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 September 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 November 19, 2004, there were issued and outstanding 113,655,150 shares of our Class A common stock.
1
FONIX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – As of September 30, 2004 and December 31, 2003
3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
Three Months and Nine Months Ended September 30, 2004 and 2003
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Evaluation of Disclosure Controls and Procedures
37
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
37
Item 2.
Changes in Securities and Use of Proceeds
38
Item 6.
Exhibits
38
2
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||
|
|
|
| 2004 |
| 2003 |
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ 356,000 | $ 50,000 | ||||
Accounts receivable | 1,932,000 | 4,000 | ||||
Deposit in escrow | 340,000 | - | ||||
Subscriptions receivable | - | 245,000 | ||||
Inventory | 3,000 | 3,000 | ||||
| Prepaid expenses and other current assets | 166,000 |
| 40,000 | ||
Total current assets | 2,797,000 | 342,000 | ||||
Long-term investments | 237,000 | - | ||||
Property and equipment, net of accumulated depreciation of $1,473,000 and $1,176,000, respectively | 205,000 | 125,000 | ||||
Deposits and other assets | 1,025,000 | 75,000 | ||||
Intangible assets, net of accumulated amortization of $3,867,000 and $0, respectively | 13,895,000 | - | ||||
Goodwill, net of accumulated amortization of $2,296,000 | 2,631,000 |
| 2,631,000 | |||
Total assets | $ 20,790,000 |
| $ 3,173,000 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
Current liabilities | ||||||
Accrued payroll and other compensation | $ 3,035,000 | $ 6,964,000 | ||||
Accounts payable | 6,040,000 | 2,650,000 | ||||
Accrued liabilities - related parties | - | 1,443,000 | ||||
Accrued liabilities | 6,224,000 | 1,189,000 | ||||
Call warrants | 261,000 | - | ||||
Deferred revenues | 1,020,000 | 540,000 | ||||
Current portion of notes payable | 267,000 | 30,000 | ||||
Notes payable - related parties | 763,000 | 467,000 | ||||
Advance on Series I Preferred Stock | - | 240,000 | ||||
| Deposits and other | 181,000 |
| 7,000 | ||
Total current liabilities | 17,791,000 | 13,530,000 | ||||
Long-term notes payable, net of current portion | 5,583,000 |
| 40,000 | |||
Total liabilities | 23,374,000 |
| 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, 95,930,183 and 54,329,787 shares outstanding, respectively | 10,000 | 5,000 | ||||
Class B non-voting, none outstanding | - | - | ||||
| Additional paid-in capital | 210,763,000 | 195,284,000 | |||
Outstanding warrants to purchase Class A common stock | 1,272,000 | 1,334,000 | ||||
Cumulative foreign currency translation adjustment | 15,000 | 30,000 | ||||
| Accumulated deficit | (222,394,000) |
| (207,550,000) | ||
Total stockholders' deficit | (2,584,000) |
| (10,397,000) | |||
Total liabilities and stockholders' deficit | $ 20,790,000 |
| $ 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 September 30, | Nine Months Ended September 30, | |||||||||
|
|
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
Revenues | $ 4,426,000 | $ 457,000 | $ 10,593,000 | $ 1,678,000 | ||||||
Cost of revenues | (2,227,000) | (13,000) | (5,288,000) | (196,000) | ||||||
Impairment loss on capitalized software technology |
| - |
| - |
| - |
| (822,000) | ||
Gross profit |
| 2,199,000 |
| 444,000 |
| 5,305,000 |
| 660,000 | ||
Expenses: | ||||||||||
Selling, general and administrative | 3,816,000 | 1,338,000 | 9,950,000 | 5,082,000 | ||||||
Impairment loss on intangible assets | - | - | 738,000 | 302,000 | ||||||
Amortization of intangible assets | 1,586,000 | - | 3,867,000 | 51,000 | ||||||
| Product development and research |
| 592,000 |
| 1,123,000 |
| 2,058,000 |
| 3,882,000 | |
Total expenses |
| 5,994,000 |
| 2,461,000 |
| 16,613,000 |
| 9,317,000 | ||
Other income (expense): | ||||||||||
Interest income | - | 1,000 | 5,000 | 11,000 | ||||||
Gain on forgiveness of liabilities | 1,159,000 | - | 1,661,000 | 26,000 | ||||||
Interest expense | (685,000) | (852,000) | (1,587,000) | (1,916,000) | ||||||
| Equity in net loss of affiliate |
| - |
| 50,000 |
| - |
| (138,000) | |
Other income (expense), net |
| 474,000 |
| (801,000) |
| 79,000 |
| (2,017,000) | ||
Net loss | (3,321,000) | (2,818,000) | (11,229,000) | (10,674,000) | ||||||
Preferred stock dividends |
| (315,000) |
| - |
| (3,615,000) |
| - | ||
Loss attributable to common stockholders |
| $ (3,636,000) |
| $ (2,818,000) |
| $ (14,844,000) |
| $ (10,674,000) | ||
Basic and diluted loss per common share |
| $ (0.04) |
| $ (0.11) |
| $ (0.18) |
| $ (0.37) | ||
Net loss | $ (3,321,000) | $ (2,818,000) | $ (11,229,000) | $ (10,674,000) | ||||||
Other comprehensive loss - foreign currency translation |
| - |
| 3,000 |
| (15,000) |
| (6,000) | ||
Comprehensive loss |
| $ (3,321,000) |
| $ (2,815,000) |
| $ (11,244,000) |
| $ (10,680,000) | ||
See accompanying notes to condensed consolidated financial statements.
4
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||
September 30, | ||||||
|
|
|
| 2004 |
| 2003 |
Cash flows from operating activities | ||||||
Net loss | $ (11,229,000) | $ (10,674,000) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Stock issued for services | 41,000 | - | ||||
Interest expense related to issuance of common stock to Breckenridge | 358,000 | |||||
Accretion of discount on note receivable from affiliate | (9,000) | |||||
Accretion of discount on notes payable | 365,000 | 868,000 | ||||
Amortization of investment in affiliate | - | 125,000 | ||||
Impairment losses | 738,000 | 1,124,000 | ||||
Gain on forgiveness of liabilities | (1,661,000) | - | ||||
Amortization of intangibles | 3,867,000 | - | ||||
Depreciation and amortization | 301,000 | 355,000 | ||||
Equity in net loss of affiliate | - | 13,000 | ||||
Foreign exchange gain | (15,000) | (9,000) | ||||
Changes in assets and liabilities, net of effects from purchase of LTEL: | ||||||
Accounts receivable | 347,000 | 26,000 | ||||
Inventory | - | 43,000 | ||||
Prepaid expenses and other current assets | (61,000) | 142,000 | ||||
Other assets | 34,000 | 107,000 | ||||
Accounts payable | (521,000) | 1,491,000 | ||||
Accrued payroll and other compensation | (3,929,000) | 3,095,000 | ||||
Other accrued liabilities | 1,205,000 | (96,000) | ||||
Deferred revenues | (139,000) | (143,000) | ||||
|
| Bank overdraft | - |
| 178,000 | |
| Net cash used in operating activities | (10,657,000) |
| (3,006,000) | ||
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 | (233,000) |
| - | |||
| Net cash (used in) provided by investing activities | (526,000) |
| 403,000 | ||
Cash flows from financing activities | ||||||
Proceeds from issuance of Class A common stock, net | 8,924,000 | 3,492,000 | ||||
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) | (250,000) | ||||
Payments on long-term debt | - | (12,000) | ||||
Principal payments on Series D debentures | - |
| (650,000) | |||
| Net cash provided by financing activities | 11,489,000 |
| 2,580,000 | ||
Net increase (decrease) in cash and cash equivalents | 306,000 | (23,000) | ||||
Cash and cash equivalents at beginning of period | 50,000 |
| 24,000 | |||
Cash and cash equivalents at end of period | $ 356,000 |
| $ 1,000 | |||
See accompanying notes to condensed consolidated financial statements.
5
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Supplemental schedule of noncash investing and financing activities
For the Nine Months Ended September 30, 2004:
Issued 1,463,735 shares of Class A common stock in full satisfaction of $292,000 of liabilities
The Company purchased all of the capital stock of LTEL Holdings Corporation for $12,800,000. In conjunction with the acquisition, the Company acquired $22,259,000 of assets and assumed $9,459,000 of liabilities of LTEL Holdings Corporation by the issuance of 7,036,802 shares of Class A common stock valued at $4,176,000, the issuance of 2,000 shares of 5% Series H nonvoting, nonconvertible preferred stock valued at $4,000,000 and the issuance of a 5% $10,000,000 promissory note valued at $4,624,000
For the Nine Months Ended September 30, 2003:
Issued 2,108,569 shares of Class A common stock in conversion of $406,846 of Series D Debentures principal and $26,154 of related accrued interest
Issued 237,584 shares of Class A common stock valued at $285,100 as consideration for deferment of Series D Debentures; issuance of shares represented an increase to the discount to be amortized over the revised term of the Series D Debentures
Converted $113,768 of accounts payable into a note payable
See accompanying notes to condensed consolidated financial statements.
6
Fonix Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 2003 Annual Report on Form 10-K, together with the amendments thereto.
Operating results for the nine months ended September 30, 2004, are n