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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999
[ ] Transition Report pursuant to 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 registrant as specified in its charter)
Delaware 22-2994719
(State of Incorporation) (I.R.S. Employer Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
(Address of principal executive offices and zip code)
(801) 328-0161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X or No
As of May 19, 1999, 70,660,944 shares of common stock, par value $.0001 per
share, were issued and outstanding.
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This Amendment No. 1 to the Quarterly Report on Form 10-Q of Fonix
Corporation is submitted to amend the following Items, which originally were
submitted as part of the Annual Report filed with the Securities and Exchange
Commission as of May 19, 1999:
Part II
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................3
Pursuant to SEC Rule 12b-15, the foregoing Item, as amended hereby, is set forth
below in its entirety.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998.
Overview
Fonix is a development-stage company engaged in marketing and development of
proprietary automated speech recognition ("ASR"), text-to-speech ("TTS") and
handwriting recognition technologies and products which may be licensed in whole
or in part to third parties. The Company aims to make commercially available a
comprehensive package of products and technologies that allow humans to interact
with computer and other electronic products in a more efficient, intuitive and
natural way rather than through traditional methods such as the keyboard.
Specifically, Fonix has developed proprietary automated speech recognition and
related technologies such as text-to-speech (speech synthesis), handwriting
recognition and speech compression. These technologies, as developed to date,
use speech recognition techniques that include the use of a proprietary neural
network method. Neural networks are computer-based methods which simulate the
way the human brain processes information. Fonix licenses its technologies to
and has entered into co-development relationships and strategic alliances with
third parties including producers of application software, operating systems,
computers and microprocessor chips.
Automated Speech Recognition
Presently available traditional voice recognition technologies have been used in
a variety of products for industrial, telecommunications, business and personal
applications. Speech recognition algorithms in software have been developed and
refined over the past several years. However, the increase in processing speed
and memory capacity of personal computers has accounted for much of the
improvement in traditional speech recognition systems during that period. This
improvement includes vocabulary size, recognition accuracy and continuous speech
recognition ability. Currently available speech recognition systems for personal
computers include speech command systems for navigating the Windows(R) interface
and inexpensive, discrete word dictation systems offered by Dragon Systems, IBM,
Lernout & Hauspie and others. Recently, general and specific vocabulary
continuous speech dictation systems also have been introduced by Philips, IBM,
Dragon Systems and others. In addition, telephony applications with menu choice
systems and small vocabulary dialogue systems have been demonstrated by Nuance,
Nortel and others.
Despite the nominal advances in performance of such presently available systems,
there are significant limitations inherent in all of these systems, each of
which continues to use traditional approaches generally based on Hidden Markov
Models ("HMM") technology. These traditional approaches have not advanced
appreciably since the late 1980s. Applications based on such traditional speech
recognition systems for personal computers all require close-talking microphones
in relatively low noise environments and a formal speaking style to achieve
acceptable accuracy. In so-called continuous dictation systems, significant
adaptation to user speech, speaking style, and content area also are required.
These traditional systems are generally restricted to speech recognition for a
single individual dictating in a quiet environment; presently available
telephony-based systems are even more limited in general functionality.
The present industry standard methodology, the HMM, uses a general template or
pattern matching technique based on statistical language models. Massachusetts
Institute of Technology researcher Dr. Victor Zue has noted that
speech-recognition systems based on such technology
"utilize little or no specific-speech knowledge, but rely instead
primarily on general-purpose pattern-recognition algorithms. While
such techniques are adequate for a small class of well- constrained
speech recognition problems, their extendibility to multiple
speakers, large vocabularies, and/or continuous speech is highly
questionable. In fact, even for the applications
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that these devices are designed to serve, their performance typically
falls far short of human performance."
HMM's widely recognized weaknesses are many: (i) it does not meet the needs for
many mass market implementations, (ii) it has limited input feature types, (iii)
it accounts for only limited context, (iv) it has limited ability to generalize
acoustic and language structure, (v) it requires training data from the end-user
for acceptable performance, (vi) models become extremely large and complex as
vocabulary grows, and (vii) there is a lack of hardware parallel processing
capability.
In contrast to HMM, Fonix researchers have developed what the Company believes
to be a fundamentally new approach to the analysis of human speech sounds and
the contextual recognition of speech. The core Fonix automated speech
recognition technologies (the "ASRT" or "Core Technologies") attempt to
approximate the techniques employed by the human auditory system and language
understanding centers in the human brain. The ASRT use information in speech
sounds perceptible to humans but not discernible by current automated speech
recognition systems. They also employ neural net technologies (artificial
intelligence techniques) for identifying speech components and word sequences
contextually, similar to the way in which scientists believe information is
processed by the human brain. As presently developed, the ASRT are comprised of
several components including a phonetic sound representation recognition engine,
audio signal processing, a feature extraction process, a phoneme estimation
process, and a linguistic process consisting of two components, one of which is
expert- or rule-based and one of which is based on proprietary neural net
technologies, that are designed to interpret human speech contextually.
Fonix believes the reliable recognition of natural, spontaneous speech spoken by
one or more individuals in a variety of common environments by means of a
conveniently placed microphone, all based on its ASRT, will significantly
improve the performance, utility and convenience of applications currently based
on traditional HMM technology such as computer interface navigation, data input,
text generation, telephony transactions, continuous dictation and other
applications. Additionally, the Company believes that its ASRT will make
possible major new speech recognition applications such as the transcription of
business meetings and conversations, real-time speech-to-speech language
translation, natural dialogues with computers for information access and
consumer electronic devices controlled by natural language.
Thus, the Company believes that its ASRT offers unique speech processing
techniques that will complement and significantly enhance currently available
speech recognition systems. Through its Interactive Technologies Solutions
Group, Fonix intends to continue to license its ASRT, to continue to co-develop
the ASRT with research and development groups in industry and academia and
ultimately to market a suite of Fonix-branded technologies and products. In the
long term, the Company anticipates that automated speech recognition systems
employing the Company's unique ASRT will set the industry standard for all
automated speech recognition applications because of its anticipated capacities
to overcome the weaknesses of HMM. In addition, the Company expects that certain
elements of its Core Technologies will have industry-leading applications in
non-speech recognition industries, market segments and disciplines such as
artificial intelligence and data compression. Although these plans represent
management's beliefs and expectations based on its current understanding of the
market and its experience in the industry, there can be no assurance that actual
results will meet these expectations. See "Certain Significant Risk Factors." In
the last two fiscal years, the Company has expended $13,620,748 and $7,066,294
on research and development activities. Since its inception (October 1, 1993),
the Company has spent $34,529,320 on research and development of the ASRT. The
Company expects that a substantial part of its capital resources will continue
to be devoted to research and development of the ASRT and other proprietary
technologies for the foreseeable future.
HealthCare Solutions Group Products
The three PowerScribe products now being sold by the HealthCare Solutions Group
are PowerScribeRAD, PowerScribeRAD Software Development Kit ("SDK")TM, and
PowerScribeEM. PowerScribe products use state-of- the-art continuous speech
recognition engines licensed from Dragon Systems, Inc., which enables a user to
dictate naturally and continuously without having to pause between words.
PowerScribe incorporates customized medical language models gleaned from
millions of words sampled from medical specialty departments across North
America.
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PowerScribe products have been designed as mission-critical applications to
operate as an open and scalable continuous speech reporting and charting system.
PowerScribe products utilize core technologies from Microsoft's Back Office(R)
applications development suite and rely on Windows NT(R), Open Database
Connectivity (ODBC) and SQL Server(R) as the foundation operational elements.
PowerScribeRAD for Radiology Reporting
PowerScribeRAD enables the full automation of the radiology reporting process
and replaces existing digital dictation and transcription systems.
PowerScribeRAD permits the dictation of radiology reports directly into text,
with edit, approve, and sign functions accomplished within a matter of minutes;
thereby significantly reducing transcription costs and report turnaround time.
Once reports are dictated, they may be automatically stored in the Radiology
Information System ("RIS"), the Hospital Information System ("HIS") or
PowerScribeRAD's own report repository.
PowerScribeEM for Emergency Medicine Reporting
PowerScribeEM is a completely integrated emergency medicine dictation and
transcription system which allows emergency department professionals to dictate
their reports directly into text in the first total solution for capturing and
documenting emergency medicine clinical encounters. PowerScribeEM minimizes
training and the need for healthcare professionals to modify their work styles.
PowerScribe includes post-processing of the text for organization into a typical
structured emergency medicine report. PowerScribeEM seamlessly handles the
overall workflow of an emergency department. Once reports are dictated, reports
are either automatically stored in the HIS or in PowerScribe's own report
repository for further analysis at a later date.
PowerScribe Radiology SDK for User Development Applications
The PowerScribe Radiology SDK allows users to integrate the full functionality
of the PowerScribeRAD system into the user's own radiology applications. For
radiology environments such as a RIS or Picture Archival Communication System
("PACS") the PowerScribe SDK allows users to develop a completely integrated
dictation and transcription system utilizing continuous speech recognition.
Using this SDK, the PowerScribeRAD client functionality can be embedded into the
user's application while also customizing the user interface and report workflow
to meet specific application needs. The PowerScribeRAD SDK supports multiple
development environments including Microsoft(R) Visual Basic, C++ and the
Microsoft(R) Internet Explorer environment. The SDK includes an Active-X
composite control along with sample code and developer documentation.
Interactive Solutions Group Products
The Interactive Technologies Solutions Group offers products and technologies
which include automated speech recognition, text-to-speech, and handwriting
recognition for a variety of hardware and software platforms. The marketing
direction for the Interactive Technologies Solutions Group is to form
relationships with third parties who can incorporate Fonix technologies into
their own products or product development efforts. Such relationships may be
structured in any of a variety of ways including traditional technology
licenses, co-development relationships through joint ventures or otherwise, and
strategic alliances. The third parties with whom Fonix presently has such
relationships and with which it may have similar relationships in the future
include participants in the application software, operating systems, computer,
microprocessor chips, consumer electronics, automobile, telephony and health
care technology market sectors. Interactive Technologies Group products include
AcuVoice AV 1700, AV 2001 text-to-speech systems, and Allegro handwriting
recognition.
Embedded Technologies
Fonix has developed an application development tool, the Fonix Advanced
Application Speech Toolkit (FAAST(TM)) which allows developers to simulate,
prototype and create code for embedded applications using Fonix' human computer
interaction technologies. This system currently supports Fonix speech
recognition for command and control applications and Fonix AcuVoice
text-to-speech engines for both very high quality limited vocabulary and high
quality unlimited vocabulary applications. The system is designed to support a
number of popular microprocessors and operating systems for embedded
applications. Currently, FAAST supports the Siemens
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TriCore micro-controller. The beta version of the FAAST system will be available
for developers in June 1999. An alpha version of the system is currently being
used internally at Fonix to support the development of embedded systems
applications for several companies including consumer electronic, automotive,
and cell phone devices.
Core Speech Recognition Technologies
Since 1994 Fonix has pursued the development of a "3rd Generation" automated
speech recognition technology to overcome the limitations of currently available
commercial speech recognition systems. This development has yielded a
proprietary ASR system utilizing a unique front-end analysis of the acoustic
speech signal, a neural net based phoneme identifier, and a completely novel
neural net architecture for back-end language modeling. The latter component is
the MULTCONS or multi-level constraint satisfaction network. These developments
have been the subject of two issued patents. In addition, the Company has
acquired a related patent covering portions of this technology. Portions of this
technology are currently being employed in Fonix embedded systems applications.
Text-to-Speech (Speech Synthesis)
In 1986 AcuVoice began to develop and market a new approach to synthesized
speech, a system using actual recordings of "units" of human speech (i.e., the
sound pulsation). Since the unit of speech consists of more than one phoneme
(sound), AcuVoice's approach has been called a "large segment concatenative
speech synthesis" approach. Other companies such as DEC and AT&T began in the
early 1960s and continue until the present to use a system called "parametric
speech synthesis." Parametric systems are plagued with problems of speech
quality, because their unit is not an actual recording, but a computer's version
of what a human voice sounds like. Poor speech quality also occurs because the
parametric unit consists, for the most part, of a single phoneme, such as the
"t" in the word "time."
Although as early as 1994 AcuVoice released versatile prototypes of its system,
it was not until early 1996 that the AcuVoice Speech Synthesizer was ready for
sale into the telecommunications, multi-media, educational and assistive
technology markets. AcuVoice won awards as "best text-to-speech" product at the
Computer Technology Expo '97 and '98 and the best of show award at AVIOS '97.
Presently AcuVoice products are sold to end-users, systems integrators and OEMs.
Fonix text-to-speech products include those developed by AcuVoice and those
developed by Fonix. All are sold under the AcuVoice brand name. The products
include the AcuVoice AV 1700 TTS system for end-user desktop and laptop system
use. The AcuVoice AV 2001 SDK is a software development kit for developers of
telephony applications. Run-time software licenses for the AV 2001 are offered
for applications developed with the SDK.
The SDK supports major computer telephony platforms.
Handwriting Recognition
Prior to the Papyrus Acquisition in October 1998, PAI developed and began
selling handwriting recognition software including the Allegro handwriting
recognition software. The Allegro handwriting recognition software is a single
letter recognition system like the popular Graffiti handwriting recognition
software for the PalmPilot PDA. However, Allegro's alphabet is all natural in
appearance as lower case letters. Because the letters are written in the
standard way in almost all instances, the Allegro system is easy to use and
requires practically no learning. Allegro is sold by Purple Software in England
for the Psion Series 5 hand-held PC. This software has also been licensed to
Philips for its popular smart cell phone. Allegro is also the subject of a sales
agreement with Lucent Technologies for use in its Inferno operating system.
Papyrus has also developed cursive handwriting recognition software which
recognizes naturally-written whole words. This cursive technology is only
available as a licensed product to OEM customers. Both the Allegro and the
cursive handwriting recognition software are user independent and require no
training on the software.
In March 1998, the Company expanded its suite of human-computer interaction
technologies by acquiring the award-winning voice synthesis technologies of
AcuVoice, Inc. ("AcuVoice"). The business operations previously conducted by
AcuVoice are now part of the Company's Interactive Technologies Solutions Group.
During the three months ended March 31, 1999, the Company received in the
aggregate, $53,806 in revenue from licensing or sale of
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the AcuVoice technologies and products compared to pro-forma revenue of $46,735
for the comparable three month period of 1998.
In September 1998, the Company acquired Articulate Systems, Inc. ("Articulate"),
a developer of leading voice recognition and systems software for specialized
applications in the health care industry. The business operations previously
conducted by Articulate are now conducted by the Company's HealthCare Solutions
Group based in Woburn, Massachusetts. During the three months ended March 31,
1999, the Company received in the aggregate, $1,056,526 in revenue from sales of
the PowerScribe Radiology product marketed by the HealthCare Solutions Group
compared to pro-forma revenue of $142,782 for the comparable three month period
of 1998.
In October 1998, the Company acquired the Papyrus Companies. Papyrus develops
and markets printing and cursive handwriting recognition software for PDAs, pen
tablets and mobile phones. The Company operates the business formerly operated
by Papyrus as part of its Interactive Technologies Solutions Group from its
facilities in Woburn, Massachusetts. During the three months ended March 31,
1999, the Company received no revenue from licensing or sale of the Papyrus
technologies compared to pro-forma revenue of $140,462 for the comparable three
month period of 1998.
The Company markets its previously developed ASR technologies, together with TTS
technologies and products acquired from AcuVoice and handwriting recognition
technologies and products acquired from Papyrus through its Interactive
Technologies Solutions Group. The present marketing direction for the
Interactive Technologies Solutions Group is to form relationships with third
parties which can incorporate the Company's technologies and the other
technologies available to the Interactive Technologies Solutions Group into
their own products or product development efforts. Such relationships may be
structured in any of a variety of ways including traditional technology
licenses, co-development relationships through joint ventures or otherwise, and
strategic alliances. The third parties with whom the Company presently has such
relationships and with which it may have similar relationships in the future
include participants in the application software, operating systems, computer,
microprocessor chips, consumer electronics, automobile, telephony and health
care technology industries.
The Company markets voice recognition and systems software for specialized
applications in the health care industry through its HealthCare Solutions Group.
The HealthCare Solutions Group presently markets large vocabulary voice
recognition software for the rapid capture, transcription and management of
clinical information dictated by radiologists and emergency medical physicians.
The products now being sold by the HealthCare Solutions Group, including
PowerScribe Radiology and PowerScribeEM, are marketed to major hospitals and
medical centers nationwide.
In addition to the transactions involving AcuVoice, Articulate and Papyrus in
1998, the Company was also in negotiations to acquire several other speech
technology-related companies. The Company terminated all such acquisition
discussions in late 1998.
Resignation of Chairman of the Board
Effective April 30, 1999, Stephen M. Studdert resigned as Chairman of the Board
of Directors of the Company and Thomas A. Murdock, the Chief Executive Officer
of the Company, was elected Chairman. Mr. Studdert continues as a member of the
Board of Directors.
Year 2000 Issue
Many computer systems and software products are coded to accept only two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, many companies' software and computer systems will need to be upgraded
or replaced in order to comply with such Year 2000 requirements. Fonix is
subject to the risk that problems encountered with Year 2000 issues, either in
its internal systems, technologies and products, or in external systems could
adversely affect its operations and financial condition.
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In the ordinary course of its business, Fonix tests and evaluates its
technologies and software and hardware products. Fonix believes that its
technologies and products generally are Year 2000 compliant, meaning that the
use or occurrence of dates on or after January 1, 2000 will not materially
affect the performance of such technologies or products with respect to four
digit date dependent data or the ability of such products to correctly create,
store, process, and output information related to such data. However, Fonix may
learn that certain of its technologies or products do not contain all necessary
software routines and codes necessary for the accurate calculation, display,
storage, and manipulation of data involving dates. In addition, Fonix has
warranted or expects to warrant that the use or occurrence of dates on or after
January 1, 2000 will not adversely affect the performance of its technologies or
products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If the end
users of any of Fonix's technologies or products experience Year 2000 problems,
those persons could assert claims for damages.
Fonix uses third-party equipment and software that may not be Year 2000
compliant. Fonix is presently conducting a review of key products provided by
outside vendors to determine if their products are Year 2000 compliant. Although
that process is not yet completed, Fonix presently believes that all software
provided by third parties that is critical to its business is Year 2000
compliant. Fonix expects to complete its review of all internal systems for Year
2000 compliance by June 30, 1999. If this third-party equipment or software does
not operate properly with regard to the Year 2000 issue, Fonix may incur
unexpected expenses to remedy any problems. Such costs may materially adversely
affect Fonix's business, operating results, and financial condition. In
addition, if Fonix's key systems, or a significant number of its systems, fail
as a result of Year 2000 problems Fonix could incur substantial costs and
disruption of its business. Fonix may also experience delays in implementing
Year 2000 compliant software products. Any of these problems may materially
adversely affect Fonix's business, operating results or financial condition.
In addition, the purchasing patterns of Fonix's licensees, potential licensees,
customers and potential customers may be affected by Year 2000 issues. Many
companies are expending significant resources to correct their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to license Fonix technologies or to purchase other Fonix products.
This may adversely affect Fonix's business, operating results, and financial
condition.
Results of Operations
Three months ended March 31, 1999 compared with three months ended March 31,
1998
During the three months ended March 31, 1999, the Company recorded revenues of
$1,110,332, a decrease of $185,453 over the same period in the previous year. In
the 1998 comparable period the Company received its first revenues of
$1,295,785, of which, $1,291,712 was paid by Siemens as a non-refundable license
fee. The 1999 revenues are primarily from sales and licensing fees related to
the PowerScribe dictation product and TTS technologies and products.
The Company incurred product development and research expenses of $2,971,279
during the three months ended March 31, 1999, an increase of $270,076 over the
same period in the previous year. This increase was due primarily to the
addition of product development and research personnel, equipment, facilities
and the operations of the Interactive Technologies and HealthCare Solutions
Groups. The Company anticipates similar or increased product development and
research costs as it continues to develop and market the applications and
products offered by its HealthCare Solutions and Interactive Technologies
Solutions Groups. During the three months ended March 31, 1999, the Company
expended a total of approximately $280,000 in connection with the development of
the AcuVoice and Articulate purchased in-process research and development
projects. No amounts were expended in connection with these projects during the
three months ended March 31, 1998.
Selling, general and administrative expenses were $3,675,561 and $1,380,080 ,
respectively, for the three months ended March 31, 1999 and 1998. Salaries,
wages and related costs were $2,093,626 and $716,550 for the three months ended
March 31 1999 and 1998, respectively, an increase of $1,377,076. This increase
is attributable to increases in personnel costs resulting from the acquisitions
of AcuVoice, Articulate and Papyrus. Legal and accounting expenses increased
$238,692, marketing expenses increased $336,668 and consulting and outside
services increased by $94,094.
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Amortization of goodwill and purchased core technologies were $1,287,581 and
$98,783 , respectively, for the three months ended March 31, 1999 and 1998
representing an increase of $1,188,798. This increase is primarily attributable
to the amortization of intangible assets acquired in connection with the
acquisitions of AcuVoice, Articulate and Papyrus.
The Company incurred losses from operations of $7,049,528 and $12,199,281 during
the three months ended March 31, 1999 and 1998, respectively. The decrease in
losses from operations is due primarily to the $9,315,000 charge for in-process
research and development costs during the three months ended March 31, 1998,
offset in part by increases in general and administrative expenses and
amortization expense. The Company anticipates that its investment in ongoing
scientific product development and research will continue at present or
increased levels for at least the remainder of fiscal 1999, assuming
availability of working capital.
Net other expense was $2,245,333 for the three months ended March 31, 1999, an
increase of $2,204,886 over the three months ended March 31, 1998. This increase
was due primarily to increased interest expense of $1,955,455 due to financing
costs associated with the issuance of the Series C 5% Convertible Debentures.
In-Process Research and Development
At the dates of acquisition of AcuVoice and Articulate, management estimated
that each of the acquired in- process research and development projects of
AcuVoice and Articulate were approximately 75 percent complete and that an
additional $1.0 million would be required to develop each of these projects to
commercial viability. Additionally, management anticipated release dates of the
fourth quarter of 1999 for the AcuVoice projects, and the first quarter of 2000
for the Articulate projects. As of March 31, 1999, the Company has expended a
total of approximately $190,000 and $500,000 in connection with the AcuVoice and
Articulate acquired in-process research and development projects, respectively,
and management estimates that a total of approximately $810,000 and $500,000
will be required to complete the AcuVoice and Articulate projects, respectively.
Management estimates that the AcuVoice and Articulate projects are 80 percent
and 87 percent complete, respectively, as of March 31, 1999, and that the
release dates are the same as anticipated at the date of acquisition.
Liquidity and Capital Resources
The Company must raise additional funds to be able to satisfy its cash
requirements during the next twelve months. The scientific research and
development, corporate operations and marketing expenses will continue to
require additional capital. In addition, the Company's recent acquisitions of
AcuVoice, Articulate, and Papyrus place further requirements on the Company's
limited cash resources. Because the Company presently has only limited revenue
from operations, the Company intends to continue to rely primarily on financing
through the sale of its equity and debt securities or sales of existing
technologies or businesses to satisfy future capital requirements until such
time as the Company is able to enter into additional acceptable third party
licensing or co-development arrangements such that it will be able to finance
ongoing operations out of license, royalty and sales revenue. There can be no
assurance that the Company will be able to enter into such agreements.
Furthermore, the issuance of equity securities or other securities which are or
may become convertible into equity securities of the Company in connection with
such financing (or in connection with acquisitions) would result in dilution to
the stockholders of the Company which could be substantial.
The Company had negative working capital of $13,903,731 at March 31, 1999
compared to negative working capital of $14,678,975 at December 31, 1998. The
current ratio was 0.10 at March 31, 1999, compared to 0.59 at December 31, 1998.
Current assets decreased by $19,221,364 to $1,493,842 from December 31, 1998 to
March 31, 1999. Current liabilities decreased by $19,996,608 to $15,397,573
during the same period. The increase in working capital from December 31, 1998
to March 31, 1999, was primarily attributable to the payment of notes payable
and other accrued liabilities from the proceeds of the Series C 5% Convertible
Debentures. Total assets were $41,261,363 at March 31,1999 compared to
$61,989,927 at December 31, 1998.
During the three months ended March 31, 1999, the Company granted 753,000 stock
options to various employees and 9,500 stock options to two consultants at
exercise prices ranging from $1.28 to $1.78 per share. The term of all
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options granted during this three month period is ten years from date of grant.
As of March 31, 1999, the Company had a total of 16,419,282 options outstanding.
From its inception, the Company's principal source of capital has been private
and other exempt sales of the Company's debt and equity securities. On January
29, 1999, the Company entered into a Securities Purchase Agreement with four
investors pursuant to which the Company sold its Series C 5% Convertible
Debentures (the "Debentures") in the aggregate principal amount of $4,000,000.
The outstanding principal amount of the Debentures is convertible at any time at
the option of the holder into shares of the Company's common stock at a
conversion price equal to the lesser of $1.25 or 80% of the average of the
closing bid price of the Company's common stock for the five trading days
immediately preceding the conversion date. The Company also issued 400,000
warrants in connection with this financing. The warrants entitle the holders to
purchase up to 400,000 shares of the Company common stock at an exercise price
of $1.25 per share. On March 3, 1999, the Company executed a Supplemental
Agreement pursuant to which the Company agreed to sell an additional $2,500,000
principal amount of the Debentures on the same terms and conditions as the
January 29, 1999 agreement, except no additional warrants were issued. Gross
proceeds to the Company from these two transactions were $6,500,000.
The obligations of the Company for repayment of the Debentures, as well as its
obligation to register the common stock underlying the potential conversion of
the Debentures and the exercise of the warrants issued in these transactions,
were personally guaranteed by Thomas A. Murdock, Roger D. Dudley (each of whom
are executive officers and directors of the Company) and Stephen M. Studdert
(director of the Company) (collectively, "Guarantors"). The personal guarantees
of these Guarantors were secured by a pledge of 6,000,000 shares of Fonix common
stock beneficially owned by them and held in the name of Thomas A. Murdock,
Trustee. In connection with the Supplemental Agreement, the Company agreed to
pledge as collateral for repayment of the Debentures, a lien on the patent
covering certain ASR technologies. At the present time the Company has not
executed a security agreement in favor of the investors describing the patent.
In connection with the guaranty and the pledge of Fonix common stock given by
Guarantors, the Company agreed to indemnify and hold them harmless in the event
of a default that results in any payment or other liability or damage incurred
by any of them. In consideration for the guaranty and pledge by Guarantors, the
Company also agreed to grant each of them common stock purchase warrants to
purchase 666,666 shares of common stock at a price of $1.59 per share. However,
the Guarantors have declined the grant of these warrants. On or about April 6,
1999, the holders of the Debentures notified the Company and Guarantors that
Guarantors were in default under the terms of the pledge, and that the holders
intended to exercise their rights to sell some or all of the pledged shares. At
the present time, the Company has no knowledge of sales of Guarantors' shares by
the holders of the debentures. However, if the holders proceed to sell some or
all of Guarantors' shares, the Company may be obligated under its indemnity
agreement in favor of Guarantors to issue shares to the Guarantors in
replacement of all shares sold by the holders and to reimburse Guarantors for
any income tax liability incurred as a result of the holders' sales of
Guarantors' shares.
During the three months ended March 31, 1999, 17,500 shares of Series D
Convertible Preferred Stock and 45,072 shares of Series E Convertible Preferred
Stock and related dividends were converted into 426,464 shares and 1,086,531
shares, respectively, of the Company's common stock.
At December 31, 1998, the Company had a revolving note payable to a bank in the
amount of $19,988,193. This note was due January 8, 1999, bore an interest rate
of 6.00 percent, and was secured by a certificate of deposit in the amount of
$20,000,000. The Company paid this revolving note in full, including accrued
interest, on January 8, 1999 with proceeds from the certificate of deposit that
secured the note and $22,667 in cash.
At March 31, 1999, the Company had an unsecured revolving note payable to a bank
in the amount of $50,000. Amounts loaned under the revolving note payable are
limited to $50,000. The weighted average outstanding balance during the three
months ended March 31, 1999 was $50,000. The weighted average interest rate was
9.75 percent during this period. This note is payable on demand, matures April
1, 2007, bears interest at a bank's prime rate plus 2.0 percent (9.75 percent at
March 31, 1999) and requires interest to be paid monthly.
At March 31, 1999, the Company had a note payable to a lender in the amount of
$560,000 which bears interest at 18 percent per annum, which interest is payable
monthly. The note payable was originally due January 2, 1999 and is secured by
certain accounts receivable of the Company's HealthCare Solutions Group. The
Company has extended the due date through May 28, 1999 by paying the lender
accrued interest plus a fee of $5,600. The
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Company anticipates that it will request additional extensions of the due date.
The note is personally guaranteed by two officers and a member of the Board of
Directors of the Company.
At March 31, 1999, the Company had unsecured demand notes payable outstanding to
former Articulate stockholders in the aggregate amount of $4,658,980 related to
the acquisition of Articulate in 1998. These notes were payable on demand any
time after November 30, 1998. In December 1998, the holder of a $407,971 note
demanded payment. In connection with this demand, the Company paid the holder a
partial payment of $50,000 in 1998 and the holder agreed to extend the date on
which demand could be made to March 15, 1999 and increase the interest rate to
11 percent per year. No additional demand has been given for payment of this
note. In 1998, the Company also negotiated extensions of $986,481 of the notes
to May 30, 1999 and adjusted the interest rate to 10 percent per year. During
the three months ended March 31, 1999 and subsequent to March 31, 1999, the
Company made partial payments of $50,000and $175,000, respectively, on a
$2,535,235 note and agreed to pay the balance in connection with a sale of one
of its operating segments.
At March 31, 1999, the Company had unsecured demand notes payable outstanding to
former Articulate employees in the aggregate amount of $452,900 and an accrued
liability of $404,100 to the same employees. Both amounts are related to
incentive compensation granted the employees for continued employment with the
Company after the acquisition of Articulate in 1998. The demand notes bear
interest at an annual rate of 8.5 percent and were payable upon demand after
November 1, 1998. None of the holders of these notes has demanded payment. The
Company has agreed to pay interest on these notes at 9 percent per year after
November 1, 1998. No demand for payment has been made for the $404,100 by the
former Articulate employees.
At March 31, 1999, the Company had unsecured demand notes payable to former
Papyrus stockholders in the aggregate amount of $1,710,000, which notes were
issued in connection with the acquisition of Papyrus in 1998. The notes were
payable in various installments from February 28, 1999 through September 30,
1999. In April 1999, the Company entered into agreements with five former
Papyrus shareholders to reduce the aggregate amounts payable to them under these
notes from $1,632,375 to $1,188,909, which amounts will be paid in connection
with a sale of one of the Company's operating segments. The aggregate remaining
balance of $77,625 of the notes payable to former shareholders of Papyrus will
also be paid at the closing of the contemplated sale of the operating segment.
At March 31, 1999, the Company had an unsecured revolving note payable in the
amount of $184,839 in principal and $5,929 in accrued interest to SMD, a company
owned by two individuals who are executive officers and directors and one
individual who is a director of the Company and who each beneficially own more
than 10 percent of the Company's common stock. The weighted average balance
outstanding during the three months ended March 31, 1999 was $53,398. This
revolving note is payable on demand and bears interest at an annual rate of 12
percent. The maximum amount outstanding under this revolving note during the
period ended March 31, 1999 was $184,839. In 1999, advances to the three
individuals in the amount of $59,986 were applied as a partial payment of this
note.
In December 1998, two individuals who are executive officers and directors and
one individual who is a director of the Company ("Guarantors") guaranteed
certain obligations of the Company. As security for some of the guarantees, the
Guarantors also pledged shares of Fonix common stock beneficially owned by them.
In March 1999, 143,230 of the shares previously pledged by the Guarantors to a
bank were sold by the bank and the proceeds were used to pay Company credit card
balances and the related accrued interest in full totaling $244,824. These
amounts are now included in the unsecured revolving note payable to SMD
described above.
At March 31, 1999, the Company had an unsecured, non-interest bearing demand
note payable in the amount of $100,000 to Synergetics, Inc. ("Synergetics"), a
research and development entity. This note is payable on demand.
At March 31, 1999, the Company had an unsecured note payable to an officer of
the Company in the amount of $20,000, which bears interest at an annual rate of
10 percent and was due December 31, 1998. The holder of this note agreed to
extend the due date to June 30, 1999.
At March 31, 1999, the Company had an unsecured note payable to an officer of
the Company in the amount of $43,691 which bears interest at an annual rate of
10 percent and is due on or before July 31, 1999. Subsequent to March 31, 1999,
this same officer advanced an additional $25,000 to the Company under similar
terms.
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On April 22, 1999, the Company entered into a loan agreement with an
unaffiliated entity pursuant to which the Company received proceeds in the
aggregate principal amount of $1,000,000. This note is payable in full including
accrued interest on July 28, 1999 and bears interest at the prime rate as
published in The Wall Street Journal under the heading "Money Rates" plus 2.0
percent (9.75 percent at April 22, 1999). The loan is secured by all the assets
of Fonix/ASI Corporation, a wholly owned subsidiary of the Company, including
its intellectual property rights represented by patents, copyrights and
trademarks. On May 14, 1999, an additional $100,000 was advanced under the terms
of this note. . The Company anticipates that it will need to raise additional
funds to satisfy its cash requirements during the next twelve months. Even
taking into account expected revenues from the HealthCare Solutions and
Interactive Technologies Solutions Groups, the Company's ongoing operating
expenses will remain higher than revenues from operations at least through the
first three quarters of 1999. Accordingly, the Company expects to incur
significant losses until such time as it is able to enter into substantial
licensing and co-development agreements and receive substantial revenues from
such arrangements or from the operations of its recently acquired subsidiaries,
of which there can be no assurance. Scientific research and development,
corporate operations and marketing expenses will continue to require additional
capital. The Company therefore intends to continue to rely primarily on
financing through sales of its equity and debt securities to satisfy future
capital requirements until such time as the Company is able to enter into
additional third-party licensing or co-development arrangements such that it
will be able to finance ongoing operations out of license, royalty and sales
revenues. There can be no assurance that the Company will be able to sell its
equity and debt securities such that sufficient operating capital will be
available when and in the amounts needed. Furthermore, the issuance of equity
securities or other securities which are or may become convertible to the equity
securities of the Company in connection with such financing (or in connection
with acquisitions) will result in dilution to the stockholders of the Company
which could be substantial.
The Company presently has no plans to purchase any new research and development
or office facilities.
Outlook
Corporate Objectives, Technology Vision and Acquisition Strategy
The Company has positioned itself as a developer of "next generation" speech and
human-computer interface technologies that will provide multiple product
solutions for business, consumer and service applications. The fonix management
team has assembled leading talents in the ASR, TTS, handwriting recognition and
other arenas related to these technologies. The Board of Directors and
management have developed a business strategy that identifies the Company's
strengths and objectives, outlines a vision of the next major market
opportunities in the computer, telephony and electronics industries and
articulates a corporate and technology strategy that includes strategic
alliances, collaborative development agreements, strategic acquisitions and,
ultimately, marketing a suite of Fonix- branded products.
The Company believes that its Core Technologies will be the platform for the
next generation of automated speech technology and products. Most speech
recognition products offered by other companies are based on technologies such
as HMM, that are largely in the public domain and represent nothing particularly
"new" or creative. The Fonix Core Technologies are based on proprietary,
patented technology. The Company will continue to seek patent protection of the
Core Technologies as well as technologies and inventions derived from the
knowhow, technologies and products obtained with the acquisition of AcuVoice,
Articulate and Papyrus. Management believes this strategy will set the Company's
advanced human computer interaction products apart from the competition.
The Company is determined to become a multi-market, multi-product enterprise
offering advanced speech and human-computer interface technologies for business,
consumer and service applications. Advanced human- computer interface
technologies and multi-modal systems include:
o speech recognition and synthesis
o speaker identification and verification
o handwriting recognition
o pen and touch screen input
o natural language understanding
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Anticipated products incorporating such advanced multi-modal human computer
interface technology include the following:
o PCs and PDAs
o cellular phones
o automotive and home environment speech controls
o automated information and transaction kiosks
o telephone systems with natural dialogue and gesture
controls
o medical transcription and reporting systems, including
PowerScribeRAD and PowerScribeEM
o smart consumer appliances and electronics
o speech and pen-based computers utilizing handwriting
and cursive recognition
o interactive education and entertainment systems
o redesigned appliances o toys and games
This next generation technology presents important product and service
opportunities for companies like Fonix in a variety of industry segments,
including:
o semiconductors
o health care
o telecommunications
o computers
o software
o consumer electronics
o entertainment
o automotive
Fonix is a technology company. Since its inception, the Company has focused on
the development of its Core Technologies and related complementary technologies,
including those technologies obtained in connection with the acquisitions of
AcuVoice, Articulate and Papyrus. The Company will pursue the development of
advanced speech and computer-interface technologies that will enhance or may be
enhanced by its own Core Technologies. Fonix will pursue this development
through strategic alliances, such as the Siemens agreement in the
telecommunications industry, and through collaborative research arrangements
such as its agreements with Oregon Graduate Institute and Brigham Young
University.
As the Company proceeds to implement its strategy and to reach its objectives,
it anticipates that it will continue to realize several benefits for itself and
for its shareholders. In addition, the Company expects further development of
complementary technologies, added product and applications development
expertise, access to market channels and additional opportunities for strategic
alliances in other industry segments.
The strategy described above is not without risk, and shareholders and others
interested in the Company and its common stock should carefully consider the
risks contained the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 1 to the
Quarterly Report on Form 10-Q for the period ended March 31, 1999, to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 11th day
of August, 1999.
Fonix Corporation
Date: August 11, 1999 /s/ Roger D. Dudley
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Roger D. Dudley
Executive Vice President
