As filed with the Securities and Exchange Commission on February 12, 2007
Registration No. 333-137201
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------
ONE VOICE TECHNOLOGIES, INC.
----------------------------
(Name of small business issuer in its charter)
NEVADA 95-4714338
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
7372
(Primary Standard Industrial
Classification Code Number)
4275 EXECUTIVE SQUARE, SUITE 200
LA JOLLA, CALIFORNIA 92037
(858) 552-4466
(Address and telephone number of principal executive offices
and principal place of business)
DEAN WEBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONE VOICE TECHNOLOGIES, INC.
4275 EXECUTIVE SQUARE, SUITE 200
LA JOLLA, CALIFORNIA 92037
(858) 552-4466
(Name, address and telephone number of agent for service)
Copies to:
DARRIN M. OCASIO, ESQ.
ERIC A. PINERO, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ________
CALCULATION OF REGISTRATION FEE
-------------------------------------------------- ------------------- ------------------ -------------------- -------------
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION
OFFERING PRICE AGGREGATE FEE
PER SHARE (2) OFFERING PRICE
-------------------------------------------------- ------------------- ------------------ -------------------- -------------
Common stock, $.001 par value issuable upon 144,000,000 (3) $.013 $1,872,000.00 $200.30*
conversion of the convertible notes
-------------------------------------------------- ------------------- ------------------ -------------------- -------------
Common stock, $.001 par value issuable upon 17,493,516 (4) $.013 $ 227,416.00 $ 24.33*
exercise of Class A warrants
-------------------------------------------------- ------------------- ------------------ -------------------- -------------
Total 161,493,516 $2,099,416.00 $224.64*
-------------------------------------------------- ------------------- ------------------ -------------------- -------------
*Previously paid.
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of a portion of
the warrants held by the selling stockholders, representing 31% of our total
issued and outstanding shares of common stock as of the date of this prospectus.
In addition to the shares set forth in the table, the amount to be registered
includes an indeterminate number of shares issuable upon conversion of the
secured convertible notes and exercise of the warrants, as such number may be
adjusted as a result of stock splits, stock dividends and similar transactions
in accordance with Rule 416. The number of shares of common stock registered
hereunder represents a good faith estimate by us of the number of shares of
common stock issuable upon conversion of the secured convertible notes and upon
exercise of the warrants. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a good
faith estimate of the number of shares of our common stock that we believe will
be issuable upon conversion of the secured convertible notes and upon exercise
of the warrants to account for market fluctuations, and antidilution and price
protection adjustments, respectively. Should the conversion ratio result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary. In addition, should a decrease in the exercise price as a
result of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416, but
will file a new registration statement to cover the resale of such additional
shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
September 5, 2006, which was $.013 per share.
(3) Includes 150% of the shares of our common stock issuable upon conversion of
our secured convertible notes which we issued in July and August 2006.
(4) Includes shares of our common stock issuable upon exercise of a portion of
our Class A common stock purchase warrants at an exercise price equal to $0.015
per share which we issued in July and August 2006.
_________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 12, 2007
ONE VOICE TECHNOLOGIES, INC.
161,493,516 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
161,493,516 shares of our common stock, representing 31% of our total issued and
outstanding shares of common stock as of the date of this prospectus, including
up to (i) 82,500,000 shares of common stock underlying our 6% secured
convertible notes in the aggregate principal amount of $550,000 which we issued
in July 2006, (ii) 61,500,000 shares of common stock underlying our 6% secured
convertible notes in the aggregate principal amount of $420,000 which we issued
in August 2006, (iii) 9,304,940 shares of common stock issuable upon the
exercise of a portion of our Class A common stock purchase warrants at a price
of $.015 per share which we issued in July 2006, and (iv) 8,188,576 shares of
common stock issuable upon the exercise of a portion of our Class A common stock
purchase warrants at a price of $.015 per share which we issued in August 2006.
The secured convertible notes are convertible into our common stock at the lower
of (i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices
for our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The selling stockholders
may sell common stock from time to time in the principal market on which the
stock is traded at the prevailing market price or in negotiated transactions.
The selling stockholders may be deemed underwriters of the shares of common
stock, which they are offering. We will pay the expenses of registering these
shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "ONEV". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on September 5, 2006, was $.013.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2007.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by One Voice
Technologies, Inc. with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
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TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 5
Prospectus Summary 6
Risk Factors 9
Use of Proceeds 15
Market For Common Equity and Related Stockholder Matters 15
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Description of Business 22
Description of Property 25
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships and Related Transactions 29
Security Ownership of Certain Beneficial Owners and Management 29
Description of Securities 30
Commission's Position on Indemnification For Securities Act Liabilities 30
Plan of Distribution 31
Selling Stockholders 33
Legal Matters 36
Experts 36
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 37
Available Information 37
Index to Consolidated Financial Statements 38
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events.
In some cases, you can identify forward-looking statements by words such as
"may," "should," "expect," "plan," "could," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or other
applicable laws, we do not intend to update or revise any forward-looking
statements.
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PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
ONE VOICE TECHNOLOGIES, INC.
OUR BUSINESS
We are a voice recognition technology company with over $43 million invested in
research and development and deployment of more than 20 million products
worldwide in seven languages. To date, our customers include: Walt Disney
Internet Group, Warner Home Video, Golden State Cellular, Inland Cellular,
Eloqui Wireless, Cell One of Amarillo, Panhandle Telephone Cooperative, Plateau
Wireless, West Central Wireless, Telispire PCS, NewEgg.com, PC Alchemy, CompUSA,
Dell.com and Cannon PC. Based on our patented technology, we offer voice
solutions for the Telecom and Interactive Multimedia markets. Our telecom
solutions allow business and consumer phone users to voice dial, group
conference call, read and send e-mail and instant message, all by voice. We
offer PC Original Equipment Manufacturers (OEM's) the ability to bundle a
complete voice interactive computer assistant which allows PC users to talk to
their computers to quickly play digital media (music, videos, DVD), along with
read and send e-mail messages, SMS text messaging to mobile phones, PC-to-Phone
calling (VoIP) and PC-to-PC audio/video. We believe that we are strongly
positioned across these markets with our patented voice technology.
We believe that the presence of voice technology as an interface in mobile
communications and PC computing is of paramount importance. Voice interface
technology makes portable communications products mobile, more effective and
safer to use and it makes communicating with a PC to play digital content, such
as music, videos and photos, easier for consumers. Our development efforts
currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone, directory assistance
and in-home digital media access.
We are listed on the Over-The-Counter Bulletin Board under the symbol "ONEV". We
are incorporated in the State of Nevada and we commenced operations on July 14,
1999. Our principal executive offices are located at 4275 Executive Square,
Suite 200, La Jolla, California 92037, and our telephone number is (858)
552-4466.
The Offering
Common stock offered by selling stockholders.......... Up to 161,493,516 shares, representing 31% of our total issued
and outstanding shares of common stock as of the date of this
prospectus, including the following:
- up to 82,500,000 shares of common stock underlying secured
convertible notes in a principal amount of $550,000 issued
pursuant to our July 2006 Subscription Agreement (includes a
good faith estimate of the shares underlying convertible
notes to account for market fluctuations and antidilution
protection adjustments, respectively),
- up to 61,500,000 shares of common stock underlying secured
convertible notes in a principal amount of $420,000 issued
pursuant to our August 2006 Subscription Agreement (include
a good faith estimate of the shares underlying convertible
notes to account for market fluctuations and antidilution
protection adjustments, respectively),
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- up to 9,304,940 shares of common stock issuable upon the
exercise of Class A common stock purchase warrants at a
price of $.015 per share issued pursuant to our July 2006
Subscription Agreement (includes a good faith estimate of
the shares underlying warrants to account for antidilution
protection adjustments), and
- up to 8,188,576 shares of common stock issuable upon the
exercise of Class A common stock purchase warrants at a
price of $.015 per share issued pursuant to our August 2006
Subscription Agreement (includes a good faith estimate of
the shares underlying warrants to account for antidilution
protection adjustments),
This number represents 31% of our current outstanding
stock.
Common stock to be outstanding after the offering........... Up to 675,062,117 shares
Use of proceeds........................................ We will not receive any proceeds from the sale of the common
stock. However, we will receive the sale price of any common
stock we sell to the selling stockholders upon exercise of the
warrants. We expect to use the proceeds received from the
exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled one
year after the closing date to exercise up to the warrants on a
cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective
registration statement. In the event that the selling
stockholders exercise the warrants on a cashless basis, then we
will not receive any proceeds from the exercise of those
warrants. The proceeds received from the sale of the secured
convertible notes will be used for working capital needs.
Over-The-Counter Bulletin Board Symbol................. ONEV
The above information regarding common stock to be outstanding after the
offering is based on 513,568,601 shares of common stock outstanding as of
September 1, 2006 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders, although
there can be no assurances that any warrants will be exercised.
JULY 2006 SUBSCRIPTION AGREEMENT*
On July 6 and 14, 2006, we completed a private placement pursuant to a
Subscription Agreement which we entered into with several accredited and/or
qualified institutional investors pursuant to which the investors subscribed to
purchase an aggregate principal amount of $550,000 in 6% secured convertible
promissory notes and 1 Class A common stock purchase warrant for each 1share
which would be issued on the closing date assuming full conversion of the
secured convertible notes issued on the closing date.
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The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, August 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance and at any time, until paid
in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 48,530,839 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering the shares of our
common stock issuable upon conversion of the secured promissory notes and
exercise of the Class A warrants no later than 45 days after the closing date
and cause it to be effective within 120 days after the closing date. If we do
not meet the aforementioned filing and effectiveness deadlines, we shall pay to
each investor an amount equal to 1% for the first 30 days or part thereof of the
pendency of such non-registration event and 2% for each 30 days or part thereof
thereafter, of the purchase price of the secured convertible notes remaining
unconverted and purchase price of the shares of our common stock issued upon
conversion of the notes.
On August 28, 2006, we entered into a letter agreement with the investors of our
July 2006 Subscription Agreement under which the parties agreed to extend the
date we are required to file the registration statement to September 8, 2006 in
order to permit the registration of the shares underlying our secured
convertible notes issued pursuant to the August 2006 Subscription Agreement
(described below).
AUGUST 2006 SUBSCRIPTION AGREEMENT*
On August 29 and September 8, 2006, we completed a private placement pursuant to
which we entered into a Subscription Agreement with several accredited and/or
qualified institutional investors pursuant to which the investors subscribed to
purchase an aggregate principal amount of up to $510,000 in 6% secured
convertible promissory notes and 1 Class A common stock purchase warrant for
each 1share which would be issued on the closing date assuming full conversion
of the secured convertible notes issued on the closing date. On September 8,
2006, we received subscriptions for an aggregate of $420,000 in secured
convertible notes.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, September 1, 2006 and semi-annually thereafter, and mature 2
years after the date of issuance. Each investor shall have the right to convert
the secured convertible notes after the date of issuance and at any time, until
paid in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 42,708,334 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
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reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering the shares of our
common stock issuable upon conversion of the secured promissory notes and
exercise of the Class A warrants no later than 10 days after the closing date
and cause it to be effective on or prior to November 3, 2006. If we do not meet
the aforementioned filing and effectiveness deadlines, we shall pay to each
investor an amount equal to 1% for the first 30 days or part thereof of the
pendency of such non-registration event and 2% for each 30 days or part thereof
thereafter, of the purchase price of the secured convertible notes remaining
unconverted and purchase price of the shares of our common stock issued upon
conversion of the notes.
*We claim an exemption from the registration requirements of the Act for the
private placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the investors were accredited investors
and/or qualified institutional buyers, the investors had access to information
about us and their investment, the investors took the securities for investment
and not resale, and we took appropriate measures to restrict the transfer of the
securities.
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A HISTORY OF LOSSES. WE EXPECT TO CONTINUE TO INCUR LOSSES, AND WE MAY
NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
Since inception, we have incurred significant losses and have negative cash
flows from operations. For the nine months ended September 30, 2006 and 2005, we
incurred a net loss of $3,673,114 and $4,331,231, respectively. For the year
ended December 31, 2005 and 2004, we incurred a net loss of $1,546,000 and
$8,752,000, respectively. These factors, among others discussed in Note 1 to the
financial statements, raise substantial doubt about the ability to continue as a
going concern. We expect to continue to incur net losses until sales generate
sufficient revenues to fund our continuing operations. We may fail to achieve
significant revenues from sales or achieve or sustain profitability. There can
be no assurance of when, if ever, we will be profitable or be able to maintain
profitability.
IF WE DO NOT BECOME PROFITABLE WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our future sales and profitability depend in part on our ability to demonstrate
to prospective customers the potential performance advantages of using voice
interface software. To date, commercial sales of our software have been limited.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
Our current corporate entity commenced operations in 1999 and has a limited
operating history. We have limited financial results on which you can assess our
future success. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by growing companies in new and rapidly
evolving markets, such as voice recognition software, media delivery systems and
electronic commerce.
To address the risks and uncertainties we face, we must:
o establish and maintain broad market acceptance of our products
and services and convert that acceptance into direct and
indirect sources of revenues;
o maintain and enhance our brand name;
o continue to timely and successfully develop new products,
product features and services and increase the functionality
and features of existing products;
o successfully respond to competition, including emerging
technologies and solutions; and
o develop and maintain strategic relationships to enhance the
distribution, features and utility of our products and
services.
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IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED.
We believe that our available short-term assets income will be sufficient to
meet our operating expenses and capital expenditures through the end of fiscal
year 2006. We do not know if additional financing will be available when needed,
or if it is available, if it will be available on acceptable terms. Insufficient
funds may prevent us from implementing our business strategy or may require us
to delay, scale back or eliminate certain contracts for the provision of voice
interface software.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
As a result of our limited operating history and the rapidly changing nature of
the markets in which we compete, our quarterly and annual revenues and operating
results are likely to fluctuate from period to period. These fluctuations may be
caused by a number of factors, many of which are beyond our control. These
factors include the following, as well as others discussed elsewhere in this
section:
o how and when we introduce new products and services and
enhance our existing products and services;
o our ability to attract and retain new customers and satisfy
our customers' demands;
o the timing and success of our brand-building and marketing
campaigns;
o our ability to establish and maintain strategic relationships;
o our ability to attract, train and retain key personnel;
o the demand for voice recognition applications;
o the emergence and success of new and existing competition;
o varying operating costs and capital expenditures related to
the expansion of our business operations and infrastructure,
domestically and internationally, including the hiring of new
employees;
o technical difficulties with our products, system downtime,
system failures or interruptions in Internet access
o changes in the mix of products and services that we sell to
our customers;
o costs and effects related to the acquisition of businesses or
technology and related integration; and
o costs of litigation and intellectual property protection.
In addition, because the market for our products and services is relatively new
and rapidly changing, it is difficult to predict future financial results.
For these reasons, you should not rely on period-to-period comparisons of our
financial results, if any, as indications of future results. Our future
operating results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of our
stock price.
We are in the starting stages of our business plan and are therefore more
vulnerable to unexpected or uncontrollable business and economic forces. Unknown
software errors may not be corrected in time to develop a sustainable customer
base. Unfavorable product reviews or news reports could squelch early sales
efforts. A competitor may quickly release a better version of a similar product
before we can complete our development efforts. Economic conditions such as a
national or world recession, international trade restrictions on computer
product sales, or a slowdown in new technology growth could reduce our revenues
below financially-healthy levels. The risks of a development-stage company
include the possible loss of all investment funds by investors.
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OUR CURRENT AND POTENTIAL COMPETITORS, SOME OF WHOM HAVE GREATER RESOURCES THAN
WE DO, MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAY CAUSE DEMAND FOR, AND THE
PRICES OF, OUR PRODUCTS TO DECLINE.
A number of companies have developed, or are expected to develop, products that
compete with our products. Competitors in the voice interface software market
include IBM, Scansoft and Nuance. We expect additional competition from other
companies such as Microsoft, who has recently made investments in, and acquired,
voice interface technology companies. Furthermore, our competitors may combine
with each other, and other companies may enter our markets by acquiring or
entering into strategic relationships with our competitors. Current and
potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the abilities
of their advanced speech and language technology products to address the needs
of our prospective customers.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products comparable or
superior to those we offer, adapt more quickly than we do to new technologies,
evolving industry trends and standards or customer requirements, or devote
greater resources to the development, promotion and sale of their products than
we do. Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
ABILITY TO COMPETE.
Our future success and ability to compete depends in part upon our proprietary
technology and our trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
We have recently been issued three patents covering the United States,
Australia, China and parts of Europe. Any patents that are issued to us could be
invalidated, circumvented or challenged. If challenged, our patents might not be
upheld or their claims could be narrowed. Our intellectual property may not be
adequate to provide us with competitive advantage or to prevent competitors from
entering the markets for our products. Additionally, our competitors could
independently develop non-infringing technologies that are competitive with,
equivalent to, and/or superior to our technology. Monitoring infringement and/or
misappropriation of intellectual property can be difficult, and there is no
guarantee that we would detect any infringement or misappropriation of our
proprietary rights. Even if we do detect infringement or misappropriation of our
proprietary rights, litigation to enforce these rights could cause us to divert
financial and other resources away from our business operations. Further, we
license our products internationally, and the laws of some foreign countries do
not protect our proprietary rights to the same extent as do the laws of the
United States.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of intellectual property rights. Although we attempt to avoid
infringing upon known proprietary rights of third parties, we may be subject to
legal proceedings and claims for alleged infringement by us or our licensees of
third-party proprietary rights, such as patents, trade secrets, trademarks or
copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third-party proprietary rights, even if not
successful or meritorious, could result in costly litigation, divert resources
and management's attention or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these
claims may be able to obtain injunctions, which could prevent us from selling
our products. Furthermore, former employers of our employees may assert that
these employees have improperly disclosed confidential or proprietary
information to us. Any of these results could harm our business. We may be
increasingly subject to infringement claims as the number of, and number of
features of, our products grow.
11
IF THE STANDARDS WE HAVE SELECTED TO SUPPORT ARE NOT ADOPTED AS THE STANDARDS
FOR SPEECH-ACTIVATED SOFTWARE, BUSINESSES MIGHT NOT USE OUR SPEECH-ACTIVATED
SOFTWARE PLATFORM FOR DELIVERY OF APPLICATIONS AND SERVICES, AND OUR REVENUE
GROWTH COULD BE NEGATIVELY AFFECTED.
The market for speech-activated services software is new and emerging. Certain
industry software standards have, however, been established but may change as
the technology evolves. We may not be competitive unless our products support
changing industry software standards. The emergence of industry standards other
than those we have selected to support, whether through adoption by official
standards committees or widespread usage, could require costly and time
consuming redesign of our products. If these standards become widespread and our
products do not support them, our clients and potential clients may not purchase
our products, and our revenue growth could be adversely affected. Multiple
standards in the marketplace could also make it difficult for us to design our
products to support all applicable standards, which could also result in
decreased sales of our products.
OUR FAILURE TO RESPOND TO RAPID CHANGE IN THE MARKET FOR SPEECH-ACTIVATED
SERVICES SOFTWARE COULD CAUSE US TO LOSE REVENUE AND HARM OUR BUSINESS.
The speech-activated services software industry is relatively new and rapidly
evolving. Our success will depend substantially upon our ability to enhance our
existing products and to develop and introduce, on a timely and cost-effective
basis, new products and features that meet changing end-user requirements and
incorporate technological advancements. If we are unable to develop new products
and enhanced functionalities or technologies to adapt to these changes, or if we
cannot offset a decline in revenue from existing products with sales of new
products, our business will suffer.
Commercial acceptance of our products and technologies will depend, among other
things, on:
o the ability of our products and technologies to meet and adapt
to the needs of our target markets;
o the performance and price of our products as compared to our
competitors' products;
o our ability to deliver customer service directly and through
our resellers; and
o the ability of our customers to utilize our product.
OUR DISCLOSURE CONTROLS AND PROCEDURES AND OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING ARE INEFFECTIVE. IF WE ARE UNABLE TO IMPLEMENT THE REMEDIAL ACTIONS WE
HAVE PROPOSED AND GENERALLY MAINTAIN THE EFFECTIVENESS OF OUR DISCLOSURE
CONTROLS AND PROCEDURES AND INTERNAL CONTROLS, WE WILL NOT BE ABLE TO PROVIDE
RELIABLE FINANCIAL STATEMENTS WHICH WOULD MAKE ANY INVESTMENT IN OUR COMPANY
SPECULATIVE AND RISKY.
Management received a letter dated March 31, 2006 (the "Letter") from Peterson &
Co., LLP, its independent auditors, addressed to the Chief Executive Officer and
Chairman of the Board of Directors in connection with the audit of our financial
statements as of December 31, 2005, in which the independent auditors identified
certain matters involving internal controls and procedures that they consider to
be significant deficiencies or material weaknesses under the standards of the
Public Company Accounting Oversight Board. These material weaknesses were: (1)
lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (2) lack of a functioning audit committee and lack of
a majority of outside directors on the Company's board of directors, resulting
in ineffective oversight in the establishment and monitoring of required
internal controls and procedures; (3) inadequate segregation of duties
consistent with control objectives; (4) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements; (5)
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters; (6)
ineffective controls over period end financial close and reporting processes;
and (7) inadequate procedures for appropriately identifying, assessing and
applying accounting principles. The aforementioned material weaknesses were
identified by our independent auditors in connection with the audit of our
financial statements as of December 31, 2005 and communicated to our management
through the Letter.
Management believes that the material weaknesses set forth in items (3), (4) and
(6) above did not have an affect on our financial results or any restatements
which have occurred. However, management believes that the lack of sufficient
and knowledgeable personnel to maintain appropriate accounting and financial
reporting organizational structure to support the activities of our company,
lack of a functioning audit committee and lack of a majority of outside
directors on our board of directors, resulting in ineffective oversight in the
establishment and monitoring of required internal controls and procedures,
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters, and
inadequate procedures for appropriately identifying, assessing and applying
accounting principles resulted in our determination to restate our financial
statements for the years ended December 31, 2004 and 2003. Specifically, the
material weaknesses specified in the preceding sentence resulted in management
determining that our previous accounting for our common stock purchase warrants
issued from 2003 to 2004 did not comply with Emerging Issues Task Force 00-19,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY
SETTLED IN A COMPANY'S OWN STOCK. As a result, we determined that the fair value
of the warrants should have been reclassified from additional paid in capital,
to a current liability, and that the warrant fair value should have been marked
to market as of the balance sheet date with the corresponding non-cash gain or
loss reflected in the results of operations. This resulted in us restating our
net loss for the fiscal year ended December 31, 2004 to $(8,752,000) compared to
$(5,383,000) as previously reported, and a net loss for the fiscal year ended
December 31, 2003 to $(5,839,000) compared to $(5,932,000) as previously
reported. In addition, total liabilities for the fiscal year ended December 31,
2004 and 2003 was restated to $6,464,000 and $1,431,000 respectively, compared
to $1,523,000 and $1,140,000, respectively, as previously reported.
In accordance with Exchange Act Rules 13a-15 and 15d-15, and after receipt of
the Letter, we have re-evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2005, March 31, 2006 and
September 30, 2006. Based upon this re-evaluation the Chief Executive Officer
and Chief Financial Officer have concluded that our current disclosure controls
and procedures are not effective in ensuring that the information required to be
disclosed is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rule and forms and is accumulated and
communicated to the our management, including our Chief Executive Officer (the
principal executive officer) and Chief Financial Officer (the principal
accounting and financial officer) as appropriate to allow timely decisions
regarding required disclosure.
We are committed to improving our financial organization. As part of this
commitment, we will create a segregation of duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function by the end of fiscal 2007 to resolve
non-routine or complex accounting matters. In addition, we will take the
following actions to enhance our internal controls, when funds are available to
us, which we expect to occur by the end of fiscal 2007:
i) Appointing one or more outside directors to our board of directors who shall
be appointed to the audit committee resulting in a fully functioning audit
committee who will undertake the oversight in the establishment and monitoring
of required internal controls and procedures. All compensation paid to board
members comes in the form of stock options that normally carry a value of less
than $10,000, which vest over a period of time;
ii) Preparing and implementing sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements,
which management estimates will cost approximately $65,000 per annum; and
iii) Hiring additional knowledgeable personnel with technical accounting
expertise to further support the current accounting personnel, which management
estimates will cost approximately $90,000 per annum.
Management believes that the appointment of one or more outside directors, who
shall be appointed to a fully functioning audit committee, will remedy the lack
of a functioning audit committee and a lack of a majority of outside directors
on our Board. In addition, management believes that preparing and implementing
sufficient written policies and checklists will remedy the following material
weaknesses (i) insufficient written policies and procedures for accounting and
financial reporting with respect to the requirements and application of US GAAP
and SEC disclosure requirements; (ii) ineffective controls over period end
financial close and reporting processes; and (iii) inadequate procedures for
appropriately identifying, assessing and applying accounting principles.
Further, management believes that hiring additional knowledgeable personnel with
technical accounting expertise will remedy the following material weaknesses:
(A) lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (B) inadequate segregation of duties consistent with
control objectives; and (C) ineffective personnel resources and technical
accounting expertise within the accounting function to resolve non-routine or
complex accounting matters.
Management believes that the hiring of additional personnel who have the
technical expertise and knowledge with the non-routine or technical issues we
have encountered in the past will result in both proper recording of these
transactions and a much more knowledgeable finance department as a whole. Due to
the fact that our accounting staff consists of a controller and an interim CFO,
additional personnel will also ensure the proper segregation of duties and
provide more checks and balances within the department. Additional personnel
will also provide the cross training needed to support us if personnel turn over
issues within the department occur. This coupled with the appointment of
additional outside directors will greatly decrease any control and procedure
issues the company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
We cannot assure you that we will be able to maintain adequate controls over our
financial processes and reporting. If we are unable to implement the remedial
actions we have not yet undertaken and generally maintain the effectiveness of
our disclosure controls and procedures and internal controls so as to insure
that all of the information required to be reported in our periodic reports was
recorded, processed, summarized, and reported, within the time periods specified
in the Commission's rules and forms, we will not be able to provide reliable
financial reports, our results of operations could be misstated and our
reputation may be harmed. Accordingly, any investment by you in our company
under these conditions could be speculative and risky.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENTS
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of September 1, 2006, we had 513,568,601 shares of common stock issued and
outstanding, secured convertible notes outstanding in the aggregate principal
amount of $970,000 under our July and August 2006 Subscription Agreements that
may be converted into an estimated 96,000,000 shares of common stock at current
market prices and outstanding warrants to purchase 91,239,173 shares of common
stock pursuant to our July and August 2006 Subscription Agreements. In addition,
the number of shares of common stock issuable upon conversion of the outstanding
secured convertible notes may increase if the market price of our stock
declines. All of the shares, including all of the shares issuable upon
conversion of the secured convertible notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible notes
under our July and August 2006 Subscription Agreements is essentially limitless.
The following is an example of the amount of shares of our common stock that are
issuable, upon conversion of our secured convertible notes (excluding accrued
interest), based on market prices 25%, 50% and 75% below the market price, as of
September 5, 2006 of $0.013.
12
Number of Shares
% Below Market Price Per Share Discount of 20% Issuable
-------------- --------------- --------------- -----------------
25% $.0098 $.0078 123,076,923
50% $.0065 $.0052 184,615,385
75% $.0033 $.0026 369,230,769
As illustrated, the number of shares of common stock issuable upon conversion of
our secured convertible notes will increase if the market price of our stock
declines, which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common stock at
a 20% discount to the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common stock as the
selling stockholders convert and sell material amounts of common stock could
have an adverse effect on our stock price. In addition, not only the sale of
shares issued upon conversion or exercise of secured convertible notes and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 9.99% of our
outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In July and August 2006, we entered into Subscription Agreements for the sale of
an aggregate of $550,000 and $420,000, respectively, principal amount of secured
convertible notes. The secured convertible notes are due and payable, with 6%
interest, two years from the date of issuance, unless sooner converted into
shares of our common stock. Any event of default such as our failure to repay
the principal or interest when due, our failure to issue shares of common stock
upon conversion by the holder, our failure to timely file a registration
statement or have such registration statement declared effective, breach of any
covenant, representation or warranty in the Subscription Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the secured convertible notes, including a
default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the secured convertible notes will be converted into shares
of our common stock, in accordance with the terms of the secured convertible
notes. If we were required to repay the secured convertible notes, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the notes when required, the note holders could commence
legal action against us and foreclose on all of our assets to recover the
amounts due. Any such action would require us to curtail or cease operations.
13
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the March, May, July and August 2006 Subscription Agreements,
we executed a Security Agreement in favor of the investors granting them a
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreement states that if an event of default
occurs under the Subscription Agreement, Secured Convertible Notes, Warrants, or
Security Agreement, the investors have the right to take possession of the
collateral, to operate our business using the collateral, and have the right to
assign, sell, lease or otherwise dispose of and deliver all or any part of the
collateral, at public or private sale or otherwise to satisfy our obligations
under these agreements.
RISKS RELATING TO OUR COMMON STOCK
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
14
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to exercise the
warrants on a cashless basis one year after the closing date if the shares of
common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholders
exercise the warrants on a cashless basis, then we will not receive any proceeds
from the exercise of those warrants.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the NASDAQ SmallCap Market on October 24,
2000, under the symbol ONEV. Our common stock is currently traded on The
Over-The-Counter Bulletin Board under the symbol ONEV.OB. The Over-The-Counter
Bulletin Board is sponsored by the National Association of Securities Dealers
(NASD) and is a network of security dealers who buy and sell stocks.
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
Year Ended December 31, 2004: High Low
----------------------------- -------- --------
First Quarter $ 0.05 $ 0.02
Second Quarter $ 0.22 $ 0.01
Third Quarter $ 0.16 $ 0.08
Fourth Quarter $ 0.12 $ 0.01
Year Ending December 31, 2005:
------------------------------
First Quarter $ 0.06 $ 0.04
Second Quarter $ 0.06 $ 0.03
Third Quarter $ 0.05 $ 0.03
Fourth Quarter $ 0.03 $ 0.02
Year Ending December 31, 2006:
------------------------------
First Quarter $ 0.05 $ 0.02
Second Quarter $ 0.04 $ 0.01
Third Quarter* $ 0.02 $ 0.01
* Through September 1, 2006.
HOLDERS
As of September 1, 2006, our common stock was held by 178 stockholders of
record and we had 513,568,601 shares of common stock issued and outstanding. We
believe that the number of beneficial owners is substantially greater than the
number of record holders because a significant portion of our outstanding common
stock is held of record in broker street names for the benefit of individual
investors. The transfer agent of our common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
We have not declared any dividends to date. We have no present intention of
paying any cash dividends on our common stock in the foreseeable future, as we
intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
We are a voice recognition technology company with over $43 million invested in
Research and Development and deployment of products in both the telecom and PC
multi-media markets. Our telecom solutions allow business and consumer phone
users to Voice Dial, Group Conference Call, Read and Send E-Mail and Instant
Message, all by voice. We offer PC Original Equipment Manufacturers (OEM's) the
ability to bundle a complete voice interactive computer assistant which allows
PC users to talk to their computers to quickly play digital media (music,
videos, DVD) along with read and send e-mail messages, SMS text messaging to
mobile phones, PC-to-Phone calling (VoIP) and PC-to-PC audio/video. We feel we
are strongly positioned across these markets with our patented voice technology.
We believe that the presence of voice technology as an interface in mobile
communications and PC computing is of paramount importance. Voice interface
technology makes portable communications products mobile, more effective and
safer to use and it makes communicating with a PC to play digital content, such
as music, videos and photos, easier for consumers. Our development efforts
currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone, directory assistance
and in-home digital media access.
In order to reduce expenditures, we have aggressively reduced its operating
expenses to a target of $160,000 per month beginning in November 2006. This
reduction has come from a series of measures including reduction in head-count
by eliminating all part-time workers, placing some full-time employees on
part-time status and reducing additional operating overhead. Given these cost
cutting measures, we feel we can better reach operationally break-even by
decreasing operating expenses while increasing our revenue stream.
16
TELECOM SECTOR
In the Telecom sector, we believe that the Mobile Messaging market, which has
both business and consumer market applications including: E-mail, Instant
Messages, and SMS (Short Message Service), is extremely large and is growing at
an astonishing rate. Billions of text messages are sent globally every year, and
messaging has also shown the consistent ability to generate significant revenue
for carriers. Our solutions enable users to send, intelligently route and
receive text messages using voice from any type of phone (wired or wireless)
anywhere in the world.
Our strategy, in the telecom sector, is to continue aggressive sales and
marketing activities for our voice solutions, which we believe, may result in
increased deployments and revenue stream. The product offerings will encompass
both MobileVoice(TM) suite of solutions as well as our ADA(TM) Alternative to
Directory Assistance(TM).
We have recently begun a trial-testing phase for our voice solutions with
Cingular Wireless. This trial is in joint cooperation with VeriSign. We
anticipate feedback from the trial by year-end 2006. If successful, this
opportunity could potentially lead to Cingular Wireless launching our services.
At this time we do not know if this will ever come to any material fruition.
We were recently selected by Lucent Technologies to jointly offer our
MobileVoice solutions in conjunction with Lucent services to national carriers.
We are currently working with Lucent to jointly present solutions to carrier
customers. At this time we do not know if this will ever come to any material
fruition.
We recently received a counter proposal from a large carrier in India for
MobileVoice services. We are currently negotiating terms with this carrier.
We recently received notice that our MobileVoice carrier customer Eloqui
Wireless was purchased by US Cellular and that US Cellular was discontinuing
Eloqui Wireless contracts for services including our MobileVoice service.
Subsequently, US Cellular agreed to buyout the remaining 22-month term of our
MobileVoice contract for a one-time payment of $250,000.
We recently signed a deployment contract with TELMEX for deployment of our
MobileVoice solutions to the over 18 million TELMEX subscribers throughout
Mexico. The anticipated launch is January 2007 beginning with TELMEX subsidiary
TELNOR with over 750,000 subscribers in northern Mexico. National rollout
throughout Mexico is anticipated to begin in May 2007 to the remaining 18
million TELMEX subscribers.
PC SECTOR
In the PC sector, we believe that digital in-home entertainment is rapidly
growing with the wide acceptance of digital photography, MP3 music and videos,
along with plasma and LCD TV's. We believe that companies including Apple,
Microsoft and Intel are actively creating products and technology, which allow
consumers to experience the next generation of digital entertainment. Our Media
Center Communicator(TM) product works with Microsoft Windows XP Media Center
Edition 2005 to add voice-navigation and a full suite of communication features
allowing consumers to talk to their Media Center PC to play music, view photo
slideshows, watch and record TV, place Voice-Over-IP (VoIP) phone calls, read
and send e-mail and Instant Message friends and family, all by voice.
17
Our strategy, in the PC Sector, is to continue our aggressive marketing efforts
to sign-up system integrators, such as those engaged in the business of home
theatre installation and value-added resellers under our reseller program
launched in 2005. We will continue to pursue OEMs for bundling agreements of our
Media Center Communicator product. These OEM agreements may include revenue
share business models as well as discounted individual user license fees. We
will continue to use industry associations, forums and tradeshow events such as
CES, CEDIA, EHX and Digital Life to promote awareness of our products and build
strategic alliances.
We anticipate having our Media Center Communicator bundled with a tier-one PC
manufacturer in January 2007 to coincide with the Windows Vista launch for new
PC purchases.
We recently were awarded a contract from Intel Corporation to co-develop
voice-enabled solutions for use with embedded and desktop devices. Intel has
selected our technology to be used as an integral part of these devices. This
contract is not anticipated generating material revenue for us given the narrow
niche market for these devices. We will continue to offer our technology and
services to Intel for additional contracts as they may come up from time to
time.
We have completed the design and prototyping of our Media Center remote control
and are now in discussions with retailers and distributors for purchasing
commitments. We have produced several evaluation units that are now under
evaluation by potential retailers and distributors. Given potential purchase
commitments, we will produce our remotes to fulfill these orders. We anticipate
the initial production run will cost approximately $50,000 to create the machine
tooling, plastics, electronics and assembly for the remotes. We will only go
into production given committed purchase orders to cover these manufacturing
costs. We anticipate this will happen over the next few months.
We recently wereawarded a contract from AT&T/SBC to develop next generation
voice activated remote controls for set-top box devices. This contract is
initially to develop several prototype remote control devices with a potential
production contract in 2007. This initial contract is a milestone for our
company which we believe proves that our technology is in-demand by large
customers and in conjunction with our pending patent in this area of remote
controls. Our goal is to create a market for voice enabled remote control
devices used for voice commands and VoIP (Voice-over-IP) communications (example
Skype and Vonage) that are covered in our pending patent and to license this
technology to remote control device manufacturers for use with CE devices, cable
and satellite set top boxes and Media Center computers.
18
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to impairment
of property, plant and equipment, intangible assets, deferred tax assets and
fair value computation using the Black Scholes option pricing model. We base our
estimates on historical experience and on various other assumptions, such as the
trading value of our common stock and estimated future undiscounted cash flows,
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions; however,
we believe that our estimates, including those for the above-described items,
are reasonable.
RESULTS OF OPERATIONS
The following table sets forth selected information from the statements of
operations for the three months ended September 30, 2006 and 2005.
SELECTED STATEMENT OF OPERATIONS INFORMATION
Three Months Ended
September 30,
2006 2005
----------- ------------
Gross revenues $ 151,952 $ 48,139
Cost of sales (17,449) (11,636)
General and administrative expenses (812,338) (756,972)
Other expense (86,301) (358,559)
----------- -----------
Net loss $ (764,136) $(1,079,028)
=========== ===========
DISCUSSION OF THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2005.
Gross revenues amounted to $152,000 and $48,000 for the three months ended
September 30, 2006 and 2005, respectively. The increase in revenues compared
with the prior year period resulted from the addition of three MobileVoice
customers and one Alternative to Directory Assistance customer.
General and administrative expenses increased to $812,000 for the three months
ended September 30, 2006 from $757,000 for the same period in 2005. Salary and
wage expense was $359,000 for the three months ended September 30, 2006 as
compared to $302,000 for the same period in 2005. Depreciation and amortization
expenses decreased to $31,000 for the three months ended September 30, 2006 from
$43,000 for the same period in the prior year, primarily due to the retirement
of fixed assets. Amortization and Depreciation expenses consisted of patent and
trademarks, computer equipment and software development fees. Interest expense
increased to $519,000 for the three months ended September 30, 2006, as compared
to $359,000 for the same period in the prior year. We had a net loss of
$(764,000), or basic and diluted net loss per share of $(.01), for the three
months ended September 30, 2006 compared to a net loss of $(1,079,000), or basic
and diluted net loss per share of $(0.01), for the same period in 2005.
19
NINE MONTH PERIOD IN 2006 COMPARED WITH NINE MONTH PERIOD IN 2005
Net revenue totaled $323,000 for the nine months ended September 30, 2006. Net
revenues totaled $82,000 for the nine months ended September 30, 2005.
General and administrative expenses increased to $2,766,000 for the nine months
ended September 30, 2006 ("2006 Period") from $2,395,000 for the nine months
ended September 30, 2005 ("2005 Period"). The net increase in operating expenses
over the 2005 Period was a result of the increase in stock option/compensation
expense license fee expense and legal/accounting expenses. Additionally, salary
and wage expense not including stock option compensation expense increased to
$1,108,000 for the 2006 Period as compared to $976,000 for the 2005 Period.
Depreciation and amortization decreased to $91,000 for the 2006 Period from
$139,000 for the 2005 Period.
Other income/(expense) decreased to $1,176,000 for the nine months ended
September 30, 2006 ("2006 Period") from $1,982,000 for the nine months ended
September 30, 2005 ("2005 Period"). The net decrease in other income/(expense)
over the 2005 Period was a direct result of a decrease in non-cash interest
expense associated with debt financing along non-cash gains associated with the
revaluation of warrants issued associated with debt financing. Non-cash interest
expense associated with debt financing decreased to $1,634,000 for the 2006
Period, as compared to $1,983,000 for the 2005 Period. We had a net loss of
$3,673,000 or basic and diluted net loss per share of $0.01 for the nine months
ended September 30, 2006 compared to a net loss of $4,311,000 or basic and
diluted net loss per share of $0.01 for the nine months ended September 30,
2005.
DISCUSSION OF THE YEAR ENDED DECEMBER 31, 2005 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 2004.
Revenues totaled $142,000 for the year ended December 31, 2005. Revenues of
$2,100 were earned for the year ended December 31, 2004. The recognition of
increased revenues for the year ended 2005 resulted primarily from work
performed in the MobileVoice/ADA sector.
Operating expenses decreased to $3,433,000 for the year ended December 31, 2005
from $3,734,000 for the same period in 2004.
Salary and wage expense was $1,326,000 for the year ended December 31, 2005 as
compared to $1,229,000 for the same period in 2004. Advertising and promotion
expense totaled $77,000 for the year ended December 31, 2005 as compared to
$27,000 for the same period in 2004. Advertising and promotion expense increase
resulted from us increasing our travel budget. Legal and consulting expenses
decreased to approximately $231,000 for the year ended December 31, 2005 from
approximately $263,000 for the same period in 2004. Depreciation and
amortization expenses decreased to approximately $172,000 for the year ended
December 31, 2005 from approximately $499,000 for the same period in the prior
year. Amortization and depreciation expenses consisted of patent and trademarks,
computer equipment, consultant fees, and tradeshow booth.
20
For the year ended December 31, 2005, other income was approximately $1,776,000
compared to other expense of approximately $5,018,000 for the same period in
2004. Other income (expenses) consisted of interest expense, settlement expense
and gain (loss) on warrant derivative liability. Interest expense increased to
approximately $2,487,000 for the year ended December 31, 2005, as compared to
approximately $1,650,000 for the same period in 2004, primarily due to a warrant
re-pricing in October 2005. Settlement expense increased to approximately
$760,000 for the year ended December 31, 2005, as compared to $0 for the same
period in 2004, due to a settlement agreement liability we entered into in the
beginning of 2006. Gain on warrant derivative increased to approximately
$5,070,000 for the year ended December 31, 2005, as compared to a loss of
approximately $3,369,000 for the same period in 2004, due to a change in warrant
valuation.
We had a net loss of $1,546,000 or basic and diluted net loss per share of $0.01
for the year ended December 31, 2005 compared to a net loss of $8,752,000 or
basic and diluted net loss per share of $0.05 for the same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, we had a negative working capital of $4,013,000 as
compared to a negative working capital of $3,731,000 at December 31, 2005..
Net cash used in operating activities was $2,217,000 for the 2006 Period
compared to $2,448,000 for the 2005 Period. We believe that our average monthly
cash requirements approximate $245,000.
Net cash used in investing activities was $108,000 for the 2006 Period compared
to $38,000 for the 2005 Period. During the nine months ended September 30, 2006,
cash was primarily used for capitalized computer equipment and patents.
Net cash provided by financing activities was $2,246,000 for the 2006 Period
compared to $2,274,000 for 2005 Period.
We incurred a net loss of $3,673,000 during the 2006 Period and had an
accumulated deficit of $46,337,000. Our losses through September 30, 2006
included interest and amortization expenses, development costs and operational
and promotional expenses.
FINANCING TRANSACTIONS
On August 18, 2004, we entered into a securities purchase agreement with four
accredited investors, Alpha Capital Aktiengesellschaft, Greenwich Growth Fund
Limited, Whalehaven Capital, LP and Whalehaven Fund Limited for the issuance of
7% convertible debentures in the aggregate amount of $700,000. The notes bear
interest at 7% (effective interest rate of 146% on the aggregate amount), mature
on August 18, 2007, and are convertible into our common stock, at the holders'
option, at the lower of (i) $0.085 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before August 18, 2007 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, we issued an aggregate of
7,063,774 warrants to the investors (3,531,887 Class A warrants and 3,531,887
Class B warrants). The Class A warrants are exercisable until August 18, 2009 at
a purchase price of $.0935 per share. The Class B warrants are exercisable until
August 18, 2009 at a purchase price of $.10625 per share. Net proceeds amounted
to approximately $621,000, net of debt issue cash cost of $79,000. The fair
value of the warrants of $323,000 using Black Scholes option pricing model and
the beneficial conversion feature of approximately $298,000 will be amortized
over the life of the debt using the interest method. Upon conversion of the
debt, unamortized debt issue costs are charged to expense.
On October 28, 2004, we entered into a securities purchase agreement with four
accredited investors, Alpha Capital Aktiengesellschaft, Stonestreet Limited
Partnership, Ellis International Ltd. and Momona Capital Corp. for the issuance
of 7% convertible debentures in the aggregate amount of $596,000. The notes bear
interest at 7% (effective interest rate of 100% on the aggregate amount), mature
on October 28, 2007 and are convertible into our common stock, at the holders'
option, at the lower of (i) $0.074 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before October 28, 2007 without the consent of the
holder. The full principal amount of the convertible note is due upon default
under the terms of convertible notes. In addition, we issued an aggregate of
11,825,398 Class A warrants and 11,825,398 Class B warrants to the investors.
The warrants are exercisable until October 28, 2009 at a purchase price of $0.07
per share. Net proceeds amounted to approximately $532,000, net of debt issue
cash cost of $64,000. The relative value (limited to the face amount of the
debt) of all the warrants of $276,000 using Black Scholes option pricing model
and the beneficial conversion feature of approximately $319,000 will be
amortized over the life of the debt using the interest method. Upon conversion
of the debt mentioned above, any unamortized debt issue costs will be charged to
expense.
21
On December 23, 2004, we entered into a securities purchase agreement with Alpha
Capital Aktiengesellschaft, Stonestreet Limited Partnership, Ellis International
Ltd. and Momona Capital Corp. for the issuance of 7% convertible debentures in
the aggregate amount of $894,000. The notes bear interest at 7% (effective
interest rate of 100% on the aggregate amount), mature on December 23, 2007 and
are convertible into our common stock, at the holders' option, at the lower of
(i) $0.074 or (ii) 80% of the average of the three lowest closing bid prices for
the common stock on a principal market for the 30 trading days before but not
including the conversion date. The note may not be paid, in whole or in part,
before December 23, 2007 without the consent of the holder. The full principal
amount of the convertible note is due upon default under the terms of
convertible notes. In addition, we issued an aggregate of 22,183,622 Class A
warrants and 22,183,622 Class B warrants to the investors. The warrants are
exercisable until December 23, 2009 at a purchase price of $0.07 per share. Net
proceeds amounted to approximately $835,000, net of debt issue cash cost of
$59,000. The relative value (limited to the face amount of the debt) of all the
warrants of $682,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $210,000 will be amortized over the life of
the debt using the interest method. Upon conversion of the debt mentioned above,
any unamortized debt issue costs will be charged to expense.
On March 18, 2005, we held our first closing pursuant to a subscription
agreement we entered into with several accredited investors as of March 18,
2005, pursuant to which the investors subscribed to purchase an aggregate
principal amount of $2,000,000 in 6% convertible promissory notes, and 100 Class
A and Class B common stock purchase warrants for each 100 shares which would be
issued on each closing date assuming full conversion of the convertible notes
issued on each such closing date. We received $1,000,000 of the purchase price
on the initial closing date of March 18, 2005 and received an additional
$1,000,000 of the purchase price pursuant to the second closing (as described
below). The convertible notes bear simple interest at 6% per annum payable June
1, 2005 and semi-annually thereafter and mature 3 years after the date of
issuance. Each investor shall have the right to convert the convertible notes
after the date of issuance at any time, until paid in full, at the election of
the investor into fully paid and nonassessable shares of our common stock. The
conversion price per share shall be the lower of (i) $0.047 or (ii) 80% of the
average of the three lowest closing bid prices for our common stock for the 30
trading days prior to, but not including, the conversion date. We issued an
aggregate of 29,069,768 Class A common stock purchase warrants and 29,069,768
Class B common stock purchase warrants to the investors, representing 100 Class
A and Class B warrants issued for each 100 shares which would be issued on each
closing date assuming full conversion of the convertible notes issued on each
such closing date. The Class A warrants are exercisable until four years from
the initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The holder of the Class B warrants will be
entitled to purchase one share of common stock upon exercise of the Class B
warrants for each share of common stock previously purchased upon exercise of
the Class A warrants.
On July 13, 2005, we held our second closing pursuant to the Subscription
Agreement we entered into with several accredited investors dated as of March
18, 2005. On the second closing date, we received approximately $935,000, net of
debt issue cash cost of approximately $65,000. The convertible notes bear simple
interest at 6% per annum payable upon each conversion, June 1, 2005 and
semi-annually thereafter and mature 3 years after the date of issuance. Each
investor shall have the right to convert the convertible notes after the date of
issuance and at any time, until paid in full, at the election of the investor
into fully paid and nonassessable shares of our common stock. The conversion
price per share shall be the lower of (i) $0.043 or (ii) 80% of the average of
the three lowest closing bid prices for our common stock for the 30 trading days
prior to, but not including, the conversion date as reported by Bloomberg, L.P.
on any principal market or exchange where our common stock is listed or traded.
We issued an aggregate of 38,461,537 Class A common stock purchase warrants and
38,461,537 Class B common stock purchase warrants to their investors. The Class
A warrants are exercisable until four years from the initial closing date at an
exercise price of $0.045 per share. The Class B warrants are exercisable until
four years from the initial closing date at an exercise price of $0.06 per
share. The fair value of the warrants of approximately $675,000 using Black
Scholes option pricing model and the beneficial conversion feature of
approximately $325,000 will be amortized over the life of the debt using the
interest method.
On January 24, 2006, we issued nonstatutory options to purchase an aggregate of
57,200,000 shares of our common stock at a price equal to $0.016 per share to
certain of our employees, directors and consultants. The aforementioned options
were issued pursuant to our 2005 Stock Incentive Plan.
On February 15, 2006, we voluntarily determined to reduce the exercise prices of
29,069,968 Class A warrants issued pursuant to the first closing of our March
2005 Subscription Agreement from an exercise price of $0.02 to $0.014 per share.
On March 16, 2006, we held a closing with one accredited investor pursuant to
which the investor subscribed to purchase an aggregate of 3,000,000 shares of
restricted common stock for a total purchase price of $60,000. In addition, the
investor received an aggregate of 3,000,000 Class A common stock purchase
warrants and 3,000,000 Class B common stock purchase warrants. The Class A
warrants are exercisable until four years from the closing date at an exercise
price of $0.045 per share. The Class B warrants are exercisable until four years
from the closing date at an exercise price of $0.06 per share. The holder of the
Class B warrants will be entitled to purchase one share of common stock upon
exercise of the Class B warrants for each share of common stock previously
purchased upon exercise of the Class A warrants.
On March 20, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several accredited and/or qualified
institutional investors dated as of dated as of March 17, 2006, pursuant to
which the investors subscribed to purchase an aggregate principal amount of
$700,000 in 6% secured convertible promissory notes and one Class A common stock
purchase warrant for each one share which would be issued on the closing date
assuming full conversion of the secured convertible notes issued on the closing
date.
21
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance and at any time, until paid
in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.043 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,010,000 which we issued on March 18, 2005 and July 13,
2005, December 2004 and March 2006 to certain of the investors participating in
this new private placement.
We issued an aggregate of 50,972,111 Class A common stock purchase warrants to
the investors, representing one Class A warrant issued for each one share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.045 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
On May 5, 2006, we held a closing pursuant to a subscription agreement we
entered into with several accredited investors as of May 5, 2006, pursuant to
which the investors subscribed to purchase an aggregate principal amount of
$324,000 in 6% convertible promissory notes.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance at any time, until paid in
full, at the election of the investor into fully paid and nonassessable shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.043 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. The conversion price is adjustable in the
event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the conversion price of the secured convertible notes will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets. Our
obligation to repay all principal, and accrued and unpaid interest under the
convertible notes is secured by all of our assets pursuant to a certain Security
Agreement dated as of February 16, 2006, which also secures the remaining
principal amount of our convertible notes in the aggregate amount of $225,000
which we issued on March 18, 2005, July 13, 2005 and March 20, 2006 to certain
of the investors participating in this new private placement.
On July 6 and August 29, 2006, we completed a private placement pursuant to
Subscription Agreements which we entered into with several accredited and/or
qualified institutional investors pursuant to which the investors subscribed to
purchase an aggregate principal amount of $550,000 and $420,000, respectively,
in 6% secured convertible promissory notes and 1 Class A common stock purchase
warrant for each 1share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum payable
August 1, 2006 and semi-annually thereafter, and mature 2 years after the date
of issuance. Each investor shall have the right to convert the secured
convertible notes after the date of issuance and at any time, until paid in full
into shares of our common stock. The conversion price per share shall be the
lower of (i) $0.015 or (ii) 80% of the average of the three lowest closing bid
prices for our common stock for the 30 trading days prior to, but not including,
the conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated February 16, 2006, which also
secures the remaining principal amount of our convertible notes in the aggregate
amount of $1,817,354 which we issued on March 18, 2005 July 13, 2005 March 17,
2006 May 5, 2006 July 6, 2006 and August 29, 2006 to certain of the investors
participating in this new private placement.
22
We anticipate maintaining a cash balance through our financial partners that
will sustain operations through December 2006. We continue to rely heavily on
our current method of convertible debt and equity funding, which has financed us
since 2001, until we are operationally cash flow positive. The losses through
the quarter ended September 30, 2006 were due to minimal revenue and our
operating expenses, with the majority of expenses in the areas of: salaries,
legal fees, consulting fees, as well as amortization expense relating to
software development, debt issue costs and beneficial conversion features. We
face considerable risk in completing each of our business plan steps, including,
but not limited to: a lack of funding or available credit to continue
development and undertake product rollout; potential cost overruns; a lack of
interest in its solutions in the market on the part of wireless carriers or
other customers; potential reduction in wireless carriers which could lead to
significant delays in consummating revenue bearing contracts; and/or a shortfall
of funding due to an inability to raise capital in the securities market. Since
further funding is required, and if none is received, we would be forced to rely
on our existing cash in the bank or secure short-term loans. This may hinder our
ability to complete our product development until such time as necessary funds
could be raised. In such a restricted cash flow scenario, we would delay all
cash intensive activities including certain product development and strategic
initiatives described above.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
DESCRIPTION OF BUSINESS
INTRODUCTION
We are a voice recognition technology company with over $43 million invested in
Research and Development and deployment of more than 20 million products
worldwide in seven languages. To date, our customers include: Walt Disney
Internet Group, Warner Home Video, Golden State Cellular, Inland Cellular,
Eloqui Wireless, Cell One of Amarillo, Panhandle Telephone Cooperative, Plateau
Wireless, West Central Wireless, Telispire PCS, NewEgg.com, PC Alchemy, CompUSA,
Dell.com and Cannon PC. Based on our patented technology, we offer voice
solutions for the Telecom and Interactive Multimedia markets. Our telecom
solutions allow business and consumer phone users to voice dial, group
conference call, read and send e-mail and instant message, all by voice. We
offer PC Original Equipment Manufacturers (OEM's) the ability to bundle a
complete voice interactive computer assistant which allows PC users to talk to
their computers to quickly play digital media (music, videos, DVD) along with
read and send e-mail messages, SMS text messaging to mobile phones, PC-to-Phone
calling (VoIP) and PC-to-PC audio/video. We believe that we are strongly
positioned across these markets with our patented voice technology.
We are listed on the Over-The-Counter Bulletin Board under the symbol "ONEV". We
are incorporated in the State of Nevada and we commenced operations on July 14,
1999. Our principal executive offices are located at 4275 Executive Square,
Suite 200, La Jolla, California 92037, and our telephone number is (858)
552-4466.
MARKET OPPORTUNITY
We believe that the presence of voice technology as an interface in mobile
communications and PC computing is of paramount importance. Voice interface
technology makes portable communications products mobile, more effective and
safer to use and it makes communicating with a PC to play digit content, such as
music, videos and photos, easier for consumers. Our development efforts
currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone and in-home digital
media access.
In the Telecom sector, we believe that the mobile messaging market, which has
both business and consumer market applications including: e-mail, instant
messages, and SMS (Short Message Service), is extremely large and is growing at
a rapid rate. Over six trillion text messages are sent globally every year, and
messaging has shown the consistent ability to generate significant revenue for
wireless carriers. Our solutions enable users to send, intelligently route and
receive text messages using voice from any type of phone (wired or wireless)
anywhere in the world.
In the PC sector, we believe that digital in-home entertainment is rapidly
growing with the wide acceptance of digital photography, MP3 music and videos,
along with plasma and LCD TV's. Companies including Apple, Microsoft and Intel
are actively creating products and technology, which allows consumers to
experience the next generation of digital entertainment. Our Media Center
Communicator product works with Microsoft Windows XP Media Center Edition 2005
to add voice-navigation and communication features allowing consumers to talk to
their Media Center PC to play music, view photo slideshows, watch and record TV,
place Voice-Over-IP (VoIP) phone calls, read and send e-mail and instant
messages, all by voice.
ONE VOICE PRODUCTS
MOBILEVOICE PLATFORM
Our messaging and voice-activated dialing applications are built on our
MobileVoice(TM) platform, which combines patented natural language speech
processing with the scalability, redundancy and fault-tolerance of a server
based, telco-ready architecture. The result is a completely integrated solution
that allows people to:
o Send free-format voice-to-text messages;
o Make voice-activated dialing calls; and
o Access E-mail from mobile environments - using voice.
23
MOBILEVOICE ACTIVATED DIALING(TM)
MobileVoice Activated Dialing is server-based and we believe it delivers higher
levels of accuracy and reliability than other solutions on the market today. It
was designed with a high capacity for contact lists, advanced functionality such
as synchronization and import tools that interface with Microsoft Outlook and
Lotus Notes, and we believe it requires less setup time than other solutions. It
was designed to meet the challenges of today's mobile environments while
delivering high accuracy for native and non-native speaking individuals.
We believe an opportunity exists for the adoption of MobileVice Activated
Dialing by wireless carriers, as more safety legislation is introduced for hands
free communications while operating motor vehicles. MobileVice Activated Dialing
allows a user to place calls to members of a contact list using voice commands
while employing safe driving techniques.
MOBILECONFERENCE(TM)
On-the-fly group conferencing is a new addition to our MobileVoice solution.
MobileConference allows users to connect up to 64 people on a single conference
call by speaking their name, group name or phone number.
MOBILEVOICE EMAIL(TM)
A unique Voice-to-Text Email solution that let's subscribers send free-form
email messages to PCs, mobile phones or wireless alphanumeric paging devices
while on the road. Available for English and Spanish it delivers some of the
highest levels of accuracy in the industry.
MOBILEVOICE SMS(TM)
Short Message Service (SMS) has gained wide popularity in major markets
throughout the world. MobileVoice SMS is a mobile Voice-to-Text SMS solution
that let's subscribers send free-form messages from phone-to-phone with only
their voice. Subscribers can avoid triple-tapping their text messages by
dictating the message through the MobileVoice SMS interface. Subscribers can
send messages within network or to subscribers on other networks.
MOBILEVOICE INSTANT MESSAGING(TM)
Instant messaging has long been a popular way for friends and colleagues to
communicate on their computers. MobileVoice Instant Messaging takes instant
messaging mobile, allowing people to chat and send quick messages using free
form dictation. Targeted at subscribers and enterprise customers, MobileVoice
Instant Messaging allows for voice based instant communications in mobile
environments.
MOBILEVOICE VOICE MAIL(TM)
MobileVoice Voice Mail lets subscribers record and send messages in their own
voice. The voice recording of a message will be sent as an e-mail attachment to
the recipient or group of recipients. These messages may be retrieved from any
computer or phone.
MOBILEVOICE EMAIL READER(TM)
MobileVoice Email Reader allows subscribers to fully manage their Email accounts
from any phone. Subscribers can sort and find important messages from specific
contacts. The MobileVoice Email Reader offers management tools such as "Reply",
"Reply to "All", "Forward", "Skip" and "Delete" functionality. Subscribers can
access personal and corporate Email accounts from any phone.
MEDIACENTER COMMUNICATOR VERSION 2
Media Center Communicator Version 2 uses voice recognition to control Windows(R)
XP Media Center Edition 2005. Features include:
o Voice Navigate Windows XP Media Center Edition 2005;
o Send e-mail;
o Read e-mail;
o SMS text messaging;
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o Text instant messaging;
o PC-to-PC calls;
o Video conferencing; and
o PC-to-Phone calling.
COMMUNICATOR VOICE NAVIGATION
We believe that our Media Center Communicator(TM) Version 2 makes managing
digital content easier and more efficient by using voice recognition technology.
The user can play a particular song by saying its title, watch TV, read and send
e-mail, place a phone call from a PC or instant message a friend using intuitive
voice commands. Media Center Communicator(TM) Version 2 eliminates the need to
navigate through numerous drop down menus to access favorite content which we
believe makes the experience faster and more user friendly. The request of a
particular song or artist can be done without turning on the television.
Our Media Center Communicator utilizes an open microphone solution where the
user has the ability to control his/her media center without using a remote
control. It can be set up whereby a microphone is constantly scanning the room
for a keyword that the user has set. The keyword is a personalized system name
used whenever the user wishes to make a command. The default is "One Voice."
Example: "One Voice, play artist The Rolling Stones."
COMMUNICATOR E-MAIL
Communicator's E-Mail reader will speak the user's E-Mail messages to him/her
eliminating the need to use confining keyboard and mouse interfaces. The user
has the ability to control everything using only voice. Communicator's E-Mail
reader works with widespread E-Mail accounts, including, but not limited to,
Yahoo, EarthLink, Lycos, and SBC.
COMMUNICATOR PC-TO-PHONE
Media Center Communicator's PC-to-phone calling allows full-duplex, high quality
phone calling to preset contacts or keyed entries.
COMMUNICATOR INSTANT MESSENGER
Media Center Communicator's Instant Messenger allows for online chat sessions
with other users on our network. Users can text message, talk or video chat
using Communicator's high quality, full-duplex PC-to-PC audio and video.
COMMUNICATOR SMS TEXT MESSAGING
Media Center Communicator(TM) allows the user to send a quick message to someone
on the road. Users can send SMS text messages to cellular telephones by speaking
the name of a contact or entering the cellular phone number, entering or
speaking the message and saying the "Send" command.
PATENT PROTECTION
We own exclusive rights to three United States patents on our software. We have
filed for international patent protection as well. These patents define the
primary features and unique procedures that comprise our products and solutions.
Our future success and ability to compete depends in part upon the proprietary
technology and trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
Additionally, there can be no assurances that others will not develop market and
sell products substantially equivalent to our products or utilize technologies
similar to those used by us. Although we believe that our products do not
infringe on any third-party patents and our patents offer sufficient protection,
there can be no assurance that we will not become involved in litigation
involving patents or proprietary rights. Patent and proprietary rights
litigation entails substantial legal and other costs, and there can be no
assurance that we will have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to our rights to our intellectual property may
require our management to redirect its resources to address these claims, which
could have a material adverse effect on our business, financial condition and
results of operations.
25
EMPLOYEES
At September 1, 2006, we employed 11 full-time employees and 4
consultant/part-time employees. None of these employees is subject to a
collective bargaining agreement, and there is no union representation within our
company. We maintain various employee benefit plans and believe our employee
relations are good.
DESCRIPTION OF PROPERTY
Our headquarters are located at 4275 Executive Square, Suite 200, La Jolla,
California. We lease our facility under a lease that expires in November 2010.
The size of our office is 5,162 square feet. Rent expense, net of sublease
income, amounted to $193,503 for the year ended December 31, 2005.
LEGAL PROCEEDINGS
There has been no bankruptcy, receivership or similar proceedings.
There have been no material reclassifications, mergers, consolidations, or
purchase or sale of a significant amount of assets not in the ordinary course of
business.
As previously disclosed to the public in our reports filed with the Securities
and Exchange Commission, we were the subject of a legal proceeding in the San
Diego County Superior Court (the "Court") entitled La Jolla Cove Investors, Inc.
("La Jolla") vs. One Voice Technologies, Inc., Case No. GIC850038 (the "Action")
which was filed with the Court for an unspecified amount of damages. La Jolla
held our convertible debentures related to our past financings. La Jolla claimed
that we failed to honor its conversion notices resulting in damages. La Jolla
filed a similar suit in 2004 and dismissed the suit after we transferred shares
pursuant to conversion notices and an interim settlement agreement. In
particular, we agreed to and did register 8,425,531 shares of our common stock
to honor the past conversion notice and an additional 8,425,531 shares pursuant
to such interim settlement agreement. Part of the resolution of the first
lawsuit restrained La Jolla from tendering additional conversion notices for a
specified period of time. During that time period, La Jolla requested that we
amend the terms of the outstanding debentures, but we refused to do so. We
tendered back the outstanding debenture amounts to La Jolla on two occasions. We
secured alternative financing and did not honor further conversion notices from
La Jolla. The Action was thereafter commenced by La Jolla.
On January 6, 2006, La Jolla and the Company entered into a Settlement Agreement
and Mutual Release (the "Settlement Agreement") in which La Jolla and we agreed
to forever settle, resolve and dispose of all claims, demands and causes of
action asserted, existing or claimed to exist between the parties because of or
in any way related to the Action. Under the Settlement Agreement, La Jolla and
the Company agreed that the parties shall bear their own costs and attorney's
fees associated with the Action. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the
execution of the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006.
Interest accrued on the $400,000 unpaid balance at 8% per annum commencing on
the date of the Settlement Agreement until paid in full. Because payment of
$400,000 was not made within 30 days of its due date (June 6, 2006), La Jolla is
entitled to enter a judgment against us for the unpaid balance, plus accrued
interest and $100,000, upon the filing of a declaration of default by La Jolla.
We have currently negotiated a settlement agreement on August 17, 2006 with a
revised monthly payment plan of $50,000 to be paid per month commencing Sept.
15, 2006 and 50,000 due thereafter on every 15th of the following month until
the obligation is paid in full. The conditions of the new agreement contain a 10
day grace period for late payment, if this 10 day grace period is violated the
result is a $25,000 penalty. We failed to make the payment of $50,000 on October
15, 2006 and failed to make the payment by the grace period due October 25, 2006
resulting in a $25,000 penalty. We are currently attempting to renegotiate
payment terms of the settlement agreement to prevent entry of judgment.
26
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information about our executive officers, key
employees and directors as of September 1, 2006.
Name Age Position
---- --- --------
Dean Weber 44 Chairman of the Board, President, Chief
Executive Officer, Interim Chief Financial
Officer and Director
Bradley J. Ammon 42 Director
Rahoul Sharan 44 Director
Directors serve until the next annual meeting and until their successors are
elected and qualified. Officers are appointed to serve for one year until the
meeting of the board of directors following the annual meeting of stockholders
and until their successors have been elected and qualified. There are no family
relationships between any of our directors or officers.
The principal occupations for the past five years (and, in some instances, for
prior years) of each of our executive officers and directors, followed by our
key employees, are as follows:
DEAN WEBER - CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF EXECUTIVE OFFICER, INTERIM
CHIEF FINANCIAL OFFICER AND DIRECTOR. Dean Weber brings an extensive background
to our company with over 20 years of technology and management experience. He is
responsible for developing our strategic vision and pioneering our products,
patented technology and business strategies. He was elected to our Board of
Directors in July of 1999 as Chairman. Before founding our company in 1998, Mr.
Weber played key roles in many high profile technology companies including
Northrop, United Technologies and Xerox. Throughout his career, Mr. Weber has
developed a comprehensive knowledge of Human Computer Interaction, Cognitive
Science, Artificial Intelligence and Natural Language Processing. Mr. Weber
currently has numerous patents in Artificial Intelligence, Natural Language
Processing and other related technologies. As our CEO, Mr. Weber has been
instrumental in the growth and development of the company, successfully raising
over $30 million of institutional funding, taking us public, winning the
Deloitte and Touche Technology Fast 50 award, and has been featured in Forbes,
Time, and on CNN. Mr. Weber holds a Bachelor of Science degree in Computer
Science from Central Connecticut State University.
BRADLEY J. AMMON - DIRECTOR. Bradley J. Ammon is a tax attorney in the
Washington, D.C. office of Deloitte Tax LLP. Mr. Ammon specializes in
international tax planning, including restructuring of international operations,
domestic mergers and acquisitions, and developing business plans to minimize
worldwide taxation. Prior to joining the firm, Mr. Ammon was with SAIC as an
International Tax Manager. He previously was with KPMG, LLP in the International
Corporate Services department since 1998 where his principal practice consisted
of clients in the information, communications and entertainment ("ICE")
industry. Prior to joining KPMG, Mr. Ammon worked from 1995 to 1998 at Deloitte
& Touche, LLP in their tax services department where he provided corporate,
partnership, and personal tax and business planning services to clients. Mr.
Ammon also worked several years as a staff accountant where his responsibilities
included the compilation and consolidation of monthly financial statements for
multiple subsidiaries. Mr. Ammon has a Juris Doctor and a Master's of Law in
taxation (LL.M.) from the University of San Diego, and received his
undergraduate degree from the University of California, San Diego. He is
admitted to the California Bar. Mr. Ammon was appointed to our Board on June 9,
2000.
RAHOUL SHARAN - DIRECTOR. Rahoul Sharan brings over 18 years of finance and
accounting experience to our company. He was elected to our Board of Directors
in July of 1999. Prior to joining our, Mr. Sharan was a partner of the S&P
Group, which specializes in investment financing for venture capital projects,
real estate development and construction. At S&P Group, Mr. Sharan led the
successful financing efforts for over 15 companies in several industries. Mr.
Sharan was also the President of KJN Management Ltd., which provides a broad
range of administrative, management and financial services. He also worked in
public accounting for six years with Coopers & Lybrand. At C&L, Mr. Sharan
worked in both the tax and audit groups for a wide variety of large and small
clients. Mr. Sharan holds a Bachelor of Commerce degree from the University of
British Columbia and is a member of the Institute of Chartered Accountants of
British Columbia.
27
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 2005, there were certain directors, officers
or beneficial owners of more than 10 percent of any class of our equity
securities registered pursuant to Section 12 of the Exchange Act that failed to
file on a timely basis, reports required by Section 16(a) of the Exchange Act
during the year ended December 31, 2005. With the exception of the Form 4 filed
for Dean Weber on December 5, 2005, none of our officers or Directors have filed
form 4's which they were required to file for fiscal year ended December 31,
2005. The aforementioned is based solely upon a review of Form 3, Form 4 and
Form 5 filings furnished to us during the year ended December 31, 2005, certain
written representations and shareholders who, to the best of our knowledge, hold
10 percent or more of our shares.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE. As set forth in the Audit Committee Charter adopted by the
Board of Directors, a copy of which is included in our Definitive Proxy
Statement filed with the SEC on November 29, 2001 as Exhibit A, the primary
function of the Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing (1) the financial
information provided to shareholders and others, (2) systems of internal
controls established by management and the Board of Directors and (3) the audit
process. The primary function of the Compensation Committee is to establish and
administer our executive compensation programs. Mr. Bradley J. Ammon is a member
of both committees and is "independent" as that term is defined in Rule
4200(a)(14) of the National Association of Securities Dealers' listing
standards.
The Audit Committee has reviewed our audited financial statements for fiscal
2005 and discussed them with management.
Our independent auditors, Peterson & Company, LLP, have communicated with the
Audit Committee matters such as the auditors' role and responsibility in
connection with an audit of our financial statements, significant accounting
policies, the reasonableness of significant judgments and accounting estimates,
significant audit adjustments, and such other matters as are required to be
communicated with the Audit Committee under generally accepted auditing
standards.
The Audit Committee has received from Peterson & Company, LLP written
disclosures regarding all relationships between Peterson & Company, LLP and its
related entities and us and our related entities that in the professional
judgment of Peterson & Company, LLP may reasonably be thought to bear on
independence. Peterson & Company, LLP has confirmed that, in its professional
judgment, it is independent of the Company within the meaning of the Securities
Act of 1933, as amended, and the Audit Committee has communicated such matters
with Peterson & Company, LLP.
The Audit Committee, based on the review and discussions above, recommended to
the Board of Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005 for filing with the Securities and Exchange Commission.
Director Bradley J. Ammon serves as the sole member of our Audit Committee. The
Board of Directors believes that Mr. Ammon qualifies as an "Audit Committee
Financial Expert" as that term is defined by applicable SEC rules.
GOVERNANCE AND NOMINATING COMMITTEE. The Board of Directors has established a
Governance and Nominating Committee for purposes of nominating directors and for
all other purposes outlined in the Governance and Nominating Committee Charter,
including nominees submitted to the Board of Directors by shareholders. The
Governance and Nominating Committee is composed of Bradley Ammon. The Board has
determined that each of the members of the Governance and Nominating Committee
is unrelated, an outside member with no other affiliation with us and
independent as defined by the American Stock Exchange.
NOMINATION OF DIRECTORS
As provided in its charter and our company's corporate governance principles,
the Governance and Nominating Committee is responsible for identifying
individuals qualified to become directors. The Governance and Nominating
Committee seeks to identify director candidates based on input provided by a
number of sources, including (1) the Governance and Nominating Committee
members, (2) our other directors, (3) our stockholders, (4) our Chief Executive
Officer or Chairman, and (5) third parties such as professional search firms. In
evaluating potential candidates for director, the Nominating and Corporate
Governance Committee considers the entirety of each candidate's credentials.
Qualifications for consideration as a director nominee may vary according to the
particular areas of expertise being sought as a complement to the existing
composition of the Board of Directors. However, at a minimum, candidates for
director must possess:
28
o high personal and professional ethics and integrity;
o the ability to exercise sound judgment;
o the ability to make independent analytical inquiries;
o a willingness and ability to devote adequate time and
resources to diligently perform Board and committee duties;
and
o the appropriate and relevant business experience and acumen.
In addition to these minimum qualifications, the Governance and Nominating
Committee also takes into account when considering whether to nominate a
potential director candidate the following factors:
o whether the person possesses specific industry expertise and
familiarity with general issues affecting our business;
o whether the person's nomination and election would enable the
Board to have a member that qualifies as an "audit committee
financial expert" as such term is defined by the Securities
and Exchange Commission (the "SEC") in Item 401 of Regulation
S-K;
o whether the person would qualify as an "independent" director
under the listing standards of the American Stock Exchange;
o the importance of continuity of the existing composition of
the Board of Directors to provide long term stability and
experienced oversight; and
o the importance of diversified Board membership, in terms of
both the individuals involved and their various experiences
and areas of expertise.
Governance and Nominating Committee will consider director candidates
recommended by stockholders provided such recommendations are submitted in
accordance with the procedures set forth below. In order to provide for an
orderly and informed review and selection process for director candidates, the
Board of Directors has determined that stockholders who wish to recommend
director candidates for consideration by the Governance and Nominating Committee
must comply with the following:
o The recommendation must be made in writing to the Corporate
Secretary, Dean Weber.
o The recommendation must include the candidate's name, home and
business contact information, detailed biographical data and
qualifications, information regarding any relationships
between the candidate and the Company within the last three
years and evidence of the recommending person's ownership of
our common stock.
o The recommendation shall also contain a statement from the
recommending shareholder in support of the candidate;
professional references, particularly within the context of
those relevant to Board membership, including issues of
character, judgment, diversity, age, independence, expertise,
corporate experience, length of service, other commitments and
the like; and personal references.
29
o A statement from the shareholder nominee indicating that such
nominee wants to serve on the Board and could be considered
"independent" under the Rules and Regulations of the American
Stock Exchange and the Securities and Exchange Commission
("SEC"), as in effect at that time.
All candidates submitted by stockholders will be evaluated by the Governance and
Nominating Committee according to the criteria discussed above and in the same
manner as all other director candidates.
DIRECTOR COMPENSATION
Non-employee directors receive $1,000 for each Board of Directors meeting
attended. We pay all out-of-pocket expenses of attendance.
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
No executive officer, director or any member of these individuals' immediate
families or any corporation or organization with whom any of these individuals
is an affiliate is or has been indebted to us since the beginning of our last
fiscal year.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and directors.
LEGAL PROCEEDINGS
As of the date of this prospectus, there are no material proceedings to which
any of our directors, executive officers, affiliates or stockholders is a party
adverse to us.
CODE OF ETHICS
We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation
S-B of the Securities Exchange Act of 1934. This Code of Ethics applies to our
chief executive officer and our senior financial officers.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation (including cash bonuses)
paid or accrued by us for our years ended December 31, 2005, 2004 and 2003 to
our Chief Executive Officer and our four most highly compensated officers other
than the Chief Executive Officer at December 31, 2005.
SUMMARY COMPENSATION TABLE
Annual Long-term
Compensation Compensation
----------------------- --------------------------
Awards Payouts
-------------- -----------
Securities
Underlying LTIP All Other
Fiscal Salary Bonus Options/ Payouts Compensation
Name and Principal Position Year ($) ($) SARs (#) ($) ($)
------------------------------------- --------- ------------ ---------- -------------- ----------- ----------------
Dean Weber 2005 277,000 -- -- -- --
Chief Executive Officer 2004 252,000 -- -- -- --
2003 241,629 -- -- -- --
James Hadzicki 2005 136,250 -- -- -- --
Chief Financial Officer 2004 120,000 -- -- -- --
2003 113,123 -- -- -- --
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OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR
No individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director during our fiscal year ended December 31,
2005.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
No individual exercises of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made by executive
officer or any director during our fiscal year ended December 31, 2005.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
We had no long-term incentive plans and made no stock awards during our fiscal
year ended December 31, 2005.
However, on July 29, 2005, we adopted the 2005 Stock Incentive Plan and reserved
60,000,000 shares of our common stock for issuance under the 2005 Plan.
EMPLOYMENT AGREEMENT
On February 15, 2006, we entered into an Employment Agreement with Dean Weber,
our Chief Executive Officer. Pursuant to the Employment Agreement, we will
employ Mr. Weber unless the Agreement is terminated by either party as set forth
therein. Mr. Weber will be paid an annual base salary of $282,000 (the "Base
Salary"). In addition, Mr. Weber will be eligible to earn an annual cash bonus
as may be deemed appropriate by our Board of Directors. Further, Mr. Weber may
be awarded incentive stock options pursuant to the Company's stock option plan
as may be deemed appropriate by our Board of Directors.
If the Employment Agreement is terminated as set forth therein, Mr. Weber will
be entitled to a severance package equal to no more than 100% of his Base Salary
for up to two years after the date of termination. In addition, all unvested
stock options shall immediately vest on the date of termination. During the term
of his employment, Mr. Weber will be subject to non-competition and
non-solicitation provisions, subject to standard exceptions.
AMENDED AND RESTATED 1999 STOCK OPTION PLAN
Our Amended and Restated 1999 Stock Option Plan authorizes us to grant to our
directors, employees, consultants and advisors both incentive and non-qualified
stock options to purchase shares of our Common Stock. As of December 31, 2001,
our Board of Directors had reserved 3,000,000 shares for issuance under the 1999
Plan, of which 1,900,500 shares were subject to outstanding options and
1,099,500 shares remained available for future grants. Our Board of Directors or
a committee appointed by the Board (the Plan Administrator) administers the 1999
Plan. The Plan Administrator selects the recipients to whom options are granted
and determines the number of shares to be awarded. Options granted under the
1999 Plan are exercisable at a price determined by the Plan Administrator at the
time of the grant, but in no event will the option price for any incentive stock
option be lower than the fair market value for our Common Stock on the date of
the grant. Options become exercisable at such times and in such installments as
the Plan Administrator provides in the terms of each individual option
agreement. In general, the Plan Administrator is given broad discretion to issue
options and to accept a wide variety of consideration (including shares of our
Common Stock and promissory notes) in payment for the exercise price of options.
The 1999 Plan was authorized by the Board of Directors and stockholders.
2005 INCENTIVE STOCK PLAN
On July 29, 2005 the Company adopted the 2005 Stock Incentive Plan and reserved
60,000,000 shares of the Company's common stock for issuance under the 2005
Plan. Two types of options may be granted under the 2005 Plan: (1) Incentive
Stock Options (also known as Qualified Stock Options) which may only be issued
to employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture. In addition, Stock Awards and
restricted Stock Purchase Offers may be granted under the 2005 Stock Incentive
Plan.
29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material related transactions which we entered into during the
past two fiscal years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of September 1, 2006, the number of and
percent of our common stock beneficially owned by:
o all directors and nominees, naming them,
o our executive officers,
o our directors and executive officers as a group, without
naming them, and o persons or groups known by us to own
beneficially 5% or more of our common stock:
We believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them.
A person is deemed to be the beneficial owner of securities that can be acquired
by him within 60 days from September 1, 2006 upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants or convertible securities that
are held by him, but not those held by any other person, and which are
exercisable within 60 days of September 1, 2006 have been exercised and
converted.
Shares Beneficially Owned (1)
Name and Address of Beneficial Owner Number Percent
---------------------------------------- ----------- -------
Dean Weber, CEO, President and Chairman
of the Board (2) 12,473,800 2.42%
IVantage, Inc. (2) 900,200 *
Rahould Sharan, Director 1,386,000 *
Bradley J. Ammon, Director 959,000 *
Alpha Capital Aktiengesellschaft 197,220,312 38.40%(3)
Whalehaven Capital Fund Limited 100,455,013 19.56%(3)
Bristol Investments Fund Limited 43,518,284 8.47%
Stonestreet Limited Partnership 33,898,479 6.60%
Ellis International 52,082,523 10.14%(3)
Total shares held by officers
and directors (3) persons: 15,719,000 3.06%
* Less than one percent.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of September 1, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) IVantage, Inc. is wholly owned by Dean Weber, Chairman of the Board, CEO,
and President of our company. Mr. Weber is the beneficial owner of the 900,200
shares in the name of IVantage, Inc. and those shares are also included in the
amount presented in this table for Mr. Weber.
(3) Subject to a 9.99% beneficial ownership limitation at any one point in time
by the beneficial owner together with its affiliates.
30
DESCRIPTION OF SECURITIES
Our Amended Articles of Incorporation authorize the issuance of 1,290,000,000
shares of common stock, $.001 par value per share. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of common stock have cumulative voting rights. Holders
of shares of common stock are entitled to share ratably in dividends, if any, as
may be declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefor. In the event of a liquidation,
dissolution, or winding up of the Company, the holders of shares of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of common stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares.
In addition, our Amended Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock, $.001 par value per share. The shares of
preferred stock may be issued in series, and shall have such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such stock adopted from time to time
by the board of directors. Our board of directors are expressly vested with the
authority to determine and fix in the resolution or resolutions providing for
the issuances of preferred stock the voting powers, designations, preferences
and rights, and the qualifications, limitations or restrictions thereof, of each
such series to the full extent now or hereafter permitted by the laws of the
State of Nevada.
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Under the Nevada General Corporation Law and our Articles of Incorporation, as
amended, and our Bylaws, our directors will have no personal liability to us or
our stockholders for monetary damages incurred as the result of the breach or
alleged breach by a director of his "duty of care." This provision does not
apply to the directors' (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its stockholders or that involve the absence of good faith on the part of the
director, (iii) approval of any transaction from which a director derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation or its stockholders in circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its stockholders, (v) acts or omissions that constituted an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its stockholders, or (vi) approval of an unlawful
dividend, distribution, stock repurchase or redemption. This provision would
generally absolve directors of personal liability for negligence in the
performance of duties, including gross negligence.
The effect of this provision in our Articles of Incorporation and Bylaws is to
eliminate the rights of our Company and our stockholders (through stockholder's
derivative suits on behalf of our Company) to recover monetary damages against a
director for breach of his fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (vi) above. This provision does not
limit nor eliminate the rights of our Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, our Bylaws provide that if the Nevada
General Corporation Law is amended to authorize the future elimination or
limitation of the liability of a director, then the liability of the directors
will be eliminated or limited to the fullest extent permitted by the law, as
amended. The Nevada General Corporation Law grants corporations the right to
indemnify their directors, officers, employees and agents in accordance with
applicable law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling our Company pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
31
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, or Regulation S, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions.
32
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
33
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Total Shares of Percentage
Common Stock Shares of Beneficial of Common
Issuable Upon Total Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Percentage Included in Ownership Common Stock After the After
Name Notes of Common Prospectus Before the Owned Before Offering Offering
and/or Warrants* Stock (1) Offering Offering** (2) (2)
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Alpha Capital 49,240,456 9.6% Up to 51,305,503 9.9% 0 --
Anstalt(3) 33,689,021 (1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Whalehaven Capital 49,240,456 9.6% Up to 51,305,503 9.9% 0 --
Fund Limited(4) 33,689,021 (1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Centurion Microcap 23,823,789 4.6% Up to 23,823,789 4.6% 0 --
L.P.(5) 16,691,807 (1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Bristol Investment 59,559,472 11.6% Up to 51,305,503 9.9% 0 --
Fund Limited(6) 41,729,518
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Ellis International 38,125,000 7.4% Up to 51,305,503 9.9% 0 --
Ltd.(7) 25,495,821
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Osher Capital, Inc. 15,250,000 3.0% Up to 15,250,000 3.0% 0 --
(8) 10,198,328
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
* This column represents an estimated number based on a conversion price as of a
recent date of September 1, 2006 of $.0065 divided into the principal amount.
The total shares being registered represents 31% of our total issued and
outstanding shares of common stock as of the date of this prospectus,
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 9.99% limitation.
*** Less than 1%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate (150%) of the shares issuable upon conversion
of the secured convertible notes and exercise of a portion of the warrants,
based on current market prices. Because the number of shares of common stock
issuable upon conversion of the secured convertible notes is dependent in part
upon the market price of the common stock prior to a conversion, the actual
number of shares of common stock that will be issued upon conversion will
fluctuate daily and cannot be determined at this time. Under the terms of the
secured convertible notes, if the secured convertible notes had actually been
converted on September 5, 2006, the secured convertible notes would have had a
conversion price of $.01. The
34
actual number of shares of common stock offered in this prospectus, and included
in the registration statement of which this prospectus is a part, includes such
additional number of shares of common stock as may be issued or issuable upon
conversion of the secured convertible notes and exercise of the related warrants
by reason of any stock split, stock dividend or similar transaction involving
the common stock, in accordance with Rule 416 under the Securities Act of 1933.
However the selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 9.99% of the then issued and outstanding shares of
common stock as determined in accordance with Section 13(d) of the Exchange Act.
Accordingly, the number of shares of common stock set forth in the table for the
selling stockholders exceeds the number of shares of common stock that the
selling stockholders could own beneficially at any given time through their
ownership of the secured convertible notes and the warrants. In that regard, the
beneficial ownership of the common stock by the selling stockholder set forth in
the table is not determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended.
(2) Assumes that all securities will be sold.
(3) Includes: (i) 15,000,000 shares underlying secured convertible notes issued
pursuant to our July 2006 Subscription Agreement, (ii) 1,691,807 shares
underlying Class A warrants issued pursuant to our July 2006 Subscription
Agreement, (iii) 15,000,000 shares underlying secured convertible notes issued
pursuant to our August 2006 Subscription Agreement, and (iv) 1,997,214 shares
underlying Class A warrants issued pursuant to our August 2006 Subscription
Agreement. In accordance with rule 13d-3 under the securities exchange act of
1934, Alpha Capital Anstalt is a private investment fund that is owned by all of
its investors and managed by Konrad Ackerman. Mr. Konrad Ackerman may be deemed
a control person of the shares owned by such entity, with final voting power and
investment control over such shares. The selling stockholder has notified us
that they are not broker-dealers and/or affiliates of broker-dealers.
(4) Includes: (i) 15,000,000 shares underlying secured convertible notes issued
pursuant to our July 2006 Subscription Agreement, (ii) 1,691,807 shares
underlying Class A warrants issued pursuant to our July 2006 Subscription
Agreement, (iii) 15,000,000 shares underlying secured convertible notes issued
pursuant to our August 2006 Subscription Agreement, and (iv) 1,997,214 shares
underlying Class A warrants issued pursuant to our July 2006 Subscription
Agreement. In accordance with rule 13d-3 under the securities exchange act of
1934, Whalehaven Capital Fund Limited is a private investment fund that is owned
by all of its investors and managed by Michael Finkelstein and Bhavesh Singh.
Evan Schemenauer, Arthur Jones and Jennifer Kelly may be deemed control persons
of the shares owned by such entity, with final voting power and investment
control over such shares. The selling stockholder has notified us that they are
not broker-dealers and/or affiliates of broker-dealers.
(5) Includes: (i) 15,000,000 shares underlying secured convertible notes issued
pursuant to our July 2006 Subscription Agreement and (ii) 1,691,807 shares
underlying Class A warrants pursuant to our July 2006 Subscription Agreement. In
accordance with rule 13d-3 under the securities exchange act of 1934, Centurion
Microcap, L.P. is a limited partnership that is owned by all of its partners and
managed by Abraham Schwartz, its general partner. Abraham Schwartz may be deemed
a control person of the shares owned by such entity, with final voting power and
investment control over such shares. The selling stockholder has notified us
that they are not broker-dealers and/or affiliates of broker-dealers.
(6) Includes: (i) 37,500,500 shares underlying secured convertible notes issued
pursuant to our July 2006 Subscription Agreement and (ii) 4,229,518 shares
underlying Class A warrants issued pursuant to our July 2006 Subscription
Agreement. In accordance with rule 13d-3 under the securities exchange act of
1934, Bristol Investment Fund is a private investment fund that is owned by all
of its investors and managed by Bristol Capital Advisors, LLC ("BCA"). Paul
Kessler, as manager of BCA, may be deemed a control person of the shares owned
by such entity, with final voting power and investment control over such shares.
Mr. Kessler disclaims beneficial ownership of these shares. The selling
stockholder has notified us that they are not broker-dealers and/or affiliates
of broker-dealers.
(7) Includes: (i) 22,500,000 shares underlying secured convertible notes issued
pursuant to our August 2006 Subscription Agreement and (ii) 2,995,821 shares
underlying Class A warrants issued pursuant to our August 2006 Subscription
Agreement. In accordance with rule 13d-3 under the securities exchange act of
1934, Ellis International Ltd. is a private investment fund that is owned by all
of its investors and managed by Wilhelm Ungar. Mr. Ungar may be deemed a control
persons of the shares owned by such entity, with final voting power and
investment control over such shares. . The selling stockholder has notified us
that they are not broker-dealers and/or affiliates of broker-dealers.
(8) Includes: (i) 9,000,000 shares underlying secured convertible notes issued
pursuant to our August 2006 Subscription Agreement and (ii) 1,198,328 shares
underlying Class A warrants issued pursuant to our August 2006 Subscription
Agreement. In accordance with rule 13d-3 under the securities exchange act of
1934, Osher Capital, Inc. is a corporation that is owned by all of its
shareholders and managed by Yisroel Kluger. Yisroel Kluger may be deemed a
control person of the shares owned by such entity, with final voting power and
investment control over such shares. . The selling stockholder has notified us
that they are not broker-dealers and/or affiliates of broker-dealers.
35
TERMS OF SECURED CONVERTIBLE NOTES AND THE WARRANTS
On July 6 and 14, 2006, we completed a private placement pursuant to a
Subscription Agreement which we entered into with several accredited and/or
qualified institutional investors pursuant to which the investors subscribed to
purchase an aggregate principal amount of $550,000 in 6% secured convertible
promissory notes and 1 Class A common stock purchase warrant for each 1share
which would be issued on the closing date assuming full conversion of the
secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, September 1, 2006 and semi-annually thereafter, and mature 2
years after the date of issuance. Each investor shall have the right to convert
the secured convertible notes after the date of issuance and at any time, until
paid in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 48,530,839 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering the shares of our
common stock issuable upon conversion of the secured promissory notes and
exercise of the Class A warrants no later than 45 days after the closing date
and cause it to be effective within 120 days after the closing date. If we do
not meet the aforementioned filing and effectiveness deadlines, we shall pay to
each investor an amount equal to 1% for the first 30 days or part thereof of the
pendency of such non-registration event and 2% for each 30 days or part thereof
thereafter, of the purchase price of the secured convertible notes remaining
unconverted and purchase price of the shares of our common stock issued upon
conversion of the notes.
On August 28, 2006, we entered into a letter agreement with the investors of our
July 2006 Subscription Agreement under which the parties agreed to extend the
date we are required to file the registration statement to September 8, 2006 in
order to permit the registration of the shares underlying our secured
convertible notes issued pursuant to the August 2006 Subscription Agreement
(described below).
On August 29 and September 8, 2006, we completed a private placement pursuant to
which we entered into a Subscription Agreement with several accredited and/or
qualified institutional investors pursuant to which the investors subscribed to
purchase an aggregate principal amount of up to $510,000 in 6% secured
convertible promissory notes and 1 Class A common stock purchase warrant for
each 1 share which would be issued on the closing date assuming full conversion
of the secured convertible notes issued on the closing date. On September 8,
2006, we received subscriptions for an aggregate of $420,000 in secured
convertible notes.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, September 1, 2006 and semi-annually thereafter, and mature 2
years after the date of issuance. Each investor shall have the right to convert
the secured convertible notes after the date of issuance and at any time, until
paid in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
36
We issued an aggregate of 42,708,334 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering the shares of our
common stock issuable upon conversion of the secured promissory notes and
exercise of the Class A warrants no later than 10 days after the closing date
and cause it to be effective on or prior to November 3, 2006. If we do not meet
the aforementioned filing and effectiveness deadlines, we shall pay to each
investor an amount equal to 1% for the first 30 days or part thereof of the
pendency of such non-registration event and 2% for each 30 days or part thereof
thereafter, of the purchase price of the secured convertible notes remaining
unconverted and purchase price of the shares of our common stock issued upon
conversion of the notes.
The investors have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
9.99% of the then issued and outstanding shares of common stock.
We claim an exemption from the registration requirements of the Act for the
private placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the investors were accredited investors
and/or qualified institutional buyers, the investors had access to information
about us and their investment, the investors took the securities for investment
and not resale, and we took appropriate measures to restrict the transfer of the
securities.
A complete copy of the Subscription Agreements and related documents are
incorporated by reference as exhibits to our Form SB-2 registration statement
relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the secured
convertible notes issued pursuant to our July and August 2006 Subscription
Agreements is determined by dividing that portion of the principal of the notes
to be converted and interest, if any, by the conversion price. For example,
assuming conversion of the $960,000 of secured convertible notes on September 5,
2006, at a conversion price of $0.01, the number of shares issuable upon
conversion would be:
$960,000/$0.01 = 96,000,000 shares
The following is an example of the amount of shares of our common stock that are
issuable, upon conversion of the principal amount of our secured convertible
notes, based on market prices 25%, 50% and 75% below the market price as of
September 5, 2006 of $0.013.
Number of Shares
% Below Market Price Per Share Discount of 20% Issuable
- -------------- --------------- --------------- ----------------
25% $.0098 $.0078 123,076,923
50% $.0065 $.0052 184,615,385
75% $.0033 $.0026 369,230,769
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
Our financial statements at December 31, 2005 and 2004 appearing in this
prospectus and registration statement have been audited by Peterson & Co., LLP,
our independent registered public accounting firm prior to their merger with
Squar, Milner, Miranda & Williamson, LLP, as set forth on their report thereon
appearing elsewhere in this prospectus, and are included in reliance upon such
report given upon the authority of Squar, Milner, Peterson, Miranda &
Williamson, LLP, successor in interest to Peterson & Co., LLP as experts in
accounting and auditing.
37
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On April 19, 2004, we notified Stonefield Josephson, Inc., ("SJ ") that we had
engaged Peterson & Co., LLP as our auditor and as a consequence, was dismissed
as our auditors. On April 12, 2004, we engaged Peterson & Co., LLP as our
independent registered public accountants for the fiscal year ending December
31, 2004. The action to engage Peterson & Co., LLP was taken upon the unanimous
approval of the Audit Committee of our Board of Directors.
During the two fiscal years ended December 31, 2003 and December 31, 2002 and
through April 19, 2004, (i) there were no disagreements between us and SJ on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of SJ
would have caused SJ to make reference to the matter in its reports on our
financial statements, and (ii) SJ's reports did not contain an adverse opinion
or a disclaimer of opinion, or was qualified or modified as to uncertainty,
audit scope, or accounting principles. During the two fiscal years ended
December 31, 2003 and 2002 and through April 19, 2004, there were no reportable
events as the term described in Item 304(a)(1)(iv) of Regulation S-B. SJ 's
opinion in its report on our financial statements for the years ended December
31, 2002 and 2003, included an explanatory paragraph which expressed substantial
doubt with respect to our ability to continue as a going concern.
We obtained a letter from SJ addressed to the Securities and Exchange Commission
stating whether they agreed with the above statements, as it relates to them. A
copy of such letter, dated April 28, 2004, is filed as Exhibit 16.1 to the Form
8-K filed with the Commission on May 3, 2004 and is hereby incorporated by
reference.
During the two fiscal years ended December 31, 2003 and 2004, we have not
consulted with Peterson & Co. LLP regarding either:
1. the application of accounting principles to any specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us nor
oral advice was provided that Peterson & Co., LLP concluded was an important
factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or
2. any matter that was either subject of disagreement or event, as defined in
Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item 304
of Regulation S-B, or a reportable event, as that term is explained in Item
304(a)(1)(iv)(A) of Regulation S-B.
We obtained a letter from SJ addressed to the Securities and Exchange Commission
stating whether they agreed with the above statements, as it relates to them. A
copy of such letter, dated April 28, 2004, is filed as Exhibit 16.1 to the Form
8-K filed with the Commission on May 3, 2004 and is hereby incorporated by
reference.
On November 27, 2006, we were informed by Peterson & Co., LLP (the "Former
Accountant"), our independent registered public accounting firm, that it has
consummated a merger with Squar, Milner, Miranda & Williamson, LLP (the "New
Accountant"). The New Accountant, which is located in Newport Beach, California,
is also registered with the Public Company Accounting Oversight Board. The name
of the post-merger firm is Squar, Milner, Peterson, Miranda & Williamson, LLP.
The reports of the Former Accountant on our financial statements for each of the
two most recent fiscal years, did not contain an adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles for the two most recent fiscal years and all subsequent
interim periods, except that the Former Accountant's opinion in its report on
our financial statements expressed substantial doubt with respect to our ability
to continue as a going concern for the last two fiscal years.
During our two most recent fiscal years and the subsequent interim period
through the date of merger, there were no reportable events as the term
described in Item 304(a)(1)(iv) of Regulation S-B, other than the following:
The Former Accountant has advised the Board of Directors that each of these
internal control deficiencies constitute a material weakness as defined in
Statement of Auditing Standards No. 60. Certain of these internal control
weaknesses also constitute material weaknesses in our disclosure controls.
During our two most recent fiscal years and the subsequent interim period
through the date of merger, there were no disagreements with the Former
Accountant on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
the satisfaction of the Former Accountant, would have caused it to make
reference to the subject matter of the disagreements in connection with its
reports on these financial statements for those periods.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Itronics Inc., filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at 100 F Street N.E. Washington, D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at 100 F Street
N.E. Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
38
INDEX TO FINANCIAL STATEMENTS
ONE VOICE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
AUDITED FINANCIAL STATEMENTS: YEAR ENDED DECEMBER 31, 2005 AND 2004
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity (Deficit) F-4 - F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-23
INTERIM FINANCIAL STATEMENTS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Balance Sheets F-24
Statements of Operations F-25
Statements of Cash Flows F-28 - F-29
Notes to Financial Statements F-30 - F-35
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
One Voice Technologies, Inc.
We have audited the accompanying balance sheets of One Voice Technologies, Inc.
(the "Company") as of December 31, 2005 and 2004, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of One Voice Technologies, Inc. as
of December 31, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has reported recurring losses from operations
aggregating $42,644,000, and had a working capital deficit of $3,731,000. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans as to these matters are described in Note 1.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PETERSON & CO., LLP
San Diego, California
March 31, 2006
F-1
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2005 & 2004
ASSETS
2005 2004
------------ ------------
(Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 338,811 535,642
Accounts receivable 42,696 6,274
Inventories 5,254 9,724
Prepaid expenses 40,574 27,756
------------ ------------
Total current assets 427,335 579,396
PROPERTY AND EQUIPMENT, net 84,703 177,949
OTHER ASSETS:
Software development and licensing, net 40,552 78,700
Trademarks, net 5,517 13,310
Patents, net 94,200 118,569
Deposits 18,665 2,157
Deferred debt issue costs 69,970 96,954
------------ ------------
Total assets $ 740,942 $ 1,067,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 128,630 $ 162,625
Accrued expenses 147,305 72,887
Security deposits -- 12,522
Settlement agreement liability 920,000 --
License agreement liability 930,000 1,050,000
Warrant derivative liability 2,032,299 4,941,415
Current portion of convertible debt, net -- 92,044
------------ ------------
Total current liabilities 4,158,234 6,331,493
LONG-TERM DEBT:
Long term portion of notes payable, 100,000 100,000
Long term portion of convertible debt, net 221,850 32,656
------------ ------------
Total liabilities 4,480,084 6,464,149
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock; $.001 par value, 990,000,000 and 250,000,000
Shares authorized at December 31, 2005 and 2004,
respectively; 363,590,152 and 246,467,927 shares issued
and outstanding at December 31, 2005 and 2004, respectively 363,590 246,468
Additional paid-in capital 38,561,381 35,474,238
Accumulated deficit (42,664,113) (41,117,820)
------------ ------------
Total stockholders' equity (deficit) (3,739,142) (5,397,114)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 740,942 $ 1,067,035
============ ============
The accompanying notes form an integral part of these financial statements.
F-2
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31,
2005 2004
------------- -------------
(Restated)
REVENUE $ 142,285 $ 2,105
COST OF REVENUE 31,467 1,930
------------- -------------
GROSS PROFIT 110,818 175
GENERAL AND ADMINISTRATIVE EXPENSES 3,433,281 3,733,753
------------- -------------
NET LOSS FROM OPERATIONS (3,322,463) $ (3,733,578)
OTHER INCOME (EXPENSES)
Interest expense (2,487,116) (1,649,641)
Settlement expense, net (760,387) --
Gain (loss) on warrant derivative 5,070,081 (3,369,412)
Other, net (46,408) 741
------------- -------------
NET LOSS $ (1,546,293) $ (8,751,890)
============= =============
NET LOSS PER SHARE, basic and diluted $ (.01) $ (.05)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 299,279,000 188,236,940
============= =============
The accompanying notes form an integral part of these financial statements.
F-3
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common stock Additional Total
---------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------ ------------ ------------ ------------ ----------------
Balance at December 31, 2003 (Restated) 107,130,615 $ 107,131 $ 31,851,609 $(32,365,930) $ (407,190)
Issuance of warrants in connection
with debt financing 1,281,550 1,281,550
Beneficial conversion feature
embedded in debt securities 827,626 827,626
Exercise of warrants for cash 12,008,067 12,008 1,368,121 1,380,129
Conversion of debt to
equity - Alpha Capital 25,720,939 25,721 587,172 612,893
Conversion of debt to
equity - Bristol Investments 4,317,308 4,317 96,708 101,025
Conversion of debt to
equity - Ellis Enterprise 5,229,575 5,230 165,230 170,460
Conversion of debt to
equity - Greenwich Funds 2,541,700 2,542 99,889 102,431
Conversion of debt to
equity - Whalehaven Capital 2,639,175 2,639 124,834 127,473
Conversion of debt to
equity - Whalehaven Fund 2,009,448 2,009 84,787 86,796
Conversion of debt to
equity - Momona Capital 375,994 376 14,777 15,153
Conversion of debt to
equity - Stonestreet Limited 6,067,844 6,068 239,640 245,708
Conversion of debt to
equity - La Jolla Cove 78,427,262 78,427 13,845 92,272
Reclassification of warrants to
current liabilities (1,281,550) (1,281,550)
Net loss for the year ended
December 31, 2004 (8,751,890) (8,751,890)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 (Restated) 246,467,927 246,468 35,474,238 (41,117,820) (5,397,114)
The accompanying notes form an integral part of these financial statements.
F-4
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Common stock Additional Total
---------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------ ------------ ------------ ------------ ----------------
Issuance of common stock in connection 17,000,000 17,000 -- 17,000
with private placement
Issuance of warrants in connection
with private placement 489,400 489,400
Issuance of warrants in connection
with debt financing 1,399,637 1,399,637
Beneficial conversion feature
embedded in debt securities 600,363 600,363
Exercise of warrants for cash 31,552,521 31,553 617,658 649,211
Expenses incurred in connection
with warrant re-pricing 271,898 271,898
Conversion of debt to
equity - Alpha Capital 25,945,668 25,945 714,676 740,621
Conversion of debt to
equity - Momona Capital 1,938,262 1,938 74,215 76,153
Conversion of debt to
equity - Ellis Enterprise 11,522,589 11,523 257,446 268,969
Conversion of debt to
equity - Omega Capital 3,488,833 3,489 61,511 65,000
Conversion of debt to
equity - Whalehaven Capital 9,110,077 9,110 235,769 244,879
Conversion of debt to
equity - Whalehaven Fund 1,026,466 1,026 40,032 41,058
Conversion of debt to
equity - Osher Capital 1,714,932 1,715 43,631 45,346
Conversion of debt to
equity - Stonestreet Limited 13,822,877 13,823 441,842 455,665
Reclassification of warrants to
current liabilities (2,160,935) (2,160,935)
Net loss for the year ended
December 31, 2005 (1,546,293) (1,546,293)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 363,590,152 $ 363,590 $ 38,561,381 $(42,664,113) $ (3,739,142)
============ ============ ============ ============ ============
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash flows from operating activities:
Net loss $ (1,546,293) $ (8,751,890)
------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 172,426 499,216
Loss on disposal of assets 49,332 --
Amortization of debt discount and debt issue costs 2,351,877 1,917,203
Warrant re-pricing 271,898 --
(Gain)loss on warrant derivative liability (5,070,081) 3,369,412
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (36,422) 130,726
Inventories 4,470 (9,724)
Prepaid expenses and other assets (157,844) (191,021)
Deposits (16,508) 7,769
Increase (decrease) in liabilities:
Accounts payable (33,965) (10,463)
Accrued expenses 74,418 14,468
Settlement agreement liability 920,000 --
License agreement liability (120,000) 380,000
Deposit (12,522) --
------------ ------------
Net cash used in operating activities (3,149,214) (2,644,304)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (45,768) (63,046)
Software development costs -- (22,080)
Trademarks (528) --
Patents (11,906) (65,718)
------------ ------------
Net cash used in investing activities (58,202) (150,844)
------------ ------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-6
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash flows from financing activities:
Proceeds from issuance of common stock 506,400 --
Proceeds from convertible debt 2,000,000 2,109,000
Proceeds from warrant exercise 649,210 1,369,044
Payments for debt issue costs (145,025) (200,963)
------------ ------------
Net cash provided by financing activities 3,010,585 3,277,081
------------ ------------
Net increase (decrease) in cash (196,831) 481,933
Cash and cash equivalents, beginning of year 535,642 53,709
------------ ------------
Cash and cash equivalents, end of year $ 338,811 $ 535,642
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 74,727 $ 74,621
============ ============
Income taxes paid $ 800 $ 800
============ ============
Supplemental disclosure of non-cash financing activities:
Issuance of warrant derivative in connection
with private placement and debt financing $ 2,160,935 $ 1,281,550
============ ============
Beneficial conversion feature of debt $ 600,363 $ 827,626
============ ============
Common Stock issued upon conversion of debt $ 1,937,691 $ 1,554,211
============ ============
The accompanying notes form an integral part of these financial statements.
F-7
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
One Voice Technologies, Inc. is incorporated under the laws of the State of
Nevada. The Company develops voice recognition software and it commenced
operations in 1999.
Prior to the fourth quarter of 2005, the Company's financial statements had been
prepared and presented as those of a development stage enterprise. Based on the
commercialization of its Mobile Voice product during 2005, the Company believes
that such presentation is no long necessary. Cumulative disclosures required for
development stage enterprises that were included in the previously filed
December 31, 2004 financial statements have been omitted in the comparative
financial statements presented here in.
GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred significant losses since inception of $42,664,000 and used
cash for operations of $ 3,149,000 during the year ended December 31, 2005. The
Company also has a working capital deficit of $3,731,000 and a stockholders'
deficit of $3,739,000 as of December 31, 2005. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management is
currently seeking additional equity or debt financing. Additionally, management
is currently pursuing revenue-bearing contracts utilizing various applications
of its technology including wireless technology. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
RESTATEMENT TO PRIOR YEAR FINANCIAL STATEMENTS
Subsequent to the issuance of the financial statements for the years ended
December 31, 2004 and 2003, management determined that the Company's previous
accounting for its warrants did not comply with Emerging Issues Task Force
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). As a result, the
Company determined that the fair value of the warrants should have been
reclassified from additional paid in capital, to a current liability, and that
the warrant fair value should have been marked to market as of the balance sheet
date with the corresponding non-cash gain or loss reflected in the results of
operations. Accordingly, the accompanying financial statements for the years
ended December 31, 2004 and 2003 have been restated from the amounts previously
reported.
The impact of this restatement will change net income within the various periods
covered. This correction in the accounting for its warrants had no impact on the
Company's net sales, net cash flows, cash balances or debt covenant compliance.
A summary of the significant effects of the restatements is as follows:
As Previously As
Reported Adjustments Restated
-------------- ------------ --------------
Year Ended December 31, 2004
----------------------------
Net loss $ (5,382,478) $(3,369,412) $ (8,751,890)
Net loss per share, basic and diluted $ (0.03) $ (0.02) $ (0.05)
Year Ended December 31, 2003
----------------------------
Net loss $ (5,931,972) $ 93,078 $ (5,838,894)
Net loss per share, basic and diluted $ (0.09) $ -- $ (0.09)
F-8
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company develops voice recognition based software for both the Telecom and
Interactive Multimedia PC sectors.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' disclosures to conform
to current year classifications.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the amount of revenue and expense reported during
the period. Actual results could differ from those estimates.
FAIR VALUE:
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable and notes payable and
convertible debt. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable, approximates their fair value due to their
short term nature. The carrying value of notes payable and convertible debt
approximate their fair value, as interest approximates market rates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
CONCENTRATION:
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
REVENUE RECOGNITION:
The Company recognizes revenues when earned in the period in which the service
is provided.
Service and license fees are deferred and recognized over the life of the
agreement. Revenues from the sale of products will be recognized upon shipment
of the product.
ADVERTISING AND PROMOTION COSTS:
Advertising and promotion costs are expensed as incurred. For the years ended
December 31, 2005 and 2004, advertising and promotion costs were $77,000 and
$27,000 respectively.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is being provided by
use of the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years.
F-9
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES:
Inventories are valued at the lower of cost or market based on actual cost.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). Pursuant to EITF
00-19, an evaluation of specifically identified conditions is made to determine
whether the fair value of warrants issued is required be classified as a
derivative liability. The fair value of warrants classified as derivative
liabilities is adjusted for changes in fair value at each reporting period, and
the corresponding non-cash gain or loss is recorded in current period earnings.
DEBT WITH STOCK PURCHASE WARRANTS:
Proceeds received from debt issued with stock purchase warrants are allocated
between the debt and the warrants, based upon the relative fair values of the
two securities. The balance allocated to warrants is accounted for either as
additional paid-in capital or as a warrant derivative liability. The resulting
debt discount is amortized to expense over the term of the debt instrument,
using the interest method. In the event of settlement of such debt in advance of
the maturity date, an expense is recognized for the remaining unamortized
discount.
DEBT WITH BENEFICIAL CONVERSION FEATURE:
We account for convertible debt in accordance with Financial Accounting
Standards Board Emerging Issues Task Force ("EITF") Issue No. 98-5 and Issue
00-27. These pronouncements require the use of the intrinsic value method for
recognition of the beneficial conversion feature included with indebtedness,
and requires amortization of the amount associated with the convertibility
feature over the life of the debt instrument. Upon conversion of the debt, any
unamortized beneficial conversion discount will be charged to expense.
SOFTWARE DEVELOPMENT COSTS:
The Company accounts for their software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," ("SFAS No. 86").
SFAS No. 86 requires the Company to capitalize the direct costs and allocate
overhead associated with the development of software products. Initial costs are
charged to operations as research prior to the development of a detailed program
design or a working model. Costs incurred subsequent to the product release, and
research and development performed under contract are charged to operations.
Capitalized costs are amortized over the estimated product life of four years on
the straight-line basis. The Company evaluates for impairment losses annually or
when economic circumstances necessitate. The Company will recognize an
impairment loss in the amount by which the unamortized capitalized cost of a
computer software product exceeds the net realizable value of that asset. No
impairment losses were recognized during the years ended December 31, 2005 and
2004.
Amortization expense totaled $37,000 and $338,000 for the years ended December
31, 2005 and 2004, respectively. Accumulated amortization as of December 31,
2005 amounted to $1,635,000.
F-10
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
TRADEMARKS AND PATENTS:
The Company's trademark costs consist of legal fees paid in connection with
trademarks. The Company amortizes trademarks using the straight-line method over
the period of estimated benefit, generally four years. Amortization expense
charged for the years ended December 31, 2005 and 2004 totaled $8,000 and
$34,000, respectively. Accumulated amortization as of December 31, 2005 amounted
to $238,000.
The Company's patent costs consist of legal fees paid in connection with patents
pending. The Company amortizes patents using the straight-line method over the
period of estimated benefit, generally five years. Amortization expense charged
for the years ended December 31, 2005 and 2004 totaled $36,000 and $25,000,
respectively. Accumulated amortization as of December 31, 2005 amounted to
$93,000.
In accordance with SFAS 142, the Company periodically evaluates whether events
or circumstances have occurred that may affect the estimated useful life or the
recoverability of the remaining balance of the patent and trademarks. Impairment
of the assets is triggered when the estimated future undiscounted cash flows do
not exceed the carrying amount of the intangible asset. If the events or
circumstances indicate that the remaining balance of the assets may be
permanently impaired, such potential impairment will be measured based upon the
difference between the carrying amount of the assets and the fair value of such
assets, determined using the estimated future discounted cash flows generated.
NET LOSS PER COMMON SHARE:
Basic earnings per share is calculated using the weighted-average number of
outstanding common shares during the period. Diluted earnings per share is
calculated using the weighted-average number of outstanding common shares and
dilutive common equivalent shares outstanding during the period, using either
the as-converted method for convertible notes and convertible preferred stock or
the treasury stock method for options and warrants.
The net loss per common share for the years ended December 31, 2005 and 2004 is
based on the weighted average number of shares of common stock outstanding
during the periods. Potentially dilutive securities include options, warrants
and convertible debt; however, such securities have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
INCOME TAXES:
Deferred income taxes are reported using the asset/liability method. Deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-11
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
INCENTIVE AND STOCK BASED COMPENSATION:
Pro forma information regarding the effect on operations as required by SFAS 123
and SFAS 148, has been determined as if the Company had accounted for its
employee stock options under the fair value method of those statements. Pro
forma information, using the Black-Scholes method at the date of grant, is based
on the following assumptions:
Expected life 3 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. No expense was
recognized under APB 25. The Company's pro forma information is as follows:
December 31, 2005 December 31, 2004
------------------ ------------------
Net loss, as reported $(1,546,293) $(8,751,890)
------------ ------------
Stock compensation calculated under SFAS 123 $ (1,000) $ (51,500)
------------ ------------
Pro forma net loss $(1,547,293) $(8,803,390)
------------ ------------
Basic and diluted historical loss per share $ (0.01) $ (0.05)
------------ ------------
Pro forma basic and diluted loss per share $ (0.01) $ (0.05)
------------ ------------
RESEARCH AND DEVELOPMENT
Expenses related to the company's internal research and development efforts, are
expensed in the year incurred. Research and development expense were $701,000
and $633,000 for the years ended December 31, 2005 and 2004 respectively.
F-12
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS:
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"), which replaces APB Opinion No. 120, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 changes the requirements for accounting and reporting
a change in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an accounting
pronouncement. In the unusual instance it does not include specific transition
provisions. Specifically, SFAS No. 154 requires retrospective application to
prior periods' financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the effects of the change, the new accounting
principle must be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and a corresponding adjustment must be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of the
change, the new principle must be applied as if it were adopted prospectively
from the earliest date practicable. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. SFAS No. 154 does not change the transition provisions of any existing
pronouncements. The Company has evaluated the impact of SFAS No. 154 and does
not expect the adoption of this statement to have a significant impact on its
statement of income or financial condition. The Company will apply SFAS No. 154
in future periods, when applicable.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share-Based Payment". SFAS No. 123(R) replaces SFAS No. 123 "Accounting
for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". SFAS No. 123(R) requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award. SFAS No. 123(R) is effective for fiscal year beginning after June 15,
2005. The Company plans to adopt SFAS No. 123(R) on January 1, 2006. SFAS 123(R)
eliminates the alternative to use the intrinsic value method of accounting that
was provided in SFAS 123 as originally issued. In accordance with SFAS No. 148,
the Company has been disclosing the impact on net income and earnings per share
had the fair value based method been adopted.
(2) PROPERTY AND EQUIPMENT:
A summary is as follows: 2005 2004
----------- ------------
Computer equipment $ 687,365 $ 974,837
Website development 38,524 38,524
Equipment 1,562 197,049
Furniture and fixtures 46,431 122,020
Leasehold improvements -- 15,222
Telephone equipment 4,293 99,910
----------- ------------
778,175 1,447,562
Less accumulated depreciation
and amortization (693,472) (1,269,613)
----------- ------------
$ 84,703 $ 177,949
=========== ============
Depreciation expense totaled $89,682 and $99,448 for the years ended December
31, 2005 and 2004, respectively.
F-13
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) ACCRUED LIABILITIES
Accrued expenses at December 31 consist of the following:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Accrued paid time off $ 74,961 $ 54,172
Accrued interest 72,109 18,715
Other 235 --
------------ ------------
Accrued expenses $ 147,305 $ 72,887
============ ============
(4) NOTES PAYABLE:
On August 8, 2003 the Company entered into a note payable in the amount of
$100,000, with principal and interest at 8.0% per annum, due on August 8, 2008.
At December 31, 2005 and 2004 the balance on the note payable was $100,000.
(5) LICENSE AGREEMENT LIABILITY
In March 2000 the Company entered into a Software License Agreement ("License
Agreement")with Philips Speech Processing, a division of Philips Electronics
North America ("Philips"). Pursuant to the License Agreement, the Company
received a world-wide, limited, nonexclusive license to certain speech
recognition software owned by Philips. The initial term of the License Agreement
was three (3) years, and the License Agreement included an extended term
provision under which the License Agreement was automatically renewable for
successive one (1) year periods, unless terminated by either party upon a
minimum of sixty (60) days written notice prior to the expiration of the initial
term or any extended term.
The License Agreement provides for the Company to pay a specified commission on
revenues from products incorporating licensed software, and includes minimum
royalty payment obligations over the initial three (3) year term of the License
Agreement in the aggregate amount of $1,100,000.
Under an amendment to the License Agreement entered into in March 2002, the
initial term of the License Agreement was extended for two (2) years, and the
aggregate minimum royalty payment was increased to $1,500,000. The amendment
also included a revised payment schedule of the minimum royalty payment
obligation that provided for semi-annual payments of $250,000 (due on June 30th
and December 31st of each year). In lieu of scheduled payments, in May, 2003,
based on a verbal agreement with Philips, the Company began making monthly
payments of $15,000, of which $10,000 is being applied against the remaining
minimum royalty payment due and $5,000 is being applied as interest.
As of December 31, 2005 and 2004, the outstanding minimum royalty obligations
pursuant to the License Agreement were $930,000 and $1,050,000, respectively.
F-14
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) SETTLEMENT AGREEMENT LIABILITY
On January 6, 2006, La Jolla Cove Investors, Inc. ("La Jolla") and the Company
entered into a Settlement Agreement and Mutual Release (the "Settlement
Agreement") in which La Jolla and we agreed to forever settle, resolve and
dispose of all claims, demands and causes of action asserted, existing or
claimed to exist between the parties because of or in any way related to the
Action. Under the Settlement Agreement, La Jolla and the Company agreed that the
parties shall bear their own costs and attorney's fees associated with the
Action and that the outstanding principle balance of convertible notes payable
and accrued interest owed to La Jolla in the aggregate amount $159,613, would be
extinguished. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the
execution of the Settlement Agreement;
o $300,000 within 90 days of the date of the Settlement
Agreement; and
o $400,000 within 150 days of the date of the Settlement
Agreement.
Interest shall accrue on the $700,000 unpaid balance at 8% per annum commencing
on the date of the Settlement Agreement until paid in full. If any payment is
not made within 30 days of its due date, La Jolla may enter a judgment against
us for the then unpaid balance, plus accrued interest and $100,000, upon the
filing of a declaration of default by La Jolla.
As the finalization of the Settlement Agreement provided additional evidence
with respect to conditions that existed at the balance sheet date, the effects
of the Settlement agreement, as discussed below, have been reflected in the
December 31, 2005 financial statements.
Balance Sheet- As of December 31, 2005, a total of $900,000 has been accrued as
a Settlement Agreement liability, and included as a current liability, based on
the cash obligation and the estimated fair value of the stock to be issued. In
addition, convertible notes and accrued interest payable have been reduced by a
total of $159,613.
Statement of Operations- A Settlement Expense totaling $760,387, which
represents the net amount of the $920,000 payout obligation and the $159,613
reduction of notes payable and accrued interest payable, has been recorded as a
component of Other Income (Expense) for the year ended December 31, 2005.
(7) WARRANT DERIVATIVE LIABILITY
During the years ended December 31, 2005 and 2004 the Company issued warrants in
connection with convertible debt agreements and private placements that required
analysis in accordance with EITF 00-19. EITF 00-19 specifies the conditions
which must be met in order to classify warrants issued in a company's own stock
as either equity or as a derivative liability. Evaluation of these conditions
under EITF 00-19 resulted in the determination that these warrants are
classified as a derivative liability. In accordance with EITF 00-19, warrants
which are determined to be classified as derivative liabilities are
marked-to-market each reporting period, with a corresponding non-cash gain or
loss charged to the current period. The Company valued all warrant derivative
liabilities as of December 31, 2005 using a Black-Scholes option pricing model
using the following assumptions: expected dividend yield of 0.0%, expected stock
price volatility of 100%, risk free interest rate of 4.35% and a remaining
contractual life ranging from 0.30 years to 4.00 years. The Company valued all
warrant derivative liabilities as of December 31, 2004 using a Black-Scholes
option pricing model using the following assumptions: expected dividend yield of
0.0%, expected stock price volatility of 215%, risk free interest rate of 5.50%
and a remaining contractual life ranging from 1.30 years to 5.00 years. The
valuation conducted as of December 31, 2005 resulted in a non-cash gain of
$5,070,000 with a corresponding decrease in the warrant derivative liability.
The valuation conducted as of December 31, 2004 resulted in a non-cash loss of
$3,369,000 with a corresponding increase in the warrant derivative liability. As
of December 31, 2005 and 2004, the fair value of the warrant derivative
liability was $2,032,000 and $4,941,000, respectively.
F-15
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE NOTES PAYABLE:
On August 18, 2004, the Company entered into a securities purchase agreement
with four accredited investors, Alpha Capital Aktiengesellschaft, Greenwich
Growth Fund Limited, Whalehaven Capital, LP and Whalehaven Fund Limited for the
issuance of 7% convertible debentures in the aggregate amount of $700,000. The
notes bear interest at 7% (effective interest rate of 146% on the aggregate
amount), mature on August 18, 2007, and are convertible into the Company's
common stock, at the holders' option, at the lower of (i) $0.085 or (ii) 80% of
the average of the three lowest closing bid prices for the common stock on a
principal market for the 30 trading days before but not including the conversion
date. The note may not be paid, in whole or in part, before August 18, 2007
without the consent of the holder. The full principal amount of the convertible
notes is due upon default under the terms of convertible notes. In addition, the
Company issued an aggregate of 7,063,774 warrants to the investors (3,531,887
Class A warrants and 3,531,887 Class B warrants).The Class A warrants are
exercisable until August 18, 2009 at a purchase price of $.0935 per share. The
Class B warrants are exercisable until August 18, 2009 at a purchase price of
$.10625 per share. Net proceeds amounted to approximately $621,000, net of debt
issue cash cost of $79,000. The fair value of the warrants of $323,000 using
Black Scholes option pricing model and the beneficial conversion feature of
approximately $298,000 have been recorded as debt discount and is being
amortized over the life of the debt using the interest method. Upon conversion
of the debt, any unamortized debt discount costs will be charged to expense.
On October 28, 2004, the Company entered into a securities purchase agreement
with four accredited investors, Alpha Capital Aktiengesellschaft, Stonestreet
Limited Partnership, Ellis International Ltd. and Momona Capital Corp. for the
issuance of 7% convertible debentures in the aggregate amount of $596,000. The
notes bear interest at 7% (effective interest rate of 100% on the aggregate
amount), mature on October 28, 2007 and are convertible into the Company's
common stock, at the holders' option, at the lower of (i) $0.074 or (ii) 80% of
the average of the three lowest closing bid prices for the common stock on a
principal market for the 30 trading days before but not including the conversion
date. The note may not be paid, in whole or in part, before October 28, 2007
without the consent of the holder. The full principal amount of the convertible
note is due upon default under the terms of convertible notes. In addition, the
Company issued an aggregate of 11,825,398 Class A warrants and 11,825,398 Class
B warrants to the investors. The warrants are exercisable until October 28, 2009
at a purchase price of $0.07 per share. Net proceeds amounted to approximately
$532,000, net of debt issue cash cost of $64,000. The relative value (limited to
the face amount of the debt) of all the warrants of $276,000 using Black Scholes
option pricing model and the beneficial conversion feature of approximately
$319,000 have been recorded as debt discount and is being amortized over the
life of the debt using the interest method. Upon conversion of the debt, any
unamortized debt discount will be charged to expense.
On December 23, 2004, the Company entered into a securities purchase agreement
with Alpha Capital Aktiengesellschaft, Stonestreet Limited Partnership, Ellis
International Ltd. and Momona Capital Corp. for the issuance of 7% convertible
debentures in the aggregate amount of $894,000. The notes bear interest at 7%
(effective interest rate of 100% on the aggregate amount), mature on December
23, 2007 and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.074 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before December 23, 2007 without the consent of the
holder. The full principal amount of the convertible note is due upon default
under the terms of convertible notes. In addition, the Company issued an
aggregate of 22,183,622 Class A warrants and 22,183,622 Class B warrants to the
investors. The warrants are exercisable until December 23, 2009 at a purchase
price of $0.07 per share. Net proceeds amounted to approximately $835,000, net
of debt issue cash cost of $59,000. The relative value (limited to the face
amount of the debt) of all the warrants of $682,000 using Black Scholes option
pricing model and the beneficial conversion feature of approximately $210,000
have been recorded as debt discount and is being amortized over the life of the
debt using the interest method. Upon conversion of the debt mentioned above, any
unamortized debt discount will be charged to expense.
F-16
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE NOTES PAYABLE:
On March 18, 2005, the Company held its first closing pursuant to a Subscription
Agreement it entered into with several accredited investors dated as of March
18, 2005, pursuant to which the investors subscribed to purchase an aggregate
principal amount of $2,000,000 in 6% convertible promissory notes, and 100 Class
A and Class B common stock purchase warrants for each 100 shares which would be
issued on each closing date assuming full conversion of the convertible notes
issued on each such closing date. Net proceeds amounted to $920,000, net of debt
issue cash cost of $80,000.
The convertible notes bear simple interest at 6% per annum payable upon each
conversion, June 1, 2005 and semi-annually thereafter and mature 3 years after
the date of issuance. Each investor shall have the right to convert the
convertible notes after the date of issuance and at any time, until paid in
full, at the election of the investor into fully paid and nonassessable shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.047 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. In addition, the company issued an
aggregate of 29,069,768 Class A common stock purchase warrants and 29,069,768
Class B common stock purchase warrants to the investors, representing 100 Class
A and Class B warrants issued for each 100 shares which would be issued on the
each closing date assuming full conversion of the convertible notes issued on
each such closing date. The Class A warrants are exercisable until four years
from the initial closing date at an exercise price of $0.045 per share. The
Class B warrants are exercisable until four years from the initial closing date
at an exercise price of $0.06 per share. The holder of the Class B warrants will
be entitled to purchase one share of common stock upon exercise of the Class B
warrants for each share of common stock previously purchased upon exercise of
the Class A warrants.
On July 13, 2005, we held our second closing pursuant to the Subscription
Agreement we entered into with several accredited investors dated as of March
18, 2005.
On the second closing date, the Company received approximately $935,000, net of
debt issue cash cost of approximately $65,000. The convertible notes bear simple
interest at 6% per annum payable upon each conversion, June 1, 2005 and
semi-annually thereafter and mature 3 years after the date of issuance. Each
investor shall have the right to convert the convertible notes after the date of
issuance and at any time, until paid in full, at the election of the investor
into fully paid and nonassessable shares of our common stock. The conversion
price per share shall be the lower of (i) $0.043 or (ii) 80% of the average of
the three lowest closing bid prices for our common stock for the 30 trading days
prior to, but not including, the conversion date as reported by Bloomberg, L.P.
on any principal market or exchange where our common stock is listed or traded.
In addition, the Company issued an aggregate of 38,461,537 Class A common stock
purchase warrants and 38,461,537 Class B common stock purchase warrants to their
investors. The Class A warrants are exercisable until four years from the
initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The fair value of the warrants of
approximately $675,000 using Black Scholes option pricing model and the
beneficial conversion feature of approximately $325,000 have been recorded as
debt discount and is being amortized over the life of the debt using the
interest method. Upon conversion of the debt, any unamortized discount will be
charged to expense.
F-17
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of convertible debt at December 31, 2005 is as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------- ----------- --------
LONG-TERM PORTION
Stonestreet Limited Partnership December 23, 2007 $ 10,000 $ (6,873) $ 3,127
----------- ----------- --------
Alpha Capital Aktiengesellschaft March 18, 2008 $ 175,000 $ (134,073) $ 40,927
----------- ----------- --------
Whalehaven Capital Fund Limited March 18, 2008 $ 160,000 $ (122,581) $ 37,419
----------- ----------- --------
Alpha Capital Aktiengesellschaft July 13, 2008 $ 400,000 $ (337,995) $ 62,005
----------- ----------- --------
Ellis International Limited July 13, 2008 $ 65,572 $ (55,407) $ 10,165
----------- ----------- --------
Whalehaven Capital Fund Limited July 13, 2008 $ 400,000 $ (337,993) $ 62,007
----------- ----------- --------
Omega Capital Small Cap Fund July 13, 2008 $ 25,000 $ (21,125) $ 3,875
----------- ----------- --------
Osher Capital, Inc. July 13, 2008 $ 15,000 $ (12,675) $ 2,325
----------- ----------- --------
TOTAL LONG TERM PORTION $ 1,250,572 $(1,028,722) $221,850
=========== =========== ========
A summary of convertible debt at december 31, 2004 is as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------- ----------- --------
CURRENT PORTION
La Jolla Cove Investors, Inc. December 12, 2005 $ 157,728 $ (65,684) $ 92,044
LONG-TERM PORTION
Whalehaven Fund Limited August 18, 2007 $ 40,000 $ (30,538) $ 9,462
----------- ----------- --------
Alpha Capital Aktiengesellschaft October 28, 2007 $ 200,000 $ (186,764) $ 13,236
----------- ----------- --------
Momona Capital Corp. October 28, 2007 $ 21,000 $ (20,104) $ 896
----------- ----------- --------
Stonestreet Limited Partnership October 28, 2007 $ 40,000 $ (38,295) $ 1,705
----------- ----------- --------
Ellis International Limited October 28, 2007 $ 4,841 $ (4,634) $ 207
----------- ----------- --------
Alpha Capital Aktiengesellschaft December 23, 2007 $ 300,000 $ (297,487) $ 2,513
----------- ----------- --------
Momona Capital Corp. December 23, 2007 $ 54,000 $ (53,548) $ 452
----------- ----------- --------
Stonestreet Limited Partnership December 23, 2007 $ 420,000 $ (416,483) $ 3,517
----------- ----------- --------
Ellis International Limited December 23, 2007 $ 79,700 $ (79,032) $ 668
----------- ----------- --------
TOTAL LONG TERM PORTION $ 1,159,541 $(1,126,885) $ 32,656
=========== =========== ========
F-18
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMON STOCK:
During the twelve months ended December 31, 2005, Alpha Capital
Akteingesellschaft converted approximately $741,000 of notes payable into
approximately 25,946,000 shares of the Company's common stock at an average
conversion price of $0.029. During the same period, Alpha Capital
Akteingesellschaft exercised warrants to purchase 2,000,000 shares of common
stock for cash in the amount of $48,000.
During the twelve months ended December 31, 2005, Omega Capital Small Cap Fund
converted $65,000 of notes payable into approximately 3,489,000 shares of the
Company's common stock at an average conversion price of $0.019.
During the twelve months ended December 31, 2005, Ellis International Ltd.
converted approximately $269,000 of notes payable into approximately 11,523,000
shares of the Company's common stock at an average conversion price of $0.023.
During the same period, Ellis International exercised warrants to purchase
approximately 1,500,000 shares of common stock for cash in the amount of
$37,000.
During the twelve months ended December 31, 2005, Stonestreet Limited
Partnership converted approximately $456,000 of notes payable into approximately
13,823,000 shares of the Company's common stock at an average conversion price
of $0.033.
During the twelve months ended December 31, 2005, Whalehaven Fund, Limited
converted $41,000 of notes payable into approximately 1,026,000 shares of the
Company's common stock at an average conversion price of $0.040.
During the twelve months ended December 31, 2005, Whalehaven Capital Fund, Ltd.
converted $245,000 of notes payable into approximately 9,110,000 shares of the
Company's common stock at an average conversion price of $0.027. During the same
period, Whalehaven Capital Fund, Ltd. exercised warrants to purchase
approximately 27,000,000 shares of common stock for cash in the amount of
$540,000.
During the twelve months ended December 31, 2005, Momona Capital Corp. converted
approximately $76,000 of notes payable into approximately 1,938,000 shares of
the Company's common stock at an average conversion price of $0.039. During the
same period, Momona Capital Corp. exercised warrants to purchase 1,000,000
shares of common stock for cash in the amount of $24,000.
During the twelve months ended December 31, 2005, Osher Capital Inc. converted
approximately $45,000 of notes payable into approximately 1,715,000 shares of
the Company's common stock at an average conversion price of $0.026.
During the twelve months ended December 31, 2005, an accredited investor
purchased an aggregate of 17,000,000 shares of restricted common stock for a
total purchase price of $506,400. In addition, the investor received an
aggregate of 17,000,000 Class A and 17,000,000 Class B common stock purchase
warrants with an exercise price of $0.045 and $0.06 per share respectively.
F-19
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES:
At December 31, 2005 and December 31, 2004, the Company had net operating loss
carry forwards available to reduce future taxable income, if any, of
approximately $ 35,300,000 and $30,800,000 respectively, for Federal income tax
purposes. It also had net operating loss carry forwards available to reduce
future taxable income, if any, of approximately $ 32,500,000 and $ 28,000,000
for state purposes at December 31, 2005 and 2004 respectively. The Federal and
state net operating loss carry forwards will begin expiring in 2020 and 2007,
respectively. The carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three year period.
The expected income tax provision, computed based on the Company's pre-tax
income (loss) and the statutory Federal income tax rate, is reconciled to the
actual tax provision reflected in the accompanying financial statements as
follows:
2005 2004
------------ ------------
Expected tax provision (benefit) at
statutory rates $ (615,638) $ (2,918,979)
State taxes, net of Federal benefit 528 528
Meals & Entertainment 2,364 2,923
Change in Valuation Allowance 1,702,431 1,236,748
Warrant derivative liability (2,019,636) 1,088,936
Amortization of beneficial conversion feature 966,827 590,644
Other permanent differences (36,076) --
------------ ------------
Totals $ 800 $ 800
============ ============
The provision (benefit) for income taxes in 2005 and 2004 consists of the
following:
2005 2004
------------ ------------
Current:
Federal $ -- $ --
State 800 800
------------ ------------
Totals 800 800
============ ============
Deferred:
Federal -- --
State -- --
------------ ------------
Totals -- --
------------ ------------
Totals $ 800 $ 800
============ ============
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2005 and December 31, 2004 are shown below:
2005 2004
------------ ------------
Deferred tax assets:
Accrued vacation $ 32,113 $ 23,208
Basis Difference in Fixed Assets -- 97,713
Net operating loss 14,865,631 12,961,750
Other 34,362 1,716
------------ ------------
Totals $ 14,932,106 $ 13,084,387
------------ ------------
Deferred tax liabilities:
Deferred State Taxes (981,673) (852,573)
Fixed assets (16,188) --
------------ ------------
Totals (997,861) (852,573)
Deferred tax asset (liability) $ 13,934,245 $ 12,231,814
Valuation Allowance (13,934,245) (12,231,814)
------------ ------------
Net Deferred Tax Asset (Liability) 0 0
============ ============
F-20
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under leases that expire
at various times through 2010. The following is a schedule by years of future
minimum rental payments required under operating leases that have noncancellable
lease terms in excess of one year as of December 31, 2005:
Year ending December 31,
2006 188,685
2007 194,259
2008 199,886
2009 206,081
2010 193,515
----------
$ 982,426
==========
Rent expense, net of sublease income, amounted to $193,503 for the year ended
December 31, 2005.
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN:
On July 14, 1999, the Company adopted an Incentive and Nonqualified Stock Option
Plan (the "Plan") for its employees and consultants under which a maximum of
3,000,000 options (Amendment to increase the available shares from 1,500,000 to
3,000,000 approved by the shareholders in December 2001) and approved by the
shareholders may be granted to purchase common stock of the Company. On July 29,
2005 the Company adopted the 2005 Stock Incentive Plan and reserved 60,000,000
shares of the Company's common stock for issuance under the 2005 Plan.
F-21
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED
Two types of options may be granted under the 2005 Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The Company follows SFAS No. 123 for stock options granted to
non-employees and records a consulting expense equal to the fair value of the
options at the date of grant.
During the year ended December 31, 2005 the Company granted 225,000 stock
options at an average exercise price of $0.032 to employees and consultants of
the Company. Throughout 2005, 25,000 options were terminated.
The number and weighted average exercise prices of options granted under the
plan for the years ended December 31, 2005 and 2004 are as follows:
2005 2004
-------------------- --------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- -------- ---------- --------
Outstanding at beginning of the year 1,721,500 $ 2.70 1,900,500 $ 1.54
Granted during the year 225,000 .04 -- --
Terminated during the year 25,000 .09 179,000 1.12
Exercised during the year -- -- -- --
Outstanding at end of the year 1,921,500 1.47 1,721,500 2.70
Exercisable at end of the year 1,720,806 1.61 1,701,361 2.70
The exercise prices for options outstanding as of December 31, 2005 range from
$0.03 to $12.80. The weighted average remaining contractual life of these
options is approximately 6 years.
F-22
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) WARRANTS:
At December 31, 2004, the Company had warrants outstanding that allow the
holders to purchase up to 215,373,361 shares of common stock.
The number and weighted average exercise prices of the warrants for the years
ended December 31, 2005 and 2004 are as follows:
2005 2004
---------------------- --------------------
Average Average
Exercise Exercise
Number Price Number Price
------------ ------- ---------- -------
Outstanding at beginning of the year 79,429,673 $ 0.10 16,355,921 $ 0.22
Granted during the year 169,062,610 0.05 75,081,815 0.07
Terminated during the year 1,566,400 -- --
Exercised during the year 31,552,522 0.02 12,008,063 0.03
Outstanding at end of the year 215,373,361 0.05 79,429,673 0.10
Exercisable at end of the year 181,373,361 0.05 79,429,673 0.10
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.02 Per share for Series A warrants issued in 2005. As a result, the
Company raised approximately $540,000. In connection with the re-pricing of
warrants to the investors, the Company recorded a charge of approximately
$272,000 to reflect the additional benefit created for these investors.
At December 31, 2005, the weighted average remaining contractual life of the
warrants was approximately 42 months.
(14) SUBSEQUENT EVENTS:
Subsequent to December 31, 2005, note holders converted additional note
principal into common shares as follows:
Average
Amount Converted Exercise
Converted Shares Into Price
----------- ----------- --------
Alpha Capital Akteingesellschaft $ 150,000 11,518,586 $ 0.013
Whalehaven Capital 270,000 20,368,134 $ 0.013
Ellis Enterprise Limited 65,572 5,855,167 $ 0.013
Omega Capital 25,000 2,167,075 $ 0.013
Osher Capital 15,000 1,134,088 $ 0.013
----------- ----------- --------
$ 525,572 41,043,050 $ 0.013
=========== =========== ========
F-23
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2006 2005
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 259,917 $ 338,811
Accounts receivable 26,293 42,696
Inventories 6,814 5,254
Prepaid expenses 97,727 40,574
Other current assets 5,407 --
------------ ------------
Total current assets 396,158 427,335
PROPERTY AND EQUIPMENT, net 136,018 84,703
Software development and Licensing, net 19,107 40,552
Trademarks, net 2,553 5,517
Patents, net 85,203 94,200
Deposits 18,664 18,665
Deferred debt issue costs 115,688 69,970
------------ ------------
Total assets $ 773,391 $ 740,942
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 296,568 128,630
Accrued expenses 354,898 147,305
Settlement agreement liability 450,000 920,000
License agreement liability 930,000 930,000
Warrant derivative liability 2,377,857 2,032,299
------------ ------------
Total current liabilities 4,409,323 4,158,234
LONG TERM DEBT:
Note payable 100,000 100,000
Convertible notes payable, net 678,524 221,850
Deferred rent 9,602 --
------------ ------------
Total liabilities 5,197,449 4,480,084
STOCKHOLDERS' DEFICIT:
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock; $.001 par value, 1,290,000,000 shares
authorized, 524,031,424 and 363,590,152 shares issued
and outstanding at September 30, 2006 and December
31, 2005, respectively 524,047 363,590
Additional paid-in capital 41,389,124 38,561,381
Accumulated deficit (46,337,229) (42,664,113)
------------ ------------
Total stockholders' deficit (4,424,058) (3,739,142)
------------ ------------
Total liabilities and stockholders' deficit $ 773,391 $ 740,942
============ ============
See accompanying notes
F-24
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
Sept 30, 2006 Sept 30, 2005 Sept 30, 2006 Sept 30, 2005
------------- ------------- ------------- -------------
REVENUE $ 151,952 $ 48,139 $ 323,101 $ 82,440
COST OF REVENUE 17,449 11,636 54,509 16,489
------------- ------------- ------------- -------------
GROSS PROFIT 134,503 36,503 268,592 65,951
GENERAL AND ADMINISTRATIVE EXPENSES 812,338 756,972 2,765,790 2,394,726
------------- ------------- ------------- -------------
NET LOSS FROM OPERATIONS (677,835) (720,469) (2,497,198) (2,328,775)
OTHER INCOME (EXPENSES)
Interest expense (518,549) (358,559) (1,633,596) (1,982,754)
Gain on warrant derivative 431,971 -- 652,773 --
Other, net 277 -- (195,093) 298
------------- ------------- ------------- -------------
NET LOSS $ (764,136) $ (1,079,028) $ (3,673,114) $ (4,311,231)
============= ============= ============= =============
BASIC LOSS PER SHARE $ (.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 506,483,000 309,881,000 462,570,000 283,973,000
============= ============= ============= =============
See accompanying notes.
F-25
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Sept 30, Sept 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,673,114) $(4,311,231)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation and amortization 90,580 138,764
Amortization of debt discount and debt issue costs 1,533,125 1,945,442
Gain on warrant derivative liability (652,773) --
Share based compensation expense 235,034 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 16,403 (22,887)
Inventories (1,560) (3,393)
Prepaid expenses and other current assets (62,560) (21,456)
Deposits -- (18,954)
Deferred debt issue costs -- (4,890)
Deferred rent 9,601 --
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 167,937 (92,302)
Accrued expenses 270,236 39,990
Settlement agreement liability (149,500) --
License agreement liability -- (90,000)
Deposit -- (7,292)
----------- -----------
Net cash used in operating activities (2,216,591) (2,448,209)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (90,476) (28,136)
Additions to patent costs (18,014) (10,154)
----------- -----------
Net cash used in investing activities (108,490) (38,290)
----------- -----------
F-26
(Continued)
Nine Months Ended
Sept 30, Sept 30,
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 112,000 309,600
Proceeds from convertible debt 1,984,000 1,854,976
Payments for debt issue costs (150,013) --
Proceeds from warrant exercise 300,200 108,960
----------- -----------
Net cash provided by financing activities 2,246,187 2,273,536
----------- -----------
NET DECREASE IN CASH (78,894) (212,963)
CASH AND CASH EQUIVALENTS, beginning of period 338,811 535,642
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 259,917 $ 322,679
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 10,000 $ 59,727
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Issuance of warrant derivative in connection
with private placement and debt financing $ 998,000 $ 1,399,637
=========== ===========
Beneficial conversion feature of debt $ 597,000 $ 600,363
=========== ===========
Common Stock issued upon conversion of debt $ 1,480,000 $ 1,614,945
=========== ===========
Common Stock issued in connection $ 320,500 $ --
with reduction of settlement liability =========== ===========
See accompanying notes.
F-27
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
One Voice Technologies, Inc. is incorporated under the laws of the State of
Nevada. The Company develops voice recognition software.
Prior to the fourth quarter of 2005, the Company's financial statements had been
prepared and presented as those of a development stage enterprise. Based on the
commercialization of its Mobile Voice product during 2005, the Company believes
that such presentation is no longer necessary.
Located in La Jolla, California, the Company has 8 full-time employees and 2
consultants. The Company is traded on the NASD OTC Electronic Bulletin Board
("OTCBB") under the symbol ONEV One Voice commenced operations on July 14, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS:
The accompanying interim financial statements are unaudited. These financial
statements include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. The balance sheet as of
December 31, 2005 was derived from the Company's audited financial ststements.
Interim results are not necessarily indicative of the results to be expected for
the full year ending December 31, 2006. The financial statements and notes
thereto should be read in conjunction with the financial statements included in
the Company's annual report on Form 10-KSB for the year ended December 31, 2005.
GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred significant losses since inception of $46,337,000 and used
cash for operations of $2,217,000 during the nine months ended September 30,
2006. The Company also has a working capital deficit of $4,013,000 and a
stockholders' deficit of $4,424,000 as of September 30, 2006. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management is currently seeking additional equity or debt financing and
is pursuing revenue-bearing contracts utilizing various applications of its
technology including wireless technology. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2006, the Financial Accounting Standards Board ("FASB") released
Statement No. 155, Accounting for Certain Hybrid Financial Instruments, ("SFAS
No. 155") was released. SFAS No.155 is an amendment of Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities , and Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 155 establishes, among other items, the
accounting for certain derivative instruments embedded within other types of
financial instruments; and, eliminates a restriction on the passive derivative
instruments that a qualifying special-purpose entity may hold. Effective for the
Company beginning January 1, 2007, SFAS No. 155 is not expected to have any
impact on the Company's financial position, results of operations or cash flows.
F-28
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 2006, the FASB released Statement No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, ("SFAS No. 156") was
released. SFAS No. 156 amends SFAS No. 140 to require that all separately
recognized servicing assets and liabilities in accordance with SFAS No. 140 be
initially measured at fair value, if practicable. Furthermore, this standard
permits, but does not require, fair value measurement for separately recognized
servicing assets and liabilities in subsequent reporting periods. SFAS No. 156
is also effective for the Company beginning January 1, 2007; however, the
standard is not expected to have an impact on the Company's financial position,
results of operation or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes-an interpretation of FASB Statement No. 109" (FIN 48). FIN 48
clarifies the accounting for uncertainty in tax positions and requires that a
Company recognizes in its financial statements the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not
expected to have any impact on The Company's financial position.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This Statement focuses on creating consistency and comparability in fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We are
currently evaluating the impact of adopting SFAS 157 on our financial
statements.
(3) SETTLEMENT AGREEMENT LIABILITY:
On January 6, 2006, La Jolla Cove Investors, Inc. and the Company entered into a
Settlement Agreement and Mutual Release (the "Settlement Agreement") in which La
Jolla and we agreed to forever settle, resolve and dispose of all claims,
demands and causes of action asserted, existing or claimed to exist between the
parties because of or in any way related to the Action. Under the Settlement
Agreement, La Jolla and the Company agreed that the parties shall bear their own
costs and attorney's fees associated with the Action. In addition, we agreed to
pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the
execution of the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006 (this payment was not made)
Interest accrued on the $400,000 unpaid balance at 8% per annum commencing on
the date of the Settlement Agreement until paid in full. Because payment of
$400,000 was not made within 30 days of its due date (June 6, 2006), La Jolla is
entitled to enter a judgment against us for the unpaid balance, plus accrued
interest and $100,000, upon the filing of a declaration of default by La Jolla.
Upon a negotiation being reached the payment has been restructured at to an
amount of $50,000 due the 15th of each month starting September 15, 2006 with a
10 day late payment grace period. Accordingly, $450,000 is accrued as a
settlement liability along with accrued interest of 34,000 as of September 30,
2006.
(4) LICENSE AGREEMENT LIABILITY:
In March 2000 the Company entered into a Software License Agreement ("License
Agreement") with Philips Speech Processing, a division of Philips Electronics
North America ("Philips"). Pursuant to the License Agreement, the Company
received a world-wide, limited, nonexclusive license to certain speech
recognition software owned by Philips. The initial term of the License Agreement
was three (3) years, and the License Agreement included an extended term
provision under which the License Agreement was automatically renewable for
successive one (1) year periods, unless terminated by either party upon a
minimum of sixty (60) days written notice prior to the expiration of the initial
term or any extended term.
F-29
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The License Agreement provides for the Company to pay a specified commission on
revenues from products incorporating licensed software, and includes minimum
royalty payment obligations over the initial three (3) year term of the License
Agreement in the aggregate amount of $1,100,000.
Under an amendment to the License Agreement entered into in March 2002, the
initial term of the License Agreement was extended for two (2) years, and the
aggregate minimum royalty payment was increased to $1,500,000. The amendment
also included a revised payment schedule of the minimum royalty payment
obligation that provided for semi-annual payments of $250,000, through December
31, 2004 (due on June 30th and December 31st of each year). In lieu of scheduled
payments, in May, 2003, based on a verbal agreement with Philips, the Company
began making monthly payments of $15,000, of which $10,000 is being applied
against the remaining minimum royalty payment due and $5,000 is being applied
against interest.
Under an amendment to the License Agreement entered into in January 2006, the
term of the License Agreement was extended for five (5) years through December
31, 2010, and the monthly minimum royalty payment was set at $17,500. The
amendment also granted the Company a five (5) year interest-free period to repay
the $930,000 currently outstanding. In addition to minimum monthly royalty
payments, the company is required to make additional payments to Philips once it
has become operationally break-even. The additional monthly payments are capped
at $200,000 per calendar year. As of September 30, 2006 and December 31,2005,
the outstanding minimum royalty obligations pursuant to the License Agreement
was $930,000. In the event of default by One Voice, Philips shall be entitled to
terminate the agreement if such default is not cured within 60 days after
written notice has been given. Upon such termination, One Voice is obligated to
pay any open debts at once.
(5) WARRANT DERIVATIVE LIABILITY
Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company's Own
Stock ("EITF 00-19") specifies the conditions which must be met in order to
classify warrants issued in a company's own stock as either equity or as a
derivative liability. Evaluation of these conditions under EITF 00-19 resulted
in the determination that these warrants should be classified as a derivative
liability. In accordance with EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked-to-market each reporting period,
with a corresponding non-cash gain or loss charged to the current period. The
Company valued all warrant derivative liabilities as of September 30, 2006 using
a Black-Scholes option pricing model using the following assumptions: expected
dividend yield of 0.0%, expected stock price volatility of 128%, risk free
interest rate of 4.62% and a remaining contractual life ranging from .9 years to
3.5 years. The Company valued all warrant derivative liabilities as of December
31, 2005 using a Black-Scholes option pricing model using the following
assumptions: expected dividend yield of 0.0%, expected stock price volatility of
100%, risk free interest rate of 4.35% and a remaining contractual life ranging
from 0.30 years to 4.00 years. During the nine months ended September 30, 2006,
warrants issued in connection with equity and debt financing agreements with an
initial fiar value of $998,331 were added to the warrant derivative liability.
The valuation conducted as of September 30, 2006 resulted in a non-cash gain
during the three months ended September 30, 2006 of $431,971 with a
corresponding decrease in the warrant derivative liability. As of September 30,
2006 and December 31, 2005, the fair value of the warrant derivative liability
was $2,377,857 and 2,032,299 respectively.
F-30
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE:
On August 8, 2003 the Company issued a promissory note in the aggregate
principal amount of $100,000, paying interest at 8.0% per annum, due on August
8, 2008. At September 30, 2006 and December 31, 2005 the balance on the note
payable was $100,000.
(7) CONVERTIBLE NOTES PAYABLE:
On March 17, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several institutional investors, pursuant
to which the investors subscribed to purchase an aggregate principal amount of
$700,000 in 6% secured convertible promissory notes and one Class A common stock
purchase warrant for each one share which would be issued on the closing date
assuming full conversion of the secured convertible notes issued on the closing
date.
The secured convertible notes bear simple interest at 6% per annum payable June
1, 2006 and semi-annually thereafter, and mature 2 years after the date of
issuance. Each investor shall have the right to convert the secured convertible
notes after the date of issuance and at any time, until paid in full into shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.043 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. The conversion price is adjustable in the
event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the conversion price of the secured convertible notes will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets. Our
obligation to repay all principal and accrued and unpaid interest under the
convertible notes is secured by all of our assets pursuant to a certain Security
Agreement dated February 16, 2006, which also secures the remaining principal
amount of our convertible notes in the aggregate amount of $1,827,354 which we
issued on March 18, 2005 July 13, 2005 March 17, 2006 May 5, 2006 July 6, 2006
and August 29, 2006 2005 and to certain of the investors participating in this
new private placement.
We issued an aggregate of 50,972,111 Class A common stock purchase warrants to
the investors, representing one Class A warrant issued for each one share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.045 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. The fair value of the
warrants of $457,000 using the Black Scholes option pricing model is recorded as
a derivative liability. The beneficial conversion feature of approximately
$243,000 will be amortized over the life of the debt using the interest method.
On May 5, 2006 we completed a private placement pursuant to a Subscription
Agreement which we entered into with several institutional investors, pursuant
to which the investors subscribed to purchase an aggregate principal amount of
$324,000 in 6% secured convertible promissory notes. The secured convertible
notes bear simple interest at 6% per annum payable June 1, 2006 and
semi-annually thereafter, and mature 2 years after the date of issuance. Each
investor shall have the right to convert the secured convertible notes after the
date of issuance and at any time, until paid in full into shares of our common
stock. The conversion price per share shall be the lower of (i) $0.043 or (ii)
80% of the average of the three lowest closing bid prices for
F-31
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. The beneficial conversion feature of approximately
$110,000 will be amortized over the life of the debt using the interest method.
On July 6, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several institutional investors, pursuant
to which the investors subscribed to purchase an aggregate principal amount of
$550,000 in 6% secured convertible promissory notes and one Class A common stock
purchase warrant which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum payable
August 1, 2006 and semi-annually thereafter, and mature 2 years after the date
of issuance. Each investor shall have the right to convert the secured
convertible notes after the date of issuance and at any time, until paid in full
into shares of our common stock. The conversion price per share shall be the
lower of (i) $0.015 or (ii) 80% of the average of the three lowest closing bid
prices for our common stock for the 30 trading days prior to, but not including,
the conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated February 16, 2006, which also
secures the remaining principal amount of our convertible notes in the aggregate
amount of $1,827,354 which we issued on March 18, 2005 July 13, 2005 March 17,
2006 May 5, 2006 July 6, 2006 and August 29, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 48,530,839 Class A common stock purchase warrants to
the investors, representing one Class A warrant issued for each one share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. The fair value of the
warrants of $298,000 using the Black Scholes option pricing model is recorded as
a derivative liability. The beneficial conversion feature of approximately
$226,000 will be amortized over the life of the debt using the interest method.
On August 29, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several institutional investors, pursuant
to which the investors subscribed to purchase an aggregate principal amount of
$420,000 in 6% secured convertible promissory notes and one Class A common stock
purchase warrant which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
F-32
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The secured convertible notes bear simple interest at 6% per annum payable
September 1, 2006 and semi-annually thereafter, and mature 2 years after the
date of issuance. Each investor shall have the right to convert the secured
convertible notes after the date of issuance and at any time, until paid in full
into shares of our common stock. The conversion price per share shall be the
lower of (i) $0.015 or (ii) 80% of the average of the three lowest closing bid
prices for our common stock for the 30 trading days prior to, but not including,
the conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated February 16, 2006, which also
secures the remaining principal amount of our convertible notes in the aggregate
amount of $1,827,354 which we issued on March 18, 2005 July 13, 2005 March 17,
2006 May 5, 2006 July 6, 2006 and August 29, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 42,708,334 Class A common stock purchase warrants to
the investors, representing one Class A warrant issued for each one share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. The fair value of the
warrants of $186,000 using the Black Scholes option pricing model is recorded as
a derivative liability. The beneficial conversion feature of approximately
$18,000 will be amortized over the life of the debt using the interest method.
During the nine months ended September 30, 2006, $1,480,000 of notes payable and
accrued interest was converted into approximately 119,907,000 shares of the
Company's common stock at an average conversion price of $0.01 per share.
F-33
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Convertible notes payable at September 30, 2006 consists of
the following:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------- ----------- -----------
LONG-TERM PORTION
Stonestreet Limited
Partnership December 23, 2007 $ 10,000 $ (4,338) $ 5,662
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft July 13, 2008 $ 225,000 $ (137,851) $ 87,149
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft March 17, 2008 $ 250,000 $ (182,358) $ 67,642
----------- ----------- -----------
Ellis International
Limited March 17, 2008 $ 26,354 $ (19,375) $ 6,979
----------- ----------- -----------
Whalehaven Capital
Fund Limited March 17, 2008 $ 80,000 $ (58,470) $ 21,530
----------- ----------- -----------
Momona Capital
Corp March 17, 2008 $ 35,000 $ (25,435) $ 9,565
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft May 5, 2008 $ 108,000 $ (29,353) $ 78,647
----------- ----------- -----------
Whalehaven Capital
Fund Limited May 5, 2008 $ 108,000 $ (29,353) $ 78,647
----------- ----------- -----------
Omega Capital
Small Cap Fund May 5, 2008 $ 15,000 $ (4,279) $ 10,721
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft July 6, 2008 $ 100,000 $ (84,278) $ 15,722
----------- ----------- -----------
Bristol Investment Fund
Ltd July 6, 2008 $ 250,000 $ (210,694) $ 39,306
----------- ----------- -----------
Centurion Microcap
L.P July 6, 2008 $ 100,000 $ (84,278) $ 15,722
----------- ----------- -----------
Whalehaven Capital
Fund Limited July 6, 2008 $ 100,000 $ (84,278) $ 15,722
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft August 29, 2008 $ 100,000 $ (47,227) $ 52,773
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft August 29, 2008 $ 5,000 $ (267) $ 4,733
----------- ----------- -----------
Ellis International
Limited August 29, 2008 150,000 $ (70,840) $ 79,160
----------- ----------- -----------
Osher Capital August 29, 2008 $ 60,000 $ (28,458) $ 31,542
----------- ----------- -----------
Whalehaven Capital
Fund Limited August 29, 2008 $ 100,000 $ (47,430) $ 52,570
----------- ----------- -----------
Whalehaven Capital
Fund Limited August 29, 2008 $ 5,000 $ (268) $ 4,732
----------- ----------- -----------
TOTAL LONG TERM PORTION $ 1,827,354 $(1,148,830) $ 678,524
=========== =========== ===========
F-34
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) COMMON STOCK:
During the nine months ended September 30, 2006, Alpha Capital
Akteingesellschaft converted approximately $373,000 of notes payable and accrued
interest into approximately 31,529,000 shares of the Company's common stock at
an average conversion price of $0.012. During the same period, Alpha Capital
Akteingesellschaft exercised warrants to purchase 14,300,000 shares of common
stock for cash in the amount of $200,200.
During the nine months ended September 30, 2006, Whalehaven Fund, Limited
converted approximately $757,000 of notes payable and accrued interest into
approximately 56,317,000 shares of the Company's common stock at an average
conversion price of $0.013.
During the nine months ended September 30, 2006, Momona Capital Corp. converted
approximately $66,000 of notes payable and accrued interest into approximately
6,107,000 shares of the Company's common stock at an average conversion price of
$0.011.
During the nine months ended September 30, 2006, Ellis International Ltd.
converted approximately $148,000 of notes payable into approximately 12,965,000
shares of the Company's common stock at an average conversion price of $0.011.
During the same period, Ellis International Ltd. exercised warrants to purchase
6,250,000 shares of common stock for cash in the amount of $100,000.
During the nine months ended September 30, 2006, Omega Capital Small Cap Fund
converted approximately $120,000 of notes payable into approximately 11,855,000
shares of the Company's common stock at an average conversion price of $0.010.
During the nine months ended September 30, 2006, Osher Capital Inc. converted
approximately $16,000 of notes payable into approximately 1,134,000 shares of
the Company's common stock at an average conversion price of $0.014.
During the nine months ended September 30, 2006, an accredited investor
purchased an aggregate of 7,000,000 shares of restricted common stock for a
total purchase price of $112,000. In addition, the investor received an
aggregate of 3,000,000 Class A and 3,000,000 Class B common stock purchase
warrants with an exercise price of $0.045 and $0.06 per share respectively.
(9) ACCOUNTING FOR STOCK-BASED COMPENSATION:
On January 1, 2006 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.123 (Revised 2004), "Share Based Payment," ("SFAS 123"),
using the modified prospective method. In accordance with SFAS No. 123, the
Company measures the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. That cost
is recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.
Under the modified prospective approach, SFAS 123 applies to new awards and to
awards that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized for the first quarter of fiscal 2006 includes compensation cost
for all share-based payments granted prior to, but not yet vested on, January 1,
2006, based on the grant-date fair value estimated in accordance with the pro
forma provisions of SFAS 123, and compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. Prior periods were not
restated to reflect the impact of adopting the new standard. During the nine
months ended September 30, 2006, the Company recorded $235,000 in non-cash
charges for the implementation of SFAS 123R. As of September 30, 2006, there was
approximately $240,000 of total unrecognized compensation costs related to
unvested options.
F-35
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fair value of stock options at date of grant was estimated using the
Back-Scholes model with the following assumptions: expected volatility of 90.9%,
expected term of 2.0 years, risk-free interest rate of 4.62%, and expected
dividend yield of 0%. Expected volatility is based on the historical
volatilities of the Company's common stock. The expected life of employee stock
options is determined using historical data of employee exercises and represents
the period of time that stock options are expected to be outstanding. The risk
free interest rate is based on the U.S. Treasury Moody AAA for the expected life
of the stock option.
The following table summarizes the stock option transactions during the nine
months ended September 30, 2006:
September 30, 2006
------------------------------------
Weighted
average
Weighted remaining
average contractual
exercise life
Shares price (in years)
---------- ---------- ----------
Options outstanding 1/1/2006 1,921,500 $ 1.47 5.63
Options granted 57,700,000 $ 0.016 9.32
Options exercised -- -- --
Options terminated -- -- --
Options outstanding 9/30/2006 59,621,500 $ .06 9.19
----------
Options exercisable 9/30/2006 20,996,500 $ .15 9.19
==========
Prior to January 1, 2006, the Company accounted for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Had compensation cost for the plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS No. 123," the Company's net earnings and earnings per share
would have been:
Three Months Ended Nine Months Ended
Sept.30, 2005 Sept.30, 2005
------------- -------------
Net loss, as reported $ (1,079,028) $ (4,311,231)
Deduct: total stock based
employee compensation expense
determined under fair value based
methods for all options, net of (400) (700)
related tax effects -- --
Pro forma net loss (1,079,428) (4,311,931)
Earnings per share:
Basic- as reported $ (0.01) $ (0.01)
============= =============
Basic- pro forma $ (0.01) $ (0.01)
============= =============
Weighted average
common equivalent
shares outstanding
basic and diluted 309,881,000 283,973,000
============= =============
The pro forma compensation costs presented above were determined using the
weighted average fair values of options granted under the Company's stock option
plans. The fair value of the grants was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions. See the 2005
assumptions below:
Expected life 3 Years
Risk-free interest rate 5.5%
Dividend yield -
Volatility 100%
F-36
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. THIS DOCUMENT MAY ONLY BE USED WHERE
IT IS LEGAL TO SELL THE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
UP TO 161,493,516 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
----
Cautionary Note Regarding Forward-Looking Statements 6
Prospectus Summary 7
Risk Factors 11
Use of Proceeds 16 One Voice Technologies, Inc.
Market For Common Equity And Related Stockholder
Matters 16
Management's Discussion And Analysis and Results of
Operations 17
Business 22
Description of Property 25
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships And Related Transactions 29 _________________________
Security Ownership Of Certain Beneficial Owners
And Management 29 PROSPECTUS
_________________________
Description of Securities 30
Indemnification for Securities Act Liabilities 30
Plan of Distribution 31
Selling Stockholders 32
Legal Matters 36
Experts 36
Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure 37
Available Information 37
Index To Financial Statements F-1
February 12, 2007
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Nevada General Corporation Law and our Articles of Incorporation, as
amended, and our Bylaws, our directors will have no personal liability to us or
our stockholders for monetary damages incurred as the result of the breach or
alleged breach by a director of his "duty of care." This provision does not
apply to the directors' (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its stockholders or that involve the absence of good faith on the part of the
director, (iii) approval of any transaction from which a director derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation or its stockholders in circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its stockholders, (v) acts or omissions that constituted an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its stockholders, or (vi) approval of an unlawful
dividend, distribution, stock repurchase or redemption. This provision would
generally absolve directors of personal liability for negligence in the
performance of duties, including gross negligence.
The effect of this provision in our Articles of Incorporation and Bylaws is to
eliminate the rights of our Company and our stockholders (through stockholder's
derivative suits on behalf of our Company) to recover monetary damages against a
director for breach of his fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (vi) above. This provision does not
limit nor eliminate the rights of our Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, our Bylaws provide that if the Nevada
General Corporation Law is amended to authorize the future elimination or
limitation of the liability of a director, then the liability of the directors
will be eliminated or limited to the fullest extent permitted by the law, as
amended. The Nevada General Corporation Law grants corporations the right to
indemnify their directors, officers, employees and agents in accordance with
applicable law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling our Company pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 224.64*
Accounting fees and expenses 20,000.00*
Legal fees and expenses 25,000.00*
Miscellaneous 775.36**
-----------
TOTAL $ 46,000.00*
===========
* Previously Paid.
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Following is a summary of unregistered securities issued during the period May
2003 through February 2007.
II-1
On April 10, 2003, we entered into a securities purchase agreement with four
accredited investors, Alpha Capital Aktiengesellschaft, Ellis Enterprises Ltd.,
Greenwich Growth Fund Limited, and 01144 Limited for the issuance of 4%
convertible debentures in the aggregate amount of $600,000. The notes bear
interest at 4% (effective interest rate in excess of 100%), mature on April 10,
2005, and are convertible into our common stock, at the holders' option, at the
lower of (i) $0.1166 or (ii) 80% of the average of the five lowest closing bid
prices for the common stock on a principal market for the 30 trading days before
but not including the conversion date. The note may not be paid, in whole or in
part, before April 10, 2005 without the consent of the holder. The full
principal amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, we issued an aggregate of 350,004 warrants to
the investors. The warrants are exercisable until April 10, 2008 at a purchase
price of $.1272 per share. Net proceeds amounted to approximately $540,000, net
of debt issue cash cost of $60,000. The fair value of the warrants of $25,000
using Black Scholes option pricing model and the beneficial conversion feature
of approximately $515,000 have been amortized over the life of the debt using
the interest method. Upon conversion of the debt, any unamortized debt issue
costs was charged to interest expense.
On June 30, 2003, we entered into a securities purchase agreement with two
accredited investors, Alpha Capital Aktiengesellschaft, and Bristol Investment
Fund Limited for the issuance of 4% convertible debentures in the aggregate
amount of $500,000. The notes bear interest at 4% (effective interest rate in
excess of 100% on the aggregate amount), mature on June 20, 2005, and are
convertible into our common stock, at the holders' option, at the lower of (i)
$0.1023 or (ii) 80% of the average of the five lowest closing bid prices for the
common stock on a principal market for the 30 trading days before but not
including the conversion date. The note may not be paid, in whole or in part,
before June 30, 2005 without the consent of the holder. The full principal
amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, we issued an aggregate of 291,670 warrants to
the investors. The warrants are exercisable until June 30, 2008 at a purchase
price of $.1116 per share. Net proceeds amounted to approximately $437,500, net
of debt issue cash cost of $62,500. The fair value of the warrants of $11,000
using Black Scholes option pricing model and the beneficial conversion feature
of approximately $143,000 was amortized as interest expense over the life of the
debt using the interest method. Upon conversion of the debt, any unamortized
debt issue costs was charged to interest expense.
On September 17, 2003, we entered into a securities purchase agreement with
three accredited investors, Alpha Capital Aktiengesellschaft, Bristol Investment
Fund Limited and Ellis Enterprises Ltd for the issuance of 6% convertible
debentures in the amount of $375,000. The notes bear interest at 6% (effective
interest rate of 80% on the aggregate amount), mature on September 17, 2004, and
are convertible into our common stock, at the holders' option, at the lower of
(i) $0.0474 or (ii) 78% of the average of the three lowest closing bid prices
for the common stock on a principal market for the 30 trading days before but
not including the conversion date. The note may not be paid, in whole or in
part, before September 17, 2004 without the consent of the holder. The full
principal amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, we issued 4,746,837 warrants to the investors.
The warrants are exercisable until September 17, 2010 at a purchase price of
$.0474 per share. Net proceeds amounted to approximately $334,500, net of debt
issue cash cost of $40,500. The relative value (limited to the face amount of
the debt) of all the warrants of $164,000 using Black Scholes option pricing
model, cash cost of $40,500 and the beneficial conversion feature of
approximately $170,500 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
On November 10, 2003, we entered into a securities purchase agreement with three
accredited investors, Alpha Capital Aktiengesellschaft, Bristol Investment Fund
Limited and Ellis Enterprises Ltd for the issuance of 6% convertible debentures
in the amount of $375,000. The notes bear interest at 6% (effective interest
rate of 80% on the aggregate amount), mature on November 10, 2004, and are
convertible into our common stock, at the holders' option, at the lower of (i)
$0.0474 or (ii) 78% of the average of the three lowest closing bid prices for
the common stock on a principal market for the 30 trading days before but not
including the conversion date. The note may not be paid, in whole or in part,
before November 10, 2004 without the consent of the holder. The full principal
amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, we issued 4,746,837 warrants to the investors.
The warrants are exercisable until November 10, 2010 at a purchase price of
$.0474 per share. Net proceeds amounted to approximately $345,000, net of debt
issue cash cost of $30,000. The relative value (limited to the face amount of
the debt) of all the warrants of $127,000 using Black Scholes option pricing
model, cash cost of $30,000 and the beneficial conversion feature of
approximately $211,000 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
II-2
On December 12, 2003, we entered into a securities purchase agreement with La
Jolla Cove Investors, Inc. for the issuance of a 7.75% convertible debenture in
the aggregate amount of $250,000. The note bears interest at 7.75%, matures on
December 12, 2005, and is convertible into our common stock, at the holders'
option. The number of common shares this debenture may be converted is equal to
the dollar amount of the debenture being converted multiplied by eleven, minus
the product of the Conversion Price multiplied by ten times the dollar amount of
the Debenture being converted, and the entire forgoing result shall be divided
by the Conversion Price. The Conversion Price is defined as the lower of (i)
$0.25 or (ii) 80% of the average of the three lowest volume weighted average
prices during the twenty (20) trading days prior to Holder's election to
convert. Beginning in the first full calendar month after the Registration
Statement is declared effective, Holder shall convert at least 7%, but no more
than 15% (such 15% maximum amount to be cumulative from the deadline), of the
face value of the debenture per calendar month into our common shares, provided
that the common shares are available, registered and freely tradable. In
addition, we issued an aggregate of 2,500,000 warrants to the investors. The
warrants are exercisable until December 12, 2006 at a purchase price of $1.00
per share. Holder will exercise at least 7%, but no more than 15% (such 15%
maximum amount to be cumulative from the Deadline), of the Warrants per calendar
month, provided that the Common Shares are available, registered and freely
tradable. The 15% monthly maximum amount shall not be applicable if the Current
Market Price of the Common Stock at anytime during the applicable month is
higher than the Current Market Price of the Common Stock on the Closing Date. In
the event Holder does not exercise at least 7% of the Warrants in any particular
calendar month, Holder shall not be entitled to collect interest on the
Debenture for that month. The fair value of the warrants of $18,000 using Black
Scholes option pricing model and the beneficial conversion feature of
approximately $219,000 will be amortized as interest expense over the life of
the debt using the interest method. Upon conversion of the debt mentioned here,
any unamortized debt issue costs will be charged to expense. As of December 31,
2003 the principal balance amounted to $250,000 and the unamortized debt
discount amounted to approximately $243,000.
On August 18, 2004, we entered into a securities purchase agreement with four
accredited investors, Alpha Capital Aktiengesellschaft, Greenwich Growth Fund
Limited, Whalehaven Capital, LP and Whalehaven Fund Limited for the issuance of
7% convertible debentures in the aggregate amount of $700,000. The notes bear
interest at 7% (effective interest rate of 146% on the aggregate amount), mature
on August 18, 2007, and are convertible into our common stock, at the holders'
option, at the lower of (i) $0.085 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before August 18, 2007 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, we issued an aggregate of
7,063,774 warrants to the investors (3,531,887 Class A warrants and 3,531,887
Class B warrants).The Class A warrants are exercisable until August 18, 2009 at
a purchase price of $.0935 per share. The Class B warrants are exercisable until
August 18, 2009 at a purchase price of $.10625 per share. Net proceeds amounted
to approximately $621,000, net of debt issue cash cost of $79,000. The fair
value of the warrants of $323,000 using Black Scholes option pricing model and
the beneficial conversion feature of approximately $298,000 will be amortized
over the life of the debt using the interest method. Upon conversion of the
debt, unamortized debt issue costs are charged to expense.
On October 28, 2004, we entered into a securities purchase agreement with four
accredited investors, Alpha Capital Aktiengesellschaft, Stonestreet Limited
Partnership, Ellis International Ltd. and Momona Capital Corp. for the issuance
of 7% convertible debentures in the aggregate amount of $596,000. The notes bear
interest at 7% (effective interest rate of 100% on the aggregate amount), mature
on October 28, 2007 and are convertible into our common stock, at the holders'
option, at the lower of (i) $0.074 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before October 28, 2007 without the consent of the
holder. The full principal amount of the convertible note is due upon default
under the terms of convertible notes. In addition, we issued an aggregate of
11,825,398 Class A warrants and 11,825,398 Class B warrants to the investors.
The warrants are exercisable until October 28, 2009 at a purchase price of $0.07
per share. Net proceeds amounted to approximately $532,000, net of debt issue
cash cost of $64,000. The relative value (limited to the face amount of the
debt) of all the warrants of $276,000 using Black Scholes option pricing model
and the beneficial conversion feature of approximately $319,000 will be
amortized over the life of the debt using the interest method. As of December
31, 2004, the balance owed was $266,000 and the unamortized discount amounted to
$250,000. Upon conversion of the debt mentioned above, any unamortized debt
issue costs will be charged to expense.
II-3
On April 22, 2005, we held a closing with one accredited investor pursuant to
which the investor subscribed to purchase an aggregate of 5,500,000 shares of
restricted common stock for a total purchase price of $145,200. In addition, the
investor received an aggregate of 5,500,000 Class A common stock purchase
warrants and 5,500,000 Class B common stock purchase warrants to the investor,
representing 100 Class A and Class B warrants issued for each 100 shares which
were issued on the closing date. The Class A warrants are exercisable until four
years from the closing date at an exercise price of $0.045 per share. The Class
B warrants are exercisable until four years from the closing date at an exercise
price of $0.06 per share. The holder of the Class B warrants will be entitled to
purchase one share of common stock upon exercise of the Class B warrants for
each share of common stock previously purchased upon exercise of the Class A
warrants.
On May 6, 2005, we held a closing with one accredited investor pursuant to which
the investor subscribed to purchase an aggregate of 2,500,000 shares of
restricted common stock for a total purchase price of $66,000. In addition, the
investor received an aggregate of 2,500,000 Class A common stock purchase
warrants and 2,500,000 Class B common stock purchase warrants to the investor,
representing 100 Class A and Class B warrants issued for each 100 shares which
were issued on the closing date. The Class A warrants are exercisable until four
years from the closing date at an exercise price of $0.045 per share. The Class
B warrants are exercisable until four years from the closing date at an exercise
price of $0.06 per share. The holder of the Class B warrants will be entitled to
purchase one share of common stock upon exercise of the Class B warrants for
each share of common stock previously purchased upon exercise of the Class A
warrants.
On July 11, 2005, we held a closing with one accredited investor pursuant to
which the investor subscribed to purchase an aggregate of 3,000,000 shares of
restricted common stock for a total purchase price of $98,400. In addition, the
investor received an aggregate of 3,000,000 Class A common stock purchase
warrants and 3,000,000 Class B common stock purchase warrants to the investor,
representing 100 Class A and Class B warrants issued for each 100 shares which
were issued on the closing date. The Class A warrants are exercisable until four
years from the closing date at an exercise price of $0.045 per share. The Class
B warrants are exercisable until four years from the closing date at an exercise
price of $0.06 per share. The holder of the Class B warrants will be entitled to
purchase one share of common stock upon exercise of the Class B warrants for
each share of common stock previously purchased upon exercise of the Class A
warrants.
On October 13, 2005, we held our first closing with one accredited investor
pursuant to which the investor subscribed to purchase an aggregate of 6,000,000
shares of restricted common stock for a total purchase price of $196,800. In
addition, the investor received an aggregate of 6,000,000 Class A common stock
purchase warrants and 6,000,000 Class B common stock purchase warrants to the
investor, representing 100 Class A and Class B warrants issued for each 100
shares which were issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.045 per share. The Class B warrants are exercisable until four years from the
closing date at an exercise price of $0.06 per share. The holder of the Class B
warrants will be entitled to purchase one share of common stock upon exercise of
the Class B warrants for each share of common stock previously purchased upon
exercise of the Class A warrants. We received $98,400 of the purchase price on
the initial closing date of October 13, 2005 and received an additional $98,400
of the purchase price pursuant to the second closing, which took place on
October 25, 2005.
On January 24, 2006, we issued nonstatutory options to purchase an aggregate of
57,200,000 shares of our common stock at a price equal to $0.016 per share to
certain of our employees, directors and consultants. The aforementioned options
were issued pursuant to our 2005 Stock Incentive Plan.
On February 7, 2006, we issued 10,000,000 restricted common shares to La Jolla
Cove Investors, Inc. pursuant to a Settlement Agreement entered into on January
6, 2006.
On March 16, 2006, we held a closing with one accredited investor pursuant to
which the investor subscribed to purchase an aggregate of 3,000,000 shares of
restricted common stock for a total purchase price of $60,000. In addition, the
investor received an aggregate of 3,000,000 Class A common stock purchase
warrants and 3,000,000 Class B common stock purchase warrants to the investor,
representing 100 Class A and Class B warrants issued for each 100 shares which
were issued on the closing date. The Class A warrants are exercisable until four
years from the closing date at an exercise price of $0.045 per share. The Class
B warrants are exercisable until four years from the closing date at an exercise
price of $0.06 per share. The holder of the Class B warrants will be entitled to
purchase one share of common stock upon exercise of the Class B warrants for
each share of common stock previously purchased upon exercise of the Class A
warrants.
II-4
On March 20, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several accredited and/or qualified
institutional investors dated as of dated as of March 17, 2006, pursuant to
which the investors subscribed to purchase an aggregate principal amount of
$700,000 in 6% secured convertible promissory notes and one Class A common stock
purchase warrant for each one share which would be issued on the closing date
assuming full conversion of the secured convertible notes issued on the closing
date.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance and at any time, until paid
in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower
of(i) $0.043 or (ii) 80% of the average of the three lowest closing bid prices
for our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets.
We issued an aggregate of 50,972,111 Class A common stock purchase warrants to
the investors, representing one Class A warrant issued for each one share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.045 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
On April 20, 2006, the Company issued 3,000,000 restricted common shares in
exchange for an agreement to provide consulting services and a release on
potential Claims.
On May 5, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several accredited and/or qualified
institutional investors pursuant to which the investors subscribed to purchase
an aggregate principal amount of $324,000 in 6% secured convertible promissory
notes.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance at any time, until paid in
full, at the election of the investor into fully paid and nonassessable shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.043 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. The conversion price is adjustable in the
event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the conversion price of the secured convertible notes will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets.
Further, on June 27, 2006 we entered into a Subscription Agreement with one
accredited investor pursuant to which we sold, and the investor purchased, an
aggregate of 4,000,000 restricted shares of our common stock at a per share
purchase price of $0.013.
On July 6, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several accredited and/or qualified
institutional investors pursuant to which the investors subscribed to purchase
an aggregate principal amount of $550,000 in 6% secured convertible promissory
notes and 1 Class A common stock purchase warrant for each 1share which would be
issued on the closing date assuming full conversion of the secured convertible
notes issued on the closing date. We received gross proceeds of $300,000 on July
6, 2006 and will receive the remaining $250,000 on or prior to July 14, 2006.
II-5
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, August 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance and at any time, until paid
in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 48,530,839 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
On August 28, 2006, we entered into a Subscription Agreement with several
accredited and/or qualified institutional investors pursuant to which the
investors subscribed to purchase an aggregate principal amount of $420,000 in 6%
secured convertible promissory notes and 1 Class A common stock purchase warrant
for each 1share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, September 1, 2006 and semi-annually thereafter, and mature 2
years after the date of issuance. Each investor shall have the right to convert
the secured convertible notes after the date of issuance and at any time, until
paid in full, at the election of the investor into fully paid and nonassessable
shares of our common stock. The conversion price per share shall be the lower of
(i) $0.015 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market or
exchange where our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured convertible
notes will be adjusted in the event that we spin off or otherwise divest
ourselves of a material part of our business or operations or dispose all or a
portion of our assets. Our obligation to repay all principal, and accrued and
unpaid interest under the convertible notes is secured by all of our assets
pursuant to a certain Security Agreement dated as of February 16, 2006, which
also secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,827,000 which we issued on March 18, 2005, July 13, 2005,
March 20, 2006, May 5, 2006 and July 6, 2006 to certain of the investors
participating in this new private placement.
We issued an aggregate of 42,708,334 Class A common stock purchase warrants to
the investors, representing 1 Class A warrant issued for each 1 share which
would be issued on the closing date assuming full conversion of the secured
convertible notes issued on the closing date. The Class A warrants are
exercisable until four years from the closing date at an exercise price of
$0.015 per share. The exercise price of the Class A warrants will be adjusted in
the event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the exercise price of the warrants will be adjusted in the event that
we spin off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
During the nine months ended September 30, 2006, an accredited investor agreed
to purchase an aggregate of 7,000,000 shares of restricted common stock for a
total purchase price of $112,000.
On December 21, 2006, we issued an aggregate of 20,000,000 shares of common
stock to the investors of our 8% revolving credit notes on a pro rata basis.
II-6
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of One Voice Technologies, Inc. or
executive officers of One Voice Technologies, Inc., and transfer was restricted
by One Voice Technologies, Inc. in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
Exhibit
-------
No. Description
--- -----------
PLANS OF ACQUISITION
2.1 Merger Agreement and Plan of Reorganization with
Conversational Systems, Inc. dated June 22, 1999
(filed herewith).
ARTICLES OF INCORPORATION AND BYLAWS
3.1 Articles of Incorporation of Belridge Holdings Corp.
filed with the Nevada Secretary of State on August 23,
1995 (incorporated by reference to Exhibit 3(i) to our
Form 10-SB filed October 7, 1999).
3.2 Certificate of Amendment of Articles of Incorporation
of Belridge Holdings Corp. changing its name to Dead
On, Inc. (incorporated by reference to Exhibit 3(i) to
our Form 10-SB filed October 7, 1999). The Certificate
originally filed on September 25, 1998, was canceled
and re-filed with the Nevada Secretary of State on
June 10, 1999.
3.3 Articles of Merger for the merger of Conversational
Systems, Inc. into Dead On, Inc. filed with the Nevada
Secretary of State on July 14, 1999 with supporting
documents (incorporated by reference to Exhibit 2 to
our Form 10-SB, filed October 7, 1999). This document
changed the name of the surviving entity, Dead On,
Inc., to ConversIt.com, Inc.
3.4 Certificate of Amendment of Articles of Incorporation
of ConversIt.com, Inc. changing its name to One Voice
Technologies, Inc. (incorporated by reference to
Exhibit 2 to our Form 10-SB filed October 7, 1999).
3.5 Bylaws of Belridge Holdings Corp. (incorporated by
reference to Exhibit 3(ii) of our Form 10-SB, filed
October 7, 1999).
3.6 Amendment to Bylaws dated July 11, 2000 (excerpted)
(incorporated by reference to Exhibit 4.3 of our Form
S-8, filed October 3, 2000).
3.7 Certificate of Amendment of Articles of Incorporation
increasing One Voice's common stock to 250,000,000.
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
4.1 Common Stock Purchase Warrant with Veritas SG
Investments from the January 2000 offering
(incorporated by reference to Exhibit 4.1 of our Form
SB-2, filed November 11, 2000).
4.2 Form of Common Stock Purchase Warrant from the March
2000 offering (incorporated by reference to Exhibit
4.1 of our Form SB-2, filed November 11, 2000).
II-7
4.3 Securities Purchase Agreement ("SPA") with Nevelle
Investors LLC dated October 3, 2000, and Form of
Debenture (Exhibit A to the SPA), Form of Warrant
(Exhibit B to the SPA), Conditional Warrant dated
October 3, 2000 (Exhibit C to the SPA) and
Registration Rights Agreement dated October 3, 2000
(Exhibit E to the SPA), each with Nevelle Investors
LLC (incorporated by reference to Exhibit 4 to our
Form 10-QSB, filed November 14, 2000).
CONSENT
5.1 Consent of Sichenzia Ross Friedman Ference LLP
(filed herewith).
MATERIAL CONTRACTS
10.1 Employment Agreement with Dean Weber dated July 14,
1999 (incorporated by reference to Exhibit 10 to our
Form 10-SB, filed October 7, 1999). This agreement was
amended on April 10, 2000, to increase Mr. Weber's
annual salary to $252,000.
10.2 Consulting Agreement with KJN Management Ltd. For the
services of James Hadzicki dated July 14, 1999
(incorporated by reference to Exhibit 10 to our Form
10-SB, filed October 7, 1999). This agreement was
amended on April 10, 2000, to increase the annual
consulting fee to $180,000.
10.3 Software Agreement with IBM/OEM dated September 21,
1999 (incorporated by reference to Exhibit 4.4 to our
Form SB-2 filed November 20, 2000).
10.4 Software License Agreement with Philips Spech
Processing dated March 3, 2000 (incorporated by
reference to Exhibit 4.4 to our Form SB-2 filed
November 20, 2000).
10.5 Amended and Restated 1999 Stock Option Plan
(incorporated by reference to Exhibit 4.4 to our Form
S-8, Amendment No. 1, filed October 4, 2000).
10.6 Subscription Agreement dated August 8, 2002
(incorporated by reference to our registration
statement on Form SB-2 filed September 12, 2002).
10.7 Alpha Capital Note dated August 8, 2002 (incorporated
by reference to our registration statement on Form
SB-2 filed September 12, 2002)
10.8 Alpha Capital Warrant dated August 8, 2002
(incorporated by reference to our registration
statement on Form SB-2 filed September 12, 2002)
10.9 Stonestreet Note dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2
filed September 12, 2002)
10.10 Stonestreet Warrant dated August 8, 2002 (incorporated
by reference to our registration statement on Form
SB-2 filed September 12, 2002)
10.11 Subscription Agreement dated November 14, 2002
(incorporated by reference to our registration
statement on Form SB-2 filed September 12, 2002)
10.12 Alpha Capital Note dated August 8, 2002 (incorporated
by reference to our registration statement on Form
SB-2 filed September 12, 2002)
10.13 Alpha Capital Warrant dated August 8, 2002
(incorporated by reference to our registration
statement on Form SB-2 filed September 12, 2002)
10.14 Ellis Note dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2
filed September 12, 2002)
10.15 Ellis Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2
filed September 12, 2002)
10.16 Bristol Note dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2
filed September 12, 2002)
II-8
10.17 Bristol Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2
filed September 12, 2002)
10.18 Subscription Agreement dated April 10, 2003
(incorporated by reference to our registration
statement on Form SB-2 filed April 30, 2003)
10.19 Form of Warrant dated June 30, 2003 (incorporated by
reference to our registration statement on Form SB-2
filed April 30, 2003)
10.20 Subscription Agreement dated September 17, 2003
(incorporated by reference to our registration
statement on Form SB-2 filed October 20, 2003)
10.21 Form of convertible note dated September 17, 2003
(incorporated by reference to our registration
statement on Form SB-2 filed October 20,2003)
10.22 Form of Warrant dated September 17, 2003 (incorporated
by reference to our registration statement on Form
SB-2 filed October 20, 2003)
10.23 Security Agreement dated September 17, 2003
(incorporated by reference to our registration
statement on Form SB-2 filed October 20, 2003)
10.24 Modification Agreement dated September 17, 2003
(incorporated by reference to our registration
statement on Form SB-2 filed October 20, 2003)
10.25 La Jolla Convertible Debenture (incorporated by
Reference to our registration statement on Form SB-2
filed December 22, 2003)
10.26 La Jolla Registration Rights Agreement (incorporated
by reference to our registration statement on Form
SB-2 filed December 22, 2003)
10.27 La Jolla Letter Agreement (incorporated by reference
to our registration statement on Form SB-2 filed
December 22, 2003)
10.28 La Jolla Securities Purchase Agreement (incorporated
by reference to our registration statement on Form
SB-2 filed December 22, 2003)
10.29 La Jolla Warrant (incorporated by reference to our
registration statement on Form SB-2 filed December 22,
2003)
10.30 La Jolla Letter Agreement (incorporated by reference
to our registration statement on Form SB-2 filed
December 22, 2003)
10.31 Subscription Agreement dated August 18, 2004
(incorporated by reference to our registration
statement on Form SB-2 filed September 7, 2004)
10.32 Form of Convertible Note dated August 18, 2004
(incorporated by reference to our registration
statement on Form SB-2 filed September 7, 2004)
10.33 Form of Class A Warrant dated August 18, 2004
(incorporated by reference to our registration
statement on Form SB-2 filed September 7, 2004)
10.34 Form of Class B Warrant dated August 18, 2004
(incorporated by reference to our registration
statement on Form SB-2 filed September 7, 2004)
10.35 Subscription Agreement, dated October 28, 2004, by and
among One Voice Technologies, Inc., Alpha Capital
Aktiengesellschaft, Stonestreet Limited Partnership,
Ellis International Ltd., and Momona Capital Corp.
(incorporated by reference to our current report on
Form 8-K filed November 9, 2004)
II-9
10.36 Fund Escrow Agreement dated October 28, 2004, by and
among One Voice Technologies, Inc., Alpha Capital
Aktiengesellschaft, Stonestreet Limited Partnership,
Ellis International Ltd., Momona Capital Corp., and
Grushko & Mittman, P.C. (incorporated by reference to
our current report on Form 8-K filed November 9, 2004)
10.37 Form of Convertible Note issued to Alpha Capital
Aktiengesellschaft, Stonestreet Limited Partnership,
Ellis International Ltd., and Momona Capital Corp.
(incorporated by reference to our current report on
Form 8-K filed November 9, 2004)
10.38 Form of Class A Share Purchase Warrant issued to Alpha
Capital Aktiengesellschaft, Stonestreet Limited
Partnership, Ellis International Ltd., and Momona
Capital Corp. (incorporated by reference to our
current report on Form 8-K filed November 9, 2004)
10.39 Form of Class B Share Purchase Warrant issued to Alpha
Capital Aktiengesellschaft, Stonestreet Limited
Partnership, Ellis International Ltd., and Momona
Capital Corp. (incorporated by reference to our
current report on Form 8-K filed November 9, 2004)
10.40 Subscription Agreement, dated March 18, 2005, by and
among One Voice Technologies, Inc. and the investors
named on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
March 24, 2005)
10.41 Form of Convertible Note of One Voice Technologies,
Inc. issued to the investors named on the signature
pages thereto. (incorporated by reference to our
current report on Form 8-K filed March 24, 2005)
10.42 Form of Class A Common Stock Purchase Warrant of One
Voice Technologies, Inc. issued to the investors named
on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
March 24, 2005)
10.43 Form of Class B Common Stock Purchase Warrant of One
Voice Technologies, Inc. issued to the investors named
on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
March 24, 2005)
10.44 Subscription Agreement, dated March 17, 2006, by and
among One Voice Technologies, Inc. and the investors
named on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
March 23, 2006)
10.45 Form of Convertible Note of One Voice Technologies,
Inc. issued to the investors named on the signature
pages thereto. (incorporated by reference to our
current report on Form 8-K filed March 23, 2006)
10.46 Form of Class A Common Stock Purchase Warrant of One
Voice Technologies, Inc. issued to the investors named
on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
March 23, 2006).
10.47 Subscription Agreement, dated May 5, 2006, by and
among One Voice Technologies, Inc. and the investors
named on the signature pages thereto. (incorporated by
reference to our registration statement on Form SB-2
filed May 9, 2006)
10.48 Form of Convertible Note of One Voice Technologies,
Inc. issued to the investors named on the signature
pages thereto. (incorporated by reference to our
registration statement on Form SB-2 filed May 9, 2006)
10.49 Subscription Agreement, dated July 6, 2006, by and
among One Voice Technologies, Inc. and the investors
named on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed July
11, 2006)
II-10
10.45 Form of Convertible Note of One Voice Technologies,
Inc. issued to the investors named on the signature
pages thereto. (incorporated by reference to our
current report on Form 8-K filed July 11, 2006)
10.46 Form of Class A Common Stock Purchase Warrant of One
Voice Technologies, Inc. issued to the investors named
on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed July
11, 2006).
10.47 Subscription Agreement, dated August 28, 2006, by and
among One Voice Technologies, Inc. and the investors
named on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
September 1, 2006).
10.48 Form of Convertible Note of One Voice Technologies,
Inc. issued to the investors named on the signature
pages thereto. (incorporated by reference to our
current report on Form 8-K filed September 1, 2006).
10.49 Form of Class A Common Stock Purchase Warrant of One
Voice Technologies, Inc. issued to the investors named
on the signature pages thereto. (incorporated by
reference to our current report on Form 8-K filed
September 1, 2006).
CONSENT
23.1 Consent of Independent Registered Accounting Firm,
PETERSON & CO., LLP (filed herewith).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
II-11
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of La Jolla, State of California, on February 12, 2007.
ONE VOICE TECHNOLOGIES, INC.
BY: /S/ DEAN WEBER
-------------------------------------------------
DEAN WEBER
PRESIDENT, CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER) AND INTERIM
CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ DEAN WEBER PRESIDENT, CHIEF EXECUTIVE FEBRUARY 12, 2007
-------------------- OFFICER (PRINCIPAL EXECUTIVE
DEAN WEBER OFFICER), CHAIRMAN OF THE
BOARD AND INTERIM CHIEF FINANCIAL
OFFICER (PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
/S/ Rahoul Sharan DIRECTOR FEBRUARY 12, 2007
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Rahoul Sharan
/S/ BRADLEY J. AMMON DIRECTOR FEBRUARY 12, 2007
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BRADLEY J. AMMON
II-13