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 March 31, 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 May 1, 1996, 36,359,571 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
March 31,
1996
--------------
Current assets:
Cash and cash equivalents $ 11,051,053
Notes Receivable 836,894
Interest receivable 54,376
--------------
Total Current Assets 11,942,323
Property & Equipment, net of accumulated
depreciation of $4,798 118,337
Intangible assets, net of accumulated
amortization of $1,418 32,233
--------------
$ 12,092,893
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 8,400,275
Accounts payable 428,842
Accrued expenses 17,466
Convertible debenture 500,000
--------------
Total Current Liabilities 9,346,583
--------------
Stockholders' equity:
Preferred stock -
Common stock 3,283
Additional paid-in capital 15,912,513
Accumulated deficit (13,169,486)
--------------
Total stockholders' equity 2,746,310
--------------
$ 12,092,893
==============
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended 1993
March 31, (inception) to
-------------------------------- March 31,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
-------------- -------------- --------------
Expenses:
General and administrative 363,202 226,840 6,132,360
Research and development 816,661 681,540 6,929,648
-------------- -------------- --------------
Total expense 1,179,863 908,380 13,062,008
-------------- -------------- --------------
Loss from operations (1,179,863) (908,380) (13,062,008)
-------------- -------------- --------------
Other income (Expenses):
Interest income 126,614 32,587 338,812
Interest (expense) (103,938) (50,307) (476,838)
-------------- -------------- --------------
Total Other Income (Expenses) 22,676 (17,720) (138,026)
-------------- -------------- --------------
Loss before income taxes and
extraordinary item (1,157,187) (926,100) (13,200,034)
Current tax expense - - -
Deferred tax expense - - -
-------------- -------------- --------------
Loss before extraordinary item (1,157,187) (926,100) (13,200,034)
Extraordinary income:
Forgiveness of debt, net of taxes - - 30,548
-------------- -------------- --------------
Net Loss $ (1,157,187) $ (926,100) $ (13,169,486)
============== ============== ==============
Loss per common share:
Loss before extraordinary items $ (0.04) $ (0.05) $ (0.72)
Extraordinary item - - 0.00
-------------- -------------- --------------
Loss per common share $ (0.04) $ (0.05) $ (0.72)
============== ============== ==============
Weighted average shares 31,118,026 18,323,744 18,311,749
============== ============== ==============
</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,
Three months ended 1993
March 31, (inception) to
-------------------------------- March 31,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,157,187) $ (926,100) $ (13,169,486)
Adjustments to reconcile net loss
to net cash used in operations:
Common stock issued for non-cash - - 2,705,650
Write-off of assets received in
acquisition - - 1,281
Depreciation and amortization 4,999 - 6,217
Non cash forgiveness of debt income - - (30,548)
Changes in assets and liabilities:
(Increase) in interest receivable (28,152) (4,235) (54,376)
Increase (decrease) in accounts payable (97,212) 303,843 2,064,111
Increase (decrease) in accrued expenses (13,530) 10,880 109,384
-------------- -------------- --------------
Net cash used in operating activities (1,291,082) (615,612) (8,367,767)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (74,393) - (123,136)
Investment in intangible assets (9,598) (24,053) (33,651)
Investment in notes receivable (800,000) - (836,894)
-------------- -------------- --------------
Net cash used in investing activities (883,991) (24,053) (993,681)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 2,782,753 389,192 10,751,942
Payment of notes payable - - (1,779,806)
Proceeds from debenture - - 500,000
Proceeds from issuance of
common stock 2,593,763 633,632 10,940,365
-------------- -------------- --------------
Net cash provided by financing activities 5,376,516 1,022,824 20,412,501
-------------- -------------- --------------
Net increase in cash and cash equivalents 3,201,443 383,159 11,051,053
Cash and cash equivalents at beginning of period 7,849,610 2,145,889 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 11,051,053 $ 2,529,048 $ 11,051,053
============== ============== ==============
</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,
Three months ended 1993
March 31, (inception) to
-------------------------------- March 31,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 117,468 $ 39,427 $ 367,632
Income taxes paid $ - $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the three months ended March 31, 1996:
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 ended March 31, 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 March 31, 1996 the Company had a note receivable in the amount of
$36,894 which bears interest at 18% per annum and is due March 31, 1996.
As of March 31, 1996 the principal balance had not been paid, and the
Company is taking measures to have the balance paid in full. Accrued
interest on the note receivable amounted to $504.58 at March 31, 1996.
At March 31, 1996 the Company had a note receivable in the amount of
$800,000 which bears interest at 18% per annum and is due July 1, 1996.
At March 31, 1996 accrued interest on the note receivable amounted to
$800. At March 31, 1996 an $8,000 loan fee due the Company was
outstanding, and was subsequently received in full on April 1, 1996.
Also, subsequent to March 31, 1996, $600,000 of the $800,000 note was
received, reducing the outstanding note payable to $200,000.
At March 31, 1996 the Company has a revolving note payable in the amount
of $8,400,275 to a bank at an interest rate of 5.85%. This note payable
is due May 24, 1996, and is secured by a certificate of deposit in the
amount of $10,600,000. Subsequent to March 31, 1996, the
7
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - NOTES RECEIVABLE / PAYABLE(Continued)
note payable was further secured by an additional certificate of deposit
in the amount of $1,400,000.
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, 1996, 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 March 31, 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
[See Note 3].
Funding Agreement - In October 1995, the Company entered into a funding
arrangement with a private investment entity. Under terms of the
agreement, the private investment entity agreed to fund the Company with
$6,050,000 ("Funding Commitment") over an 11 month period in exchange for
the Company's issuance of a total of 11,562,500 shares of the Company's
common stock, and a $500,000 Series A Subordinated Convertible Debenture
(the "Debenture") which is convertible into 166,167 shares of Series A
Preferred Stock (described above) or into the same number of shares of
common stock. The preferred stock, assuming it is authorized and issued,
may be converted to common stock at the discretion of the investor on a
one for one basis. The first $1,540,000 of the Funding Commitment was paid
to the Company on October 23, 1995 as consideration for the issuance of
the Debenture and the issuance of 2,166,667 shares of common stock [See
Note 3]. The balance of the Funding Commitment, $4,510,000 is to be paid
as consideration for the issuance by the Company of 9,395,833 shares of
common stock. As of March 31, 1996 the private investment entity had paid
a total of $3,305,000 in exchange for which the Company has issued
5,843,750 shares of common stock. On April 24, 1996 an additional
$375,000 was received by the Company in exchange for which the Company
issued 781,250 shares of
8
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK(Continued)
common stock. The remaining balance of the Funding Commitment of
$2,370,000 is payable by the private investment entity through August 1996
subject to the Company completing certain technology development
milestones. The balance of the shares of common stock (4,937,500) due the
investor, will be issued proportionately upon receipt of the remaining
installment payments made by the investor.
Common Stock Transactions - During the three months ended March 31, 1996,
the Company issued a total of 3,426,000 shares of common stock for net
cash proceeds of $4,207,388 at prices ranging from $.48 to $3.18 per
share. Included in these issuances were 200,000 shares issued as a
finders fee, valued at $304,000 and 2,500,000 shares issued as part of a
funding arrangement [See Note 4, 2nd paragraph].
Stock Options and Warrants - On April 3, 1995 three unrelated individuals
were offered and purchased 120,000 warrants for restricted common stock
in connection with a stock purchase agreement. The warrants were
purchased at $.0033 per share with an exercise price of $2.00 per share.
The warrants are exercisable anytime prior to April 3, 1998.
In April 1995, all of the disinterested directors of the Company approved
the issuance of warrants to purchase 3,700,000 shares of common stock to
an entity controlled by the majority shareholders of the Company with the
right to convert accrued management fees due from the Company to that
entity for the purchase of 3,700,000 warrants and the exercise price of
the warrants. The warrants were offered in April 1995, purchased on July
31, 1995 for a purchase price of $.033 per warrant and were then
exercised on August 11, 1995 at $.35 per share. The related entity
controlled by the majority shareholders of the Company canceled invoices
for $1,417,100 in management fees due from the Company as consideration
for the warrants and the exercise price of the warrants. The exercise
price was less than the market price of the Company's common stock
because, among other reasons, the shares issued upon exercise of the
warrants are restricted shares pursuant to Rule 144 and to assist the
Company in relieving debt and preserving limited cash reserves by
converting payables to restricted common stock.
In November 1994, the Company granted the right to purchase warrants for
the purchase of an aggregate of 155,000 shares of restricted common stock
to certain individuals, including warrants for 30,000 shares to three
directors. In October 1995, certain of these individuals were granted the
right to purchase warrants to purchase an additional 185,000 shares of
restricted common stock. In order to preserve the Company's limited cash,
warrants were
9
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK(Continued)
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.
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 rights 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, March 31, 1996:
Three months ended
March 31, 1996
------------------
Expenses:
Management fees expense $ 150,000
Rent expense 6,000
Payables:
Accounts payable $ 339,252
10
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
The Company rents office space from a company owned by the majority
shareholders under a month-to-month lease for $2,000 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 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 $816,661 to the R&D Entity for
research and development for the three months ended March 31, 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.
11
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company is attempting to resolve this problem with its former
attorney. 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 March 31, 1996
the total of all deferred tax assets is approximately $4,900,000 and the
total of the deferred tax liabilities is approximately $1,000. The amount
of and ultimate realization of the benefits from the deferred tax assets
for income tax purposes is dependent, in part, upon the tax laws in
effect, the Company's future earnings, and other future events, the
effects of which cannot be determined. Because of the uncertainty
surrounding the realization of the loss carryforwards the Company has
established a valuation allowance of approximately $4,900,000 for the
three months ended March 31, 1996. The net change in the valuation
allowance is approximately $2,300,000 for the three months ended
March 31, 1996.
The Company has available at March 31, 1996, unused operating loss
carryforwards of approximately $13,200,000, 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
12
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - GOING CONCERN(Continued)
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 a loss of $1,157,187 for the period ended March 31, 1996.
As of March 31, 1996, the Company has working capital of $2,595,740 which
may not be adequate to finish the development of the technology. These
items raise substantial doubt about the ability of the Company to continue
as a going concern.
Although there has been substantial progress in the development of the
Company's voice-activated computer hardware and software, the Company
does not have a viable product, has not had any sales, and there can be
no assurance that the Company will develop a viable product or have any
sales. Management plans to continue financing the development of the
Company's technology through additional loans and/or sales of the
Company's equity securities.
The Company's continuation as a going concern is dependent upon its
ability to satisfactorily meet its debt obligations, meet its product
development goals, secure adequate new financing and generate sufficient
cash flows from operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 10 - SUBSEQUENT EVENTS
Issuance of Stock - Subsequent to March 31, 1996, the Company issued an
additional 2,527,000 shares of common stock to offshore investors for net
cash proceeds of $6,705,699. In connection with the 2,527,000 shares
issued, the Company issued 220,000 shares of common stock valued at
$597,520 in finders fee.
Also, subsequent to March 31, 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.
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.
13
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
14
<PAGE>
Item 2. Management's Plan of Operation
The Company is a development stage business which is involved in the
research and development of proprietary computer natural language voice
recognition hardware, software and firmware. Because the Company still is in
the research and 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 $816,661 and
$681,540 for the three months ended March 31, 1996 and March 31, 1995,
respectively. General and administrative expenses (which consist primarily of
management fees to a related entity and professional fees for legal and
accounting services), were $363,202 and $226,840, respectively, for the periods
ended March 31, 1996 and March 31, 1995. Due to these significant research and
development and general and administrative expenses, the Company has incurred
losses of $1,157,187 and $926,100 for the periods ended March 31, 1996 and March
31, 1995, respectively. At March 31, 1996, the Company had an accumulated
deficit of $13,169,486 and stockholders' equity of $2,746,310. 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
14
<PAGE>
development of the Company's technologies according to that schedule. The
Company presently anticipates that it will complete alpha testing and begin beta
testing 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 and directly
to distributors. 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 March 31, 1995, the Company had outstanding
debt to related parties in the amount of $431,711. 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 March 31,
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
$2,593,763 for the three months ended March 31, 1996. Additional equity
securities were issued during that period for service related, non-cash
consideration of $304,000.
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 March 31, 1995, the Company had funds on
deposit of $2,534,917 and owed the bank a total of $2,530,834. As of March 31,
1996, the Company had funds on deposit of $10,600,000, and the Company owed
$8,400,275 to the bank, which obligation matures May 24, 1996. The relationship
with the bank is re-negotiated every three months. On February 28, 1996, the
Company and the bank agreed to extend the term of the relationship for an
additional three-month term on comparable competitive terms. 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 March 31, 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 March 31, 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
15
<PAGE>
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 March 31, 1996 the private investment entity had paid
a total of $3,305,000 in exchange for which the Company has issued 5,843,750
shares of common stock. On April 24, 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 $2,370,000 is payable
by the private investment entity through August 1996 subject to the Company
completing certain technology development milestones. The balance of the shares
of common stock (4,937,500) 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 recently hired seven engineers and presently has a need for
four additional engineers with specific scientific expertise in linguistic
processing and neural net development. These persons will be hired as
technology milestones are achieved and additional funding is received. In
addition, if and when the Company completes the alpha and beta testing of its
technologies, approximately thirty more employees will be initially required for
sales and marketing and customer support services.
The Company has no plans to purchase any new plants or expand any existing
facility. However, new testing equipment is required and will be purchased as
sufficient capital is raised for its acquisition.
16
<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.
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
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