27) $ (0.75)
Extraordinary item - - - - 0.00
-------------- -------------- -------------- -------------- --------------
Loss per common share $ (0.04) $ (0.16) $ (0.12) $ (0.27) $ (0.75)
============== ============== ============== ============== ==============
Weighted average shares 38,842,204 21,580,689 35,434,318 19,638,187 21,528,092
============== ============== ============== ============== ==============
</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,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,209,280) $ (5,214,407) $ (16,221,579)
Adjustments to reconcile net loss
to net cash used in operations:
Common stock issued for non-cash - 2,442,900 2,705,650
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 32,135 708 33,353
Non cash forgiveness of debt income - - (30,548)
Changes in assets and liabilities:
(Increase) in interest receivable (116,409) (8,509) (142,633)
(Increase) in prepaid expense (98,789) - (98,789)
Increase (decrease) in accounts payable 117,427 1,363,274 2,278,750
Increase (decrease) in accrued expenses 69,892 59,103 192,806
-------------- -------------- --------------
Net cash used in operating activities (4,205,024) (1,356,931) (11,281,709)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (516,640) - (565,383)
Investment in intangible assets (9,598) (24,053) (33,651)
Investment in notes receivable (5,400,000) - (5,436,894)
Payment of notes receivable 4,166,894 - 4,166,894
-------------- -------------- --------------
Net cash used in investing activities (1,759,344) (24,053) (1,869,034)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 10,226,031 2,131,416 18,195,220
Payment of notes payable - (514,268) (1,779,806)
Proceeds from debenture - - 500,000
Proceeds from issuance of
common stock 12,759,962 1,186,751 21,106,564
-------------- -------------- --------------
Net cash provided by financing activities 22,985,993 2,803,899 38,021,978
-------------- -------------- --------------
Net increase in cash and cash equivalents 17,021,625 1,422,915 24,871,235
Cash and cash equivalents at beginning of period 7,849,610 2,145,889 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 24,871,235 $ 3,568,804 $ 24,871,235
============== ============== ==============
</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,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 417,868 $ 132,183 $ 668,032
Income taxes paid $ - $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the nine months ended September 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 accordance with generally
accepted accounting principles for interim information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (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 nine months ended September 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 that 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 applicable capitalization requirements.
NOTE 2 - NOTES RECEIVABLE / PAYABLE
Between May 14, 1996 and August 13, 1996, the Company advanced a total
of $1,900,000 in short-term debt financing to K.L.S. Enviro Resources,
Inc., a Nevada corporation ("KLS"), in increments of $710,000, $450,000,
$150,000 and $590,000. KLS executed a promissory note for the first
advance in June 1996, but on August 13, 1996, and pursuant to ongoing
negotiations between the Company and KLS, KLS executed and delivered a
replacement note for the first advance and notes for each of the
subsequent advances totaling $1,900,000 (the "Notes"). The Notes were
secured by all assets of KLS, except for certain real property owned by
KLS. In addition, the Notes were convertible at the option of the
Company into restricted shares of KLS common stock. Specifically, the
Notes provided that the $710,000 increment is convertible at the rate of
$0.30 per share and the balance of the financing ($1,190,000) is
convertible at the rate of $0.40 per share. Incident to the provision
of the debt financing described in this paragraph, Thomas A. Murdock, an
executive officer, director and significant shareholder of the Company,
assumed a position on the KLS board of directors effective July 10,
1996. In addition, a group comprised of a current executive officer and
director of KLS and a private entity controlled by Mr. Murdock and two
other executive officers and directors of the Company, namely Mr.
Studdert and Mr. Dudley, known as SMD L.L.C. ("SMD"), agreed to purchase
3,561,000 shares of common stock and 100,000 shares of preferred stock
convertible into 500,000 shares of common stock from the estate of a
former executive officer and director of KLS. The Company demanded
payment of the foregoing sums prior to September 30, 1996 and was
advised by the debtor that it was not in a position to pay all or
substantially all of the amount then due. The board of directors of the
Company, after obtaining independent counsel and advice, determined it
did not wish to convert the Notes to restricted common stock. SMD
agreed to loan KLS $1,673,700 for the purpose of making a payment in
that amount to the Company. On September 30, 1996, using funds borrowed
from SMD, KLS paid the Company $1,673,700, leaving a balance due and
owing at September 30, 1996, of $272,156. The principal amount of such
remaining balance, being $270,000, was subsequently sold by the Company
to a shareholder of KLS(and non-affiliate of the Company) on December
31, 1996, who thereafter converted it to restricted common stock of KLS
at a rate of $.30 per share. After the repayment of $1,673,700, the
Company loaned $200,000 to KLS on the same terms of the previous
advances leaving a total indebtedness of $470,000. These loans were
repaid in full by December 31, 1996. See Note 5, below.
The Company loaned $500,000 to an unrelated entity on August 26, 1996.
The obligation bears interest at 12% per annum, is secured by assets of
the borrower and is due on demand.
At September 30, 1996 the Company had an unsecured note receivable from
an entity not affiliated with the Company in the amount of $1,000,000
which bears interest at 12% per annum and is due and payable thirty days
after written notice from the Company. At September 30, 1996 accrued
interest on the note receivable amounted to $10,055.
At September 30, 1996 the Company had a revolving note payable in the
amount of $15,843,553 to a bank at an interest rate of 5.75%. This note
payable is due November 7, 1996, and is secured by a certificate of
deposit in the amount of $20,000,000. On November 7, 1996, similar
terms were negotiated to extend the note.
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 at the conversion price of $3.00 per share [See Note 4].
NOTE 4 - CAPITAL STOCK
Preferred Stock - Pursuant to a funding agreement entered into during
October 1995, the Company agreed to amend its certificate of incorporation
to authorize the issuance of Series A Preferred Stock. As of September
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]. As of September 30, 1996 the balance of the Funding Commitment,
$4,510,000, was paid in full for which the Company issued 9,395,833
additional shares of common stock. Thus, the Company has received a total
of $6,050,000 for which the Company has issued the Debenture and a total
of 11,562,500 shares of common stock.
Common Stock Transactions - During the nine months ended September 30,
1996, the Company issued a total of 12,161,242 shares of common stock for
net cash proceeds of $12,759,962 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 8,218,750 shares issued as part of a
funding arrangement [See Note 4, 2nd paragraph].
Stock Options and Warrants - 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. None of these options have been exercised.
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 during each entire 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 $4.06 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. 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 in
connection with the Funding Commitment. 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 acquired 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
outside 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 nine months
ended, September 30, 1996:
Three months ended Nine months ended
September 30, 1996 September 30,1996
--------------------- ------------------
Expenses:
Management fees expense $ - $ 200,000
Base rent expense 13,428 30,380
Payables:
Accounts payable $ 380,421 $ 380,421
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.
Prior to September 30, 1996, management of the Company reviewed the
status of various loans made to third parties, including loans to KLS
which then totaled $1,900,000. The loans accrue interest at the rate of
12% per annum and are due on demand. As a result of that review
management determined that KLS was unlikely to repay the balance then
due, together with interest accruing thereon, without significant delays
and, possibly, commencement of foreclosure proceedings. Management also
considered conversion of the unpaid balance of principal and interest
into common stock of the borrower at conversion prices ranging between
$.30 and $.40 per share. In this regard, management engaged an
independent consultant to determine whether such conversion would allow
the Company an opportunity to obtain repayment of the indebtedness more
quickly than if the balance due and owing under the various loans was
demanded by the Company. The independent consultant concluded that it
was highly unlikely that the Company could convert all or a significant
part of the debt due and owing from the borrower into common stock of
the borrower and thereafter dispose of the common stock in a fashion
which would allow the Company to recover an amount equal to or greater
that the balance due and owing under the loans. Based upon that
assessment, SMD proposed to loan KLS funds to repay $1,673,700 of the
amounts owing to the Company. The Company received payment of the same
amount of principal and interest from KLS from the funds provided by
SMD.
Subsequent to the end of the period covered by this report, on December
31, 1996, Mr. Studdert and Mr. Dudley joined the board of directors of
KLS, and Mr. Studdert accepted the position of Chairman of that board
and Mr. Dudley accepted the position of Chief Financial Officer of KLS.
In addition, the KLS board appointed Joseph Verner Reed and Rick D.
Nydegger, directors of the Company, to fill newly created vacancies on
the KLS board. Since December 31, 1996, Mr. Reed chairs the
compensation committee of the KLS board and Mr. Dudley chairs its audit
committee. Mr. Studdert, Mr. Murdock and Mr. Dudley serve as three of
the four members of the KLS board's executive committee.
NOTE 6 - RESEARCH AND DEVELOPMENT
On or about October 16, 1993, the Company entered into a Product
Development and Assignment Agreement (the "Development Agreement") with
an unrelated research and development entity ("R&D Entity"), whereby the
R&D Entity is developing certain technology related to the Company's
natural language speech recognition technology (the "Speech Technology").
The Development Agreement was amended and restated by the parties on March
31, 1995. 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 and rights to participate in the profits of the R&D Entity.
An entity owned by three officers, directors and significant shareholders
of the Company has provided management services for the R&D Entity,
including management of accounts payable. Under the terms of the
Development Agreement, the Company owns the intellectual property rights,
all technology and technology rights that are developed by the R&D Entity
with respect to the Speech Technology. The Company agreed to provide all
funding necessary for the R&D Entity to develop a commercially viable
technology. 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 Development Agreement the Company is obligated to use its
best efforts in raising the necessary funding for the development,
manufacturing and marketing of the Speech Technology. The Company has not
yet completed the research and development of the Speech Technology, and
consequently, has not recorded any revenues from sales or licenses. Under
the terms of the Development Agreement, the Company paid $1,226,559 to the
R&D Entity for research and development for the three months ended
September 30, 1996 and $3,134,097 for the nine months ended September 30,
1996. If and when the Company completes the development of the Speech
Technology and develops a commercially viable technology based thereon,
and assuming sales of such a technology commence, the Company will be
obligated to pay the unaffiliated R&D Entity a royalty fee amounting to
ten percent (10%) of the gross sales price of each revenue dollar produced
from the license or sale of the Speech Technology.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On July 17, 1996, the Company entered into a lease agreement for a 25,600
square foot facility. The lease provides for a term of eight years and
an option to extend for an additional five years. The Company will
consolidate development, marketing and other activities at the new
facility. Occupancy of the facility is expected before November 15, 1996.
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 lessor cannot accommodate the Company's expansion needs,
if any.
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 September 30,
1996 the total of all deferred tax assets is approximately $6,000,000 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 carryforward the Company has
established a valuation allowance of approximately $6,000,000 as of
September 30, 1996. The net change in the valuation allowance is
approximately $600,000 for the three months ended September 30, 1996 and
approximately $3,400,000 for the nine months ended September 30, 1996.
The Company has available at September 30, 1996, an unused operating loss
carryforward of approximately $16,200,000, which may be applied against
future taxable income and which expires 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
$1,694,909 for the three months ended September 30, 1996 and $4,209,280
for the nine months ended September 30, 1996. As of September 30, 1996,
the Company has working capital of $9,294,736 which may not be adequate
to finish the development of the Speech Technology. These items raise
substantial doubt about the ability of the Company to continue as a going
concern.
Although it continues to develop the Speech Technology, the Company has
not had any sales nor licenses of its technology, and there can be no
assurance that the Company will develop a viable product or have any sales
or licenses of its Speech Technology. Management plans to continue
financing the development of the Company's Speech 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, continue development
of its Speech Technology, 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 - 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.
<PAGE>
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
The Company is a development stage business involved in the research and
development and production of natural language speech recognition technologies,
using specific-speech knowledge, proprietary modeling, and a linguistic process
including a neural network system (artificial Intelligence) to recognize natural
language speech. Because the Company still is in the development stage of its
business, the Company has not yet distributed any product based on its Speech
Technology. Therefore, the Company has had no revenue from its operations.
In October 1993 the Company entered into the Development Agreement with
the R&D Entity, and on March 31, 1995, the Development Agreement was amended and
restated by the parties. The terms of the Development Agreement specify that
the research and development of the Company's Speech 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 and rights to participate in the profits of the R&D Entity, however, such
share ownership and profit participation rights constitutes less than 5% of the
total number of the R&D Entity's common stock issued and outstanding and project
participation rights. An entity owned by three officers, directors and
significant shareholders of the Company has provided certain management
services, including accounts payable management, for the R&D Entity. Under the
Development Agreement, the Company is responsible for providing all of the
funding for the development of the Speech 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 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 Speech
Technology. The amounts paid to the R&D Entity pursuant to the 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 Speech Technology has yet been completed, all funds
paid to the R&D Entity by the Company are not capitalized, rather, they are
accounted for as research and development expense.
The Company incurred research and development expenses of $1,226,559 and
$691,055 for the three months ended September 30, 1996 and September 30, 1995,
respectively. General and administrative expenses were $595,717 and $2,781,041,
respectively, for the three months ended September 30, 1996 and September 30,
1995. Due to these significant research and development and general and
administrative expenses, the Company has incurred losses of $1,694,909 and
$3,500,661 for the three months ended September 30, 1996 and September 30, 1995,
respectively. At September 30, 1996, the Company had an accumulated deficit of
$16,221,579 and stockholders' equity of $9,860,416. The Company anticipates
similar losses in the future as it continues the development of the Speech
Technology and expects such losses to continue until such time as a commercially
viable technology is completed and significant revenues are realized. However,
there can be no assurance that the Company will complete a commercially viable
Speech Technology, or that sufficient revenues will be generated from sales or
licenses of such technology to allow the Company to operate profitably.
The Company has completed and tested in a laboratory environment various
components of the Speech Technology. The Company plans to continue to develop
and test in the laboratory its integrated components, both software and
hardware. When, and if, the Company has completed and successfully tested the
core elements of its Speech Technology, management expects to present the
technology to personal computer hardware OEM's, independent software vendors
and value-added developers and resellers. Significant amounts of capital will
be necessary to complete the development and testing of the Company's Speech
Technology prior to marketing or the presentation of the technology to personal
computer hardware OEM's, independent software vendors and value-added developer
and resellers. Accordingly, the Company expects to incur significant losses at
least through calendar 1997.
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 September 30, 1995, the Company had
outstanding debt to related parties in the amount of $656,874. Pursuant to an
investment agreement between the Company and a private investment entity dated
October 23, 1995 (the "Private Investment Agreement"), $506,874 of the $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. Except as
disclosed in Note 5 to the financial statements accompanying this report, at
September 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 $2,000,000 for the three months ended September 30, 1996.
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, 1995, the Company had funds
on deposit of $3,568,800 and owed the bank a total of $3,568,637. As of
September 30, 1996, the Company had funds on deposit of $20,000,000, and the
Company owed $15,843,553 to the bank, which obligation matures on February 3,
1997. The relationship with the bank is re-negotiated every three months. The
Company and the bank have negotiated an 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 September 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. As of September 30, 1996 the
balance of the Funding Commitment, $4,510,000, has been paid in full for which
the Company issued 9,395,833 additional shares of common stock. The Company has
received a total of $6,050,000 for which the Company has issued the Debenture
and a total of 11,562,500 shares of common stock. The Company has no further
obligation to issue common stock under the Funding Commitment (except as such
may be issued upon conversion of the Debenture or the preferred stock).
Presently, as a result of the agreement described above and additional
domestic and offshore sales of its equity and debt securities, 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 Speech Technology and marketing of any product
incorporating such technology 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 its Speech Technology, 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 Speech Technology. There can be no assurance that the Company
will receive the necessary financing to develop and market its Speech Technology
from either OEM or licensing contracts or by the offer and sale of the Company's
debt or equity securities.
The Company plans to hire additional engineers as required and as funding
is available. In addition, if and when the Company completes the testing of the
Speech Technology, the Company believes that 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 facility. The lease provides for a term of eight years and an
option to extend for an additional five years. The Company will consolidate
development, marketing and other activities at the new facility. Occupancy of
the facility is expected before November 15, 1996. 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. From time to time, the Company may publish forward
looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward looking
statements. In order to comply with the terms of that safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, the
continuing need for operating funds which will necessitate the Company incurring
debt or issuing shares in amounts that may result in substantial dilution to
existing stockholders, the technological obsolescence of planned products and/or
technology now being developed by the Company, the significant accumulated
losses of the Company, the reaction to or acceptance of the Company's technology
in the marketplace, competition from larger and better-funded competitors, and
the availability of trained personnel. 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On July 22, 1996, the Company conducted its 1996 annual meeting of
shareholders. At the annual meeting, all former members of the Company's Board
of Directors were elected for another term of service. Those directors include
Stephen M. Studdert, Alan C. Ashton, Ph.D., Joseph Verner Reed, James B. Hayes,
Thomas A. Murdock and Roger D. Dudley. At the annual meeting, the Company's
shareholders also were asked to and did approve the Company's 1996 Long-term
Stock Investment & Incentive Plan (the "Employee Plan") and the 1996 Director's
Stock Option Plan (the "Directors' Plan"). The shareholders also ratified the
selection of Pritchett, Siler & Hardy, P.C., as the Company's independent public
accountants. The following table summarizes the voting at the annual meeting.
<TABLE>
<CAPTION> Broker
Issue/Board Nominee For Against(1) Abstention(1) Non-Votes
- --------------------------- ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Approve Employee Plan and 22,895,389 41,892 23,815 0
Director's Plan
Ratify selection of 22,954,566 500 6,296 0
accountants
Stephen M. Studdert 22,960,472
Alan C. Ashton, Ph.D. 22,960,472
Joseph Verner Reed 22,960,372
James B. Hayes 22,960,372
Thomas A. Murdock 22,960,472
</TABLE>
(1) Information provided to the Company by the Company's independent proxy
service agency does not distinguish between abstentions and negative votes
with respect to votes cast for the election of directors. There were
22,961,362 shares of voting Common Stock represented in person or by proxy
at the annual meeting.
<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
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 24,871
<SECURITIES> 0
<RECEIVABLES> 1,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,383
<PP&E> 565
<DEPRECIATION> 31
<TOTAL-ASSETS> 26,948
<CURRENT-LIABILITIES> 17,088
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 9,856
<TOTAL-LIABILITY-AND-EQUITY> 26,948
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488
<INCOME-PRETAX> (4,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,209)
<EPS-PRIMARY> (0.12)
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