<PAGE>
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 June 30, 2000.
[ ] 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, including 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 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 August 10, 2000, 165,528,685 shares of Class A voting common
stock, par value $.0001 per share, were issued and outstanding.
<PAGE>
Fonix Corporation and Subsidiaries
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
-------------- --------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 272,129 $ 232,152
Accounts receivable, net of allowance for doubtful accounts of $20,000 for 2000
and 1999 7,649 184,901
Prepaid expenses 184,667 51,747
Interest and other receivables 14,243 10,539
Inventory 2,690 1,546
-------------- --------------
Total current assets 481,378 480,885
Cash held in escrow 2,090,072 2,038,003
Property and equipment, net of accumulated depreciation of $2,281,454 and
$1,938,494, respectively 868,327 1,148,802
Intangible assets, net of accumulated amortization of $5,621,972 and
$4,392,457, respectively 14,170,077 15,399,593
Other assets 105,276 105,864
-------------- --------------
Total assets $ 17,715,130 $ 19,173,147
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible promissory note $ 3,450,000 $ -
Advances - 1,000,000
Notes payable - related parties 77,625 77,625
Accounts payable 901,150 1,359,040
Accrued liabilities 848,722 857,033
Accrued liabilities - related parties 1,689,133 1,814,134
Income taxes payable 22,394 50,000
Deferred revenues 672,365 127,849
-------------- --------------
Total current liabilities 7,661,389 5,285,681
Series C 5% convertible debentures - 3,971,107
-------------- --------------
Total liabilities 7,661,389 9,256,788
-------------- --------------
Common stock and related repricing rights subject to redemption; 1,801,802 shares and
repricing rights outstanding in 1999 (aggregate redemption value of $2,500,000) - 1,830,000
-------------- --------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.0001 par value; 50,000,000 shares authorized; Series A,
convertible; 166,667 shares outstanding
(aggregate liquidation preference of $6,055,012) 500,000 500,000
Series D, 4% cumulative convertible; 164,500 and 381,723 shares
outstanding, respectively
(aggregate liquidation preference of $3,534,557) 3,988,583 9,095,910
Series F, 6% cumulative convertible; 10,755 shares outstanding
(aggregate liquidation preference of $220,478) 220,478 -
Common stock, $.0001 par value; 300,000,000 shares authorized;
Class A voting, 165,506,685 and 123,535,325 shares outstanding, respectively 16,550 12,353
Class B non-voting, none outstanding - -
Additional paid-in capital 133,979,289 112,769,420
Outstanding warrants 3,856,030 2,850,530
Deferred interest expense (1,906,305) -
Deferred consulting expense (27,590) (435,051)
Deficit accumulated during the development stage (130,573,294) (116,706,803)
-------------- --------------
Total stockholders' equity 10,053,741 8,086,359
-------------- --------------
Total liabilities and stockholders' equity $ 17,715,130 $ 19,173,147
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Fonix Corporation
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
October 1,
1993
Three Months Ended Six Months Ended (Inception) to
June 30, June 30, June 30,
------------------------- ----------------------------
2000 1999 2000 1999 2000
------------ ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 143,825 $ 231,571 $ 200,272 $ 285,377 $ 3,244,503
Cost of revenues 3,651 7,949 6,599 13,240 66,971
------------ ------------ -------------- ------------- --------------
Gross margin 140,174 223,622 193,673 272,137 3,177,532
------------ ------------ -------------- ------------- --------------
Expenses:
Selling, general and administrative 2,455,315 1,944,727 5,793,921 4,689,793 46,356,987
Product development and research 1,478,362 1,858,524 2,929,120 4,371,350 41,836,245
Amortization of goodwill and purchased core technology 607,136 657,609 1,214,273 1,315,218 5,515,436
Purchased in-process research and development - - 474,000 - 9,789,000
------------ ------------ -------------- ------------- --------------
Total expenses 4,540,813 4,460,860 10,411,314 10,376,361 103,497,668
------------ ------------ -------------- ------------- --------------
Loss from operations (4,400,639) (4,237,238) (10,217,641) (10,104,224) (100,320,136)
------------ ------------ -------------- ------------- --------------
Other income (expense):
Interest income 70,773 911 101,092 22,957 3,863,203
Interest expense (448,293) (511,002) (480,740) (2,737,396) (9,440,439)
Other expense - (2,404) - (2,404) (157,345)
Cancellation of common stock reset provision - - - - (6,111,577)
----------- ------------- -------------- ------------- -------------
Total other income (expense), net (377,520) (512,495) (379,648) (2,716,843) (11,846,158)
----------- ------------- -------------- ------------- -------------
Loss from continuing operations before income tax benefit (4,778,159) (4,749,733) (10,597,289) (12,821,067) (112,166,294)
Income tax benefit - - - - 3,331,895
------------ ------------ -------------- ------------- --------------
Loss from continuing operations (4,778,159) (4,749,733) (10,597,289) (12,821,067) (108,834,399)
Discontinued operations:
Operating loss of HealthCare Solutions Group - (1,768,052) - (2,991,579) (12,229,033)
Gain on disposal of HealthCare Solutions Group, net of
income taxes of $3,100,000 - - - - 3,766,646
------------ ------------ -------------- ------------- --------------
Loss before extraordinary items (4,778,159) (6,517,785) (10,597,289) (15,812,646) (117,296,786)
Extraordinary items:
Loss on extinguishment of debt - - - - (881,864)
Gain on forgiveness of debt 46,887 - 78,864 - 583,269
------------ ------------ -------------- ------------- --------------
Net loss $(4,731,272) $(6,517,785) $ (10,518,425) $(15,812,646) $(117,595,381)
============ ============ ============== ============= ==============
Basic and diluted net loss per common share $ (0.03) $ (0.10) $ (0.09) $ (0.26)
============ ============ ============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Fonix Corporation
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
October 1,
1993
Six Months Ended (Inception) to
June 30, June 30,
------------------------------
2000 1999 2000
--------------- -------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (10,518,425) $ (15,812,649) $ (117,595,381)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 312,500 100,000 5,958,654
Issuance of common stock for patent - - 100,807
Non-cash expense related to issuance of debentures,
warrants, preferred and common stock 1,967,433 2,169,556 14,457,696
Non-cash compensation expense related to issuance
of stock options 842,856 119,240 3,699,771
Non-cash expense related to issuance of notes payable
and accrued expense for services - - 857,000
Non-cash exchange of notes receivable for services - - 150,000
Non-cash portion of purchased in-process research
and development - - 13,136,000
Loss on disposal of property and equipment - - 154,940
Gain on sale of HealthCare Solutions Group - - (3,766,646)
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 1,572,476 3,113,226 10,604,462
Income tax provision - - (3,331,895)
Extraordinary loss on extinguishment of debt - - 881,864
Extraordinary gain on forgiveness of debt (78,864) - (583,269)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable, net 177,252 (804,690) (216,678)
Employee advances - 7,245 (59,986)
Interest and other receivables (3,704) (15,868) (11,450)
Inventory (1,144) (44,582) (28,526)
Prepaid assets (132,920) (24,161) (183,767)
Cash held in escrow (52,069) - (90,072)
Other assets 588 (4,460) (118,313)
Accounts payable (379,026) 103,136 2,984,373
Accrued liabilities 247,648 583,542 1,403,749
Accrued liabilities - related party (125,001) 22,403 1,165,943
Income taxes payable (27,606) - (27,606)
Deferred revenues 544,516 529,596 1,258,024
--------------- -------------- ---------------
Net cash used in operating activities (5,653,490) (9,958,466) (69,199,025)
--------------- -------------- ---------------
Cash flows from investing activities, net of effects
of acquisitions:
Proceeds from sale of HealthCare Solutions Group - - 21,805,982
Acquisition of subsidiaries, net of cash acquired - - (15,323,173)
Proceeds from sale of property and equipment - - 50,000
Purchase of property and equipment (62,485) (67,677) (3,498,045)
Investment in intangible assets - - (164,460)
Issuance of notes receivable - - (3,228,600)
Payments received on notes receivable - 245,000 2,128,600
--------------- -------------- ---------------
Net cash provided by (used in) investing activities (62,485) 177,323 1,770,304
--------------- -------------- ---------------
Cash flows from financing activities:
Bank overdraft - (138,034) -
Convertible promissory note and advances 3,450,000 - 4,450,000
Net proceeds (payment) from revolving note payable - (19,988,193) (49,250)
Net proceeds (payments) from revolving note payable -
related parties - (1,758,741) (7,813,537)
Proceeds from other notes payable - 5,453,760 9,865,427
Payments on other notes payable - - (9,567,806)
Principal payments on capital lease obligation - (35,054) (153,390)
Proceeds from issuance of convertible debentures, net - 6,254,240 9,439,240
Proceeds from sale of warrants - 438,240 1,511,168
Proceeds from sale of common stock, net - - 38,175,700
Proceeds from exercise of warrants 250,000 - 250,000
Proceeds from exercise of stock options 305,952 - 305,952
Proceeds from sale of preferred stock, net 1,750,000 - 19,457,346
Proceeds from sale of common stock and related
repricing rights subject to redemption, net - - 1,830,000
--------------- -------------- ---------------
Net cash provided by (used in) financing activities 5,755,952 (9,773,782) 67,700,850
--------------- -------------- ---------------
Net (decrease) increase in cash and cash equivalents 39,977 (19,554,925) 272,129
Cash and cash equivalents at beginning of period 232,152 20,045,539 -
--------------- -------------- ---------------
Cash and cash equivalents at end of period $ 272,129 $ 490,614 $ 272,129
=============== ============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Fonix Corporation and Subsidiaries
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
October 1,
1993
Six Months Ended (Inception) to
June 30, June 30,
--------------------------
Supplemental disclosure of cash flow information: 2000 1999 2000
------------- ----------- -------------
<S> <C> <C> <C>
Cash paid during the period for interest $ - $ 381,118 $ 4,616,701
Cash paid during the period for income taxes $ 27,606 $ - $ 27,606
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Six Months Ended June 30, 2000:
Preferred stock dividends of $598,066 were accrued on Series D and Series F
preferred stock.
217,223 shares of Series D preferred stock and related dividends of
$255,600 were converted into 15,436,378 shares of Class A common stock.
305,281 shares of Series F preferred stock and related dividends of
$2,780,842, including $2,750,000 related to the beneficial conversion
feature recorded upon issuance, were converted into 8,181,950 shares of
Class A common stock.
The Company issued 600,000 warrants valued at $474,000 to an executive
officer and director of the Company as consideration for the rights to
certain pen and voice input technology.
The Company issued 228,364 shares of Class A common stock to two former
directors of the Company upon the exercise of 400,000 options as stock
appreciation rights.
A total of $3,971,107 in principal of Series C convertible debentures and
related interest of $290,957 were converted into 10,385,364 shares of Class
A common stock.
The Company issued 4,568,569 shares of Class A common stock upon the
exercise of repricing rights associated with the common stock subject to
redemption.
The Company issued 250,000 shares of Class A common stock to an unrelated
party for consulting fees valued at $312,500.
The Company accrued preferred stock dividends amounting to $80,000
resulting from liquidated damages on Series D preferred stock.
The Company issued 612,069 shares of Class A common stock valued at
$688,578 as payment for liquidated damages amounting to $394,800 and a fee
for the revision of certain terms of the preferred stock agreement
amounting to $213,778.
The Company recorded deferred interest expense of $2,116,000 related to
the beneficial conversion feature on the equity line of credit. A total of
$209,695 was recorded as interest expense.
The Company converted $1,000,000 in advances into 50,000 shares of Series F
preferred stock.
For the Six Months Ended June 30, 1999:
The Company entered into capital lease obligations for equipment in the
amount of $57,332.
Advances to employees totaling $59,986 were applied as payments on a
related-party note payable.
143,230 shares previously pledged to a bank by certain officers and
directors of the Company as collateral for Company credit card debt were
sold by the bank and the proceeds were used to pay the debt and the related
accrued interest in full totaling $244,824.
100,000 shares of Class A common stock previously pledged to a law firm by
certain officers and directors of the Company as collateral for legal work
were sold by the law firm and the proceeds were used to pay for legal
services totaling $72,335.
Preferred stock dividends of $997,146 were recorded related to the
beneficial conversion features of Series D and E convertible preferred
stock.
Preferred stock dividends of $432,084 were accrued on Series D and Series E
convertible preferred stock.
The Company issued 200,000 shares of Class A common stock to an unrelated
party for consulting fees valued at $100,000.
36,000 shares of Series D convertible preferred stock and related dividends
of $15,741 were converted into 1,288,479 shares of Class A common stock.
91,572 shares of Series E convertible preferred stock and related dividends
of $33,616 were converted into 3,246,183 shares of Class A common stock.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements of Fonix Corporation and subsidiaries (collectively, the
"Company" or "Fonix") have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the following disclosures are adequate to make the
information presented not misleading.
These condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the periods presented. The Company's business
strategy is not without risk, and readers of these condensed consolidated
financial statements should carefully consider the risks set forth under the
heading "Certain Significant Risk Factors" in the Company's 1999 Annual Report
on Form 10-K.
Operating results for the three months and six months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. The Company suggests that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, and its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
Net Loss Per Common Share - Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
At June 30, 2000 and 1999, there were outstanding common stock equivalents to
purchase 23,893,822 and 108,565,042 shares of common stock, respectively, that
were not included in the computation of diluted net loss per common share as
their effect would have been anti-dilutive, thereby decreasing the net loss per
common share.
6
<PAGE>
The following table is a reconciliation of the net loss numerator of basic and
diluted net loss per common share for the three months and six months ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
------------------------------ --------------------------
Per Per
Share Share
Amount Amount Amount Amount
-------------- ------------- ------------- ----------
<S> <C> <C>
Net loss from continuing operations $ (4,778,159) $ (4,749,733)
Preferred stock dividends (520,574) (301,669)
-------------- -------------
Net loss from continuing operations
attributable to common stockholders (5,298,733) $(0.03) (5,051,402) $ (0.08)
Discontinued operations, net of taxes -- -- (1,768,052) (0.02)
Extraordinary items, net of taxes 46,887 -- -- --
-------------- ------------- ------------- ----------
Net loss attributable to common
shareholders $ (5,251,846) $ (0.03) $ (6,819,454) $ (0.10)
============== ============= ============= ==========
Weighted average common shares
outstanding 162,274,479 67,067,853
============== =============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
------------------------------ --------------------------
Per Per
Share Share
Amount Amount Amount Amount
-------------- ------------- ------------- ----------
<S> <C> <C>
Net loss from continuing operations $ (10,597,289) $(12,821,067)
Preferred stock dividends (3,348,066) (1,429,230)
-------------- -------------
Net loss from continuing operations
attributable to common stockholders (13,945,355) $(0.09) (14,250,297) $ (0.22)
Discontinued operations, net of taxes -- -- (2,991,579) (0.04)
Extraordinary items, net of taxes 78,864 -- -- --
-------------- ------------- ------------- ----------
Net loss attributable to common
shareholders $ (13,866,491) $ (0.09) $(17,241,876) $ (0.26)
============== ============= ============= ==========
Weighted average common shares
outstanding 153,123,348 65,779,527
============== =============
</TABLE>
Reclassifications - Certain reclassifications have been made in the prior period
condensed consolidated financial statements to conform with the current period
presentation.
2. DISCONTINUED OPERATIONS
7
<PAGE>
On September 1, 1999, the Company completed the sale of the operations and a
significant portion of the assets of its HealthCare Solutions Group ("HSG") to
Lernout & Hauspie Speech Products N.V. ("L&H"), an unrelated third party. Upon
the closing of the sale, the Company discontinued the operations of HSG. The
results of operations of HSG have been reported separately as discontinued
operations in the accompanying 1999 and inception to date condensed consolidated
statements of operations.
3. INTANGIBLE ASSETS
Intangible assets consist of purchased core technology and goodwill in
connection with the acquisitions of AcuVoice, Inc. ("AcuVoice") and the Papyrus
companies (collectively "Papyrus"), and direct costs incurred by the Company in
applying for patents covering its technologies. Amortization is computed on a
straight-line basis over the estimated useful lives ranging from five to eight
years. Total accumulated amortization was $5,621,972 and $4,392,457 at June 30,
2000, and December 31, 1999, respectively.
The carrying values of the Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that they may
not be recoverable. In that event, the Company would project cash flows to be
generated from the use of the asset and its eventual disposition over the
remaining life of the asset. If the projections indicated that the cost in
excess of the net asset would not be recoverable, the Company's carrying value
of the asset would be reduced by the estimated excess of the value over the
projected cash flows. The Company assesses impairment of long-lived assets at
the lowest level for which there are identifiable cash flows that are
independent of other groups of assets. As of June 30, 2000, the Company does not
believe any of its long-lived assets are impaired. However, the amount of
goodwill and other long-lived assets considered realizable could be reduced in
the near term based on changing conditions and the Company's ability to fund
further marketing and development of its products and technologies.
4. RELATED-PARTY NOTES PAYABLE
In connection with the acquisition of Papyrus in 1998, the Company issued demand
notes payable to former Papyrus stockholders in the aggregate amount of
$1,710,000. 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 $1,111,284, which amount was paid in September 1999. A
balance of $77,625 remains outstanding as of June 30, 2000. The note holders
have made no demand for payment of such notes.
5. EQUITY LINE OF CREDIT AND CONVERTIBLE PROMISSORY NOTE
On August 8, 2000, the Company entered into a Private Equity Line Agreement (the
"Equity Line Agreement") with a private investor (the "Equity Line Investor")
that gives the Company the right to draw up to $20 million for operations and
other purposes. In connection with the Equity Line Agreement, up to $7.5 million
may be drawn by the Company under the terms of a convertible promissory note
dated June 20, 2000. The note bears interest at six percent (6%) annually,
compounded monthly, and is due June 30, 2001. Under the terms of the promissory
note, the Equity Line Investor has the right to convert, at its option, all or
any portion of the outstanding principal and interest into shares of Class A
common stock at the lesser of (a) $0.75 or (b) 85 percent of the average of the
three lowest closing bid prices of Class A common stock in the twenty-day
trading period prior to the date of the conversion.
The balance available under the Equity Line Agreement after offsetting draws
under the promissory note described above is available to the Company through a
mechanism of drawdowns and puts of stock. The Company is entitled to drawdown
funds and to put to the Equity Line Investor shares of Class A common stock in
lieu of repayment of the drawdown. The number of shares issued is determined by
dividing the dollar amount of the drawdown by 90 percent of the average of the
two lowest closing bid prices of Class A common stock over the seven trading-day
period following the date the Company tenders the put notice. The Equity Line
Investor is required to fund the amounts requested by the Company within two
trading days after the seven trading-day period.
As of June 30, 2000, the Company had drawn $3,450,000 on the convertible
promissory note and recorded $207,000 as interest expense for the three months
and six months ended June 30, 2000. Subsequent to June 30,
8
<PAGE>
2000, an additional $1,014,516 has been drawn on the note. As of June 30, 2000,
the Company recorded a beneficial conversion feature in the amount of
$2,116,000, of which $209,695 was amortized into interest expense.
In connection with the Equity Line Agreement, the Company granted registration
rights to the Equity Line Investor. Accordingly, the Company has filed a
registration statement describing the Class A common stock issuable in
connection with draws on the Equity Line Agreement and is required to use its
best efforts to cause the registration statement to be declared effective by
October 15, 2000. In the event that the registration statement has not been
declared effective by the Securities and Exchange Commission by October 15,
2000, the Company is obligated to pay liquidated damages to the Equity Line
Investor at the rate of two percent (2%) of the outstanding balance of the
amounts drawn on the promissory note, beginning on the first day of the 30-day
period following that date and the first day of each 30-day period thereafter
until the registration statement is declared effective. Upon effectiveness of
the registration statement, the Equity Line Investor shall have the right to
convert the dollar amount accrued as liquidated damages into shares of Class A
common stock at the same conversion terms as the convertible promissory note.
6. SERIES C CONVERTIBLE DEBENTURES
During the six months ended June 30, 2000, holders of the Company's Series C
convertible debentures converted $3,971,107 of principal together with interest
accrued thereon into 10,385,364 shares of Class A common stock.
7. PREFERRED STOCK
Series D Preferred Stock - During the six months ended June 30, 2000, 217,223
shares of Series D convertible preferred stock together with related accrued
dividends of $255,600 were converted into 15,436,378 shares of Class A common
stock. As of June 30, 2000, 164,500 shares of Series D preferred stock remained
outstanding.
The Class A common shares underlying the original issue of the Series D
preferred stock were covered in a registration statement which was declared
effective on August 11, 1999. However, in the ensuing months, due to the accrual
of dividends and the decline in the price of the Company's Class A common stock,
the Class A common shares converted and convertible from the Series D preferred
stock exceed the number of shares available under the registration statement.
Under the terms of the Series D preferred stock agreement, the holders of
approximately 2,700,000 unregistered shares are entitled to liquidated damages
in the amount of 2% of the original value of the Series D shares every thirty
days while such shares are not registered for resale. During the six months
ended June 30, 2000, the Company recorded a preferred stock dividend in the
amount of $80,000 related to such liquidated damages. On August 10, 2000, the
Company filed a registration statement covering these shares. The Company will
continue to accrue a preferred stock dividend of $25,000 per month until the
registration statement is declared effective.
Similarly, the holder of the remaining 164,500 shares of Series D preferred
stock is entitled to liquidated damages based upon the same calculation until
the underlying Class A common shares are registered for resale. However, under
the terms of a letter agreement dated June 30, 2000, the holder of the Series D
shares waived the liquidated damages and revised certain terms of conversion of
the Series D shares to provide a minimum conversion rate of $0.75 until December
31, 2000. The Company issued 612,069 shares of Class A common stock valued at
$688,578 on June 30, 2000, in consideration for the waiver and revision in
terms. Of that amount, $394,800 was recorded as a preferred dividend and the
balance of $293,778 was recorded in other operating expense. The Class A common
shares issued to the holder of the Series D preferred shares and the Class A
common shares underlying the outstanding Series D shares were also included in
the registration statement filed on August 8, 2000.
Series F Preferred Stock - Effective February 1, 2000, the Company entered into
an agreement with five investors whereby it sold a total of 290,000 shares of
its Series F convertible preferred stock for $2,750,000 in cash. Dividends
accrued on the stated value ($20 per share) of Series F convertible preferred
stock at a rate of six percent (6%) per year, were payable annually or upon
conversion in cash or common stock at the option of the Company, and were
convertible into shares of Class A common stock at any time at the holders'
option. The Series F preferred stock was convertible into shares of Class A
common stock at a price of $0.75 per share during the first 90 days following
the close of the transaction, and thereafter at a price equal to 85 percent of
the average of the three lowest closing bid prices in the 20-day trading period
prior to the conversion of the Series F preferred stock. Using
9
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the conversion terms most beneficial to the holders, the Company recorded a
preferred stock dividend of $2,750,000 for the beneficial conversion feature
related to these shares on the date the Series F preferred stock was issued.
On May 22, 2000, the Series F investors and the Company agreed to amend the
Series F Stock Purchase Agreement adding a sixth investor and increasing the
number of Series F preferred shares issued by 26,036 shares. Other terms and
provisions of the Series F preferred stock remained the same.
During the six months ended June 30, 2000, 305,281 shares of Series F preferred
stock together with dividends accrued thereon were converted into 8,181,950
shares of Class A common stock. As of June 30, 2000, 10,755 shares of Series F
preferred stock remained outstanding.
8. COMMON STOCK AND COMMON STOCK SUBJECT TO REDEMPTION
Class A Common Stock - During the six months ended June 30, 2000, 34,003,692
shares of Class A common stock were issued in connection with conversions of
debentures and preferred stock (see Notes 6 and 7). Also during the same period,
735,228 shares of Class A common stock were issued as a result of the exercise
of stock options, stock appreciation rights and warrants.
On May 8, 2000, the Company issued 250,000 shares of Class A common stock
(having a market value of $312,500 at that date) to an unrelated third party in
consideration for services rendered.
On June 30, 2000, the Company issued 612,069 shares of Class A common stock
(having a market value of $688,578 on that date) to the holder of the shares of
Series D preferred stock in consideration for the waiver of certain rights and
amendment of certain terms relating to conversion of such Series D preferred
stock (see Note 7).
Common Stock Subject to Redemption - In connection with a private offering of
Class A common stock completed in December 1998, the purchaser of 1,801,802
shares of Class A common stock received an equal number of repricing rights (the
"Repricing Rights"), which provided for the issuance of shares of Class A common
stock based upon fluctuations of the market price of the stock. Also included in
the private offering were certain repurchase rights (the "Repurchase Rights")
which could, upon the occurrence of certain events, have required the Company to
repurchase all or a portion of the holder's Class A common shares or Repricing
Rights received in the private offering.
On February 14, 2000, the holder of the Repricing Rights converted its rights
into 4,568,569 shares of Class A common stock and subsequently sold all the
shares. Simultaneously, the initial shares of Class A common stock subject to
the Repurchase Rights were sold. Because the Company has no further obligation
under the Repricing Rights or the Repurchase Rights as a result of these
transactions, $1,830,000 recorded as "common stock and related repricing rights
subject to redemption" in the Company's December 31, 1999 balance has been
reclassified to Stockholders' Equity as an increase to Class A common stock and
additional paid-in capital.
Common Stock Options - On January 31, 2000, the board of directors approved an
increase of 10,000,000 shares to be available under the Company's 1998 Employee
Incentive and Stock Option Plan. A registration statement on Form S-8 covering
these additional shares was filed with the Securities and Exchange Commission
and declared effective on February 14, 2000. During the six months ended June
30, 2000, the Company granted 2,562,400 options to purchase shares of Class A
common stock at exercise prices ranging from $0.28 to $1.50 per share. The term
of all options granted during this period is ten years from the date of grant.
Of the stock options granted, options to purchase 2,339,000 shares vested March
31, 2000, and the balance vest over the three years following issuance. Of the
total granted, 197,000 were issued to consultants for services performed for the
Company and were recorded as consulting expense in the amount of $53,190, based
upon the fair market value determined using the Black-Scholes option pricing
model. The remainder of the options were granted to employees and had a weighted
average fair market value of $0.30 per share using the Black-Scholes option
pricing model. Had compensation expense for these options been recorded in
accordance with the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss would have been $14,559,508 or
$0.10 per share for the six months ended June 30, 2000. As of June 30, 2000, the
Company had options to purchase a total of 16,309,834 Class A common shares
outstanding.
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Warrants - On January 19, 2000, the Company issued warrants for the purchase of
300,000 shares of Class A common stock for services previously rendered by a
professional services firm. The warrants have a three year life, exercise prices
ranging from $0.28 to $1.25 per share and vest as follows: 100,000 in March 2000
and 200,000 in September 2000. The warrants were valued at $45,000 using the
Black-Scholes option pricing model and were issued in satisfaction of an
obligation that was recorded in December 1999.
In February 2000, the Company entered into an agreement with an executive
officer and director of the Company to purchase, all of his rights and interests
in certain methods and apparatus for integrated voice and pen input for use in
computer systems. In consideration for this technology, the Company granted the
executive officer warrants to purchase 600,000 shares of the Company's Class A
common stock at an exercise price of $1.00 per share. The warrants were
immediately exercisable and expire February 10, 2010. The warrants were valued
at $0.79 per share and were recorded as purchased in-process research and
development. The Company granted the executive officer the right to repurchase
the technology from the Company at fair market value if the Company subsequently
determines not to commercialize the related technologies or products.
On May 3, 2000, warrants for the purchase of 200,000 shares of Class A common
stock were exercised at a price of $1.25 per share, resulting in cash proceeds
of $250,000.
9. RELATED-PARTY TRANSACTIONS
The Company rents office space from Studdert Companies Corporation ("SCC") under
a sublease that is guaranteed by two officers and directors of the Company who
are also officers, owners and directors of SCC. The sublease monthly payments
are $10,368. The Company believes the terms of the sublease are at least as
favorable as the terms that could have been obtained from an unaffiliated third
party in a similar transaction.
10. PRODUCT DEVELOPMENT AND RESEARCH AGREEMENTS
Synergetics - Prior to March 1997, the Company's scientific research and
development activities were conducted solely by a third party, Synergetics,
Inc., pursuant to product development and assignment contracts (collectively,
the "Synergetics Agreement"). Under that arrangement, Synergetics provided
personnel and facilities to conduct research and product development activities.
The Company financed the Synergetics research and development activities on an
as-required basis and the Company was obligated to pay to Synergetics a royalty
of 10 percent (the "Royalty") of net revenues from sales of products
incorporating Synergetics' "VoiceBox" technology as well as technology
derivative thereof. Synergetics compensated its developers and others
contributing to the development effort, in part, by granting "Project Shares" to
share in a portion of the Royalty received by Synergetics. On April 6, 1998, the
Company and Synergetics entered into a Royalty Modification Agreement whereby
the Company agreed to offer an aggregate of 4,800,000 non-transferable Class A
common stock purchase warrants to the holders of the Project Shares in
consideration for which Synergetics agreed to cancel any further obligation on
the part of the Company to pay the Royalty. The exercise price of the warrants
was to be $10 per share and the warrants would not be exercisable until the
first to occur of (1) the date that the per share closing bid price of the Class
A common stock was equal to or greater than $37.50 per share for a period of 15
consecutive trading days, or (2) September 30, 2000. Effective March 31, 2000,
the Company and Synergetics entered into a Restated Royalty Modification
Agreement whereby the Company agreed to pay Synergetics $28,000 (the
"Cancellation Amount") to cancel the obligation of the Company to pay the
Royalty or issue the 4,800,000 warrants. The Company has paid the Cancellation
Amount to Synergetics and the Royalty and warrant obligations have been
canceled. The Company has no further obligations to Synergetics.
IMC2 - In March 1998, the Company entered into a professional services agreement
with IMC2 Corporation ("IMC2") a research and development entity, to assist in
the continuing development of specific automated speech recognition
technologies. The president of IMC2 is also the president of Synergetics. The
professional services agreement is for a term of 36 months and requires the
Company to make monthly payments of $22,000. Under the terms of the agreement,
the Company expended a total of $66,000 in each of the three-month periods ended
June 30, 2000 and 1999, and $132,000 in each of the six-month periods ended June
30, 2000 and 1999.
11. COMMITMENTS AND CONTINGENCIES
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Executive Employment Agreements - On November 1, 1996, the Company entered into
employment contracts with three executive officers (one of whom, Stephen M.
Studdert, is no longer an executive officer) which originally expired on
December 31, 2001, but were amended effective January 31, 2000, to expire
December 31, 2005. As amended, the annual base salary for each executive officer
is $309,400 and may be adjusted upward in future years as deemed appropriate by
the board of directors. As bonus compensation for extending the term of each
agreement at a compensation level less than provided in the original agreement,
each executive was granted 1,400,000 options, effective July 19, 2000, at an
exercise price of $1.05. In January 1999, Mr. Studdert resigned as the Company's
chief executive officer and entered into a separation agreement pursuant to
which Mr. Studdert will be paid $250,000 per year through January 31, 2001 and
$100,000 for the 12 months ending January 31, 2002. His employment contract was
canceled.
In January 1998, the Company entered into an employment contract with another
executive officer which expires in January 2001. The minimum annual salary
required by this agreement was $225,000, but was reduced 30% by mutual agreement
effective February 1999, in connection with cost reductions initiated by the
Company. In the event that, during the contract term, both a change of control
occurs and, within six months after such change in control occurs, the executive
officer's services are terminated by the Company for any reason other than
cause, death or retirement, the executive officer shall be entitled to receive
an amount in cash equal to all base salary then and thereafter payable within 30
days of termination.
Employment Agreement - In January 1998, the Company entered into an employment
contract with an employee which expires in January 2001. The annual salary under
this agreement was $180,000, but was reduced 30% by mutual agreement effective
February 1999, in connection with cost reductions initiated by the Company. This
level of compensation continued through June 30, 2000. By mutual agreement, the
employee's contract was terminated effective June 30, 2000, in return for which
the employee received options to purchase 50,000 shares of the Company's Class A
common stock at a price of $1.125 per share, the market price on that date.
12. LITIGATION
Oregon Graduate Institute - On July 28, 1999, Oregon Graduate Institute ("OGI")
filed a notice of default, demand for mediation and demand for arbitration with
the American Arbitration Association. In its demand, OGI asserted that the
Company was in default under three separate agreements between the Company and
OGI in the total amount of $175,000. On September 23, 1999, the Company
responded to OGI's demand and denied the existence of a default under the three
agreements identified by OGI. Moreover, the Company asserted a counterclaim
before the American Arbitration Association against OGI in an amount not less
than $250,000. Neither OGI nor the Company have undertaken any discovery.
However, a hearing has been set for September 19-21, 2000. The Company believes
the OGI arbitration claim is without merit, and management intends to vigorously
pursue its counterclaim against OGI.
The Company is involved in other lawsuits, claims and actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters will not
materially affect the consolidated financial position or results of operations
of the Company.
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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, 1999.
Overview
Since inception, Fonix has devoted substantially all of its resources to
research, development and acquisition of software technologies that enable
intuitive human interaction with computers, consumer electronics, and other
electronic devices. Through June 30, 2000, the Company has incurred cumulative
losses amounting to $108,834,399, excluding cumulative losses from discontinued
operations of $8,462,387 and net extraordinary losses of $298,595. Losses are
expected to continue until the effects of marketing and sales efforts begin to
take effect, if ever.
Beginning in 1999 and continuing through 2000, Fonix management is transforming
its strategic focus from technology research, development and acquisition into
sales and marketing and product delivery. For the six months ended June 30,
2000, the Company expended $1,019,947 in sales and marketing activities. The
Company is making this transition while continuing to achieve technology
upgrades in order to maintain distinct competitive technological advantages.
In its current marketing efforts, the Company seeks to form relationships with
third parties who can incorporate human user interface ("HUI") technologies into
new or existing products. 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 developers of application
software, operating systems, computers, microprocessor chips, consumer
electronics, automobiles, telephony and other technology products.
In February 1999, in connection with this transition in strategic focus, the
Company undertook an aggressive program of cost reduction emphasized in four
areas of operations:
1. Salaries, wages and related costs - Salaries greater than $50,000
per year were reduced 20 to 30 percent;
2. Third-party consultants - Reliance on third-party consultants was
reduced in the areas of research and development, marketing and
public relations;
3. Occupancy costs - Office space was reduced to accommodate current
operating needs; and
4. Asset acquisition - Acquisition of new operating assets was
significantly restricted.
Implementation of these measures reduced the monthly deficit in cash flows from
operating activities from approximately $3 million in early 1999 to less than $1
million in December 1999. For the six months ended June 30, 2000, the average
monthly deficit in cash flows from operating activities was $942,000 as compared
to $1,660,000 for the same period in 1999.
On May 19, 1999, Fonix signed an agreement to sell the operations and a
significant portion of the assets of its HealthCare Solutions Group ("HSG"),
which consisted primarily of the operations of Articulate Systems, Inc.
("Articulate"), to Lernout & Hauspie Speech Products N.V. ("L&H"), an unrelated
third party. The sale closed September 1, 1999. The proceeds from the sale were
used to reduce certain of the Company's liabilities and provided working capital
to allow Fonix to focus on marketing and developing technologies and products.
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Results of Operations
The results of operations discussed below give effect to the sale of the HSG and
the classification of its net assets and operating activities as discontinued
operations
Three months ended June 30, 2000, compared with three months ended June 30, 1999
During the three months ended June 30, 2000, the Company recorded revenues of
$143,825, reflecting a decrease of $87,746 from the same period in the previous
year. Revenues in 1999 included a payment of $200,000 from one customer for
license fees. There were no large, single payments in 2000, but revenues from
ongoing sales and licensing activities have increased in 2000 from 1999.
Revenues in 2000 and 1999 were generated through sales and licensing of the
Company's products and technologies.
Selling, general and administrative expenses were $2,455,315 and $1,944,726 for
the three months ended June 30, 2000 and 1999, respectively. The net increase of
$510,589 is a primarily a result of non-cash consulting and other expenses
related to financing arrangements amounting to $606,278. Excluding these costs,
selling, general and administrative expenses actually decreased by approximately
$96,000 for the three months ended June 30, 2000, as compared to the same period
for 1999. This net decrease includes reductions in legal and accounting fees of
$202,000, occupancy costs of $95,000, other consulting fees of $139,000 and
other operating expenses of $246,000, all resulting from the cost-reduction
measures initiated in 1999. However, offsetting these reductions were increases
in compensation-related expenses of $518,000 and travel-related expenses of
$84,000, reflecting increased emphasis and activity in marketing, sales and
business development efforts.
The Company incurred product development and research expenses of $1,478,362
during the three months ended June 30, 2000, a decrease of $380,163 from the
same period in the previous year. This decrease is due primarily to the
transition in strategic focus and the resulting cost reduction program initiated
in February 1999. Decreases of $207,000 in compensation related expenses and
$180,000 in consulting, occupancy and travel-related expenses are reflections of
successful efforts in these cost reduction measures.
The Company incurred losses from operations of $4,400,639 and $4,237,238 during
the three months ended June 30, 2000 and 1999, respectively. While operating
losses for the three months ended June 30, 2000 actually increased from those
incurred in the three months ended June 30, 1999, a reduction in the negative
cash flows of the Company resulted from the disposal of the HealthCare Solutions
Group, as well as decreases in cash outlays for operating expenses described
above.
Six months ended June 30, 2000, compared with six months ended June 30, 1999
During the six months ended June 30, 2000, the Company recorded revenues of
$200,272, reflecting a decrease of $85,105 from the same period in the previous
year. Revenues in 1999 included a payment of $200,000 from one customer for
license fees. There were no large, single payments in 2000, but revenues from
ongoing sales and licensing activities has increased in 2000 from 1999. Revenues
in 2000 and 1999 were generated through sales and licensing of the Company's
products and technologies.
Selling, general and administrative expenses were $5,793,921 and $4,689,793 for
the six months ended June 30, 2000 and 1999, respectively. Included in these
expenses for the six months ended June 30, 2000, are compensation- related
charges in the amount of $816,667 resulting from the exercise of stock
appreciation rights and revaluation of options previously granted for which
terms were revised. Also included are charges related to warrants and shares
issued to consultants and advisors assisting in the planning and development of
the Company's strategic focus and other finance-related matters totaling
$1,572,934. Excluding these charges, selling, general and administrative
expenses incurred in ongoing operations actually decreased by $1,285,473. This
net decrease is a reflection of ongoing cost reduction efforts that have
resulted in decreases in legal and accounting expenses of $487,000, occupancy
expenses of $213,000, consulting expenses of $232,000, and other operating
expenses of $377,000.
The Company incurred product development and research expenses of $2,929,120
during the six months ended June 30, 2000, a decrease of $1,442,230 from the
same period in the previous year. This decrease was due primarily to the
transition in strategic focus and the resulting cost reduction program initiated
in February 1999. Decreases of
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$980,000 in compensation-related expenses, $158,000 in occupancy costs, and
$285,000 in consulting expenses are reflections of successful efforts in these
cost reduction measures.
The Company incurred purchased in-process research and development expense of
$474,000 resulting from the purchase of the rights to certain technology from an
executive officer and director of the Company. The executive officer received
warrants to purchase 600,000 shares of Class A common stock at an exercise price
of $1.00 per share.
The Company incurred losses from operations of $10,217,641 and $10,104,224
during the six months ended June 30, 2000 and 1999, respectively. While
operating losses for the six months ended June 30, 2000, actually increased from
those incurred in the six months ended June 30, 1999, a reduction in the
negative cash flows of the Company resulted from the disposal of the HealthCare
Solutions Group, as well as decreases in cash outlays for operating expenses
described above.
Net other expense was $379,648 for the six months ended June 30, 2000, a
decrease of $2,337,195 from the six months ended June 30, 1999. This decrease
was due primarily to $1,942,000 in interest and finance charges incurred in the
six months ended June 30, 1999, relative to the issuance of Series C convertible
debentures in January and March, 1999, and interest accrued on the outstanding
balance thereafter. Charges incurred in 2000 include fees paid on the
convertible promissory note and equity line and the amortization of deferred
interest expense resulting from the related beneficial conversion feature.
Liquidity and Capital Resources
From its inception, the Company's principal source of capital has been private
and other exempt sales of its debt and equity securities. The Company continues
to raise additional funds in like manner to satisfy its cash operating
requirements for the foreseeable future. Because the Company presently has
limited revenue from operations, it will rely primarily on financing through the
sale of its equity and debt securities to satisfy future capital requirements
until such time as sufficient revenue is generated through third-party licensing
or co-development arrangements to satisfy its ongoing operating requirements.
There can be no assurance that the Company will be able to secure this funding
or that the terms of such financing will be favorable to the Company.
Furthermore, the issuance of equity or debt securities which are or may become
convertible into equity securities of the Company may result in substantial
dilution to the stockholders of the Company.
Total assets were $17,715,130 at June 30, 2000 compared to $19,173,147 at
December 31, 1999. Current assets increased by less than $500 to $481,378 at
June 30, 2000 from $480,885 at December 31, 1999. Current liabilities increased
by $2,374,708 to $7,661,389 during the same period. The Company had negative
working capital of $7,180,011 as of June 30, 2000, compared to negative working
capital of $4,804,796 at December 31, 1999. The change in working capital from
December 31, 1999, to June 30, 2000, reflects $3,450,000 received under the
terms of the convertible promissory note.
Equity Line of Credit
On August 8, 2000, the Company entered into a Private Equity Line Agreement (the
"Equity Line Agreement") with a private investor (the "Equity Line Investor")
that gives the Company the right to draw up to $20 million for operations and
other purposes. In connection with the Equity Line Agreement, up to $7.5 million
may be drawn by the Company under the terms of a convertible promissory note
dated June 20, 2000. The note bears interest at six percent (6%) annually,
compounded monthly, and is due June 30, 2001. Under the terms of the promissory
note, the Equity Line Investor has the right to convert, at its option, all or
any portion of the outstanding principal and interest into shares of Class A
common stock at the lesser of (a) $0.75 or (b) 85 percent of the average of the
three lowest closing bid prices of Class A common stock in the twenty-day
trading period prior to the date of the conversion.
The balance available under the Equity Line Agreement after offsetting draws
under the promissory note described above is available to the Company through a
mechanism of drawdowns and puts of stock. The Company is entitled to drawdown
funds and to put to the Equity Line Investor shares of Class A common stock in
lieu of repayment of the drawdown. The number of shares issued is determined by
dividing the dollar amount of the drawdown by 90
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percent of the average of the two lowest closing bid prices of Class A common
stock over the seven trading-day period following the date the Company tenders
the put notice. The Equity Line Investor is required to fund the amounts
requested by the Company within two trading days after the seven trading-day
period.
As of June 30, 2000, the Company had drawn $3,450,000 on the convertible
promissory note and recorded $207,000 as interest expense for the three months
and six months ended June 30, 2000. Subsequent to June 30, 2000, an additional
$1,014,516 has been drawn on the note. As of June 30, 2000, the Company recorded
a beneficial conversion feature in the amount of $2,116,000, of which $209,695
was amortized into interest expense.
In connection with the Equity Line Agreement, the Company granted registration
rights to the Equity Line Investor. Accordingly, the Company has filed a
registration statement describing the Class A common stock issuable in
connection with draws under the Equity Line Agreement and is required to use its
best efforts to cause the registration statement to be declared effective by
October 15, 2000. In the event that the registration statement has not been
declared effective by the Securities and Exchange Commission by October 15,
2000, the Company is obligated to pay liquidated damages to the Equity Line
Investor at the rate of two percent (2%) of the outstanding balance of the
amounts drawn on the promissory note, beginning on the first day of the 30-day
period following that date and the first day of each 30-day period thereafter
until the registration statement is declared effective. Upon effectiveness of
the registration statement, the Equity Line Investor shall have the right to
convert the dollar amount accrued as liquidated damages into shares of Class A
common stock at the same conversion terms as the convertible promissory note.
Preferred Stock
During the six months ended June 30, 2000, 217,223 shares of Series D
convertible preferred stock together with related accrued dividends of $255,600
were converted into 15,436,378 shares of Class A common stock. As of June 30,
2000, 164,500 shares of Series D preferred stock remained outstanding.
The Class A common shares underlying the original issue of the Series D
preferred stock were covered in a registration statement which was declared
effective on August 11, 1999. However, in the ensuing months, due to the accrual
of dividends and the decline in the price of the Company's Class A common stock,
the Class A common shares converted and convertible from the Series D preferred
stock exceed the number of shares available under the registration statement.
Under the terms of the Series D preferred stock agreement, the holders of
approximately 2,700,000 unregistered shares are entitled to liquidated damages
in the amount of 2% of the original value of the Series D shares every thirty
days while such shares are not registered for resale. During the six months
ended June 30, 2000, the Company recorded a preferred stock dividend in the
amount of $80,000 related to such liquidated damages. On August 10, 2000, the
Company filed a registration statement covering these shares. The Company will
continue to accrue a preferred stock dividend of $25,000 per month until the
registration statement is declared effective.
Similarly, the remaining holder of the remaining 164,500 shares of Series D
preferred stock is entitled to liquidated damages based upon the same
calculation until the underlying Class A common shares are registered for
resale. However, under the terms of a letter agreement dated June 30, 2000, the
holder of the Series D shares waived the liquidated damages and revised certain
terms of conversion of the Series D shares to provide a minimum conversion rate
of $0.75 until December 31, 2000. The Company issued 612,069 shares of Class A
common stock valued at $688,578 on June 30, 2000, in consideration for the
waiver and revision in terms. Of that amount, $394,800 was recorded as a
preferred dividend and the balance of $293,778 was recorded in other operating
expense. The Class A common shares issued to the holder of the Series D
preferred shares and the Class A common shares underlying the outstanding Series
D shares were also included in the registration statement filed on August 8,
2000.
Effective February 1, 2000, the Company entered into an agreement with five
investors whereby it sold a total of 290,000 shares of its Series F preferred
stock for $2,750,000 in cash. Dividends which accrued on the stated value ($20
per share) of Series F preferred stock at a rate of six percent (6%) per year,
were payable annually or upon conversion in cash or common stock at the option
of the Company, and were convertible into shares of Class A common stock at any
time at the holders' option. The Series F preferred stock was convertible into
shares of Class A common stock at a price of $0.75 per share during the first 90
days following the close of the transaction, and thereafter at a price equal to
85 percent of the average of the three lowest closing bid prices in the 20-day
trading
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period prior to the conversion of the Series F convertible preferred stock.
Using the conversion terms most beneficial to the holders, the Company recorded
a preferred stock dividend of $2,750,000 for the beneficial conversion feature
related to these shares on the date the Series F preferred stock was issued.
On May 22, 2000, the Series F investors and the Company agreed to amend the
Series F Stock Purchase Agreement adding a sixth investor and increasing the
number of Series F preferred shares issued by 26,036 shares. Other terms and
provisions of the Series F preferred stock remained the same.
During the six months ended June 30, 2000, 305,281 shares of Series F preferred
stock along with dividends accrued thereon were converted into 8,181,950 shares
of Class A common stock. As of June 30, 2000, 10,755 shares of Series F
preferred stock remained outstanding.
Stock Options
During the six months ended June 30, 2000, the Company granted options to
purchase 2,562,400 shares of Class A common stock at exercise prices ranging
from $0.28 to $1.50 per share. The term of all options granted during this six
month period is ten years from the date of grant. Of the stock options issued,
options to purchase 2,339,000 shares vested March 31, 2000, and the balance vest
over the three years following issuance. As of June 30, 2000, the Company had a
total of 16,549,834 options to purchase Class A common shares outstanding.
Also during the six months ended June 30, 2000, options to purchase 306,864
shares of Class A common stock were exercised resulting in cash proceeds of
$305,952. During the same period, 228,364 shares of Class A common stock were
issued as a result of the exercise of stock appreciation rights.
Warrants
On January 19, 2000, the Company issued warrants for the purchase of 300,000
shares of Class A common stock for services rendered by a professional services
firm. The warrants have a three year life, exercise prices ranging from $0.28 to
$1.25 per share and vest as follows: 100,000 in March 2000 and 200,000 in
September 2000. The warrants were valued at $45,000 using the Black-Scholes
pricing model and were issued in satisfaction of an obligation that was recorded
in December 1999.
In February 2000, the Company entered into an agreement to purchase from an
executive officer and director of the Company, all of his rights and interests
in certain methods and apparatus for integrated voice and pen input for use in
computer systems. In consideration for this technology, the Company granted the
executive officer warrants to purchase 600,000 shares of the Company's Class A
common stock at an exercise price of $1.00 per share. The warrants are
immediately exercisable and expire February 10, 2010. The warrants were valued
at $0.79 per share and were recorded as purchased in-process research and
development. The Company granted the executive officer the right to repurchase
the technology from the Company at fair market value if the Company subsequently
determines not to commercialize the pen/voice technologies or products.
During the six months ended June 30, 2000, warrants for the purchase of 200,000
shares of Class A common stock were exercised resulting in cash proceeds of
$250,000. As of June 30, 2000, warrants for the purchase of 3,725,000 share of
Class A common stock remain outstanding.
Other
The Company presently has no plans to purchase new research and development or
office facilities.
Outlook
The Company believes that its core technologies, namely, automated speech
recognition, text-to-speech and handwriting recognition (the "Core
Technologies"), will be the platform for the next generation of automated
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speech technologies and products. Most speech recognition products offered by
other companies are based on technologies that are largely in the public domain
and represent nothing particularly "new" or creative. The Company's 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 know how, assets and rights
acquired from past acquisitions. Management believes the Company's HUI
technologies provide a competitive advantage compared to other technologies
available in the marketplace.
As the Company proceeds to implement its strategy and to reach its objectives,
it anticipates 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 set forth
under the heading "Certain Significant Risk Factors" in the Company's 1999
Annual Report on Form 10-K, Item 1, Part I.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Oregon Graduate Institute - On July 28, 1999, Oregon Graduate Institute ("OGI")
filed a notice of default, demand for mediation and demand for arbitration with
the American Arbitration Association. In its demand, OGI asserted that the
Company was in default under three separate agreements between the Company and
OGI in the total amount of $175,000. On September 23, 1999, the Company
responded to OGI's demand and denied the existence of a default under the three
agreements identified by OGI. Moreover, the Company asserted a counterclaim
before the American Arbitration Association against OGI in an amount not less
than $250,000. Neither OGI nor the Company have undertaken any discovery.
However, a hearing has been set for September 19-21, 2000. The Company believes
the OGI arbitration claim is without merit, and management intends to vigorously
pursue its counterclaim against OGI.
The Company is involved in other lawsuits, claims and actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters will not
materially affect the consolidated financial position or results of operations
of the Company.
Item 2. Changes in Securities
c. Unregistered sales of equity securities during the quarter (other than in
reliance on Regulation S).
Recent Sales of Unregistered Securities. During the three months ended June 30,
2000, the Company issued equity securities that were not registered under the
Securities Act of 1933, as amended (the "1933 Act"), other than unregistered
sales in reliance on Regulation S under the Act, as follows:
On May 8, 2000, the Company issued 250,000 shares of its Class A common
stock to consultants for services rendered. The Company issued such
shares without registration under the 1933 Act in reliance on section
4(2) of the 1933 Act and the rules and regulations promulgated
thereunder. The shares of Class A common stock were issued as
restricted securities and the certificates representing the shares were
stamped with a restrictive legend to prevent any resale without
registration under the 1933 Act or pursuant to an exemption.
On June 30, 2000, the Company issued 612,069 shares of its Class A
common stock to holders of its Series D preferred stock in
consideration for the waiver of liquidated damages and revision of
certain terms of the Series D preferred stock agreement. The Company
issued such shares without registration under the 1933 Act in reliance
on section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder. The shares of Class A common stock were issued
as restricted securities and the certificates representing the shares
were stamped with a restrictive legend to prevent any resale without
registration under the 1933 Act or pursuant to an exemption.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to
Item 601(a) of Regulation S-K:
Exhibit No. Description of Exhibit
(2)(i) Agreement and Plan of Reorganization among the Company,
Fonix Acquisition Corporation and AcuVoice dated as of
January 13, 1998, incorporated by reference from the
Company's Current Report on Form 8-K, filed March 20, 1998
(2)(ii) Agreement and Plan of Merger among Fonix, Articulate
Acquisition Corporation, and Articulate, dated as of July
31, 1998, incorporated by reference from the Company's
Current Report on Form 8-K, filed September 17, 1998
(2)(iii) Agreement and Plan of Merger among Fonix, Papyrus
Acquisition Corporation, and Papyrus Associates, Inc., dated
as of September 10, 1998, incorporated by reference from the
Company's Current Report on Form 8-K, filed November 13,
1998
(3)(i) Articles of Incorporation of the Company which are
incorporated by reference from the Company's Registration
Statement on Form S-18 dated as of September 12, 1989
(3)(ii) Certificate of Amendment of Certificate of
Incorporation dated as of March 21, 1994, which is
incorporated by reference from the Company's Annual Report
for the Fiscal Year Ended December 31, 1994 on Form 10-KSB
(3)(iii) Certificate of Amendment of Certificate of Incorporation
dated as of May 13, 1994, which is incorporated by reference
from the Company's Annual Report for the Fiscal Year Ended
December 31, 1994 on Form 10-KSB
(3)(iv) Certificate of Amendment of Certificate of
Incorporation dated as of September 24, 1997, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
(3)(v) The Company's Bylaws, as amended, which are incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(4)(i) Description of the Company's common stock and other
securities and specimen certificates representing such
securities which are incorporated by reference from the
Company's Registration Statement on Form S-18 dated as of
September 12, 1989, as amended
(4)(ii) Certificate of Designation of Rights and Preferences
of Series A Preferred Stock, filed with the Secretary of
State of Delaware on September 24, 1997, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
(4)(iii) Certificate of Designation of Rights and Preferences
of Series B Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 27, 1997, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
(4)(iv) Certificate of Designation of Rights and Preferences
of 5% Series C Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 24, 1997, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
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(4)(v) Certificate of Designation of Rights and Preferences
of Series D 4% Convertible Preferred Stock, filed with the
secretary of State of Delaware on August 27, 1998, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1998
(4)(vi) Certificate of Designation of Rights and Preferences
of Series E 4% Convertible Preferred Stock, filed with the
secretary of State of Delaware on October 15, 1998, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1998
(9)(i) Voting Trust Agreement dated as of December 10, 1993
by and among Phonic Technologies, Inc., Stephen M. Studdert,
Thomas A. Murdock and Roger D. Dudley, which is incorporated
by reference from the Company's Current Report on Form 8-K
dated as of June 17, 1994
(9)(ii) Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
October 23, 1995, incorporated by reference from the
Company's Current Report on Form 8-K dated as of October 23,
1995
(9)(iii) Second Amendment of Voting Trust Agreement by and
among the Company, Stephen M. Studdert, Thomas A. Murdock,
Roger D. Dudley, Beesmark Investments, L.C., Studdert
Companies Corporation, and Thomas A. Murdock as Trustee,
dated as of July 2, 1996, incorporated by reference from the
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996
(9)(iv) Third Amendment of Voting Trust Agreement by and among
the Company, Stephen M. Studdert, Thomas A. Murdock, Roger
D. Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
September 20, 1996, incorporated by reference from the
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996
(9)(v) Fourth Amendment of Voting Trust Agreement by and
among the Company, Stephen M. Studdert, Thomas A. Murdock,
Roger D. Dudley, Beesmark Investments, L.C., Studdert
Companies Corporation, and Thomas A. Murdock as Trustee,
dated as of September 20, 1996, incorporated by reference
from the Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(i) Product Development and Assignment Agreement dated as
of October 16, 1993 between Phonic Technologies, Inc. and
Synergetics, Inc., which is incorporated by reference from
the Company's Current Report on Form 8-K dated as of June
17, 1994
(10)(ii) Re-Stated Product Development and Assignment
Agreement dated as of March 30, 1995, between Fonix
Corporation and Synergetics, Inc., which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(10)(iii) Memorandum of Understanding dated as of March 13, 1997,
by and among the Company, Synergetics, Inc. and C. Hal
Hansen, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(iv) Employment Agreement by and between the Company and
Stephen M. Studdert, which is incorporated by reference from
the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996
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(10)(v) Employment Agreement by and between the Company and Thomas
A. Murdock, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and Roger
D. Dudley, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(vii) Restated Master Agreement for Joint Collaboration
between the Company and Siemens, dated November 14, 1997, as
revised, which is incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(viii) Restated First Statement of Work and License
Agreement between the Company and Siemens, dated February
11, 1998, as revised, which is incorporated by reference
from the Company's Annual Report on Form 10-K for the year
ended December 31, 1997
(10)(ix) Master Technology Collaboration Agreement between the
Company and OGI, dated October 14, 1997, which is
incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
(10)(x) Common stock Purchase Agreement among the Company and
JNC Opportunity Fund Ltd. and Diversified Strategies Fund,
LP, dated as of March 9, 1998, which is incorporated by
reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997
(10)(xi) Common stock Purchase Agreement between the Company and
Thomson Kernaghan & Co., dated as of March 9, 1998, which is
incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
(10)(xii) Royalty Modification Agreement among the Company
and Synergetics, dated as of April 6, 1998, which is
incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
(10)(xiii) Purchase Agreement with John Oberteuffer and the
Company dated April 9, 1998, which is incorporated by
reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997
(10)(xiv) Employment Agreement by and between the Company and
John A. Oberteuffer, which is incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(xv) First Amendment to Master Agreement for
Joint Collaboration between the Company and Siemens, dated
February 13, 1998, which is incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(xvi) Second Amendment to Master Agreement for Joint
Collaboration between the Company and Siemens, dated March
13, 1998, which is incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(vii) Series D Convertible Preferred Stock Purchase
Agreement Among Fonix corporation, JNC Opportunity Fund,
Ltd., Diversified Strategies Fund, L.P., Dominion Capital
Fund, Ltd., Sovereign Partners, LP, Canadian Advantage
Limited Partnership and Thomson Kernaghan & Co. (as agent)
dated as of August 31, 1998, incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1998
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(10)(xviii)Series E Convertible Preferred Stock Exchange and
Purchase Agreement among Fonix corporation, Sovereign
Partners, LP and Dominion Capital Fund, Ltd., dated as of
September 30, 1998, incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998
(10)(xix) Securities Purchase Agreement among Fonix Corporation
and JNC Strategic Fund, dated December 21, 1998 for
1,801,802 shares of common stock and Repricing Rights,
incorporated by reference from Amendment No. 1 to
Registration Statement on Form S-3 (File No. 333-67573)
(10)(xx) Securities Purchase Agreement among Fonix Corporation
and the investors identified therein dated January 29, 1999,
as supplemented on March 3, 1999, concerning sales of
$6,500,000 principal amount of Series C 5% Convertible
Debentures, incorporated by reference from Amendment No. 1
to Registration Statement on Form S-3 (File No. 333- 67573)
(10)(xxi) Asset Purchase Agreement - Acquisition of Certain
Assets of Fonix Corporation and Fonix/ASI Corporation by
Lernout & Hauspie Speech Products N.V., dated as of May 19,
1999, which is incorporated by reference from the Company's
Current Report on Form 8-K, filed with the Commission on
September 16, 1999 (therein designated as Exhibit 10(a))
(10)(xxii) Escrow Agreement, dated as of September 1, 1999,
which is incorporated by reference from the Company's
Current Report on Form 8-K, filed with the Commission on
September 16, 1999 (therein designated as Exhibit 10(b))
(10)(xxiii)Technology Option Agreement, dated as of May 19,
1999, which is incorporated by reference from the Company's
Current Report on Form 8-K, filed with the Commission on
September 16, 1999 (therein designated as Exhibit 10(c))
(10)(xxiv) Assignment and Assumption Agreement, dated as of
September 1, 1999, which is incorporated by reference from
the Company's Current Report on Form 8-K, filed with the
Commission on September 16, 1999 (therein designated as
Exhibit 10(d))
(10)(xxv) License Agreement by and between Fonix/ASI
Corporation and Lernout & Hauspie Speech Products N.V.,
dated as of May 19, 1999, which is incorporated by reference
from the Company's Current Report on Form 8-K, filed with
the Commission on September 16, 1999 (therein designated as
Exhibit 10(e))
(10)(xxvi) Loan Agreement, dated as of April 22, 1999, which is
incorporated by reference from the Company's Current Report
on Form 8-K, filed with the Commission on September 16, 1999
(therein designated as Exhibit 10(f))
(10)(xxvii)Amendment to Loan Agreement, dated as of May 12,
1999, which is incorporated by reference from the Company's
Current Report on Form 8-K, filed with the Commission on
September 16, 1999 (therein designated as Exhibit 10(g))
(10)(xxviii)Second Amendment to Loan Agreement, dated as of May
19, 1999, which is incorporated by reference from the
Company's Current Report on Form 8-K, filed with the
Commission on September 16, 1999 (therein designated as
Exhibit 10(h))
(10)(xxix) Loan Agreement, dated as of May 19, 1999, which is
incorporated by reference from the Company's Current Report
on Form 8-K, filed with the Commission on September 16, 1999
(therein designated as Exhibit 10(i))
(10)(xxx) First Amendment to Loan Agreement, dated as of August 12,
1999, which is
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incorporated by reference from the Company's Current Report
on Form 8-K, filed with the Commission on September 16, 1999
(therein designated as Exhibit 10(j))
(10)(xxxi) Agreement, dated as of July 31, 1999, which is
incorporated by reference from the Company's Current Report
on Form 8-K, filed with the Commission on September 16, 1999
(therein designated as Exhibit 10(k))
(10)(xxxii)Series F Convertible Preferred Stock Purchase
Agreement, Among Fonix Corporation, Sovereign Partners, LP,
Dominion Capital Fund, LTD., Dominion Investment Fund, LLC,
Canadian Advantage, L.P., and Queen LLC, dated as of
February 1, 2000, which is incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
(27) Financial Data Schedule
(B) Reports filed on Form 8-K during the three-month period ended June
30, 2000: NONE
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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: August 14, 2000 /s/ Roger D. Dudley
------------------------------ -----------------------------
Roger D. Dudley, Executive Vice President,
Chief Financial Officer
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