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Fonix Corp · 10-Q · For 3/31/07

Filed On 5/15/07 5:21pm ET   ·   SEC File 0-23862   ·   Accession Number 1096906-7-738

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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 5/15/07  Fonix Corp                        10-Q        3/31/07    5:71                                     Southridge Svcs LLC/FA

Quarterly Report   ·   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Fonix Corporation Form 10-Q March 31, 2007          HTML    292K 
 2: EX-31.1     Exhibit 31.1 - Certification of President           HTML     12K 
 3: EX-31.2     Exhibit 31.2 - Certification of Chief Financial     HTML     12K 
                          Officer                                                
 4: EX-32.1     Exhibit 32.1 - Certification of President Pursuant  HTML      8K 
                          to Section 906 of the Sarbanes-Oxley Act               
                          of 2002                                                
 5: EX-32.2     Exhibit 32.2 - Certification of Chief Financial     HTML      8K 
                          Officer Pursuant to Section 906 of the                 
                          Sarbanes-Oxley Act of 2002

10-Q   ·   Fonix Corporation Form 10-Q March 31, 2007

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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 March 31, 2007, 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check One):
Larger Accelerated Filer __ Accelerated Filer __ Non-Accelerated Filer   X .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act). Yes __  No  X 

As of May 10, 2007, there were issued and outstanding 1,707,139,820 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 March 31, 2007, and December 31, 2006
3
     
 
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2007 and 2006
4
     
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
5
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
     
Item 4.
Controls and Procedures
28
     
     
PART II - OTHER INFORMATION
     
Item 1.
Legal Proceedings
28
     
Item 1A.
Risk Factors
29
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
30
     
Item 6.
Exhibits
30






 
 
 
 
2
 
 
Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
   
March 31,
  
December 31,
  
 
  
2007
  
2006
  
           
ASSETS
              
               
Current assets
              
Cash and cash equivalents
  
$
397,000
  
$
5,000
  
Accounts receivable, net of an allowance for doubtful accounts of $0 and $137,000, respectively
    
-
    
-
  
Prepaid expenses and other current assets
    
7,000
    
4,000
  
               
Total current assets
    
404,000
    
9,000
  
               
Property and equipment, net of accumulated depreciation of $1,275,000 and $1,261,000, respectively
    
34,000
    
48,000
  
               
Deposits and other assets
    
117,000
    
117,000
  
               
Goodwill
    
2,631,000
    
2,631,000
  
               
Total assets
  
$
3,186,000
  
$
2,805,000
  
               
LIABILITIES AND STOCKHOLDERS' DEFICIT
              
               
Current liabilities
              
Accrued liabilities
  
$
2,677,000
  
$
2,054,000
  
Accounts payable
    
1,048,000
    
1,504,000
  
Net liabilities of discontinued subsidiaries
    
20,819,000
    
20,819,000
  
Derivative liability
    
19,591,000
    
20,941,000
  
Accrued payroll and other compensation
    
214,000
    
214,000
  
Accrued settlement obligation, net of unamortized discount of $0 and $118,000, respectively
    
1,530,000
    
1,530,000
  
Deferred revenues
    
447,000
    
460,000
  
Notes payable - related parties
    
902,000
    
800,000
  
Series E debentures
    
1,754,000
    
1,754,000
  
Advance on Series B Preferred Stock
    
1,250,000
    
-
  
Current portion of notes payable
   
3,652,000
    
2,883,000
  
Deposits and other
    
7,000
    
7,000
  
               
Total current liabilities
    
53,891,000
    
52,966,000
  
               
Long-term notes payable, net of current portion
    
2,908,000
    
2,988,000
  
               
Total liabilities
    
56,799,000
    
55,954,000
  
               
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 $6,055,000)
    
500,000
    
500,000
  
Series L, convertible; 1,794 shares and 1,858 shares outstanding , respectively
    
-
    
-
  
Common stock, $0.0001 par value; 5,000,000,000 shares authorized;
              
Class A voting, 1,707,139,820 shares and 1,309,965,981 shares outstanding, respectively
    
170,000
    
131,000
  
Class B non-voting, none outstanding
    
-
    
-
  
Additional paid-in capital
    
237,630,000
    
236,936,000
  
Outstanding warrants to purchase Class A common stock
    
474,000
    
474,000
  
Cumulative foreign currency translation adjustment
    
10,000
    
10,000
  
Accumulated deficit
    
(292,397,000
)
  
(291,200,000
)
               
Total stockholders' deficit
    
(53,613,000
)
  
(53,149,000
)
               
Total liabilities and stockholders' deficit
  
$
3,186,000
  
$
2,805,000
  
 
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 March 31,
  
2007
  
2006
  
           
           
Revenues
  
$
360,000
  
$
272,000
  
Cost of revenues
    
7,000
    
5,000
  
               
Gross profit
    
353,000
    
267,000
  
               
Expenses:
              
Selling, general and administrative
    
807,000
    
1,173,000
  
Product development and research
    
487,000
    
571,000
  
               
Total expenses
    
1,294,000
    
1,744,000
  
               
Other income (expense):
              
Interest expense
    
(463,000
)
  
(374,000
)
Gain on derivative liability
    
617,000
    
-
  
               
Other income (expense), net
    
154,000
    
(374,000
)
               
Net loss from continuing operations
    
(787,000
)
  
(1,851,000
)
Net loss from discontinued operations
    
-
    
(2,230,000
)
               
Net loss
    
(787,000
)
  
(4,081,000
)
Preferred stock dividends
    
(410,000
)
  
(1,849,000
)
               
Loss attributable to common stockholders
 
$
(1,197,000
)
$
(5,930,000
)
               
               
Basic and diluted loss per common share from continuing operations
  
$
(0.00
)
$
(0.01
)
               
Basic and diluted loss per common share from discontinued operations
  
$
(0.00
)
$
(0.01
)
               
               
Net loss
  
$
(787,000
)
$
(4,081,000
)
Other comprehensive (loss) income - foreign currency translation
    
-
    
7,000
  
               
Comprehensive loss
  
$
(787,000
)
$
(4,074,000
)

 
 
See accompanying notes to condensed consolidated financial statements.

 
 
 
 
4
 
 

Fonix Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Three Months Ended March 31,
  
2007
  
2006
  
Cash flows from operating activities
              
Net loss
  
$
(787,000
)
$
(4,081,000
)
Adjustments to reconcile net loss to net cash used in operating activities:
              
Discontinued operations
    
-
    
2,230,000
  
Gain on derivative liability
    
(617,000
)
  
-
  
Accretion of discount on notes payable
    
239,000
    
187,000
  
Accretion of discount on legal settlement
    
-
    
46,000
  
Depreciation
   
14,000
    
14,000
  
Foreign exchange loss (gain)
    
-
    
(7,000
)
Changes in assets and liabilities
              
Prepaid expenses and other current assets
    
(3,000
)
  
14,000
  
Intercompany account
    
-
    
238,000
  
Accounts payable
    
(456,000
)
  
134,000
  
Accrued payroll and other compensation
    
-
    
77,000
  
Other accrued liabilities
    
213,000
    
136,000
  
Deferred revenues
    
(13,000
)
  
42,000
  
               
Net cash used in operating activities
    
(1,410,000
)
  
(970,000
)
               
Cash flows from investing activities
              
Purchase of property and equipment
    
-
    
(2,000
)
               
Net cash used in investing activities
    
-
    
(2,000
)
               
Cash flows from financing activities
              
Proceeds from issuance of Class A common stock, net
    
-
    
1,220,000
  
Proceeds from related party note payable
    
102,000
    
-
  
Advance on Series B Preferred Stock
    
1,250,000
    
-
  
Proceeds from notes payable
    
450,000
    
200,000
  
Payments on related party note payable
    
-
    
(50,000
)
Payments of accrued settlement obligation
    
-
    
(260,000
)
Principal payments on notes payable
    
-
    
(99,000
)
               
Net cash provided by financing activities
    
1,802,000
    
1,011,000
  
               
Net increase in cash and cash equivalents
    
392,000
    
39,000
  
               
Cash and cash equivalents at beginning of period
    
5,000
    
28,000
  
               
Cash and cash equivalents at end of period
  
$
397,000
  
$
67,000
  

 
 
 
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 Three Months Ended March 31, 2007:

Issued 397,173,839 shares of Class A common stock in conversion of 64 shares of Series L Convertible Preferred Stock.

Accrued $370,000 of dividends on Series L Preferred Stock.

For the Three Months Ended March 31, 2006:

Issued 15,028,249 shares of Class A common stock in conversion of 266 shares of Series J Convertible Preferred Stock.

Issued 27,200,000 shares of Class A common stock in conversion of 272 shares of Series K Convertible Preferred Stock.

Issued 2,838,412 shares of Class A common stock as payment of $65,000 of dividends on Series H Preferred Stock.

Accrued $250,000 of dividends on Series H Preferred Stock.

Accrued $7,000 of dividends on Series K Preferred Stock.




















 
 
See accompanying notes to condensed consolidated financial statements.

 
 
 
 
6
 
 

Fonix Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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. 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 2006 Annual Report on Form 10-K.

The Company has not consolidated the assets, liabilities or operations related to its former telecom operations at March 31, 2007 as these assets are under the control of the court appointed bankruptcy trustee pursuant to the filing for protection under Chapter 7 of the Bankruptcy Code by LecStar Telecom, Inc., LecStar DataNet, Inc., LTEL Holdings and Fonix Telecom, Inc. on October 2, 2006. The accompanying footnotes do not include disclosures related to the operations of the aforementioned companies and represent solely the operations of Fonix Speech, Inc.

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 2006 Annual Report on Form 10-K.

Operating results for the three months ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Nature of Operations - Fonix Corporation (“the Company”) provides value-added speech technologies through its subsidiary, Fonix Speech, Inc. (“Fonix Speech”). The Company offers speech-enabling technologies including automated speech recognition (“ASR”) and text-to-speech (“TTS”) through Fonix Speech to markets for wireless and mobile devices, computer telephony, server solutions and personal software for consumer applications. The Company has received various patents for certain elements of our core technologies and have filed applications for other patents covering various aspects of its technologies. The Company seeks to develop relationships and strategic alliances with third-party developers and vendors in telecommunications, computers, electronic devices and related industries, including producers of application software, operating systems, computers and microprocessor chips. Revenues are generated through licensing of speech-enabling technologies, maintenance contracts and services.

The Company previously operated a telecommunications business, the results of which were included in prior SEC filings. On October 2, 2006, LecStar Telecom Inc., a Georgia corporation (“LecStar Telecom”), LecStar DataNet, Inc., a Georgia corporation (“LecStar DataNet”), LTEL Holdings Corporation (“LTEL Holdings”), a Delaware corporation, and Fonix Telecom Inc., a Delaware corporation (“Fonix Telecom”), each of which are direct or indirect subsidiaries of Fonix, filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The case numbers are as follows: LTEL Holdings Corporation, 06-11081 (BLS); LecStar Telecom, Inc., 06-11082 (BLS); LecStar DataNet, Inc., 06-11083 (BLS); Fonix Telecom, Inc., 06-11084 (BLS).)

LecStar Telecom, LecStar DataNet, LTEL Holdings, and Fonix Telecom sought protection under Chapter 7 of title 11 of the U.S. Bankruptcy Code, 11 U.S.C ss 101 et seq. (the “Bankruptcy Code”). Pursuant to Bankruptcy Code Section 701, on October 3, 2006, Alfred Thomas Guliano was appointed the interim trustee for LecStar Telecom, LecStar DataNet, LTEL Holdings, and Fonix Telecom. As these subsidiary companies were in Chapter 7 Bankruptcy proceedings as of the date of this Report, the results of their operations have been treated as discontinued operations.


 
 
 
 
7
 
 

Fonix Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Business Condition - For the quarters ended March 31, 2007 and 2006, we generated revenues of $360,000 and $272,000, respectively; incurred net losses of $787,000 and $4,081,000, respectively, and had negative cash flows from operating activities of $1,410,000 and $970,000, respectively. As of March 31, 2007, we had an accumulated deficit of $292,397,000, negative working capital of $53,487,000, accrued liabilities and accrued settlement liability of $4,207,000, derivative liabilities of $19,591,000 related to the issuance of Series L Preferred Stock and Series E Convertible Debentures, net liabilities of discontinued