UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X]
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2004, or
[ ]
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _____________.
Commission File No. 0-23862
Fonix Corporation
(Exact name of registrant as specified in its charter)
Delaware
22-2994719
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
9350 South 150 East, Suite 700
Sandy, Utah 84070
(Address of principal executive offices with zip code)
(801) 553-6600
(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] No[ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of August 20, 2004, there were issued and outstanding 94,295,183 shares of our Class A common stock.
#
FONIX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – As of June 30, 2004 and December 31, 2003
3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
Three Months and Six Months Ended June 30, 2004 and 2003
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and 2003
5
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
Item 4.
Evaluation of Disclosure Controls and Procedures
36
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
36
Item 2.
Changes in Securities and Use of Proceeds
36
Item 6.
Exhibits and Reports on Form 8-K
36
#
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
| June 30, 2004 |
| December 31, 2003 |
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ 1,273,000 | $ 50,000 | ||||
Deposit in escrow | 340,000 | - | ||||
Subscriptions receivable | - | 245,000 | ||||
Accounts receivable | 1,924,000 | 4,000 | ||||
Inventory | 3,000 | 3,000 | ||||
| Prepaid expenses and other current assets | 256,000 |
| 40,000 | ||
Total current assets | 3,796,000 | 342,000 | ||||
Long-term investments | 237,000 | - | ||||
Property and equipment, net of accumulated depreciation of $1,361,000 and $1,176,000, respectively | 255,000 | 125,000 | ||||
Other assets | 1,041,000 | 75,000 | ||||
Intangible assets, net of accumulated amortization of $2,282,000 and $0, respectively | 15,480,000 | - | ||||
Goodwill, net of accumulated amortization of $2,296,000 | 2,631,000 |
| 2,631,000 | |||
Total assets | $ 23,440,000 |
| $ 3,173,000 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
Current liabilities | ||||||
Accrued payroll and other compensation | $ 3,843,000 | $ 6,964,000 | ||||
Accounts payable | 5,433,000 | 2,650,000 | ||||
Accrued liabilities - related parties | 1,443,000 | 1,443,000 | ||||
Accrued liabilities | 5,181,000 | 1,189,000 | ||||
Call warrants | 261,000 | - | ||||
Deferred revenues | 1,052,000 | 540,000 | ||||
Notes payable - related parties | 463,000 | 467,000 | ||||
Advance on Series I Preferred Stock | - | 240,000 | ||||
Current portion of notes payable | 303,000 | 30,000 | ||||
| Deposits and other | 180,000 |
| 7,000 | ||
Total current liabilities | 18,159,000 | 13,530,000 | ||||
Long-term notes payable, net of current portion | 5,397,000 |
| 40,000 | |||
Total liabilities | 23,556,000 |
| 13,570,000 | |||
Commitments and contingencies | ||||||
Stockholders' deficit | ||||||
Preferred stock, $0.0001 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 H, nonconvertible; 2,000 shares outstanding (aggregate liquidation preference of $20,000,000) | 4,000,000 | - | ||||
Series I, convertible; 3,250 shares outstanding (aggregate liquidation preference of $3,250,000) | 3,250,000 | - | ||||
Common stock, $0.0001 par value; 800,000,000 shares authorized; | ||||||
Class A voting, 87,594,231 and 54,329,787 shares outstanding, respectively | 9,000 | 5,000 | ||||
Class B non-voting, none outstanding | - | - | ||||
| Additional paid-in capital | 209,593,000 | 195,284,000 | |||
Outstanding warrants to purchase Class A common stock | 1,272,000 | 1,334,000 | ||||
Cumulative foreign currency translation adjustment | 17,000 | 30,000 | ||||
| Accumulated deficit | (218,757,000) |
| (207,550,000) | ||
Total stockholders' deficit | (116,000) |
| (10,397,000) | |||
Total liabilities and stockholders' deficit | $ 23,440,000 |
| $ 3,173,000 | |||
See accompanying notes to condensed consolidated financial statements.
3
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||
|
|
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
Revenues | $ 4,242,000 | $ 632,000 | $ 6,168,000 | $ 1,221,000 | ||||||
Impairment loss on capitalized software technology | - | (822,000) | - | (822,000) | ||||||
Cost of revenues |
| (2,269,000) |
| (103,000) |
| (3,062,000) |
| (183,000) | ||
Gross profit |
| 1,973,000 |
| (293,000) |
| 3,106,000 |
| 216,000 | ||
Expenses: | ||||||||||
Selling, general and administrative | 3,779,000 | 1,518,000 | 6,130,000 | 3,761,000 | ||||||
Impairment loss on intangible assets | 738,000 | 302,000 | 738,000 | 302,000 | ||||||
Amortization of intangible assets | 1,709,000 | - | 2,282,000 | 34,000 | ||||||
| Product development and research |
| 668,000 |
| 1,084,000 |
| 1,466,000 |
| 2,759,000 | |
Total expenses |
| 6,894,000 |
| 2,904,000 |
| 10,616,000 |
| 6,856,000 | ||
Other income (expense): | ||||||||||
Interest income | 1,000 | 10,000 | 5,000 | 10,000 | ||||||
Gain on forgiveness of liabilities | 21,000 | - | 502,000 | 26,000 | ||||||
Interest expense | (666,000) | (322,000) | (902,000) | (1,064,000) | ||||||
| Equity in net loss of affiliate |
| - |
| (77,000) |
| - |
| (189,000) | |
Other expense, net |
| (644,000) |
| (389,000) |
| (395,000) |
| (1,217,000) | ||
Net loss | (5,565,000) | (3,586,000) | (7,905,000) | (7,857,000) | ||||||
Preferred stock dividends |
| (315,000) |
| - |
| (3,300,000) |
|
| ||
Loss attributable to common stockholders | (5,880,000) | (3,586,000) | (11,205,000) | (7,857,000) | ||||||
Other comprehensive loss - foreign currency translation |
| - |
| (27,000) |
| - |
| (8,000) | ||
Comprehensive loss |
| $ (5,880,000) |
| $ (3,613,000) |
| $ (11,205,000) |
| $ (7,865,000) | ||
Basic and diluted net loss per common share |
| $ (0.07) |
| $ (0.19) |
| $ (0.15) |
| $ (0.48) | ||
See accompanying notes to condensed consolidated financial statements.
4
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended | ||||||
June 30, | ||||||
|
|
|
| 2004 |
| 2003 |
Cash flows from operating activities | ||||||
Net loss | $ (7,905,000) | $ (7,857,000) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Accretion of discount on notes payable | 214,000 | 861,000 | ||||
Amortization of investment in affiliate | - | 84,000 | ||||
Impairment losses | 737,000 | 1,124,000 | ||||
Gain on forgiveness of liabilities | (502,000) | - | ||||
Amortization of intangibles | 2,282,000 | 84,000 | ||||
Depreciation and amortization | 189,000 | 169,000 | ||||
Equity in net loss of affiliate | - | 105,000 | ||||
Foreign exchange gain | (13,000) | (12,000) | ||||
Changes in assets and liabilities, net of effects from purchase of LTEL: | ||||||
Accounts receivable | 355,000 | 27,000 | ||||
Inventory | - | 20,000 | ||||
Prepaid expenses and other current assets | (151,000) | 14,000 | ||||
Other assets | 18,000 | 77,000 | ||||
Accounts payable | (1,144,000) | 1,018,000 | ||||
Accrued payroll and other compensation | (3,121,000) | 2,334,000 | ||||
Other accrued liabilities | 461,000 | (194,000) | ||||
Deferred revenues | (107,000) | (88,000) | ||||
|
| Bank overdraft | - |
| 142,000 | |
| Net cash used in operating activities | (8,687,000) |
| (2,092,000) | ||
Cash flows from investing activities | ||||||
Cash recived in connection with LTEL acquisition | 47,000 | - | ||||
Collection of principal on notes receivable | - | 403,000 | ||||
Payments of deposit into escrow | (340,000) | - | ||||
Purchase of property and equipment | (171,000) |
| - | |||
| Net cash (used in) provided by investing activities | (464,000) |
| 403,000 | ||
Cash flows from financing activities | ||||||
Proceeds from issuance of Class A common stock, net | 7,809,000 | 2,565,000 | ||||
Proceeds from Issuance of Series I Preferred | 3,010,000 | - | ||||
Payment of dividend on Series H Preferred | (350,000) | - | ||||
Principal payments on notes payable | (95,000) | (254,000) | ||||
Proceeds from long-term debt | - | 5,000 | ||||
Principal payments on Series D debentures | - |
| (650,000) | |||
| Net cash provided by financing activities | 10,374,000 |
| 1,666,000 | ||
Net increase (decrease) in cash and cash equivalents | 1,223,000 | (23,000) | ||||
Cash and cash equivalents at beginning of period | 50,000 |
| 24,000 | |||
Cash and cash equivalents at end of period | $ 1,273,000 |
| $ 1,000 | |||
See accompanying notes to condensed consolidated financial statements.
5
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended | |||||||
June 30, | |||||||
Supplemental disclosure of cash flow information: | 2004 | 2003 | |||||
Cash paid during the period for interest | $ 522,500 | $ 19,000 | |||||
Supplemental Schedule of Non-cash Investing and Financing Activities: | |||||||
For the Six Months Ended June 30, 2004: | |||||||