As filed with the Securities and Exchange Commission on June 8, 2007
Registration No. 333-133932
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
POST-EFFECTIVE AMENDMENT
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.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
61 BROADWAY, 32ND FLOOR
NEW YORK, NEW YORK 10006
(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. [ ] ________
REGISTRATION FEE PAID WITH ORIGINAL REGISTRATION STATEMENT. NO ADDITIONAL
FEE DUE.
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THIS POST EFFECTIVE AMENDMENT NO. 1 OF FORM SB-2/A AMENDS THE REGISTRATION
STATEMENT SB-2, AS AMENDED, THAT WAS FILED BY THE REGISTRANT. THE PROSPECTUS
CONTAINED IN THIS POST-EFFECTIVE AMENDMENT WILL, UPON EFFECTIVENESS OF THE
POST-EFFECTIVE AMENDMENT, SUPERSEDE THE PROSPECTUS DATED JUNE 8, 2006. ALL
FILING FEES PAYABLE IN CONNECTION WITH THE REGISTRATION OF THE SECURITIES
COVERED HEREBY WERE PREVIOUSLY PAID IN CONNECTION WITH THE FILING OF THE
ORIGINAL REGISTRATION STATEMENT.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 8, 2007
ONE VOICE TECHNOLOGIES, INC.
219,657,830 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
219,657,830 shares of our common stock, including up to (i) 36,406,250 shares of
common stock underlying secured convertible notes in a principal amount of
$466,000 issued pursuant to our 2006 Subscription Agreements;(ii) 781,250 shares
of common stock underlying convertible notes in a remaining principal amount of
$10,000 issued pursuant to our December 2004 Subscription Agreements; (iii)
32,206,485 shares of common stock issuable upon the exercise of Class A common
stock purchase warrants at a price of $.013 per share issued pursuant to our
2006 Subscription Agreements, (iv) 14,777,370 shares of common stock issuable
upon the exercise of our remaining Class A common stock purchase warrants at a
price of $.013 per share issued pursuant to our 2005 Subscription Agreements;
(v) 31,946,671 shares of common stock issuable upon the exercise of our
remaining Class A common stock purchase warrants at a price of $.013 per share
issued pursuant to our 2004 Subscription Agreements; (vi) 66,284,611 shares of
common stock issuable upon the exercise of Class B common stock purchase
warrants at a price of $.013 per share issued pursuant to our 2005 Subscription
Agreements; and (vii) 37,255,193 shares of common stock issuable upon the
exercise of our remaining Class B common stock purchase warrants at a price of
$.013 per share issued pursuant to our 2004 Subscription Agreements. The secured
convertible notes issued pursuant to our March and May 2006 Subscription
Agreement are convertible into our common stock at 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 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 June 6, 2007, was $0.0319.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 11.
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.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 5
Prospectus Summary 6-9
Risk Factors 10-16
Use Of Proceeds 17
Market For Common Equity And Related Stockholder Matters 17
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 18-36
Description Of Business 36
Legal Proceedings 37
Management 38-40
Executive Compensation 41-42
Security Ownership Of Certain Beneficial Owners And Management 43-44
Certain Relationships And Related Transactions 45
Description Of Securities 45
Commission's Position On Indemnification For Securities Act Liabilities 45
Plan Of Distribution 45-47
Selling Stockholders 47-51
Legal Matters 51
Experts 51
Available Information 51
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.
5
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 219,657,830 shares, including the following:
- up to (i) 36,406,250 shares of common stock
underlying secured convertible notes in a
principal amount of $466,000 issued pursuant to
our 2006 Subscription Agreements; (ii) and
781,250 shares of common stock underlying
secured convertible notes in a remaining
principal amount of $10,000 issued pursuant to
our 2004 Subscription Agreements (includes a
good faith estimate of the shares underlying
convertible notes to account for market
fluctuations and antidilution protection
adjustments, respectively),
- up to (i) 32,206,485 shares of common stock
issuable upon the exercise of Class A common
stock purchase warrants at a price of $.013 per
share issued pursuant to our 2006 Subscription
Agreements, (ii) 14,777,370 shares of common
stock issuable upon the exercise of our
remaining Class A common stock purchase
warrants at a price of $.013 per share issued
pursuant to our 2005 Subscription Agreements;
(iii) 31,946,671 shares of common stock
issuable upon the exercise of our remaining
Class A common stock purchase warrants at a
price of $.013 per share issued pursuant to our
2004 Subscription Agreements; (iiii) 66,284,611
shares of common stock issuable upon the
exercise of Class B common stock purchase
warrants at a price of $.013 per share issued
pursuant to our 2005 Subscription Agreements;
and (v) 37,255,193 shares of common stock
issuable upon the exercise of our remaining
Class B common stock purchase warrants at a
price of $.013 per share issued pursuant to our
2004 Subscription Agreements (includes a good
faith estimate of the shares underlying
warrants to account for antidilution protection
adjustments),
6
This post-effective amendment represents 34.41%
of our current outstanding stock.
Common stock to be
outstanding
after the offering........ Up to 859,533,061 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 638,406,693 shares of common stock outstanding as of June
6, 2007 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.
EXPLANATORY NOTE: In addition to the shares of our common stock underlying our
secured convertible notes issued under our March and May 2006 Subscription
Agreements, and shares underlying our Class A common stock purchase warrants
issued under our March 2006 Subscription Agreement, all of which we are
initially registering in this prospectus, we are also re-registering shares of
our common stock underlying the remaining principal amount of our convertible
notes in the amount of $10,000 relating to our December 2004 Subscription
Agreement, respectively, together with the remaining Class A and Class B
warrants, which we previously registered on Form SB-2 (File Nos. 333-124132 and
333-118831) to update the registration of the remaining amount of such shares.
Further, we are registering shares of our common stock underlying our Class B
common stock purchase warrants which were granted piggy-back registration rights
under our July and March 2005 Subscription Agreements.
MAY 2006 SUBSCRIPTION AGREEMENT
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.
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 declared 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.
7
MARCH 2006 SUBSCRIPTION AGREEMENT
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 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 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.
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 $1,115,000
which we issued on March 18, 2005 and July 13, 2005 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 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
$0.045 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.
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 declared 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 May 5, 2006, we entered into a letter agreement with the investors under
which the parties agreed to extend the date we are required to file the
registration statement to May 9, 2006 in order to permit the registration of the
shares underlying our secured convertible notes issued on May 5, 2006.
MARCH 2005 SUBSCRIPTION AGREEMENT
In addition, we are registering shares of our common stock in this prospectus
underlying our convertible notes in the remaining principal amount of $300,000
and our remaining Class A and Class B common stock purchase warrants which we
issued pursuant to our March 2005 Subscription Agreement.
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. 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 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.
8
The Class A warrants are exercisable until four years from the initial closing
date at an exercise price of $0.013 per share. The Class B warrants are
exercisable until four years from the initial closing date at an exercise price
of $0.013 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. The exercise price of the Class A and Class B 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.
2004 SUBSCRIPTION AGREEMENTS
Further, we are registering shares of our common stock in this prospectus
underlying our convertible notes in the remaining principal amount of $10,000
and our remaining Class A and Class B common stock purchase warrants which we
issued pursuant to our 2004 Subscription Agreements. The convertible notes bear
simple interest at 7% per annum payable upon each conversion, June 1, 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 Class A warrants are exercisable until four years from the initial closing
date at an exercise price of $0.013 per share. The Class B warrants are
exercisable until four years from the initial closing date at an exercise price
of $0.013 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. The exercise price of the Class A and Class B 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.
**With respect to all the financing arrangements set forth above, 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.
9
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 three months ended March 31, 2007 and 2006, we
incurred a net loss of $6,653,227 and $5,667,657, respectively. For the year
ended December 31, 2006 and 2005, we incurred a net loss of $4,418,844 and
$1,059,949, 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:
- Establish and maintain broad market acceptance of our products and services
and convert that acceptance into direct and indirect sources of revenues.
- Maintain and enhance our brand name.
- Continue to timely and successfully develop new products, product features and
services and increase the functionality and features of existing products.
- Successfully respond to competition, including emerging technologies and
solutions.
- Develop and maintain strategic relationships to enhance the distribution,
features and utility of our products and services.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED.
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.
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, One Voice's former 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
10
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 effect 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, 2005, 2004 and 2003. Specifically,
the material weaknesses specified in the preceding sentence resulted in
management determining that our previous accounting treatment for our common
stock purchase warrants and the treatment of embedded derivatives (e.g.,
conversion features) issued from 2003 to 2006 did not comply with the guidance
in Emerging Issues Task Force Issue No. 00-19, 05-02, 05-04 and 06-06, SFAS No.
133. These aforementioned accounting guidance provides guidance in regards to
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 and the embedded derivative features should have been
reclassified from additional paid in capital, to a current liability, and that
the warrant's fair values should have been marked to market as of December 31,
2005 and 2004 with the corresponding non-cash gain or loss reflected in the
results of operations. This resulted in the Company restating the 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,
September 30, 2006 and December 31, 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.
11
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. On
March 12, 2007 the Company engaged an outside consulting firm that specializes
in the accounting for derivative instruments that are embedded within the
Company's financing transactions. The Company will continue to engage the firm
in order to ensure proper treatment.
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.
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.
12
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.
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.
13
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 June 6, 2007, the company had 638,406,693 shares of common stock issued
and outstanding, secured convertible notes outstanding in the aggregate
principal amount of $1,457,000 Subscription Agreements that may be converted
into an estimated 75,885,417 shares of common stock at current market prices
taking into account a discounted conversion factor of $.0192 per share price and
outstanding warrants to purchase 313,436,156 shares of common stock pursuant to
our 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 Subscription Agreements is essentially limitless. The following is an
example of the amount of shares of our common stock that are issuable, upon full
conversion of our secured convertible notes (excluding accrued interest) in the
amount $1,457,000 at June 6, 2007, based on market prices 25%, 50% and 75% below
the applicable debt conversion discount price, as of June 6, 2007 of $0.0192.
Note that the discounted conversion price on all convertible debt is the average
of the lowest of the three stock prices for the past 30 days multiplied by 80%.
% BELOW MARKET PRICE PER SHARE DISCOUNT OF 20% NUMBER OF SHARES ISSUABLE
-------------- --------------- --------------- -------------------------
25% 0.0140 0.0110 132,454,545
50% 0.0100 0.0080 182,125,000
75% 0.0050 0.0040 364,250,000
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.
14
In March and May 2006, we entered into a Subscription Agreement for the sale of
an aggregate of $1,024,000 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.
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 and May 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.
15
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.
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.
16
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.
Low High
--- ----
2005
First Quarter .04 .06
Second Quarter .03 .06
Third Quarter .03 .05
Fourth Quarter .02 .03
2006
First Quarter .02 .22
Second Quarter .01 .04
Third Quarter .01 .02
Fourth Quarter .01 .02
2007
First Quarter .01 .05
Second Quarter (through June 6, 2007) .02 .04
HOLDERS
As of June 6, 2007, our common stock were held by approximately 102 stockholders
of record and 638,406,693 shares of common stock is 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.
DIVIDEND POLICY
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 on, among other things, 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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements. All
statements other than statements of historical fact made in this report are
forward looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are
forward-looking statements. These forward-looking statements can be identified
by the use of words such as "believes," "estimates," "could," "possibly,"
"probably," anticipates," "projects," "expects," "may," "will," or "should" or
other variations or similar words. No assurances can be given that the future
results anticipated by the forward-looking statements will be achieved.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Our actual results may differ significantly from
management's expectations.
The following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.
OVERVIEW OF THE BUSINESS
One Voice Technologies, Inc. is 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:
Telefonos de Mexico, S.A.B. de C.V. (TELMEX), Intel Corporation, Alltel
Wireless, Inland Cellular, Nex-Tec Wireless and several additional telecom
service providers throughout the United States.Based on our patented technology,
One Voice offers 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 messages, 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.
The Company believes 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 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. One Voice's 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, the Company has 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, the Company feels it can better reach operationally
break-even by decreasing operating expenses while increasing our revenue stream.
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. One Voice solutions enable users to send, route and receive
text messages using voice from any type of phone (wired or wireless) anywhere in
the world.
The Company's 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
(Alternative to Directory Assistance(TM)).
The Company has recently begun a trial-testing phase for our voice solutions
with Cingular Wireless. This trial is in joint cooperation with VeriSign. If
successful, this opportunity could potentially lead to Cingular Wireless
launching One Voice's services. This trial is still on-going. At this time, we
do not know if this will ever come to any material fruition.
The Company was recently selected by Lucent Technologies to jointly offer One
Voice's MobileVoice solutions in conjunction with Lucent services to national
carriers. Due to reorganizations within Lucent these efforts have been put on
hold until new management within Lucent is assigned to this effort.
18
The Company recently received a counter-proposal from a large carrier in India
for MobileVoice services. We are currently negotiating terms with this carrier.
The Company recently signed an agreement to deploy MobileVoice services with
Mohave Wireless. This service is anticipated to be launched to Mohave Wireless
subscribers in Summer, 2007.
The Company recently signed a deployment contract with TELMEX for deployment of
One Voice's MobileVoice solutions to the over 18 million TELMEX subscribers
throughout Mexico. The anticipated launch is June 2007 beginning with TELMEX
subsidiary TELNOR with over 750,000 subscribers in northern Mexico. National
rollout throughout Mexico is anticipated to begin in Summer 2007 to the
remaining 18 million TELMEX subscribers. We are currently bidding on additional
contracts within TELMEX for other services to be offered by TELMEX to their
subscribers. At this time, we do not know if these additional contracts will
ever come to any material fruition.
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. The
Company's 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.
The Company's strategy, in the PC Sector, is to continue its aggressive
marketing efforts to sign-up system integrators, such as those engaged in the
business of home theatre installation and value-added resellers under the
Company's reseller program launched in 2005. The Company will continue to pursue
OEMs for bundling agreements of its Media Center Communicator product. These OEM
agreements may include revenue share business models as well as discounted
individual user license fees. The Company 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.
The Company anticipates having its Media Center Communicator bundled with a
tier-one PC manufacturer in the Fall 2007.
The Company recently was awarded a contract from Intel Corporation to co-develop
voice-enabled solutions for use with embedded and desktop devices. Intel has
selected One Voice's technology to be used as an integral part of these devices.
This contract is not anticipated generating material revenue for the Company
given the narrow niche market for these devices. The Company will continue to
offer our technology and services to Intel for additional contracts as they may
come up from time to time.
The Company has completed the design and prototyping of its Media Center remote
control and is 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, the Company 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 in the fourth quarter 2007.
The Company recently was awarded 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
significant 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.
In summary, since the beginning of 2006, the company has deployed services with
telecom carriers and began recognizing recurring revenue. Management believes
the company's transition into the revenue recognition phase was very important
as it signifies acceptance of our solutions and the value they deliver to the
customer and their subscribers. For the year ending December 31, 2006, the
Company has experienced revenue growth of 387 % over the same period ending
December 31, 2005. The management team remains committed to generating near and
long term revenues significant enough to fund daily operations, building
shareholder value, expand the intellectual property portfolio and developing
cutting edge solutions and applications for the emerging speech recognition
market sector.
19
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, fair
value of derivative liabilities and fair value of options or warrants
computation using 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.
Revenue is recognized when the four basic criteria of revenue recognition are
met: (i) a contractual agreement exists; (ii) transfer of intellectual property
has been completed or services have been rendered; (iii) the fee is fixed or
determinable, and (iv) collectibility is reasonably assured.
STOCK-BASED COMPENSATION. Stock-based compensation to outside consultants is
recorded at fair market value in accordance with the Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS
123(R)") SFAS 123(R) and Emerging Issues Task Force No. 98-16 Accounting for
Equity Instruments That Are Issued to Other Than Employees, for Acquiring, or in
Conjunction with Selling Goods and Services("EITF 98-16"), and these costs are a
component of general and administrative expense. Prior to the adoption of, We
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value
method that was used to account for stock-based awards prior to January 1, 2006,
which had been allowed under the original provisions of Statement 123, no stock
compensation expense had been recognized in our statement of operations as the
exercise price of our stock options granted to employees and directors equaled
the fair market value of the underlying stock at the date of grant.
On January 1, 2006, we adopted SFAS 123(R) which requires the measurement and
recognition of compensation expense for all share-based awards made to employees
and directors, including employee stock options and employee stock purchases,
based on estimated fair values. SFAS 123(R) supersedes our previous accounting
for share-based awards under APB 25 for periods beginning in 2006. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107 ("SAB 107") relating to SFAS 123(R). We have applied the provisions of
SAB 107 in its adoption of SFAS 123(R). We adopted SFAS 123(R) using the
modified prospective transition method, which requires the application of the
accounting standard as of the beginning of our current year. Our financial
statements as of and for the year ended December 31, 2006 reflect the impact of
SFAS 123(R). In accordance with the modified prospective transition method, Our
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R).
Stock compensation expense recognized during the period is based on the value of
share-based awards that are expected to vest during the period. Stock
compensation expense recognized in our statement of operations for 2006 includes
compensation expense related to share-based awards granted prior to January 1,
2006 that vested during the current period based on the grant date fair value
estimated using the Black-Scholes option pricing model. Stock compensation
expense during the current period also includes compensation expense for the
share-based awards granted subsequent to January 1, 2006 based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). As stock
compensation expense recognized in the statement of operations is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures (which are currently estimated to be minimal). SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those ESTIMATES. In the our
pro forma information required under SFAS 123 for the periods prior to 2006,
forfeitures were estimated and factored into the expected term of the options.
Our determination of estimated fair value of share-based awards utilizes the
Black-Scholes option-pricing model. The Black-Scholes model is affected by our
stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors.
COMMITMENTS AND CONTINGENCIES. Commitments and Contingencies are disclosed in
the footnotes of the financial statements according to generally accepted
accounting principles. If a contingency becomes probable, and is estimatable by
management, a liability is recorded per SFAS No. 5.
20
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements to report for the fiscal year ended
December 31, 2006 or December 31, 2005. We have not entered into any
transactions with unconsolidated entities whereby we have financial guarantees,
subordinated retained interests, derivative instruments or other contingent
arrangements that expose us to material continuing risks, contingent
liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006.
ONE VOICE TECHNOLOGIES INC.
SELECTED STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED
MARCH 31, MARCH 31, PERCENTAGE
2007 2006 CHANGE CHANGE
-------------- -------------- -------------- --------------
(RESTATED)
Net Revenue $ 210,000 $ 61,000 $ 149,000 244%
Cost of goods sold 98,000 21,000 77,000 367%
-------------- -------------- -------------- --------------
GROSS PROFIT 112,000 40,000 72,000 180%
General and administrative expenses 632,000 991,000 (359,000) -36%
Other income (expense) (6,132,000) (4,717,000) (1,415,000) 30%
-------------- -------------- -------------- --------------
NET LOSS BEFORE INCOME TAX (6,652,000) (5,668,000) (984,000) 17%
============== ============== ============== ==============
Income tax expense 800 800 -- --
-------------- -------------- -------------- --------------
NET LOSS $ (6,652,800) $ (5,668,800) $ (984,000) 17%
REVENUES
Net revenues totaled $210,000 and $61,000 for the three months ended March 31,
2007 and 2006, respectively. Increased revenues of $149,000 (244%) between the
two periods was attributable to 4 new MobileVoice customers.
COST OF GOODS SOLD
Cost of goods sold for the three months ended March 31, 2007 and 2006 totaled
$98,000 and $21,000, respectively. The increase in cost of goods sold of $77,000
(367%) between the two periods was due to the reclassification of expenses
during 2007 that previously had been recorded as general and administrative
expenses. These expenses are related to licensing agreements that allow the
voice recognition products offered to be functional.
GENERAL AND ADMINISTRATIVE EXPENSE
Operating expenses totaled $632,000 and $991,000 for the three months ended
March 31, 2007 and 2006, respectively. The decrease of $359,000 (36%) between
the two periods was due to overall budget reductions and the reclassification of
operating expenses to cost of goods sold.
SALARY AND COMPENSATION
Salary and wage expenses totaled $293,000 and $409,000 for the three months
ended March 31, 2007 and 2006, respectively. The decrease of $116,000 (28%)
between the two periods was due to headcount reductions, which increased the
overall efficiency of the Company.
ACCOUNTING LEGAL AND CONSULTING
Accounting, Legal and consulting totaled $121,00 and $56,000 for the three
months ended March 31, 2007 and 2006, respectively. The increase of $65,000
(116%) between the two periods was due to increased year end 2006 audit fees due
to the transition of audit firms and filing fees incurred for the filing of the
registration statement on Form SB-2.
OTHER INCOME (EXPENSE)
Other income (expense) totaled $6,132,000 and $4,717,000 for the three months
ended March 31, 2007 and 2006, respectively. An increase of $1,415,000 (30%).
o Other income (expense) consist of interest expense, settlement expense, gain
(loss) on warrant / debt derivative liability and other misc. Details below.
21
INTEREST EXPENSE
----------------
INTEREST EXPENSE SUMMARY
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
-------------- --------------
Debt issue cost $ 82,714 $ 56,079
Discount amortization 148,541 662,478
Accrued interest 36,800 25,788
Other / penalties 2,567 -
-------------- --------------
TOTAL $ 270,622 $ 744,345
For three months ended March 31, 2007 and 2006, interest expense was
approximately $271,000 compared to $744,000 respectively.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the three months ended March 31, 2007 and 2006, interest expense related to
debt issue costs was approximately $83,000 compared to $56,000, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the three months ended March 31, 2007, and 2006, interest expense related to
the amortization of discount was approximately $149,000 compared to $662,000
respectively.
3. Monthly accrued interest related to notes payable and convertible notes
payable financing.
This represents a future cash transaction if the convertible interest accrued is
not converted into common stock. No accrued interest related to convertible
notes payable was paid in cash during the three months ended March 31, 2007 and
2006.
For the three months ended March 31, 2007 and 2006, interest expense related to
notes payable and convertible notes payable was approximately $37,000 compared
to $26,000, respectively.
4. Other / misc. for the three months ended March 31, 2007 and 2006, was
approximately $3,000 compared to $0 respectively.
SETTLEMENT EXPENSE
For the three months ended March 31, 2007 and 2006, settlement expense was
approximately $0 compared to $101,000 respectively. The decrease between the two
periods was attributable to a one time settlement for the exchange of services.
Payment was in the form of the Company's restricted common stock.
LOSS ON WARRANT DERIVATIVES
For the three months ended March 31, 2007 and 2006, losses recorded on warrant
derivatives was approximately $5,913,000 compared to $3,878,000 respectively.
See Note 10 in the accompanying notes to the financial statements.
GAIN / (LOSS) ON DEBT DERIVATIVES
For the three months ended March 31, 2007 and 2006, gain recorded on debt
derivatives were approximately $52,000 compared to $0 respectively. See Note 9
in the accompanying notes to the financial statements.
OTHER INCOME (EXPENSE)
For the three months ended March 31, 2007 and 2006, other / net was
approximately $0 compared to a gain of $6,000 respectively. The decrease between
the two periods was attributable to a one time gain on the sale of fixed assets
during the period ended March 31, 2006.
22
RESULTS OF OPERATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE
FISCAL YEAR ENDED DECEMBER 31, 2005.
ONE VOICE TECHNOLOGIES INC.
SELECTED STATEMENT OF OPERATIONS INFORMATION
--------------------------------------------
($000'S) ($000'S) ($000'S)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, PERCENTAGE
2006 2005 CHANGE CHANGE
-------------- -------------- -------------- --------------
Net Revenue $ 691,000 $ 142,000 $ 549,000 387%
Cost of goods sold 163,000 31,000 132,000 426%
-------------- -------------- -------------- --------------
GROSS PROFIT 528,000 111,000 417,000 376%
General and administrative expenses 3,516,000 3,433,000 83,000 2%
Other income (expense) (1,431,000) 2,263,000 (3,694,000) -163%
-------------- -------------- -------------- --------------
NET LOSS $ (4,419,000) $ (1,059,000) $ (3,360,000) 317%
============== ============== ============== ==============
REVENUES
Net revenues totaled $691,000 and $142,000, respectively, for the year ended
December 31, 2006 and December 31, 2005. Increased revenues of $548,000 (387%)
were attributable to new MobileVoice customers. The Company also had a one time
contract settlement in cash for early termination due to a One Voice customer
being purchased by another telecommunication company.
GENERAL AND ADMINISTRATIVE EXPENSE
Operating expenses totaled $3,516,000 for the year ended December 31, 2006 from
$3,433,000 for the same period in 2005. The majority of our cash related
operating expenses consist of compensation related expenses and regular monthly
overhead items including: rents, utilities, various insurance policies, legal
and audit fees. The increase of $83,000 (2%) over year 2005 is allocated between
the above mentioned items. The increase for the current year was primarily due
to the increase in business activities related to supporting the development of
our company.
SALARY AND COMPENSATION
Salary and wage expenses were $1,437,000 for the year ended December 31, 2006 as
compared to $1,326,000 for the same period in 2005. The increase of $111,000
(8%) was due to increase in use of independent contractors in year 2006.
ADVERTISING AND PROMOTION
Advertising and promotion expense totaled $53,000 for the year ended December
31, 2006 as compared to $77,000 for the same period in 2005. Advertising and
promotion expense decrease of $24,000 (32%) resulted from the Company decreasing
both travel budget and trade show expense.
LEGAL AND CONSULTING
Legal and consulting expenses decreased to approximately $149,000 for the year
ended December 31, 2006 from approximately $231,000 for the same period in 2005.
The decrease in year 2006 compared to year 2005 of $82,000 (35%) was due to the
fact that the Company employed an outside management consultant in 2005, and the
Company no longer retained their services in year 2006.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased to approximately $123,000 for
the year ended December 31, 2006 from approximately $172,000 for the same period
in 2005. Amortization and depreciation expenses consisted of patent and
trademarks, computer equipment, software development, and tradeshow booth. The
decrease of $49,000 (28%) was due to assets being 100% depreciated throughout
the year 2006.
OTHER INCOME (EXPENSE)
For the years ended December 31, 2006 and 2005, other expense was approximately
$1,431,000 compared to other income of approximately $2,263,000 respectively.
Other income (expense) consisted of interest expense, settlement expense, gain
(loss) on warrant derivative liability and other income (expense), details
below.
23
INTEREST EXPENSE
For the years ended December 31, 2006 and 2005, interest expense was
approximately $1,579,000 compared to $2,420,000 respectively.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the year ended December 31, 2006, and December 31, 2005, interest expense
related to debt issue costs was approximately $152,000 compared to $172,000,
respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the years ended December 31, 2006, and 2005, interest expense related to the
amortization of discount was approximately $1,296,000 compared to $2,112,000,
respectively.
3. Monthly accrued interest related to notes payable and convertible notes
payable financing.
This represents a future cash transaction if the convertible interest accrued is
not converted into common stock. No accrued interest related to convertible
notes payable was paid in cash during year's ended December 31, 2006 and 2005.
For the years ended December 31, 2006, and 2005, interest expense related to
Notes payable and convertible notes payable was approximately $128,000 compared
to $76,000, respectively.
4. Other / penalties for the year ended December 31, 2006 were approximately
$3,000 compared to $60,000, respectively.
INTEREST EXPENSE SUMMARY
------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
-------------- --------------
Debt issue cost $ 152,000 $ 172,000
Discount amortization 1,296,000 2,112,000
Accrued interest 128,000 76,000
Other / penalties 3,000 60,000
-------------- --------------
TOTAL $ 1,579,000 $ 2,420,000
-------------- --------------
SETTLEMENT EXPENSE
For the years ended December 31, 2006, and 2005, settlement expense was
approximately $101,000 compared to $760,000 respectively. The decrease in period
2006 over 2005 is attributable to a one time legal settlement incurred in 2005
with La Jolla Cove Investors and the re-pricing of common stock warrants issued
relating to convertible debt financing activities.
GAIN / (LOSS) ON DEBT DERIVATIVES
For the years ended December 31, 2006, and 2005, gains recorded on debt
derivatives were approximately $12,000 compared to $419,000 respectively. See
Note 9 in the accompanying financial statements.
GAIN / (LOSS) ON WARRANT DERIVATIVES
For the years ended December 31, 2006, and 2005, gains recorded on warrant
derivatives were approximately $197,000 compared to $5,070,000 respectively. See
Note 9 in the accompanying financial statements.
OTHER INCOME (EXPENSE)
For the years ended December 31, 2006, and 2005, other net was approximately a
gain of $5,000 compared to a loss of $46,000 respectively. The decrease in
period 2006 over 2005 is attributed to the disposal of fixed assets in 2005.
The Company had a net loss of $4,419,000 or basic and diluted net loss per share
of $0.01 for the year ended December 31, 2006, compared to a net loss of
$1,060,000 or basic and diluted net loss per share of $0.01 for the same period
in 2005.
24
LIQUIDITY AND CAPITAL RESOURCES
NON-CASH EXPENSES EFFECTING OPERATING ACTIVITIES
Non-cash related expenses of $6,143,000 are reflected in the period ended March
31, 2007 net loss of $6,653,000 and consist of the following:
THREE MONTHS ENDED
MARCH 31, 2007
2007
--------------
NET LOSS (6,653,227)
NON-CASH RELATED EXPENSES
Depreciation and amortization 25,240
Stock compensation expense 36,783
Stock issuance for exchange of debt 33,760
Amortization of note discount 148,541
Interest payable 36,800
Gain / (loss) on warrant and debt derivatives 5,861,417
--------------
TOTAL NON-CASH RELATED EXPENSE 6,142,541
--------------
ADJUSTED CASH NET (LOSS) $ (510,686)
The above information is intended to illustrate the negative impact that these
specific expenses have on the Company's net loss. There are no cash transactions
that related to these expenses. More specifically, this table is shown to
demonstrate the negative impact that the re-valuation of warrant and debt
derivatives have on the income statement. Please note that this table is not in
conformity with auditing standards generally accepted in the United States of
America.
o Depreciation and amortization expense of $25,000.
o Compensation expense relating to the issuance of stock options of $37,000.
o Issuance of common stock in exchange for services and debt of $34,000.
o Amortization of embedded discount relating to convertible debt financing of
$149,000.
o Accrued interest expense related to convertible debt financing transactions of
$37,000.
o Re-pricing of the warrant derivative liability and debt derivative relating to
convertible debt financing of $5,861,000.
The non-cash related expenses of $2,357,000 were reflected in the year ended
December 31, 2006 net loss of $4,419,000 and consisted of the following:
- Compensation expense relating to the issuance of stock options of $272,000.
- Issuance of common stock in exchange for services and debt of $311,000.
- Amortization of embedded discount relating to convertible debt financing of
$1,777,000.
- Re-pricing of the warrant derivative liability relating to convertible debt
financing of $231,000.
At March 31, 2007, the Company had a working capital deficit of $11,301,000 as
compared with a working capital deficit of $5,101,000 at March 31, 2006. The
increase of $6,200,000 consists of $8,926,000 of warrant and debt derivative
liability as of March 31, 2007
At December 31, 2006, we had a working capital deficit of $5,101,000 as compared
with a working capital deficit of $3,840,000 at December 31, 2005.
Net cash used for operating activities is $536,000 for the three months ended
March 31, 2007 compared to $765,000 for the three months ended March 31, 2006.
Net cash used for operating activities was $2,678,000 for the year ended
December 31, 2006 compared to $3,149,000 for the year ended December 31, 2005.
Net cash used for investing activities is $19,000 for the three months ended
March 31, 2007 compared to $20,000 for the three months ended March 31, 2006.
Net cash used for investing activities was $155,000 for the year ended December
31, 2006 compared to net cash used of $58,000 for the year ended December 31,
2005.
Net cash used for financing activities is $563,000 for the three months ended
March 31, 2007 compared to $518,000 for the three months ended March 31, 2006.
25
Net cash provided by financing activities was $2,529,000 for the year ended
December 31, 2006 and resulted from sales by the Company of convertible debt
securities, common stock and proceeds from the exercise of common stock warrants
during the year. This compares to proceeds of $3,011,000 from financing
activities for the year ended December 31, 2005.
We incurred a net loss of $4,419,000 during the year ended December 31, 2006 and
had an accumulated deficit of $46,857,000. Our losses through December 2006
included interest expense, amortization of debt discount, amortization of
software licensing agreements, development costs, operational and promotional
expenses.
FINANCING TRANSACTIONS
NET PROCEEDS RECEIVED DUE TO FINANCING ACTIVITY
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
-------------- --------------
Private placement $ - $ 60,000
Warrant exercise 52,240 -
Convertible debt financing - 639,500
Revolving line of credit 482,000 -
-------------- --------------
TOTAL $ 534,240 $ 699,500
NET PROCEEDS RECEIVED DUE TO FINANCING ACTIVITY AS OF 12/31/2006
2006 2005
-------------- --------------
Private placement $ 112,000 $ 506,400
Warrant exercise 300,200 649,210
Convertible debt financing 1,994,000 2,000,000
Revolving line of credit 240,000 -
-------------- --------------
TOTAL PROCEEDS RECEIVED $ 2,406,200 $ 3,155,610
============== ==============
CONVERTIBLE NOTES PAYABLE SUMMARY
During the three months ended March 31, 2007 the Company did not enter into any
convertible debt financing agreements.
During the three months ended March 31, 2007 and 2006, $135,000 and $992,000 of
notes payable was converted into approximately 21,429,000 and 71,383,000 shares
of the Company's common stock at an average conversion price of $ 0.0063
and$0.014 per share.
On March 17, 2006, the Company 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 $1,115,000 which we
issued on March 18, 2005 and July 13, 2005 to certain of the investors
participating in this new private placement.
26
The Company 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.
A SUMMARY OF CONVERTIBLE DEBT AT MARCH 31, 2007 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ (2,595) $ 7,405
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (86,538) 163,462
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (96,436) 153,564
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (38,574) 61,426
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (36,873) 68,127
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (55,310) 94,690
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (22,124) 37,876
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (36,878) 68,122
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT MARCH 31, 2007 $ 1,457,000 $ (460,485) $ 996,515
=============== =============== ===============
27
A SUMMARY OF CONVERTIBLE DEBT AT DECEMBER 31, 2006 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ - $ 10,000
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 13, 2008 135,000 (53,838) 81,162
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (108,727) 141,273
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (120,832) 129,168
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (46,089) 53,911
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (43,305) 61,695
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (64,957) 85,043
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (25,983) 34,017
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (43,310) 61,690
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT DECEMBER 31, 2006 $ 1,592,000 $ (609,028) $ 982,972
=============== =============== ===============
28
COMMON STOCK
CONVERTIBLE DEBT CONVERSION
During the three months ended March 31, 2007, Alpha Capital Akteingesellschaft
converted approximately $135,000 of notes payable into approximately 21,428,571
shares of the Company's common stock at an average conversion price of $0.0063.
During the three months ended March 31, 2006, Alpha Capital Akteingesellschaft
converted approximately $291,000 of notes payable into approximately 21,196,000
shares of the Company's common stock at an average conversion price of $0.014.
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 three months ended March 31, 2006, Whalehaven Fund, Limited converted
approximately $583,000 of notes payable into approximately 41,030,000 shares of
the Company's common stock at an average conversion price of $0.014.
During the three months ended March 31, 2006, Ellis International Ltd. converted
approximately $75,000 of notes payable into approximately 5,855,000 shares of
the Company's common stock at an average conversion price of $0.013. 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 three months ended March 31, 2006, Omega Capital Small Cap Fund
converted approximately $27,500 of notes payable into approximately 2,167,000
shares of the Company's common stock at an average conversion price of $0.013.
During the three months ended March 31, 2006, Osher Capital Inc. converted
approximately $15,600 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 three months ended March 31, 2006, an accredited investor purchased
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 and 3,000,000 Class B common stock purchase warrants with an exercise
price of $0.045 and $0.06 per share respectively.
o WARRANT EXERCISE
During the three months ended March 31, 2007 approximately 8,000,000 common
stock warrants were exercised at a price of $0.00653. The Company received
approximately $52,000
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 December 31, 2006 the balance on the note payable was $100,000.
PRIVATE PLACEMENTS OF COMMON STOCK FOR CASH SUMMARY
During the 3 months ended March 31, 2007 and 2006, the company received $0 and
$60,000 respectively, related to private placement activity.
During the year ending December 2005 the Company held multiple closings with
several accredited investors pursuant to which the investors subscribed to
purchase an aggregate of 17,000,000 shares of restricted common stock for a
total purchase price of $506,400. In addition, the investors received an
aggregate of 17,000,000 Class A common stock purchase warrants and 17,000,000
Class B common stock purchase warrants, representing 100 Class A and Class B
warrants issued for each 100 shares which were issued on the closing date. The
Class A warrant is 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.
During the year ending December 2006 the Company held multiple closings with an
accredited investor pursuant to which the investor subscribed to purchase 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 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.
29
WARRANT EXERCISE
During the three months ended March 31, 2007 approximately 8,000,000 common
stock warrants were exercised at a price of $0.00653. The Company received
approximately $52,000
On February 28, 2006 the Company completed a private placement with an
institutional investor involving an exercise of class A common stock purchase
warrants. The warrants were previously issued in connection with a prior private
placement with the investor. The company received $200,200 and a total of
14,300,000 Class A common stock purchase warrants were exercised at a purchase
price of $.014.
On March 23, 2006 the Company completed a private placement with an
institutional investor involving an exercise of class A common stock purchase
warrants. The warrants were previously issued in connection with a prior private
placement with the investor. The company received $100,000 and a total of
6,250,000 Class A common stock purchase warrants were exercised at a purchase
price of $.016.
REVOLVING CREDIT NOTE PAYABLE
On December 21, 2006, the Company completed a private placement pursuant to a
Revolving Credit Note Agreement which the Company entered into with several
institutional Investors, pursuant to which the Investors subscribed to advance
up to a maximum amount of $640,000 bearing an interest rate of 7%. The term of
the agreement shall be effective as of December 21, 2006 with a term of 1 year
ending December 20, 2007. On March 20, 2007 the original Revolving Credit Note
Agreement was amended. The amendment increased the maximum borrowing by the
Company to an amount of $740,000. All terms and agreements of the original note
are still in full force and effect.
During the Period of January 1, 2007 thru March 31, 2007 the Company borrowed
$482,000 from the revolving note. During the same period the Company paid
$55,721 against the outstanding balance for a net borrowing of $426,279.
As of March 31, 2007 the outstanding principal amount owed to the Investors is
$666,280.
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 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. The Company received approximately $920,000,
net of debt issue cash cost of approximately $80,000 of the purchase price on
the initial closing date of March 18, 2005 and will receive an additional
$1,000,000 of the purchase price pursuant to the second closing. 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 non assessable 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. 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 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.
30
On July 13, 2005, the Company held its 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 non assessable 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 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 will be amortized over
the life of the debt using the interest method.
On March 17, 2006, the Company 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 $1,592,000 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.
The Company 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 the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 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.
31
On July 6, 2006, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 $1,592,000 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.
The Company 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, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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.
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 $1,592,000 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.
The Company issued an aggregate of 41,414,141 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.
32
During the twelve months ended December 31, 2006, $1,745,000 of notes payable
and accrued interest were converted into approximately 160,374,000 shares of the
Company's common stock at an average conversion price of $0.01 per share.
SUBSEQUENT EVENTS
- FINANCING
During April 1, 2007 thru May 16, 2007, the Company received advances that were
applied towards the Revolving Credit Note agreement dated December 21, 2006
totaling $50,000. The advances were used for expenses relating to normal monthly
operating expenses incurred by the Company.
- RESTRICTED COMMON STOCK GRANTED IN EXCHANGE FOR SERVICES RENDERED
On April 27, 2007 the Company granted a total of 1,500,000 shares of restricted
common stock as compensation to an independent contractor for services provided
during the fiscal year ended December 31, 2006 audit.
WARRANTS
On April 4, 2007 the company issued to an accredited investor a total of
4,001,838 restricted common stock purchase warrants at a price of $.00653 per
share pursuant to a cashless exercise.
On April 23, 2007 the company issued to an accredited investor a total of
12,578,616 restricted common stock purchase warrants at a price of $.00636 per
share. The company received cash proceeds of $80,000.
FUTURE CAPITAL OUTLOOK
The Company will continue to rely heavily on our current method of convertible
debt and equity funding, which have financed us since 2001. The losses through
the year ended December 31, 2006 and three months ended March 31, 2007 were due
to minimal revenue and our operating expenses, with the majority of expenses in
the areas of: salaries, legal fees, consulting fees, debt issue costs and
licensing costs. The Company faces 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,
collection of monthly accounts receivable 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.
33
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 existence of voice technology as an interface in mobile
communications and PC computing is of paramount importance. Voice interface
technology makes portable communications 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. One Voice's 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 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. One Voice solutions enable users to send, delete, and 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. One Voice's Media
Center Communicator product works with Microsoft Windows Vista and 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.
MOBILEVOICE(TM)
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:
- Send free-format voice-to-text messages
- Place voice-activated dialing calls
- Access their E-mail from mobile and fixed line phones
- Place group calls to up to 64 people on a single call
- Supports email access to most major providers including Hotmail, Yahoo Mail,
AOL Mail, Gmail, POP3 and IMAP servers
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.
34
We believe an opportunity exists for the adaptation of MobileVoice Activated
Dialing by wireless carriers, as more safety legislation is introduced for hands
free communications while operating motor vehicles. MobileVoice 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 One Voice's 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 E-MAIL(TM)
A unique Voice-to-Text email solution that enables subscribers send free-form
email messages to PCs, mobile phones or wireless alphanumeric paging devices
while on the road. Available for English and Spanish, we believe 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 enables subscribers to 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)
We believe that 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 email attachment to
the recipient or group of recipients. These messages may be retrieved from any
computer or phone.
MOBILEVOICE EMAIL READER(TM)
MobileVoice E-mail Reader allows subscribers to fully manage their email
accounts from any phone. Subscribers can sort and find important messages from
specific contacts. The MobileVoice E-mail Reader offers management tools such as
"Reply", "Reply to All", "Forward", "Skip" and "Delete". Subscribers can access
personal and corporate e-mail accounts from any phone. Includes support for
Hotmail, Yahoo Mail, AOL Mail, Gmail, POP3 and IMAP servers.
MOBILEVOICE LANDLINE(TM)
Supports all the powerful features of MobileVoice but tailored to the needs of
fixed line telecom providers. Features include:
- Multiple sub-accounts per phone line offering each individual in the home
their own personalized service
- Dial Tone Hotlink(TM) allowing subscribers to simply pickup the phone and tell
MobileVoice Landline to call an individual, group or access email
- Both individual and shared address books for all sub-accounts
MEDIA CENTER COMMUNICATOR(TM)
Media Center Communicator uses voice recognition to control Microsoft Windows
Vista and XP Media Center Edition 2005. Features include:
- Simple to use voice commands with no voice training required
- High accuracy with a wide range of accents
- Ability to play MP3 or Apple iTunes music using voice commands
- PC-to-Phone calling using Skype to anywhere worldwide
- Home automation for setting thermostats, lighting, security cameras and much
more
- Read and send email
- View photos and photo slideshows
- Create custom voice macros to launch websites and applications
- Works with Windows Media Center DVD players (Sony and Niveus)
35
INTELLECTUAL PROPERTY AND 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.
Patent protection is important to our business. The patent position of companies
in the hi-technology field generally is highly uncertain, involves complex legal
and factual questions, and can be subject of much litigation.
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 assurance 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 and
defending or bringing claims, related to our intellectual property rights may
require our management to redirect its resources to address these claims, this
could have a material adverse effect on our business, financial condition and
results of operations.
It is possible that other parties have conducted or are conducting research and
could develop processes that would precede any of our processes.
Our competitive position is also dependent upon unpatented trade secrets. We
intend to implement a policy of requiring our employees, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with us. These
agreements will provide that all confidential information developed or made
known to the individual during the course of their relationship with us must be
kept confidential, except in specified circumstances. However, we cannot assure
you that these agreements will provide meaningful protection for our trade
secrets or other proprietary information in the event of unauthorized use or
disclosure of confidential information. Additionally, we cannot assure you that
others will not independently develop equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that such trade
secrets will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
EMPLOYEES
At June 6, 2007, we employed 7 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. The Company leases its 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 $220,908 for the year ended December 31, 2006 which
included the subleasing of two satellite offices in Texas. We believe that our
current office space and facilities are sufficient to meet our present needs and
do not anticipate any difficulty securing alternative or additional space, as
needed, on terms acceptable to us.
36
LEGAL PROCEEDINGS
>From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm business. Except as disclosed
below we are currently not aware of any such legal proceedings or claims that
will have, individually or in the aggregate, a material adverse affect on
business, financial condition or operating results.
There has been no bankruptcy, receivership or similar proceedings. 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:
- 10,000,000 restricted shares of our common stock upon the execution of the
Settlement Agreement;
- $300,000 was paid on May 5, 2006; and
- $400,000 was due on June 6, 2006. $50,000 was paid September 13, 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 were unable to come to terms on a payment arrangement with La Jolla. La Jolla
sought to enforce a $100,000 penalty provision for past late payments.
On January 23, 2007 La Jolla Cove Investors Inc, filed suit in the Superior
Court Of California entitled La Jolla Cove Investors, Inc. vs. One Voice
Technologies, Inc., Case No. GIC850038 for in reference to the settlement
agreement mentioned above. The penalty by default of $100,000 was dismissed by
the court.
Accordingly, $350,000 is accrued as a settlement liability along with accrued
interest of $44,861 as of June 6, 2007.
37
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information about our executive officers, key
employees and directors as of June 6, 2007.
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 has served as Chairman of the
board, president, chief executive officer, interim chief financial officer and
director since the inception of the Company in July 1999. Mr. 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.
38
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
2006 and discussed them with management.
Our independent auditors, PMB Helin Donovan, 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 PMB Helin Donovan, LLP written disclosures
regarding all relationships between PMB Helin Donovan, LLP and its related
entities and us and our related entities that in the professional judgment of
PMB Helin Donovan, LLP may reasonably be thought to bear on independence. PMB
Helin Donovan, 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 PMB Helin
Donovan, 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,
2006 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:
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;
39
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.
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. The Company will 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.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of our company. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
ended December 31, 2006, and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended December 31, 2006, we believe that during the
year ended December 31, 2006, our executive officers, directors and all persons
who own more than ten percent of a registered class of our equity securities
complied with all Section 16(a) filing requirements.
40
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation
that the Company has paid or that has accrued on behalf of chief executive
officer and other executive officers with annual compensation exceeding $100,000
during the years ended December 31, 2006 and 2005
SUMMARY COMPENSATION TABLE
Change in
Pension Value
and
Non-Equity Non-Qualified
Name & Incentive Plan Deferred All Other
Principal Salary Bonus Stock Option Compensation Compensation Compensation
Position Year ($) ($) Awards($) Awards ($) ($) Earnings ($) ($) Total ($)
------------------------------------------------------------------------------------------------------------------------------------
Dean Weber 2006 $282,000 $7,800 (1) $113,519 $ 403,319
CEO, President 2005 $277,000 -- $ 277,000
James Hadzicki (3) 2006 $161,000 (2) $34,056 $ 195,056
Former CFO 2005 $136,250 -- $ 136,250
1 On January 24, 2006, One Voice Technologies issued Dean Weber, CEO and
President of One Voice Technologies Inc. 24,000,000 common stock options.
One Voice Technologies recorded stock compensation expense of $22,974.00.
2 On January 24, 2006, One Voice Technologies issued James Hadzicki CFO of
One Voice Technologies Inc. 7,200,000 common stock options. One Voice
Technologies recorded stock compensation expense of $19,640.00.
3 On November 8, 2006, James Hadzicki resigned as our Chief Financial
Officer to pursue other outside ventures. There was no disagreement or
dispute between Mr. Hadzicki and our company which led to his resignation.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table sets forth information with respect to grants of
options to purchase our common stock under our 2006 Stock Incentive Plan to the
named executive officers during the fiscal year ended December 31, 2006.
Option Awards Stock Awards
---------------------------------------------------------------------------------- ------------------------------------------------
Equity
Incentive
Plan Awards:
Equity Market or
Equity Incentive Payout
Incentive Plan Awards: Value
Plan Number of
Awards Market of Unearned
Number Number Number Number Value of Unearned Shares,
of of of of Shares Shares or Shares, Units or
Securities Securities Securities or Units Units of Units or Other
Underlying Underlying Underlying of Stock Stock Other Rights Rights
Unexercised Unexercised Unexercised Option That Have That Have That Have That Have
Options Options Unearned Exercise Option Not Not Not Not
(#) (#) Options Price Expiration Vested Vested Vested Vested
Name Exercisable Unexercisable (#) ($) Date (#) ($) (#) ($)
----------------- ----------- ------------- ----------- ---------- ---------- --------- --------- ------------ ------------
Dean Weber 8,000,000 16,000,000 $0.016 01/24/2016
CEO, President
On January 24, 2006, One Voice Technologies issued Dean Weber, CEO and President
of One Voice Technologies Inc. 24,000,000 common stock options. One Voice
Technologies recorded stock compensation expense of $22,974.00. The above
options carry vesting date's as follows: 1/3 of the options vest on the grant
date, 1/3 of the options vest one year after the grant date, the final 1/3 of
the options vest two years after the grant date .
41
DIRECTOR COMPENSATION
The following table sets forth with respect to the named director,
compensation information inclusive of equity awards and payments made in the
year end December 31, 2006.
Change in
Pension
Value and
Nonqualified
Fees Earned or Non-Equity Deferred All Other
Paid in Cash Stock Awards Option Incentive Plan Compensation Compensation Total
Name ($) ($) Awards ($) Compensation ($) Earnings ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
--------------- ------------ ------------ ---------- ---------------- ------------ ------------ -------
Rahoul Sharan (1) $ 10,541 $10,541
Brad Ammon (2) $ 7,027 $2,804 $ 9,831
(1) On January 24, 2006, One Voice Technologies issued Rahoul Sharan a
member of the Board of Directors of One Voice Technologies Inc.
2,600,000 common stock options. One Voice Technologies recorded a
total stock compensation expense of $10,541.00 for the year ended
December 31, 2006.
(2) On January 24, 2006, One Voice Technologies issued Brad Ammon a
member of the Board of Directors of One Voice Technologies Inc.
2,600,000 common stock options. One Voice Technologies recorded a
total stock compensation expense of $7,027.00 for the year ended
December 31, 2006.. In addition to issuing stock options, Brad was
also reimbursed $ 2,804.00 on 07/24/2006 which related to travel
expenses incurred while attending the annual Board of Director's
meeting held in San Diego California. Brad was issued form 1099 for
$2,804.00 in January 2007.
The above options carry vesting date's as follows: 1/3 of the options vest on
the grant date, 1/3 of the options vest one year after the grant date, the final
1/3 of the options vest two years after the grant date .
EMPLOYMENT AGREEMENTS
On April 1, 2007, 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 $340,000 (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.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 6, 2007 (i) by each person who is known
by us to beneficially own more than 5% of our common stock; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors as a
group. Each person's address is c/o One Voice Technologies, Inc., 4275 Executive
Square, Suite 200, La Jolla, California 92037.
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 June 6, 2007 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 June 6, 2007 have been exercised and converted.
SHARES BENEFICIALLY OWNED NAME OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER OWNED (1) CLASS (2)
DEAN WEBER, CEO, INTERIM CFO,
PRESIDENT AND CHAIRMAN OF THE BOARD 19,957,800 3.1%
----------------- ------------
RAHOUL SHARAN, DIRECTOR 2,660,000 0.4%
----------------- ------------
BRADLEY J. AMMON, DIRECTOR 1,808,333 0.3%
----------------- ------------
ALPHA CAPITAL AKTEINGESELLSCHAFT 142,181,021 22.3%
----------------- ------------
WHALEHAVEN CAPITAL FUND LIMITED 93,369,316 14.6%
----------------- ------------
BRISTOL INVESTMENTS FUND LIMITED 35,167,806 5.5%
----------------- ------------
STONESTREET LIMITED PARTNERSHIP 32,475,617 5.1%
----------------- ------------
ELLIS INTERNATIONAL 43,731,013 6.9%
----------------- ------------
----------------- ------------
TOTAL 371,350,906 58%
================= ============
TOTAL SHARES HELD BY OFFICERS
AND DIRECTORS
----------------- ------------
(3) PERSONS 24,426,133 3.8%
================= ============
(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 June 6, 2007 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) Based upon 638,406,693 shares issued and outstanding on June 6, 2007.
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.
43
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material related transactions which we entered into during the
past two fiscal years.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In November 2006, the Board of Directors of the Company determined, pursuant to
a policy of periodically reviewing the selection of the Company's independent
auditors that it would reevaluate the Company's audit engagement for fiscal year
2006. Accordingly, on February 16, 2007, Squar, Milner, Peterson, Miranda &
Williamson, LLP (the "Former Accountant") was dismissed as the auditors for the
Company. On February 16, 2007, the Company engaged PMB Helin Donovan, LLP (the
"New Accountant"), as its independent certified public accountant. The Company's
decision to engage the New Accountant was approved by its Board of Directors on
February 16, 2007.
The reports of the Former Accountant on the financial statements of the Company
for each of the two most recent fiscal years ended December 31, 2005 did not
contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles, except that
the Former Accountant's report on the Company's financial statements for the
year ended December 31, 2005 expressed substantial doubt with respect to the
Company's ability to continue as a going concern.
During the Company's two most recent fiscal years and the subsequent interim
periods through the date of dismissal, there were no reportable events as the
term described is in Item 304(a)(1)(iv) of Regulation S-B, except for the
following:
The Former Accountant advised management that they noted the following
significant deficiencies in internal controls that were believed to be material
weaknesses under the standards of the Public Company Accounting Oversight Board:
(1) lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (2) an ineffective control environment due to the
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) insufficient personnel resources and
technical accounting expertise within the accounting function to resolve
non-routine or complex accounting matters including application and
implementation of US GAAP and SEC reporting requirements; (6) ineffective
controls over period end financial close and reporting processes; and (7)
inadequate procedures for appropriately identifying, assessing and applying
accounting principles.
During the Company's two most recent fiscal years and the subsequent interim
periods through June 6, 2007, 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 such years.
During the Company's two most recent fiscal years and the subsequent interim
periods through the date of engagement, the Company did not consult with the New
Accountant regarding the application of accounting principles to a specific
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, and no written or oral
advice was provided by the New Accountant that was a factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issues.
44
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.
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;
45
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.
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.
46
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.
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.
47
TOTAL SHARES TOTAL
OF COMMON BENEFICIAL
STOCK ISSUABLE TOTAL PERCENTAGE SHARES OF OWNERSHIP AFTER
UPON FULL OF COMMON STOCK, COMMON STOCK THE OFFERING PERCENTAGE
CONVERSION OF ASSUMING FULL INCLUDED BENEFICIAL PERCENTAGE OF ASSUMING FULL OF COMMON
CONVERTIBLE CONVERSION OF IN THIS OWNERSHIP COMMON STOCK CONVERSION OF STOCK OWNED
NOTES AND/OR DEBT AND/OR PROSPECTUS BEFORE THE BEFORE THE DEBT/WARRANT AFTER THE
NAME WARRANTS (1)(3) WARRANTS (3) (1)(3) OFFERING (2) OFFERING (2) EXERCISE (4) OFFERING (4)
------------------------------------------------------------------------------------------------------------------------------------
STONESTREET LIMITED
PARTNERSHIP (1) 32,736,034 3.5% 32,736,034 32,736,034 4.88% - 0.0%
-----------------------------------------------------------------------------------------------------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT (2) 110,254,853 11.0% 110,254,853 74,858,668 9.99% 11,360,744 1.26%
-----------------------------------------------------------------------------------------------------------
WHALEHAVEN CAPITAL
FUND LIMITED (3) 43,598,507 4.7% 43,598,507 66,293,475 9.41% 22,694,968 2.4%
-----------------------------------------------------------------------------------------------------------
ELLIS INTERNATIONAL
LIMITED (4) 20,504,494 2.2% 20,504,494 20,766,998 3.15% 262,504 0.0%
-----------------------------------------------------------------------------------------------------------
GREENWICH GROWTH FUND
LIMITED (5) 1,009,110 0.1% 1,009,110 1,009,110 0.16% - 0.0%
-----------------------------------------------------------------------------------------------------------
OMEGA CAPITAL SMALL CAP
FUND (6) 1,831,124 0.2% 1,831,124 1,831,124 0.29% - 0.0%
-----------------------------------------------------------------------------------------------------------
MOMONA CAPITAL CORP. (7) 5,671,830 0.6% 5,671,830 6,388,364 0.99% 716,534 0.1%
-----------------------------------------------------------------------------------------------------------
OSHER CAPITAL (8) 4,051,878 0.5% 4,051,878 4,051,878 0.63% - 0.0%
(1) Includes a good faith estimate (150%) of the shares issuable upon conversion
of the secured convertible notes and exercise of 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 June 6, 2007, the
secured convertible notes would have had a conversion price of $.00192. The
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.
48
(2) 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. Based on 638,406,693 shares outstanding as of June 6, 2007.
(3) The Selling Stockholder may not to convert the debenture or exercise its
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 exceeds 9.99% of the then issued and outstanding shares
of common stock. 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.
(4) Assumes that all securities registered will be sold.
(5) Includes: (i) 781,250 shares underlying the remaining $10,000 principal
amount of secured convertible notes issued under our 2004 Subscription
Agreements; (ii) 15,977,392 shares underlying Class A warrants issued under our
2004 Subscription Agreements; and (iii) 15,977,392 shares underlying Class B
warrants issued under our 2004 Subscription Agreements. In accordance with Rule
13d-3 under the Securities Exchange Act of 1934, Stonestreet Limited Partnership
is a private investment fund that is owned by all its investors and managed by
Ms. Libby Leonard and Mr. Michael Finkelstein. Ms. Libby Leonard and Mr. Michael
Finkelstein may be deemed control persons of the shares owned by such entity,
with final voting power and investment control over such shares.
(6) Includes: (i) 27,968,750 shares underlying the remaining $358,000 principal
amount of secured convertible note issued under our 2006 Subscription
Agreements; (ii) 18,204,325 shares underlying Class A warrants issued under our
2006 Subscription Agreements; (iii) 12,712,522 shares underlying Class A
warrants issued under our 2005 Subscription Agreements; (iv) 11,178,367 shares
underlying Class A warrants issued under our 2004 Subscription Agreements; (v)
27,012,522 shares underlying Class B warrants issued under our 2005 Subscription
Agreements; and (vi) 13,178,367 shares underlying Class B warrants issued under
our 2004 Subscription Agreements. In accordance with rule 13d-3 under the
securities exchange act of 1934, Alpha Capital Atiengesellschaft 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.
(7) Includes: (i) 8,437,500 shares underlying the remaining $108,000 principal
amount of secured convertible notes issued under our 2006 Subscription
Agreements; (ii) 5,625,709 shares underlying Class A warrants issued under our
2006 Subscription Agreements; (iii) 27,012,522 shares underlying Class B
warrants issued under our 2005 Subscription Agreements; (iv) 1,261,388 shares
underlying Class A warrants issued under our 2004 Subscription Agreements; and
(v) 1,261,388 shares underlying Class B warrants issued under our 2004
Subscription Agreements. 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.
(8) Includes: (i) 4,473,143 shares underlying Class A warrants issued under our
2006 Subscription Agreements; (ii) 8,441,413 shares underlying Class B warrants
issued under our 2005 Subscription Agreements; (iii) 3,024,969 shares underlying
Class A warrants issued under our 2004 Subscription Agreements; and (viii)
4,564,969 shares underlying Class B warrants issued under our 2004 Subscription
Agreements. 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.
(9) Includes: (i) 504,555 shares underlying Class A warrants issued under our
2004 Subscription Agreements and (ii) 504,555 shares underlying Class B warrants
issued under our 2004 Subscription Agreements.
(10) Includes: (i) 38,909 shares underlying Class A warrants issued under our
2005 Subscription Agreements and (ii) 1,792,215 shares underlying Class B
warrants issued under our 2005 Subscription Agreements. In accordance with rule
13d-3 under the securities exchange act of 1934, Omega Capital Small Cap Fund is
a private investment fund that is owned by all of its investors and managed by
Herman Segal. Herman Segal may be deemed a control person of the shares owned by
such entity, with final voting power and investment control over such shares.
49
(11) Includes: (i) 3,903,308 shares underlying Class A warrants issued under our
2006 Subscription Agreements and (ii) 1,768,522 shares underlying Class B
warrants issued under our 2004 Subscription Agreements. In accordance with rule
13d-3 under the securities exchange act of 1934, Momona Capital Corp. is a
private investment fund that is owned by all of its investors and managed by
Arie Rabinowitz. Mr. Arie Rabinowitz may be deemed a control person of the
shares owned by such entity, with final voting power and investment control over
such shares.(12) Includes 2,025,939 shares underlying Class A warrants issued
under our 2005 Subscription Agreements and 2,025,939 shares underlying Class B
warrants issued under our 2005 Subscription Agreements . 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.
TERMS OF SECURED CONVERTIBLE NOTES AND THE 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 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 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.
In addition, 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. 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 $1,115,000
which we issued on March 18, 2005 and July 13, 2005 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
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 $0.045 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.
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 declared 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.
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.
50
The Purchasers 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.
A complete copy of the Subscription Agreement and related documents are
incorporated by reference as exhibits to our Form SB-2 registration statement
relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The following is an example of the amount of shares of our common stock that are
issuable, upon full conversion of our secured convertible notes (excluding
accrued interest) in the amount $1,457,000 at June 6, 2007, based on market
prices 25%, 50% and 75% below the applicable debt conversion discount price, as
of June 6, 2007 of $0.0192.
Note that the discount price on all convertible notes is the average of the
lowest of the three stock prices for the past 30 days multiplied by 80%.
% BELOW MARKET PRICE PER SHARE DISCOUNT OF 20% NUMBER OF SHARES ISSUABLE
-------------- --------------- --------------- -------------------------
25% 0.0140 0.0110 132,454,545
50% 0.0100 0.0080 182,125,000
75% 0.0050 0.0040 364,250,000
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, 2006 appearing in this prospectus and
registration statement have been audited by PMB Helin Donovan, LLP, independent
auditors, and our financial statements at December 31, 2005 appearing in this
prospectus and registration statement have been audited by Squar, Milner,
Peterson, Miranda and Williamson, LLP, independent auditors, 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 such firm as experts in
accounting and auditing.
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 One Voice Technologies 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.
51
INDEX TO FINANCIAL STATEMENTS
ONE VOICE TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2006 AND 2005
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRMS F-1
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRMS F-2
Balance Sheets as of March 31, 2007 and December 31, 2006 F-3
Statements of Operations for the years ended
December 31, 2006 and 2005 F-4
Statements of Stockholders'(Deficit) for the years ended
December 31, 2006 and 2005 F-5 - F-6
Statements of Cash Flows for the years ended
December 31, 2006 and 2005 F-7 - F-8
Notes to Financial Statements F-9 - F-43
INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2007 AND 2006
CONTENTS
Balance Sheets as of March 31, 2007 and December 31, 2006 F-44
Statements of Operations for the three months
ended March 31, 2007 and 2006 F-45
Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 F-46
Notes to Financial Statements F-47 - F-71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders One Voice Technologies, Inc.
La Jolla, California
We have audited the accompanying consolidated balance sheet of One Voice
Technologies, Inc. ("One Voice") as of December 31, 2006, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity and cash flows for the year ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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
statement is 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 includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of One
Voice Technologies, Inc. as of December 31, 2006 and the consolidated results of
their operations and their consolidated cash flows for the years ended December
31,2006, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financials statements, the Company
changed its method of accounting for stock-based compensation upon adoption of
Financial Accounting Standards No. 123(R), "Share-Based Payment."
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 $4,419,000 and had a working capital deficit of $5,101,000. 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.
PMB HELIN DONOVAN, LLP
San Francisco, California
April 16, 2007
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
One Voice Technologies, Inc.
We have audited the accompanying balance sheet of One Voice Technologies, Inc.
as of December 31, 2005, and the related statements of operations, stockholders'
deficit, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the financial statements, One Voice Technologies, Inc.
has reported accumulated losses during the development stage and had a working
capital deficiency as of December 31, 2005. These factors raise substantial
doubt the about the Company's ability to continue as a going concern.
Management's plans as to these matters are described in Note 1. The 2005
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Notes 1 and 19, the accompanying financial statements as of
December 31, 2005 and for the year then ended have been restated.
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
Squar, Milner, Peterson, Miranda & Williamson, LLP
San Diego, California
March 31, 2006, except for the effects of the restatement discussed in Notes 1
and 19, as to which the date is April 16, 2007
F-2
ONE VOICE TECHNOLOGIES INC.
BALANCE SHEETS
--------------
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
Assets (restated)
Current Assets:
Cash and cash equivalents $ 34,585 $ 338,811
Accounts Receivable 99,111 42,696
Inventories 4,841 5,254
Prepaid expenses 28,785 40,574
------------ ------------
TOTAL CURRENT ASSETS 167,322 427,335
PROPERTY AND EQUIPMENT, NET 164,389 84,703
Software development & licensing, net 12,618 40,552
Trademarks, net 2,452 5,517
Patents, net 77,580 94,200
Deposits 18,665 18,665
Deferred debt issue costs 344,835 69,970
------------ ------------
TOTAL ASSETS $ 787,861 $ 740,942
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 444,088 $ 128,630
Accrued expenses 239,593 147,305
Settlement agreement liability 350,000 920,000
License agreement liability 930,000 930,000
Debt derivative liability 256,495 108,917
Warrant derivative liability 2,808,308 2,032,299
Revolving line of credit 240,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 5,268,484 4,267,151
------------ ------------
LONG TERM LIABILITIES:
Note payable 100,000 100,000
Convertible notes payable, net 982,972 422,480
Deferred rent 12,017 --
------------ ------------
TOTAL LIABILITIES 6,363,473 4,789,631
------------ ------------
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, 584,513,673 and
363,590,152 shares issued and outstanding at
December 31, 2006 and December 31, 2005,
respectively 585,327 363,590
Additional paid-in capital 40,696,540 38,026,356
Accumulated deficit (46,857,479) (42,438,635)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (5,575,612) (4,048,689)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 787,861 $ 740,942
============ ============
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
------------- -------------
(RESTATED)
Net Revenue $ 690,540 $ 142,285
Cost of goods sold 162,682 31,467
------------- -------------
Gross profit 527,855 110,818
------------- -------------
General and administrative expenses 3,515,336 3,433,281
------------- -------------
Net loss from operations (2,987,478) (3,322,463)
Other income / (expense)
Interest expense (1,579,327) (2,419,514)
Settlement expense, net (100,500) (760,387)
Gain on warrant and debt derivatives 242,970 5,488,823
Other income (expense) 5,491 (46,408)
------------- -------------
Total other income / (expense) (1,431,366) 2,262,514
------------- -------------
Net loss $ (4,418,844) $ (1,059,949)
============= =============
Basic loss per share $ (0.01) $ (0.01)
============= =============
Basic weighted average shares outstanding 485,469,000 299,279,000
============= =============
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT)
-------------------------------------
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT (DEFICIT)
-------------- ------------ ----------------- --------------- ---------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
BALANCE AT DECEMBER 31, 2004 (RESTATED) 246,467,927 $ 246,468 $ 35,263,881 $ (41,378,686) $ (5,868,337)
ISSUANCE OF COMMON STOCK IN CONNECTION
with private placement 17,000,000 17,000 - - 17,000
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 275,695 275,695
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 (1,059,949) (1,059,949)
-------------- ------------ ----------------- --------------- ---------------
Balance at December 31, 2005 (restated) 363,590,152 $ 363,590 $ 38,026,356 $ (42,438,635) $ (4,048,689)
============== ============ ================= =============== ===============
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) (CONTINUED)
-------------------------------------------------
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT (DEFICIT)
-------------- ------------ ----------------- --------------- ---------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
Balance at December 31, 2005 (restated) 363,590,152 $ 363,590 $ 38,026,356 $ (42,438,635) $ (4,048,689)
Issuance of common stock in connection
with private placement 20,000,000 20,000 355,500 375,500
Exercise of warrants for cash 20,550,000 20,550 279,650 300,200
Expenses incurred in connection
with stock option compensation 239,059 239,059
Expenses incurred in connection
with securing financing agreements 20,000,000 20,000 212,000 232,000
Conversion of debt to
equity - Alpha Capital 46,750,254 46,750 425,452 472,202
Conversion of debt to
equity - Momona Capital 11,652,219 11,652 90,807 102,459
Conversion of debt to
equity - Ellis International Limited 17,381,205 17,381 160,062 177,443
Conversion of debt to
equity - Omega Capital 14,425,710 14,426 122,822 137,248
Conversion of debt to
equity - Whalehaven Capital 69,030,045 69,844 770,391 840,235
Conversion of debt to
equity - Osher Capital 1,134,088 1,134 14,441 15,575
Net loss for the year ended
December 31, 2006 (4,418,844) (4,418,844)
-------------- ------------ ----------------- --------------- ---------------
BALANCE AT DECEMBER 31, 2006 584,513,673 $ 585,327 $ 40,696,540 $ (46,857,479) $ (5,575,612)
============== ============ ================= =============== ===============
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
-------------- --------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,418,844) $ (1,059,949)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation and amortization 123,236 172,426
Loss on disposal of assets -- 49,332
Amortization of debt discount and debt issue costs 1,783,252 2,284,275
Warrant re-pricing -- 271,898
(Gain) loss on debt derivative liability (12,342) (418,742)
(Gain) loss on warrant derivative liability (230,628) (5,070,081)
Share based compensation expense 272,168 --
CHANGES IN CERTAIN ASSETS AND LIABILITIES
Accounts receivable (56,415) (36,422)
Inventories 413 4,470
Prepaid expenses 11,789 (157,844)
Deposits -- (16,508)
Deferred rent 12,017 --
Accounts payable 315,458 (33,965)
Accrued expenses 92,287 74,418
Settlement agreement liability (570,000) 920,000
License agreement liability -- (120,000)
Deposit -- (12,522)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (2,677,609) (3,149,214)
F-7
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
------------------------
(Continued)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (130,641) (45,768)
Additions to trademark and patent costs (24,662) (12,434)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (155,303) (58,202)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of convertible notes 1,984,000 2,000,000
Issuance of common stock - private funding 432,500 506,400
Proceeds from warrant exercise 300,200 649,210
Payment for debt issue cost (428,014) (145,025)
Issuance of notes payable, long-term debt and capital leases 240,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,528,686 3,010,585
----------- -----------
Net (decrease) in cash (304,226) (196,831)
Cash and cash equivalents, beginning of period 338,811 535,642
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,585 $ 338,811
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 74,727
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
Issuance of warrant derivative in connection
with private placement and debt financing, initial valuation $ 941,331 $2,160,935
=========== ===========
Beneficial conversion feature of debt $ -- $ 275,695
=========== ===========
Common Stock issued upon conversion of debt $1,745,162 $1,937,691
=========== ===========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-8
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
One Voice Technologies, Inc., ("The Company"), is incorporated under the laws of
the State of Nevada. The Company develops voice recognition software and it
commenced operations in 1999. The Company's 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 reading and sending e-mail messages, SMS text
messaging to mobile phones, PC-to-Phone calling (VoIP) and PC-to-PC audio/video.
BASIS OF PRESENTATION
The accompanying audited financial statements represent the financial activity
of One Voice Technologies, Inc. The financial statements have been prepared in
accordance with generally accepted accounting principles in the US. The
Company's fiscal year ends on December 31 each year. The financial statements
and notes are representations of the management and the Board of Directors, who
are responsible for their integrity and objectivity.
RESTATEMENT OF 2005 FINANCIAL STATEMENTS
The Company has restated its previously issued 2005 financial statements for
matters related to the following previously reported items to properly reflect
the accounting for embedded derivatives pursuant to SFAS No. 133. The
accompanying financial statements for 2005 have been restated to reflect the
corrections. Also, certain balances at January 1, 2005 were adjusted as a result
of corrections of errors in 2004 of a similar nature (see note 19).
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 $46,857,000 and used
cash from operations of $ 2,357,000 during the year ended December 31, 2006. The
Company also has a working capital deficit of $5,101,000 of which $3,065,000
represents a non-cash warrant and debt derivative liabilities. The Company also
has a stockholder's deficit of $5,576,000 as of December 31, 2006. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management has instituted a cost reduction program that included a
reduction in labor and fringe costs. Historically, management has been able to
obtain capital through either the issuance of equity or debt, and is currently
seeking such financing. There can be no assurance as to the availability or
terms upon which such financing and capital might be available. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform to
current year classifications. These reclassifications did not have an effect on
the previously reported results of operations or retained earnings.
F-9
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Significant estimates include valuation of derivative and warrant
liabilities. 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, 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.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at net realizable value. Uncollectible
receivables are recorded as bad debt expense when all efforts to collect have
been exhausted and recoveries are posted as they are received.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of a sale arrangement
exists, delivery has occurred or services have been rendered, the sales price is
fixed or determinable, and collectibility is reasonably assured in accordance
with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB 104").
When a customer order contains multiple items such as hardware, software, and
services which are delivered at varying times, the Company determines whether
the delivered items can be considered separate units of accounting as prescribed
under Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 states that delivered
items should be considered separate units of accounting if delivered items have
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of undelivered items, and if delivery of undelivered
items is probable and substantially in the Company's control.
In these circumstances, the Company allocates revenue to each element based on
its relative vendor specific objective evidence of fair value ("VSOE"). VSOE for
products and software is established based on the Company's approved pricing
schedules. To establish VSOE for services, the Company uses standard billing
rates based on said services. Generally, the Company is able to establish VSOE
for all elements of the sales order and bifurcate the customer order or contract
accordingly. In these instances, sales are recognized on each element
separately. However, if VSOE cannot be established or if the delivered items do
not have stand alone value to the customer without additional services provided,
the Company recognizes revenue on the contract as a whole based on either the
completed-performance or proportional-performance methods as described below.
F-10
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In most cases, revenue from hardware and software product sales is recognized
when title passes to the customer. Based upon the Company's standard shipping
terms, FOB The Company, title passes upon shipment to the customer.
Revenue is recognized on service contracts using either the
completed-performance or proportional-performance method depending on the terms
of the service agreement. When the amount of services to be performed in the
last series of acts is so significant in relation to the entire service contract
that performance is deemed not to have occurred until the final act is completed
or when there are acceptance provisions based on customer-specified subjective
criteria, the completed-performance method is used. Once the last significant
act has been performed, revenue is recognized. The Company uses the
proportional-performance method when a service contract specifies a number of
acts to be performed and the Company has the ability to produce reasonable
estimates. The estimates used on these contracts are periodically updated during
the term of the contract and may result in the Company's revision of recognized
sales in the period in which they are identified.
In some contracts, billing terms are agreed upon based on performance milestones
such as the execution of a contract, the customer's acceptance of a list
detailing the equipment and/or vendor for products, the partial or complete
delivery of products and/or the completion of specified services. Payments
received before delivery has occurred or services have been rendered are
recorded as deferred revenue until the revenue recognition criteria are met.
Deferred revenue from maintenance or warranty contracts is recognized over the
terms of the underlying contract.
DEFERRED REVENUE
Revenue under maintenance agreements is deferred and recognized over the term of
the agreements (typically one year) on a straight-line basis. At December 31,
2006, the Company had no deferred revenue recorded.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred. For the years ended
December 31, 2006 and 2005, advertising and promotion costs were $21,000 and
$77,000 respectively.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined on a
standard cost basis which approximates actual cost on the first-in, first-out
("FIFO") method. Lower of cost or market is evaluated by considering
obsolescence, excessive levels of inventory, deterioration and other factors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which is
from three years to seven years depending upon the type of asset. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
Whenever assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is expensed as incurred; significant improvements are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for indicators of possible
impairment by comparison of the carrying amounts to future net undiscounted cash
flows expected to be generated by such assets when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Should an impairment exist, the impairment loss would be measured based on the
excess carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. The Company has not identified any such
impairment losses to date.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for their software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") 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, 2006 and 2005.
Amortization expense totaled $28,000 and $37,000 for the years ended December
31, 2006 and 2005, respectively. Accumulated amortization as of December 31,
2006 amounted to $1,663,000.
F-11
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2006 and 2005 totaled $3,000 and
$8,000, respectively. Accumulated amortization as of December 31, 2006 amounted
to $241,000.
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. Yearly patent renewal fees
are expensed in the year incurred. Amortization expense charged for the years
ended December 31, 2006 and 2005 totaled $41,000 and $36,000, respectively.
Accumulated amortization as of December 31, 2006 amounted to $134,000.
In accordance with SFAS No. 142, the Company evaluates its operations to
ascertain if a triggering event has occurred which would impact the value of
finite-lived intangible assets (e.g., patents). Examples of such triggering
events include a significant disposal of a portion of such assets, an adverse
change in the market involving the business employing the related asset, a
significant decrease in the benefits realized from an asset
As of December 31, 2006, no such triggering event has occurred. An impairment
test involves a comparison of undiscounted cash flows against the carrying value
of the asset as an initial test. If the carrying value of such asset exceeds the
undiscounted cash flow, the asset would be deemed to be impaired. Impairment
would then be measured as the difference between the fair value of the fixed or
amortizing intangible asset and the carrying value to determine the amount of
the impairment. The Company determines fair value generally by using the
discounted cash flow method. To the extent that the carrying value is greater
than the asset's fair value, an impairment loss is recognized for the
difference.
F-12
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE DEBT FINANCING AND DERIVATIVE LIABILITIES
The Company has issued convertible debt securities with non-detachable
conversion features and detachable warrants. The Company accounts for such
securities in accordance with Emerging Issues Task Force Issue Nos. 98-5, 00-19,
00-27, 05-02, 05-04 and 05-08, 06-06 and Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended ("SFAS 133").
In accordance with SFAS 133, the holder's conversion right provision, interest
rate adjustment provision, liquidated damages clause, cash premium option, and
the redemption option (collectively, the debt features) contained in the terms
governing the Notes are not clearly and closely related to the characteristics
of the Notes. Accordingly, the features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any scope exception
within SFAS 133, they were required by SFAS 133 to be accounted for separately
from the debt instrument and recorded as derivative financial instruments.
At each balance sheet date, the Company adjusts the derivative financial
instruments to their estimated fair value and analyzes the instruments to
determine their classification as a liability or equity. For the years ending
December 31, 2006 and 2005, the estimated fair value of the Company's embedded
features derivative liability were $256,495 and $108,917 respectively.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with ("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. For the years ending December 31,
2006 and 2005, the estimated fair value of the Company's warrant derivative
liability was $2,808,308 and $2,032,299 respectively.
DEBT DERIVATIVE LIABILITY
Proceeds received from debt issued with stock purchase warrants are allocated
between the debt and the warrants, based upon the fair values of the two
securities. The amount attributable to warrants is accounted for either as
additional paid-in capital or as a warrant derivative liability depending upon
guidance in EITF Issue No. 00-19. 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.
For the periods ending December 31, 2006 and 2005, the estimated the estimated
fair value of the Company's debt derivative liability were $256,495 and $108,917
respectively.
DEFERRED DEBT ISSUE COST
The costs relating to obtaining and securing debt financing are capitalized and
is expensed over the term of the debt instrument. In the event of settlement of
such debt in advance of the maturity date, an expense is recognized for the
remaining unamortized discount.
F-13
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Basic earnings per share ("EPS") 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, 2006 and 2005 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 anti dilutive.
The following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as the effect is antidilutive:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
(restated)
------------- -------------
Numerator - basic and diluted $ (4,418,844) $ (1,059,949)
============= =============
Denominator - basic or diluted
Weighted average common shares
outstanding 485,469,000 299,279,000
Weighted average unvested common shares
shares subject to repurchase - -
------------- -------------
Total 485,469,000 299,279,000
============= =============
------------- -------------
Net loss per share - basic and diluted $ (0.01) $ (0.01)
============= =============
Antidilutive securities:
Convertible debentures 223,595,506 140,830,180
Options 58,059,000 1,921,500
Warrants 339,979,838 215,373,361
------------- -------------
TOTAL 621,634,344 358,125,041
============= =============
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-14
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK AND WARRANTS ISSUED TO THIRD PARTIES
The Company accounts for stock and stock warrants issued to third parties,
including customers, in accordance with the provisions of the EITF Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services, and EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products) EITF 96-18". Under the provisions of EITF
96-18, if none of the Company's agreements have a disincentive for
nonperformance, the Company records a charge for the fair value of the stock and
the portion of the warrants earned from the point in time when vesting of the
stock or warrants becomes probable. EITF 01-9 requires that the fair value of
certain types of warrants issued to customers be recorded as a reduction of
revenue to the extent of cumulative revenue recorded from that customer. The
Company has not given any stock based consideration to a customer.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 2006 the Company adopted "SFAS" No.123 (Revised 2004), "Share
Based Payment," ("SFAS 123R"), using the modified prospective method. In
accordance with SFAS No. 123R, 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 123R 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 during the year ending December 31, 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 using the
Black-Scholes option pricing model, and compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value. Prior periods were not restated to reflect the impact of adopting the new
standard. During the year ended December 31, 2006, the Company recorded $272,000
in non-cash charges for the implementation of SFAS 123R.
The fair value of stock options at date of grant was estimated using the
Black-Scholes model with the following assumptions: expected volatility of
90.9%, expected term of 2.0 years, risk-free interest rate of 4.74%, 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.
During the year ended December 31, 2006 the Company granted 57,200,000 stock
options at an average exercise price of $0.016 to employees and consultants of
the Company, of which 7,000,000 are classified in the warrant table. A total of
1,062,500 options were terminated throughout the year of 2006. Under the plan
rules, upon termination of employment, a period of 90 days is granted to
exercise any vested options. If the options are not exercised within the 90 day
period, they automatically terminate.
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," (see note 17).
F-15
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK WARRANT ACTIVITY
During 2006 and 2005, the Company issued 146,917,090 and 169,062,610 warrants to
Stockholders, respectively.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants. In addition to the
assumptions in the table, the Company applies a forfeiture-rate assumption in
its estimate of fair value that is primarily based on historical annual
forfeiture rates of the Company.
2006
--------------
Expected dividend yield 0.00%
Expected volatility 72% to 81%
Average risk-free interest rate 4.82% to 5.21%
Expected life (in years) 0.9 to 6.5
The Company accounts for stock options and warrants issued to third parties for
services in accordance with the provisions of the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services". Under the provisions of EITF 96-18, because none of the Company's
agreements have a disincentive for nonperformance, the Company records a charge
for the fair value of the portion of the stock options and warrants earned from
the point in time when vesting of the stock options and warrants becomes
probable. Final determination of fair value of the stock options and warrants
occurs upon actual vesting.
F-16
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses include internal and external costs. Internal
costs include salaries and employment related expenses and allocated facility
costs. External expenses consist of costs associated with outsourced software
development activities. In accordance with SFAS No. 2, "Accounting for Research
Development Costs", all such costs are charged to expense as incurred. During
2006 and 2005 all research and development costs were internal. Research and
development expense were $704,000 and $701,000 for the years ended December 31,
2006 and 2005 respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, are
excluded from net income. For the fiscal years ended December 31, 2006 and 2005,
the Company's comprehensive income (loss) had equaled its net loss. Accordingly,
a statement of comprehensive loss is not presented.
COMMITMENTS AND CONTINGENCIES
Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company's legal counsel
evaluates the perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or expected to be
sought therein.
If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature of the guarantee would be
disclosed.
SEGMENT
The Company operates in a single business segment that includes the design and
development.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 154 replaces APB Opinion No. 20 and SFAS 3 and became effective in the
first quarter of 2006. The standard introduces a new requirement to
retrospectively apply accounting principle changes to prior years' comparative
financial statements as if the Company had always applied the newly adopted
accounting principle. Changes in depreciation, amortization and depletion
methods previously considered a change in accounting principle are now
considered a change in estimate under SFAS 154, requiring prospective adoption.
New pronouncements may contain specific implementation guidance which would
supersede the requirements of SFAS 154. The adoption of SFAS 154 did not have an
impact on the consolidated financial statements included herein.
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. The Company adoption of SFAS No. 155 will not have any
material effect on its consolidated financial position, results of operations or
cash flows.
F-17
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS--AN AMENDMENT OF FASB STATEMENT NO. 140. Companies are required
to apply SFAS No. 156 as of the first annual reporting period that begins after
September 15, 2006. The Company does not believe adoption of SFAS No. 156 will
have a material effect on its unaudited condensed consolidated financial
position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 provides guidance for the recognition, derecognition and measurement
in financial statements of tax positions taken in previously filed tax returns
or tax positions expected to be taken in tax returns. FIN 48 requires an entity
to recognize the financial statement impact of a tax position when it is more
likely than not that the position will be sustained upon examination. If the tax
position meets the more-likely-than-not recognition threshold, the tax effect is
recognized at the largest amount of the benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. The Company will be
required to adopt FIN 48 as of January 1, 2007, with any cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of FIN 48 and does not
expect a significant impact on its earnings or financial position.
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force
("EITF") Issue No. 06-3, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement" ("EITF No.
06-3"). The scope of EITF No. 06-3 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to, sales, use, value
added, Universal Service Fund ("USF") contributions and some excise taxes. The
Task Force affirmed its conclusion that entities should present these taxes in
the income statement on either a gross or a net basis, based on their accounting
policy, which should be disclosed pursuant to APB Opinion No. 22, "Disclosure of
Accounting Policies." If such taxes are significant and are presented on a gross
basis, the amounts of those taxes should be disclosed. The consensus on EITF No.
06-3 will be effective for interim and annual reporting periods beginning after
December 15, 2006. The Company currently does not show sales tax billed to its
customers on the income statement but records the same as a liability.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements." SAB No. 108 requires
analysis of misstatements using both an income statement (rollover) approach and
a balance sheet (iron curtain) approach in assessing materiality and provides
for a one-time cumulative effect transition adjustment. SAB No. 108 is effective
for the Company's fiscal year 2006 annual financial statements. There has been
no impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective on the Company beginning July 1, 2008. The Company is
currently assessing the potential impact that the adoption of SFAS No. 157 will
have on its financial statements.
In September 2006, the FASB issued SFAS No. 158, Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106 and 132(R), which applies to all plan sponsors who
offer defined benefit postretirement plans. SFAS No. 158 requires recognition of
the funded status of a defined benefit postretirement plan in the statement of
financial position and expanded disclosures in the notes to financial
statements. The Company adopted this provision for the year ended December 31,
2006 and the adoption did not have a material impact on its consolidated
financial position. In addition, SFAS No. 158 requires measurement of plan
assets and benefit obligations as of the date of the plan sponsor's fiscal year
end. The Company is required to adopt the measurement provision of SFAS No. 158
for its fiscal year ending December 31, 2008. The Company is in the process of
evaluating the impact of the measurement provision of SFAS No. 158 on its 2008
consolidated financial position, operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred, e.g., debt issue costs. The fair value election
is irrevocable and generally made on an instrument-by-instrument basis, even if
a company has similar instruments that it elects not to measure based on fair
value. At the adoption date, unrealized gains and losses on existing items for
which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in
fair value are recognized in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by the Company
in the first quarter of fiscal 2009. MBC is currently is determining whether
fair value accounting is appropriate for any of its eligible items and cannot
estimate the impact, if any, which SFAS 159 will have on its consolidated
results of operations and financial condition.
F-18
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 15,
2005 for small business filers. 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.
3. PREPAID EXPENSES
Prepaid expenses for the year ending December 31, 2006 and 2005 of $28,785 and
$40,574 respectively consist of business, employee insurance and legal fees.
4. PROPERTY AND EQUIPMENT
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
Computer equipment $ 703,099 $ 687,365
Website development 38,524 38,524
Equipment 1,562 1,562
Furniture and fixtures 46,431 46,431
Telephone equipment 5,365 4,293
Molds and tooling 113,835 -
------------ ------------
TOTAL 908,816 778,175
Less accumulated depreciation (744,427) (693,472)
------------ ------------
NET PROPERTY AND EQUIPMENT $ 164,389 $ 84,703
============ ============
Depreciation expense totaled $50,955 and $89,682 for the years ended December
31, 2006 and 2005, respectively.
5. DEFERRED DEBT ISSUE COSTS
Total costs of $428,014 were incurred during year 2006. These costs relate to
obtaining and securing debt financing. These costs are amortized over the term
of the debt agreement. A balance of $344,835 remains as of December 31, 2006.
F-19
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
6. ACCRUED EXPENSES
Accrued expenses at December 31, 2006 and 2005 consist of the following:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
Accrued salaries $ 10,976 $ -
Accrued vacation 57,441 74,961
Accrued interest 118,842 72,109
Accrued audit fees 50,000 235
Other 2,334 -
------------ ------------
TOTAL $ 239,593 $ 147,305
============ ============
7. 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 the Company 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:
- 10,000,000 restricted shares of our common stock upon the execution of the
Settlement Agreement;
- $300,000 was paid on May 5, 2006; and
- $400,000 was due on June 6, 2006 (this payment was not made)
- $50,000 was paid on September 13, 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.
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. In January 23, 2007 La Jolla Cove Investors
Inc, filed suit in the Superior Court Of California entitled La Jolla Cove
Investors, Inc. ("La Jolla") vs. One Voice Technologies, Inc., Case No.
GIC850038 for in reference to the settlement agreement mentioned above. The
penalty by default of $100,000 was dismissed by the court.
Accordingly, $350,000 is accrued as a settlement liability along with accrued
interest of $43,000 as of December 31, 2006.
8. 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, 2006 and 2005, the outstanding minimum royalty obligations
pursuant to the License Agreement were $930,000.
F-20
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
9. DERIVATIVE LIABILITY
During the years ended December 31, 2006 and 2005 the Company entered into
convertible debt financing agreements with several institutional investors.
Embedded within these convertible financing transactions are derivatives which
require special treatment pursuant with SFAS No. 133 and EITF 00-19. The
derivatives include but are not limited to the following characteristics:
- Beneficial conversion features
- Early redemption option
- Registration rights and associated liquidated damage
The valuation conducted as of December 31, 2006 and December 31, 2005 and 2005
the fair value of the derivative liability was $256,495 and $108,917
respectively and resulted in a non-cash gain of $12,342 and $418,742
respectively.
10. WARRANT DERIVATIVE LIABILITY
During the years ended December 31, 2006 and 2005 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, 2006 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 4.74% 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, 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 .30 years to 4.00 years. The
valuation conducted as of December 31, 2006 resulted in a non-cash gain of
$231,000 with a corresponding decrease in the warrant derivative liability. 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. As
of December 31, 2006 and 2005, the fair value of the warrant derivative
liability was $2,808,000 and $2,032,000, respectively.
11. REVOLVING CREDIT NOTE PAYABLE
On December 21, 2006, the Company completed a private placement pursuant to a
Revolving Credit Note Agreement which the Company entered into with several
institutional Investors, pursuant to which the Investors subscribed to advance
up to a maximum amount of $640,000 bearing an interest rate of 7%. The term of
the agreement shall be effective as of December 21, 2006 and shall be in full
force and effect until the earliest to occur of (a) 12 months from December 21,
2006 (B) a date not less than thirty days after Lender gives notice of
termination to the Company. In connection with the Revolving Credit Note
Agreement, the Company also issued 20,000,000 shares of its common stock to the
related investors. Interest shall be calculated daily on the outstanding
principal balance due, and is to be reimbursed to the Investors a monthly basis.
The reimbursement of the interest shall be in the form of the Company's
restricted shares of common stock. The stock is to be valued at the month end
stock closing price. The advances to the Company are to be based on an amount of
up to 75% of the face value of the current and future invoices "Receivables"
submitted for borrowing. All proceeds paid relating to the previously mentioned
invoices are to be deposited into a lockbox account belonging to Investors. The
lockbox proceeds are to be 100% applied towards any outstanding principal amount
owed by the Company. The Company's obligation to repay all principal and accrued
and unpaid interest under the convertible notes is secured by the Company's
assets pursuant to a certain Security Agreement dated February 16, 2006, which
also secures the remaining principal amount of the Company's convertible notes
in the aggregate amount of $1,592,000 which the Company 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. As
of December 31, 2006 the outstanding principal amount owed to the Investors was
$240,000.
12. NOTE 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, 2006 and 2005 the principal balance on the note payable was
$100,000 with accrued interest of $27,178 and $19,178 respectively.
F-21
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE SUMMARY
During the periods ending December 31, 2006 and December 31, 2005, the Company
secured 6% convertible debt financing of $1,994,000 and $2,000,000 respectively.
The net proceeds received netted a total of $1,834,000 and $1,855,000
respectively. The difference of $160,000 and $145,000 were costs incurred to
secure the financings. These costs were recorded as debt issue cost. An embedded
conversion feature relating to the debt financings of $1,076,448 and $56,433
respectively were recorded by the Company. The Company amortizes both the issue
cost and discount to interest expense over the term of the debt agreements. The
company issued a total of 140,917,090 Class A common stock purchase warrants
relating to the period ending December 31, 2006 debt financing activities. The
company also issued a total of 67,531,305 Class A common stock purchase warrants
and 67,531,305 Class B common stock purchase warrants relating to the year ended
December 31, 2005 debt financing activities.
During the year ending December 31, 2006, $1,745,000 of notes payable and
accrued interest was converted into approximately 160,374,000 shares of the
Company's common stock at an average conversion price of $0.01 per share.
13. CONVERTIBLE NOTES PAYABLE DETAILS
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 non assessable 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, the Company held its second closing pursuant to the
Subscription Agreement the Company 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 $732,000 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-22
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE DETAILS (CONTINUED)
On March 17, 2006, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 $1,592,000 which the
Company 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.
The Company 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
$505,000 will be amortized over the life of the debt using the interest method.
F-23
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE DETAILS (CONTINUED)
On May 5, 2006 the Company 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 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 $22,000 will be amortized over
the life of the debt using the interest method.
On July 6, 2006, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 $1,592,000 which the Company 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.
The Company 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
$336,000 will be amortized over the life of the debt using the interest method.
On August 29, 2006, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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-24
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE DETAILS (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 $1,592,000 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 41,414,141 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
$214,000 will be amortized over the life of the debt using the interest method.
F-25
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
CONVERTIBLE DEBT FINANCING SUMMARY
A summary of convertible debt at December 31, 2005 is as follows:
Principal
Amount Unamortized Original
Due Date Remaining Discount Balance
----------------- ------------ ----------- -----------
(restated) (restated)
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 (247,040) 152,960
------------ ----------- -----------
Ellis International
Limited July 13, 2008 65,572 (41,854) 23,718
------------ ----------- -----------
Whalehaven Capital
Fund Limited July 13, 2008 400,000 (247,038) 152,962
------------ ----------- -----------
Omega Capital Small
Cap Fund July 13, 2008 25,000 (15,958) 9,042
------------ ----------- -----------
Osher Capital,
Inc. July 13, 2008 15,000 (12,675) 2,325
------------ ----------- -----------
Total Long Term convertible debt December 31, 2005 $ 1,250,572 $ (828,092) $ 422,480
============ =========== ===========
F-26
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
CONVERTIBLE DEBT FINANCING SUMMARY (CONTINUED)
A summary of convertible debt at December 31, 2006 is as follows:
Principal
Amount Unamortized Net
Due Date Remaining Discount Balance
----------------- ----------- ----------- -----------
Stonestreet Limited
Partnership December 23, 2007 $ 10,000 $ -- $ 10,000
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft July 13, 2008 135,000 (53,838) 81,162
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft March 17, 2008 250,000 (108,727) 141,273
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft May 5, 2008 108,000 (4,905) 103,095
----------- ----------- -----------
Whalehaven Capital
Fund Limited May 5, 2008 108,000 (4,905) 103,095
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft July 6, 2008 105,500 (46,089) 59,411
----------- ----------- -----------
Bristol Investment Fund
Ltd July 6, 2008 250,000 (120,832) 129,168
----------- ----------- -----------
Centurion Microcap
L.P July 6, 2008 100,000 (46,089) 53,911
----------- ----------- -----------
Whalehaven Capital
Fund Limited July 6, 2008 105,500 (46,089) 59,411
----------- ----------- -----------
Alpha Capital
Aktiengesellschaft August 29, 2008 105,000 (43,305) 61,695
----------- ----------- -----------
Ellis International
Limited August 29, 2008 150,000 (64,957) 85,043
----------- ----------- -----------
Osher Capital August 29, 2008 60,000 (25,983) 34,017
----------- ----------- -----------
Whalehaven Capital
Fund Limited August 29, 2008 105,000 (43,310) 61,690
----------- ----------- -----------
Total Long Term convertible debt December 31, 2006 $ 1,592,000 $ (609,028) $ 982,972
=========== =========== ===========
F-27
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK
- CONVERTIBLE DEBT CONVERSION
During the periods ending December 31, 2006 and December 31, 2005, several
institutional investors converted approximately $1,745,000 and $1,938,000 of
principal and accrued interest into approximately 160,374,000 and 68,570,000
shares of the Company's common stock at an average conversion price of $0.01 and
$0.03 respectively.
- PRIVATE PLACEMENT
During the years ended December 31, 2006 and 2005, several accredited investors
purchased approximately 20,000,000 and 17,000,000 shares of restricted common
stock for a total purchase price of approximately $376,000 and $506,000
respectively.
- WARRANT EXERCISE
During the years ending December 31, 2006 and 2005, approximately 20,550,000 and
31,500,000 common stock warrants were exercised at a price of $0.015 and $0.02
respectively. The Company received approximately $300,600 and $649,000
respectively.
14. COMMON STOCK DETAILS
During the year ended December 31, 2006, Alpha Capital Akteingesellschaft
converted approximately $472,000 of notes payable and accrued interest into
approximately 46,750,000 shares of the Company's common stock at an average
conversion price of $0.01. 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 at an average price of $0.014.
During the year ended December 31, 2006, Whalehaven Fund, Limited converted
approximately $840,000 of notes payable and accrued interest into approximately
69,030,000 shares of the Company's common stock at an average conversion price
of $0.01.
During the year ended December 31, 2006, Momona Capital Corp. converted
approximately $102,000 of notes payable and accrued interest into approximately
11,652,000 shares of the Company's common stock at an average conversion price
of $0.01.
During the year ended December 31, 2006, Ellis International Ltd. converted
approximately $177,000 of notes payable into approximately 17,381,000 shares of
the Company's common stock at an average conversion price of $0.01. 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 at an average price of
$0.016.
During the year ended December 31, 2006, Omega Capital Small Cap Fund converted
approximately $137,000 of notes payable into approximately 14,426,000 shares of
the Company's common stock at an average conversion price of $0.01.
During the year ended December 31, 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 $0.01.
During the year ended December 31, 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.
During the year 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 year 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 year 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.
F-28
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK DETAILS (CONTINUED)
During the year 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 year 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 year 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 year 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 year 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 year 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-29
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. INCOME TAXES
At December 31, 2006 the Company had net operating loss carry forwards available
to reduce future taxable income, if any, of approximately $ 39,719,000 and
$35,300,000 respectively, for Federal income tax purposes. It also had net
operating loss carry forwards available to reduce future taxable income, if any,
of approximately $ 36,719,000 and $ 32,500,000 for state purposes at December
31, 2006 and 2005 respectively. The Federal and state net operating loss carry
forwards will begin expiring in 2020 and 2007, respectively. The carry forward
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 loss
and the statutory Federal income tax rate, is reconciled to the actual tax
provision reflected in the accompanying financial statements as follows:
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
Expected tax provision (benefit) at statutory rates $ (4,418,844) $ (615,638)
State taxes, net of Federal benefit 528 528
Meals & Entertainment 12,938 2,364
Change in valuation allowance 3,059,545 1,702,431
Warrant derivative liability (209,861) (2,019,636)
Other derivative liability (12,000) --
Stock based compensation 272,168 --
Amortization of beneficial conversion feature 1,296,327 966,827
Other permanent differences -- (36,076)
------------ ------------
TOTALS $ 800 $ 800
============ ============
The provision (benefit) for income taxes in 2006 and 2005 consist of the
following:
DECEMBER 31, DECEMBER 31,
2006 2005
------------- -------------
CURRENT:
Federal $ -- $ --
State 800 800
------------- -------------
TOTALS 800 800
============= =============
DEFERRED:
Federal $ -- $ --
State -- --
------------- -------------
TOTALS -- --
------------- -------------
TOTALS $ -- $ --
============= =============
Significant components of the Company's deferred tax asset and liabilities as of
December 31, 2006 and 2005 are shown below:
DECEMBER 31, DECEMBER 31,
2006 2005
-------------- --------------
DEFERRED TAX ASSETS:
Accrued vacation $ 24,700 $ 32,113
Deferred rent 5,167 --
Net operating loss 15,223,175 14,865,631
Other -- 34,362
-------------- --------------
TOTALS $ 15,253,042 $ 14,932,106
-------------- --------------
DEFERRED TAX LIABILITIES:
Deferred state taxes $ -- $ (981,673)
Fixed assets (311,383) (16,188)
-------------- --------------
TOTALS $ (311,383) $ (997,861)
Deferred tax asset (liability) $ 14,941,659 $ 13,934,245
Valuation allowance (14,941,659) (13,934,245)
-------------- --------------
NET DEFERRED TAX ASSET (LIABILITY) $ -- $ --
============== ==============
F-30
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
16. 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 non cancelable
lease terms in excess of one year as of December 31, 2006:
Year ending December
2007 194,259
2008 199,886
2009 206,081
2010 193,515
----------
$ 793,741
==========
Rent expense, net of sublease income, amounted to $220,908 and $193,503 for the
year ended December 31, 2006 and 2005 respectively.
17. 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-31
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. 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.
In 2005, the Company 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, 2006 the Company granted 57,200,000 stock
options at an average exercise price of $0.016 to employees and consultants of
the Company. A total of 1,062,500 options were terminated throughout the year of
2006.
F-32
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
STOCK OPTIONS ACTIVITY
See Note 17 a. for a description of the Company's share-based compensation
including the stock option activity during the years ended December 31, 2006 and
2005. A summary of the Company's stock option activity and related information
is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2006 2005
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
---------- --------- --------- ----------
Outstanding at beginning of year 1,921,500 $ 1.47 1,721,500 $ 2.70
Options granted 57,200,000 0.02 225,000 0.04
Options exercised 0 N/A 0 N/A
Options terminated (1,062,500) 0.05 (25,000) 0.09
---------- ---------
OPTIONS OUTSTANDING AT END OF YEAR 58,059,000 0.06 1,921,500 1.47
---------- ---------
OPTIONS EXERCISABLE AT END OF YEAR 20,499,972 $ 0.13 1,720,806 $ 1.610
The following table summarizes the number of option shares, the weighted average
exercise price, and weighted average life (by years) by price range for both
total outstanding options and total exercisable options as of December 31, 2006:
TOTAL OUTSTANDING TOTAL EXERCISABLE
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
--------------- ----------- ---------- --------- ----------- ---------- -------
$6.08 - $ 12.80 270,000 $ 7.170 3.9 270,000 $ 7.170 3.9
$0.32 - $2.00 839,000 $ 0.911 4.3 839,000 $ 0.911 4.3
$0.016 - $0.19 56,950,000 $ 0.017 7.77 19,390,972 $ 0.020 7.77
--------------- ----------- ---------- --------- ----------- ---------- -------
TOTAL 58,059,000 $ 0.063 7.70 20,499,972 $ 0.132 7.58
=============== =========== ========== ========= =========== ========== =======
The above options carry vesting date's as follows: 1/3 of the options vest on
the grant date, 1/3 of the options vest one year after the grant date, the final
1/3 of the options vest two years after the grant date .
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-33
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17 A. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED
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 As of December 31, 2006, the
Company has 3 stock option plans for the benefit of officers, directors,
employees, independent contractors and consultants of the Company. These plans
include: (i) the 1998 Stock Option Plan, (ii) the 1996 Stock Option Plan, and
(iii) the 1996 Employee Compensatory Stock Option Plan. In addition to these
plans, the Company grants various other stock options, warrants and stock
directly to certain parties. The Company grants all such awards as incentive
compensation to officers, directors, and employees, and as compensation for the
services of independent contractors and consultants of the Company.
Stock options: The Company generally grants stock options to employees at
exercise prices equal to the fair market value of the Company's stock at the
dates of grant. Stock options may be granted throughout the year, vest
immediately, vest based on years of continuous service, or vest upon completion
of specified performance conditions, and expire 10 years following the initial
grant date. The Company recognizes compensation expense for the fair value of
the stock options over the requisite service period for each separate vesting
portion of the stock option award, or, for awards with performance conditions,
when the performance condition is met.
Warrant options: The Company generally grants stock options to directors and
consultants at exercise prices equal to the fair market value of the Company's
stock at the dates of grant. Stock options may be granted throughout the year,
vest immediately, vest based on years of continuous service, or vest upon
completion of specified performance conditions, and expire 10 years following
the initial grant date. The Company recognizes compensation expense for the fair
value of the stock options over the requisite service period for each separate
vesting portion of the stock option award, or, for awards with performance
conditions, when the performance condition is met.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants. In addition to the
assumptions in the table, the Company applies a forfeiture-rate assumption in
its estimate of fair value that is primarily based on historical annual
forfeiture rates of the Company.
2006
-----------
Expected dividend yield 0.00%
Expected volatility 109%
Average risk-free interest rate 4.74%
Expected life (in years) 3.9 to 9.7
The Company issued 225,000 stock options to employees for compensation during
2005 at an average price of $.04.
During the year ended December 31, 2006:
- $239,059 of employee compensation cost has been charged against income.
- $33,109 of director and consultant compensation cost has been charged against
income.
F-34
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
As of December 31, 2006, there was approximately $167,775 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with employees. Of this amount, $167,775 is expected to be recognized each year
throughout 2007 and 2008.
As of December 31, 2006, there was approximately $25,355 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with directors and consultants. Of this amount, $25,355 is expected to be
recognized each year throughout 2007 and 2008.
STOCK OPTIONS ISSUED TO EMPLOYEES AND DIRECTORS FOR COMPENSATION
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment", which
revised SFAS 123, "Accounting for Stock-Based compensation", and superseded APB
25, "Accounting for Stock Issued to Employees" and related interpretations. SFAS
123R requires the grant-date fair value of all share-based payment awards that
are expected to vest, including employee share options, to be recognized as
employee compensation expense over the requisite service period. The Company
adopted SFAS 123R on January 1, 2006 and applied the modified prospective
transition method. Under this transition method, the Company (1) did not restate
any prior periods; (2) is recognizing compensation expense for all share-based
payment awards that were outstanding, but not yet vested, as of January 1, 2006,
based upon the same estimated grant-date fair values and service periods used to
prepare the Company's SFAS 123 pro-forma disclosures; and (3) is applying SFAS
123R to new awards and to awards modified, repurchased, or cancelled after the
effective date. The Company recognizes the fair value of stock-based
compensation awards in selling, general and administrative expense, and research
and development expense in the consolidated statement of operations on a
straight line basis over the requisite service periods, or, for awards with
performance conditions, when the performance condition is met.
F-35
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
Following is the Company's stock option activity during the year ended December
31, 2006:
The Company issued 225,000 stock options to employees during 2005.
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:
The following table illustrates the effect on net income and net income per
share had the Company recognized compensation expense consistent with the fair
value provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" prior
to the adoption of SFAS 123R:
2005
(restated)
------------
Net loss
As reported $(1,059,949)
Deduct: reported stock compensation expense
under APB 25 - net of tax (1,000)
-----------
Pro forma net loss $(1,060,949)
===========
Basic and diluted loss per share:
As reported $ (0.01)
===========
Pro Forma $ (0.01)
===========
A summary of option activity relating to employee, director and contractor
compensation as of December 31, 2006, and changes during the year then ended is
presented below:
YEAR ENDED
DECEMBER 31,
2006
--------------------------------------------------
Weighted
Average Average
Options relating to employee, consultants Exercise Intrinsic
and director compensation Shares Price Life Value
----------- -------- ---------- -----------
Outstanding at beginning of year 1,921,500 $ 1.47 4.1 $ --
Options granted 57,200,000 0.02 7.88 0
Options exercised 0 N/A N/A 0
Options terminated (1,062,500) 0.05 N/A 0
----------- -------- ---------- -----------
OPTIONS OUTSTANDING AT END OF YEAR 58,059,000 0.06 7.70 $ --
======== ========== ===========
----------- -------- ---------- -----------
OPTIONS EXERCISABLE AT END OF YEAR 20,499,972 0.06 7.58 $ --
----------- -------- ---------- -----------
F-36
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
The total intrinsic value of options relating to employee and director
compensation exercised during the year ended December 31, 2006 was $0.
The weighted average grant date fair value of options relating to employee and
director compensation granted during 2006 was $455,696.
A summary of the status of the Company's nonvested option shares relating to
employee and director compensation as of December 31, 2006, and changes during
the year then ended is presented below:
YEAR ENDED
DECEMBER 31,
2006
---------------------------------
WEIGHTED
AVERAGE
NON VESTED OPTIONS RELATING TO EMPLOYEE, GRANT-DATE
CONSULTANTS AND DIRECTOR COMPENSATION SHARES FAIR VALUE
------------------------------------------ --------------- --------------
Outstanding at beginning of year 200,694 $ 1.47
Options granted 38,129,520 0.016
Options exercised 0 N/A
Options terminated (1,062,500) 0.016
--------------- --------------
NON VESTED AT END OF YEAR 37,267,714 $ 0.0132
=============== ==============
As of December 31, 2006, there was approximately $167,775 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with employees. Of this amount, $167,775 is expected to be recognized each year
throughout 2007 and 2008.
As of December 31, 2006, there was approximately $25,355 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with directors and contractors.
18. WARRANTS
At December 31, 2006, the Company had warrants outstanding that allow the
holders to purchase up to 339,979,838 shares of common stock.
The number and weighted average exercise prices of the warrants for the years
ended December 31, 2006 and 2005 are as follows:
December 31, December 31,
2006 2005
------------------------ ------------------------
Weighted Weighted
average average
Exercise Exercise
Number price Number price
------------- --------- ------------- ---------
Outstanding at beginning of year 215,373,361 $ 0.10 79,429,673 $ 0.10
Warrants granted 146,917,090 0.05 169,062,610 0.05
Warrants exercised (20,550,000) 0.02 (31,552,522) 0.02
Warrants terminated (1,760,613) N/A (1,566,400) N/A
------------- -------------
Warrants outstanding at end of year 339,979,838 $ 0.05 215,373,361 $ 0.05
============= ========= ============= =========
Warrants exercisable at end of year 339,979,838 $ 0.05 181,373,361 $ 0.05
============= ========= ============= =========
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.016 Per share for Series A and B warrants on March 23, 2006. As a
result, the Company raised approximately $300,200 in connection with the
re-pricing of warrants to the investors.
At December 31, 2006, the weighted average remaining contractual life of the
warrants was approximately 39 months.
19. RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated previously issued 2004 and 2005 consolidated financial
statements for matters relating to the proper treatment of conversion features
embedded in the convertible debt financing transactions. The restatement is
pursuant to EITF Nos. 00-19, 05-02, and SFAS No. 133. The accompanying financial
statements for 2005 have been restated to reflect the corrections. Accumulated
deficit at January 1, 2005 was decreased by $261,000 as a result of adjustments
related to the carrying value of convertible debentures, warrant liability and
other derivative liabilities, which previously either in part or as a whole,
were unrecorded liabilities in 2004.
F-37
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
The following is a summary of the restatements for the year ended December 31,
2004 that are reflected in the beginning balances of the financial statements
for the year ended December 31, 2005. The Company intends to file an amended
Form 10-KSB for the year ended December 31, 2005 that will incorporate the
restated financial statements as of and for the year ended December 31, 2004:
Increase / (decrease) in interest expense $ 302,651
Increase / (decrease) in gain on warrant and debt derivative 42,863
Increase / (decrease) in the fair value of debt derivative liability 471,223
Increase / (decrease) in the fair value of net convertible notes --
Increase / (decrease) additional paid in capital (210,357)
Increase / (decrease) accumulated deficit 260,866
The following is a summary of the restatements for the year ended December 31,
2004:
Total Increase of 2004 net loss $ 260,866
The effect on the Company's previously issued December 31, 2004 financial
statements are summarized as follows:
Year ended Year ended
December 31, December 31,
2004 2004
Previously
reported Change Restated
------------- --------- -------------
Balance Sheet
-------------
Derivative liability -- 471,223 471,223
------------- --------- -------------
Total current liabilities -- 471,223 471,223
Convertible notes payable, net 124,700 -- 124,700
------------- --------- -------------
Total long term liabilities 124,700 -- 124,700
------------- --------- -------------
Total liabilities 124,700 471,223 595,923
============= ========= =============
Additional paid in capital 35,474,238 (210,357) 35,263,881
Accumulated deficit (41,117,820) (260,866) (41,378,686)
------------- --------- -------------
Total stockholders equity (5,643,582) (471,223) (6,114,805)
============= ========= =============
Statement of Operations
-----------------------
Interest expense (1,649,641) (302,651) (1,952,292)
Gain on warrant and debt derivative (3,369,412) 42,863 (3,326,549)
Other Income / (Expense) -- (1,078) (1,078)
------------- --------- -------------
Net Income / (loss) (5,019,053) (260,866) (5,279,919)
============= ========= =============
F-38
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2005
The following is a summary of the restatements for the year ended December 31,
2005:
Increase / (decrease)in interest expense $ (67,602)
Increase / (decrease) in gain on warrant and debt derivative 418,742
Increase / (decrease) in the fair value of debt derivative liability 108,917
Increase / (decrease) in the fair value of net convertible notes 200,630
Increase / (decrease) additional paid in capital (535,025)
Increase / (decrease) accumulated deficit (225,478)
The following is a summary of the restatements for the year ended December 31,
2005:
Total decrease of 2005 net loss $ 225,478
The following is a summary of the restatements for the year ended December 31,
2005:
Total decrease of 2005 net loss $ 225,478
The effect on the Company's previously issued December 31, 2005 financial
statements are summarized as follows:
Year ended Year ended
December 31, December 31,
2005 2005
Previously
reported Change Restated
------------- --------- -------------
Balance Sheet
-------------
Derivative liability -- 108,917 108,917
------------- --------- -------------
Total current liabilities -- 108,917 108,917
Convertible notes payable, net 221,850 200,630 422,480
------------- --------- -------------
Total long term liabilities 221,850 200,630 422,480
------------- --------- -------------
Total liabilities 221,850 309,547 531,397
============= ========= =============
Additional paid in capital 38,561,381 (535,025) 38,026,356
Accumulated deficit (42,664,113) 225,478 (42,438,635)
------------- --------- -------------
Total stockholders equity (4,102,732) (309,547) (4,412,279)
============= ========= =============
Statement of Operations
-----------------------
Interest expense (2,487,116) 67,602 (2,419,514)
Gain on warrant and debt derivative 5,070,081 418,742 5,488,823
Other Income / (Expense) -- --
------------- --------- -------------
Net Income / (loss) 2,582,965 486,344 3,069,309
============= ========= =============
F-39
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2006
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Increase / (decrease) in interest expense $(148,960)
Increase / (decrease) in gain on warrant and debt derivative --
Increase / (decrease) in the fair value of debt derivative liability 156,350
Increase / (decrease) in the fair value of net convertible notes 247,039
Increase / (decrease) additional paid in capital (777,827)
Increase / (decrease) accumulated deficit (374,438)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Total decrease of 2006 net loss $ 148,960
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED MARCH 31, 2006 FINANCIAL
STATEMENTS ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
------------ --------- ------------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability - 156,350 156,350
------------ --------- ------------
TOTAL CURRENT LIABILITIES - 156,350 156,350
Convertible notes payable, net 90,605 247,039 337,644
------------ --------- ------------
TOTAL LONG TERM LIABILITIES 90,605 247,039 337,644
------------ --------- ------------
TOTAL LIABILITIES 90,605 403,389 493,994
============ ========= ============
Additional paid in capital 40,369,813 (777,827) 39,591,986
Accumulated deficit (48,480,731) 374,438 (48,106,293)
------------ --------- ------------
TOTAL STOCKHOLDERS EQUITY (8,110,918) (403,389) (8,514,307)
============ ========= ============
STATEMENT OF OPERATIONS
-----------------------
Interest expense (893,305) 148,960 (744,345)
Loss on warrant and debt derivative (3,877,509) - (3,877,509)
Other Income / (Expense) - - -
------------ --------- ------------
NET INCOME / (LOSS) (4,770,814) 148,960 (4,621,854)
============ ========= ============
F-40
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE SIX MONTHS ENDED JUNE 30,
2006 (UNAUDITED):
Increase / (decrease) in interest expense $(176,543)
Increase / (decrease) in gain on warrant and debt derivative --
Increase / (decrease) in the fair value of debt derivative liability 178,305
Increase / (decrease) in the fair value of net convertible notes 308,015
Increase / (decrease) additional paid in capital (888,341)
Increase / (decrease) accumulated deficit (402,021)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE SIX MONTHS ENDED JUNE 30,
2006 (UNAUDITED):
Total decrease of 2006 net loss $ 176,543
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED JUNE 30, 2006 FINANCIAL STATEMENTS
ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
------------ --------- ------------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability - 178,305 178,305
------------ --------- ------------
TOTAL CURRENT LIABILITIES - 178,305 178,305
Convertible Note Discount 420,666 308,015 728,681
------------ --------- ------------
TOTAL LONG TERM LIABILITIES 420,666 308,015 728,681
------------ --------- ------------
TOTAL LIABILITIES 420,666 486,320 906,986
============ ========= ============
Additional paid in capital 40,650,563 (888,341) 39,762,222
Accumulated deficit (45,573,090) 402,021 (45,171,069)
------------ --------- ------------
TOTAL STOCKHOLDERS EQUITY (4,922,527) (486,320) (5,408,847)
============ ========= ============
STATEMENT OF OPERATIONS - THREE MONTHS
--------------------------------------
Interest expense (221,742) 27,583 (194,159)
Gain on warrant and debt derivative 4,098,311 - 4,098,311
Other Income / (Expense) - - -
------------ --------- ------------
NET INCOME / (LOSS) 3,876,569 27,583 3,904,152
============ ========= ============
STATEMENT OF OPERATIONS - SIX MONTHS
------------------------------------
Interest expense (1,115,047) 176,543 (938,504)
Gain on warrant and debt derivative 220,802 - 220,802
Other Income / (Expense) - - -
------------ --------- ------------
NET INCOME / (LOSS) (894,245) 176,543 (717,702)
============ ========= ============
F-41
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER, 2006
The following is a summary of the restatements for the nine months ended June
30, 2006 (unaudited):
Increase / (decrease) in interest expense $ (323,053)
Increase / (decrease) gain on warrant and debt derivative --
Increase / (decrease) in the fair value of debt derivative liability 244,034
Increase / (decrease) in the fair value of net convertible notes 338,353
Increase / (decrease) additional paid in capital (1,131,918)
Increase / (decrease) accumulated deficit (548,531)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2006 (UNAUDITED):
Total decrease of 2006 net loss $ 584,531
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED SEPTEMBER 30, 2006 FINANCIAL
STATEMENTS ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
------------ ----------- ------------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability - 244,034 244,034
------------ ----------- ------------
TOTAL CURRENT LIABILITIES - 244,034 244,034
Convertible Note Discount 678,524 339,535 1,017,877
------------ ----------- ------------
TOTAL LONG TERM LIABILITIES 678,524 339,535 1,017,877
------------ ----------- ------------
TOTAL LIABILITIES 678,524 583,387 1,261,911
============ =========== ============
Additional paid in capital 41,389,124 (1,131,918) 40,257,206
Accumulated deficit (46,337,229) 548,531 (45,788,698)
------------ ----------- ------------
TOTAL STOCKHOLDERS EQUITY (4,948,105) (583,387) (5,531,492)
============ =========== ============
STATEMENT OF OPERATIONS - THREE MONTHS
--------------------------------------
Interest expense (518,549) 146,510 (372,039)
Gain on warrant and debt derivative 431,971 - 431,971
Other Income / (Expense) - - -
------------ ----------- ------------
NET INCOME / (LOSS) (86,578) 146,510 59,932
============ =========== ============
STATEMENT OF OPERATIONS - NINE MONTHS
-------------------------------------
Interest expense (1,633,596) 323,053 (1,310,543)
Gain on warrant and debt derivative 652,773 - 652,773
Other Income / (Expense) - - -
------------ ----------- ------------
Net Income / (loss) (980,823) 323,053 (657,770)
============ =========== ============
F-42
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
20. SUBSEQUENT EVENTS
- FINANCING
During January 1, 2007 thru March 30, 2007, the Company received advances that
were applied towards the Revolving Credit Note agreement dated December 21, 2006
totaling $482,000.The advances were used for expenses relating to normal monthly
operating expenses incurred by the Company. On March 22, 2007 the original loan
agreement of $640,000 dated December 21, 2006 was amended to $740,000. The other
terms and conditions related to the original agreement are still in effect.
During the year 2007 the Company paid down the balance owed on the Revolving
Credit Note by $55,000, leaving the total Revolving Credit Note balance of
$567,000. Currently the Company has availability of $73,000 to borrow against
for future cash requirements.
- CONVERSIONS
On January 17, 2007, Alpha Capital Anstalt converted approximately $135,000 of
notes payable into approximately 21,429,000 shares of the Company's common stock
at an average conversion price of $0.006.
- RESTRICTED COMMON STOCK GRANTED IN EXCHANGE FOR SERVICES RENDERED
On January 5, 2007 the Company granted 400,000 shares of restricted common stock
to The Group. The exchange is for forgiveness of $4,000 debt owed by the
Company.
On January 24, 2007 the Company granted a total of 5,000,000 shares of
restricted common stock as compensation to two accredited investors. The
exchange is for future financial consulting services. The services are to be
provided to the Board of Directors, officers or agents and employees of the
Company regarding corporate finance. The term of the agreement is thirty-six
(36) months commencing on January 9, 2007, and is renewable for successive
twelve (12) month terms by mutual agreement of the parties.
- LEGAL PROCEEDINGS
On January 23, 2007 La Jolla Cove Investors Inc, filed suit in the Superior
Court Of California entitled La Jolla Cove Investors, Inc. ("La Jolla") vs. One
Voice Technologies, Inc., Case No. GIC850038 for $484,582 in reference to the
settlement agreement mentioned above. The Court entered judgment against One
Voice Technologies Inc. for a total of $384,582 plus interest at a rate of 8%
per annum. As of April 12, 2007 no payments to date have been made to La Jolla
Cove Investors relating to the above judgment.
- LICENSE AGREEMENT LIABILITY
On February 1, 2006 the Company amended the Software License Agreement
originally entered into March 2000 with Philips Speech Processing, a division of
Philips Electronics North America ("Philips"). Under the amendment the following
payment two terms will be followed:
The 2006 past due amounts owed by the Company of $70,000 were allocated as
follows: The Company paid $20,000 on February 23, 2007, the remaining $50,000 is
be paid in the form of a non-interest bearing note payable to Philips Speech
Processing.
During the period of January 1, 2007 thru June 30, 2007 the following payments
will be allocated as follows: $6,000 is to be paid monthly by the Company to
Philips Speech Processing. The monthly remaining balance of $11,500 due to
Philips Speech Processing is to be paid by the Company in the form of a non
interest-bearing note payable to Philips Speech Processing.
On July 1, 2007 and continuing thereafter, a minimum Software License fee of
$17,500 is to be paid to Philips Speech Processing on a monthly basis.
As of March 31, 2007 the note payable balance due Philips Speech Processing was
$1,049,000.
F-43
ONE VOICE TECHNOLOGIES INC.
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,303 $ 34,585
Accounts Receivable 124,992 99,111
Inventories 4,661 4,841
Prepaid expenses 122,095 28,785
------------ ------------
TOTAL CURRENT ASSETS 294,051 167,322
PROPERTY AND EQUIPMENT, NET 172,307 164,389
Software development & licensing, net 7,400 12,618
Trademarks, net 2,408 2,452
Patents, net 69,098 77,580
Deposits 18,665 18,665
Deferred debt issue costs 262,121 344,835
------------ ------------
TOTAL ASSETS $ 826,050 $ 787,861
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 375,018 $ 444,088
Accrued expenses 262,727 239,593
Settlement agreement liability 350,000 350,000
License agreement liability 1,014,500 930,000
Debt derivative liability 204,758 256,495
Warrant derivative liability 8,721,462 2,808,308
Revolving line of credit 666,280 240,000
------------ ------------
TOTAL CURRENT LIABILITIES 11,594,745 5,268,484
------------ ------------
LONG TERM LIABILITIES:
Note payable 100,000 100,000
Convertible notes payable, net 996,515 982,972
Deferred rent 13,503 12,017
------------ ------------
TOTAL LIABILITIES 12,704,763 6,363,473
------------ ------------
STOCKHOLDER'S 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, 619,342,244 and 584,513,637 shares issued
and outstanding at March 31, 2007 and December
31, 2006, respectively 622,096 585,327
Additional paid-in capital 41,009,897 40,696,540
Accumulated deficit (53,510,706) (46,857,479)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (11,878,713) (5,575,612)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 826,050 $ 787,861
============ ============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-44
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
------------- -------------
(RESTATED)
Net Revenue $ 210,393 $ 61,298
Cost of goods sold 99,222 20,509
------------- -------------
GROSS PROFIT 111,171 40,789
------------- -------------
General and administrative expenses 631,605 990,975
------------- -------------
NET LOSS FROM OPERATIONS (520,434) (950,186)
OTHER INCOME / (EXPENSE)
Interest expense (270,622) (744,345)
Settlement expense, net -- (100,500)
Gain / (loss) on warrant and debt derivatives (5,861,417) (3,877,509)
Other income (expense) 46 5,683
------------- -------------
TOTAL OTHER INCOME / (EXPENSE) (6,131,993) (4,716,671)
------------- -------------
NET LOSS BEFORE INCOME TAX (6,652,427) (5,666,857)
Income tax expense 800 800
------------- -------------
NET LOSS $ (6,653,227) $ (5,667,657)
============= =============
BASIC LOSS PER SHARE $ (0.01) $ (0.01)
============= =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 595,741,000 409,119,000
============= =============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-45
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
----------- -----------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,653,227) $(5,667,657)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 25,240 31,387
Amortization of debt issue costs 82,714 --
Amortization of debt discount 148,543 431,123
(Gain) loss on debt derivative liability (51,737) 47,433
(Gain) loss on warrant derivative liability 5,913,154 4,391,707
Common stock issued in exchange for services 117,200 --
Non cash interest expense 8,903 --
Share based compensation expense 36,783 155,209
CHANGES IN CERTAIN ASSETS AND LIABILITIES
Accounts receivable (25,882) 15,480
Inventories 180 (5,208)
Prepaid expenses (93,311) (6,305)
Accounts payable (69,070) (29,806)
Accrued expenses 23,135 87,851
Deferred rent 1,487 3,841
Settlement agreement liability -- (220,000)
----------- -----------
Net cash used in operating activities (535,888) (764,945)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (19,414) (2,101)
Purchase of intangible assets -- (18,014)
----------- -----------
Net cash used in investing activities (19,414) (20,115)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - convertible notes -- 700,000
Issuance of common stock - private funding -- 60,000
License agreement liability 84,500 (30,000)
Warrant exercise 52,240 300,200
Payment for debt issue cost -- (65,500)
Issuance of notes payable, long-term debt and capital leases 426,280 --
----------- -----------
Net cash provided by financing activities 563,020 964,700
Net increase (decrease) in cash 7,718 179,640
Cash and cash equivalents, beginning of period 34,585 338,811
----------- -----------
Cash and cash equivalents, end of period $ 42,303 $ 518,451
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 10,000
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Issuance of warrant derivative in connection with private
placement and debt financing, initial valuation $ -- $ 457,198
=========== ===========
Common stock issued upon conversion of debt $ 135,000 $ 992,138
=========== ===========
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-46
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
ITEM 1A. DESCRIPTION OF BUSINESS
INTRODUCTION
One Voice Technologies, Inc. is 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. To date, our customers include:
Telefonos de Mexico, S.A.B. de C.V. (TELMEX), Intel Corporation, Alltel
Wireless, Inland Cellular, Nex-Tec Wireless and several additional telecom
service providers throughout the United States. 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 reading and sending 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.
The company is traded on the NASD OTC Bulletin Board ("OTCBB") under the symbol
ONEV. One Voice is incorporated in the State of Nevada and commenced operations
on July 14, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS:
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been or omitted pursuant to such rules and regulations. These financial
statements and the accompanying notes are unaudited and should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006. In the opinion of management, the financial statements herein
include adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the Company's financial position as of March 31,
2007, results of operations for the three months ended March 31, 2007 and March
31, 2006. The results of operations for the three months ended March 31, 2007
are not necessarily indicative of the operating results to be expected for the
full fiscal year or any future periods.
ORGANIZATION AND BASIS OF PRESENTATION
One Voice Technologies, Inc., ("The Company"), is incorporated under the laws of
the State of Nevada. The Company develops voice recognition software and it
commenced operations in 1999. The Company's 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 reading and sending e-mail messages, SMS text
messaging to mobile phones, PC-to-Phone calling (VoIP) and PC-to-PC audio/video.
BASIS OF PRESENTATION
The accompanying audited financial statements represent the financial activity
of One Voice Technologies, Inc. The financial statements have been prepared in
accordance with generally accepted accounting principles in the US. The
Company's fiscal year ends on December 31 each year. The financial statements
and notes are representations of the management and the Board of Directors, who
are responsible for their integrity and objectivity.
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 $53,511,000 and used
cash from operations of $ 535,888 during the three month period ended March 31,
2007. The Company also has a working capital deficit of $11,301,000 of which
$8,926,000 represents a non-cash warrant and debt derivative liabilities. The
Company also has a stockholders' deficit of $11,879,000 as of March 31, 2007.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management has instituted a cost reduction program that
included a reduction in labor and fringe costs. Historically, management has
been able to obtain capital through either the issuance of equity or debt, and
is currently seeking such financing. There can be no assurance as to the
availability or terms upon which such financing and capital might be available.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform to
current year classifications. These reclassifications did not have an effect on
the previously reported results of operations or retained earnings.
F-47
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Significant estimates include valuation of derivative and warrant
liabilities. 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, 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 revenue when persuasive evidence of a sale arrangement
exists, delivery has occurred or services have been rendered, the sales price is
fixed or determinable, and collectibility is reasonably assured in accordance
with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB 104").
When a customer order contains multiple items such as hardware, software, and
services which are delivered at varying times, the Company determines whether
the delivered items can be considered separate units of accounting as prescribed
under Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 states that delivered
items should be considered separate units of accounting if delivered items have
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of undelivered items, and if delivery of undelivered
items is probable and substantially in the Company's control.
In these circumstances, the Company allocates revenue to each element based on
its relative vendor specific objective evidence of fair value ("VSOE"). VSOE for
products and software is established based on the Company's approved pricing
schedules. To establish VSOE for services, the Company uses standard billing
rates based on said services. Generally, the Company is able to establish VSOE
for all elements of the sales order and bifurcate the customer order or contract
accordingly. In these instances, sales are recognized on each element
separately. However, if VSOE cannot be established or if the delivered items do
not have stand alone value to the customer without additional services provided,
the Company recognizes revenue on the contract as a whole based on either the
completed-performance or proportional-performance methods as described below.
F-48
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In most cases, revenue from hardware and software product sales is recognized
when title passes to the customer. Based upon the Company's standard shipping
terms, FOB The Company, title passes upon shipment to the customer.
Revenue is recognized on service contracts using either the
completed-performance or proportional-performance method depending on the terms
of the service agreement. When the amount of services to be performed in the
last series of acts is so significant in relation to the entire service contract
that performance is deemed not to have occurred until the final act is completed
or when there are acceptance provisions based on customer-specified subjective
criteria, the completed-performance method is used. Once the last significant
act has been performed, revenue is recognized. The Company uses the
proportional-performance method when a service contract specifies a number of
acts to be performed and the Company has the ability to produce reasonable
estimates. The estimates used on these contracts are periodically updated during
the term of the contract and may result in the Company's revision of recognized
sales in the period in which they are identified.
In some contracts, billing terms are agreed upon based on performance milestones
such as the execution of a contract, the customer's acceptance of a list
detailing the equipment and/or vendor for products, the partial or complete
delivery of products and/or the completion of specified services. Payments
received before delivery has occurred or services have been rendered are
recorded as deferred revenue until the revenue recognition criteria are met.
Deferred revenue from maintenance or warranty contracts is recognized over the
terms of the underlying contract.
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.
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. Yearly patent renewal fees
are expensed in the year incurred.
In accordance with SFAS No. 142, the Company evaluates its operations to
ascertain if a triggering event has occurred which would impact the value of
finite-lived intangible assets (e.g., patents). Examples of such triggering
events include a significant disposal of a portion of such assets, an adverse
change in the market involving the business employing the related asset, a
significant decrease in the benefits realized from an asset
As of March 31, 2007, no such triggering event has occurred. An impairment test
involves a comparison of undiscounted cash flows against the carrying value of
the asset as an initial test. If the carrying value of such asset exceeds the
undiscounted cash flow, the asset would be deemed to be impaired. Impairment
would then be measured as the difference between the fair value of the fixed or
amortizing intangible asset and the carrying value to determine the amount of
the impairment. The Company determines fair value generally by using the
discounted cash flow method. To the extent that the carrying value is greater
than the asset's fair value, an impairment loss is recognized for the
difference.
F-49
ONE VOICE TECHNOLOGIES INC.\
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE NOTES AND FINANCIAL INSTRUMENTS WITH EMBEDDED FEATURES
The Company accounts for conversion options embedded in convertible notes in
accordance with Statement of Financial Accounting Standard ("SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). SFAS 133
generally requires Companies to bifurcate conversion features embedded in
convertible notes from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19. SFAS
133 provides for an exception to this rule when convertible notes, as host
instruments, are deemed to be conventional as that term is described in the
implementation guidance under Appendix A to SFAS 133 and further clarified in
EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19.
The Company accounts for convertible notes (if deemed conventional) in
accordance with the provisions of Emerging Issues Task Force Issue ("EITF")98-5
"Accounting for Convertible Securities with Beneficial Conversion Features,"
("EITF 98-5"), EITF 00-27 "Application of EITF 98-5 to Certain Convertible
Instruments," Accordingly, the Company records, as a discount to convertible
notes, the intrinsic value of such conversion options based upon the differences
between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the note.
Debt discounts under these arrangements are amortized over the term of the
related debt to their earliest date of redemption.
The Companys convertible notes do host conversion features and other features
that are deemed to be embedded derivatives financial instruments or beneficial
conversion features based on the commitment date fair value of the underlying
common stock.
COMMON STOCK PURCHASE WARRANTS AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for the issuance of common stock purchase warrants issued
and other free standing derivative financial instruments in accordance with the
provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company
classifies as equity any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the Company a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share settlement).
The Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company) (ii)
give the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement).
DEFERRED DEBT ISSUE COST
The costs relating to obtaining and securing debt financing are capitalized and
is expensed over the term of the debt instrument. In the event of settlement of
such debt in advance of the maturity date, an expense is recognized for the
remaining unamortized deferred debt issue cost.
For the three months ended March 31, 2007 and the year ended December 31, 2006,
the estimated the estimated fair value of the Company's deferred debt issue cost
were $262,121 and $344,835 respectively.
F-50
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Basic earnings per share ("EPS") 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 three months ended March 31, 2007 and 2006
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 anti dilutive.
The following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as the effect is antidilutive:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
----------------- -----------------
(RESTATED)
----------------- -----------------
NUMERATOR - BASIC AND DILUTED $ (6,653,227) $ (5,667,657)
================= =================
Denominator - basic or diluted
Weighted average common shares
Outstanding 595,741,000 409,119,000
----------------- -----------------
TOTAL 595,741,000 409,119,000
================= =================
----------------- -----------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.01)
================= =================
Antidilutive securities:
Convertible debentures 144,543,651 79,905,063
Options 55,459,000 59,121,500
Warrants 331,979,838 266,345,471
----------------- -----------------
TOTAL 531,982,489 405,372,034
================= =================
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.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 48 ("FIN 48"), ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a
comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. This interpretation is effective
for fiscal years beginning after December 15, 2006.
The Company files federal income tax returns in the U.S. The Company is no
longer subject to U.S. state, or non-U.S. income tax examinations by tax
authorities for years before 2001. Certain U.S. Federal returns for years 1999
and following are not closed by relevant statutes of limitation due to unused
net operating losses reported on those returns.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, the Company had no changes in the carrying value
of its tax assets or liabilities for any unrecognized tax benefits.
F-51
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 2006 the Company adopted "SFAS" No.123 (Revised 2004), "Share
Based Payment," ("SFAS 123R"), using the modified prospective method. In
accordance with SFAS No. 123R, 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.
During the three months ended March 31, 2007 and 2006, the Company recorded
$37,000 and $155,000 respectively in non-cash charges for stock based
compensation.
The fair value of stock options at date of grant was estimated using the
Black-Scholes model with the following assumptions: expected volatility of
90.9%, expected term of 2.0 years, risk-free interest rate of 4.74%, 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 guidance from SAB 107. As such, the expected life of
the options and warrants is the average of the vesting term and the full
contractual term of the options and warrants. The risk free interest rate is
based on the U.S. Treasury notes for the expected life of the stock option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK WARRANT ACTIVITY
During three months ended March 31, 2007 and 2006, the Company issued zero and
50,972,110 warrants to Stockholders, respectively.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants.
The Company accounts for stock options and warrants issued to third parties for
services in accordance with the provisions of the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services". Under the provisions of EITF 96-18, because none of the Company's
agreements have a disincentive for nonperformance, the Company records a charge
for the fair value of the portion of the stock options and warrants earned from
the point in time when vesting of the stock options and warrants becomes
probable. Final determination of fair value of the stock options and warrants
occurs upon actual vesting.
F-52
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses include internal and external costs. Internal
costs include salaries and employment related expenses and allocated facility
costs. External expenses consist of costs associated with outsourced software
development activities. In accordance with SFAS No. 2, "Accounting for Research
Development Costs", all such costs are charged to expense as incurred. Research
and development expense were $41,000 and $225,000 for the three months ended
March 31, 2007 and 2006 respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, are
excluded from net income. For the three months ended March 31, 2007 and 2006,
the Company's comprehensive income (loss) had equaled its net loss. Accordingly,
a statement of comprehensive loss is not presented.
COMMITMENTS AND CONTINGENCIES
Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company's legal counsel
evaluates the perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or expected to be
sought therein.
If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature of the guarantee would be
disclosed.
SEGMENT
The Company operates in a single business segment that includes the design and
development.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force
("EITF") Issue No. 06-3, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement" ("EITF No.
06-3"). The scope of EITF No. 06-3 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to, sales, use, value
added, Universal Service Fund ("USF") contributions and some excise taxes. The
Task Force affirmed its conclusion that entities should present these taxes in
the income statement on either a gross or a net basis, based on their accounting
policy, which should be disclosed pursuant to APB Opinion No. 22, "Disclosure of
Accounting Policies." If such taxes are significant and are presented on a gross
basis, the amounts of those taxes should be disclosed. The consensus on EITF No.
06-3 will be effective for interim and annual reporting periods beginning after
December 15, 2006. The Company currently does not show sales tax billed to its
customers on the income statement but records the same as a liability.
F-53
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective on the Company beginning July 1, 2008. The Company is
currently assessing the potential impact that the adoption of SFAS No. 157 will
have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred, e.g., debt issue costs. The fair value election
is irrevocable and generally made on an instrument-by-instrument basis, even if
a company has similar instruments that it elects not to measure based on fair
value. At the adoption date, unrealized gains and losses on existing items for
which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in
fair value are recognized in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by the Company
in the first quarter of fiscal 2009. The Company currently is determining
whether fair value accounting is appropriate for any of its eligible items and
cannot estimate the impact, if any, which SFAS 159 will have on its consolidated
results of operations and financial condition.
3. PREPAID EXPENSES
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Financial advisor fees $ 83,400 $ -
Rents 18,000 -
Business and health insurance 20,000 24,000
Legal fees - 4,000
Other 695 785
-------------------- --------------------
TOTAL $ 122,095 $ 28,785
4. PROPERTY AND EQUIPMENT
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Computer equipment $ 716,135 $ 703,099
Website development 38,523 38,524
Equipment 1,562 1,562
Furniture and fixtures 46,430 46,431
Telephone equipment 5,364 5,365
Molds and tooling 120,216 113,836
-------------------- --------------------
TOTAL 928,230 908,816
-------------------- --------------------
Less accumulated depreciation (755,923) (744,427)
-------------------- --------------------
NET PROPERTY AND EQUIPMENT $ 172,307 $ 164,389
==================== ====================
Depreciation expense totaled $11,000 and $13,000 for the three months ended
March 31, 2007 and 2006, respectively.
F-54
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
5. DEFERRED DEBT ISSUE COSTS
These costs relate to obtaining and securing debt financing and financing
agreements. These costs are amortized over the term of the debt agreement using
the straight line method. There were no costs incurred during the three months
ended March 31, 2007. A balance of $262,000 remains as of March 31, 2007.
6. ACCRUED EXPENSES
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Accrued salaries $ 4,970 $ 10,976
Accrued vacation 63,942 57,441
Accrued interest 147,652 118,842
Accrued audit fees 40,000 50,000
Insurance 3,500 -
Other 2,663 2,334
-------------------- --------------------
TOTAL $ 262,727 $ 239,593
==================== ====================
7. 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 the Company 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)
o $50,000 was paid on September 13, 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.
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. In January 23, 2007 La Jolla Cove Investors
Inc, filed suit in the Superior Court Of California entitled La Jolla Cove
Investors, Inc. ("La Jolla") vs. One Voice Technologies, Inc., Case No.
GIC850038 for in reference to the settlement agreement mentioned above. The
penalty by default of $100,000 was dismissed by the court.
Accordingly, $350,000 is accrued as a settlement liability along with accrued
interest of $39,700 as of March 31, 2007
8. 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.
F-55
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
8. LICENSE AGREEMENT LIABILITY (CONTINUED)
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.
On February 1, 2007 the Company amended the Software License Agreement
originally entered into March 2000 with Philips Speech Processing, a division of
Philips Electronics North America ("Philips"). Under the amendment the following
payment two terms will be followed:
The 2006 past due amounts owed by the Company of $70,000 were allocated as
follows: The Company paid $20,000 on February 23, 2007, the remaining $50,000 is
to be paid in the form of a non-interest bearing note payable to Philips Speech
Processing.
During the period of January 1, 2007 thru June 30, 2007 the following payments
will be allocated as follows: $6,000 is to be paid monthly by the Company to
Philips Speech Processing. The monthly remaining balance of $11,500 due to
Philips Speech Processing is to be paid by the Company in the form of a non
interest-bearing note payable to Philips Speech Processing.
On July 1, 2007 and continuing thereafter, a minimum Software License fee of
$17,500 is to be paid to Philips Speech Processing on a monthly basis.
As of March 31, 2007 the note payable balance due Philips Speech Processing was
$1,014,500.
9. DERIVATIVE LIABILITY
During the three months ended March 31, 2007 and the year ended December 31,
2006 the Company entered into convertible debt financing agreements with several
institutional investors. Embedded within these convertible financing
transactions are derivatives which require special treatment pursuant with SFAS
No. 133 and EITF 00-19. The derivatives include but are not limited to the
following characteristics:
o Beneficial conversion features
o Early redemption option
o Registration rights and associated liquidated damage
The valuation conducted as the three months ended March 31, 2007 and the year
ended December 31, 2006 the fair value of the derivative liability was $204,758
and $256,495 respectively.
10. WARRANT DERIVATIVE LIABILITY
During the three months ended March 31, 2006, the Company issued warrants in
connection with convertible debt agreements and private placements that required
analysis in accordance with EITF 00-19. There were no warrants issued during the
period ended March 31, 2007 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
March 31, 2006 using a Black-Scholes option pricing model using the following
assumptions: expected dividend yield of 0.0%, expected stock price volatility of
110%, risk free interest rate of 483.% and a remaining contractual life ranging
from 0.30 years to 4.00 years. The Company valued all warrant derivative
liabilities as of March 31, 2007 using a Black-Scholes option pricing model
using the following assumptions: expected dividend yield of 0.0%, expected stock
price volatility of 114%, risk free interest rate of 4.74% and a remaining
contractual life ranging from .30 years to 3.75 years. The valuation conducted
as of March 31, 2006 resulted in a non-cash loss of $3,878,000 with a
corresponding increase in the warrant derivative liability. The valuation
conducted as of March 31, 2007 resulted in a non-cash loss of $5,913,000 with a
corresponding increase in the warrant derivative liability. As of March 31, 2007
and 2006, the fair value of the warrant derivative liability was $8,721,000 and
$2,808,000, respectively.
F-56
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
11. REVOLVING CREDIT NOTE PAYABLE
On December 21, 2006, the Company completed a private placement pursuant to a
Revolving Credit Note Agreement which the Company entered into with several
institutional Investors, pursuant to which the Investors subscribed to advance
up to a maximum amount of $640,000 bearing an interest rate of 7%. The term of
the agreement shall be effective as of December 21, 2006 and shall be in full
force and effect until the earliest to occur of (a) 12 months from December 21,
2006 (B) a date not less than thirty days after Lender gives notice of
termination to the Company. In connection with the Revolving Credit Note
Agreement, the Company also issued 20,000,000 shares of its common stock to the
related investors. Interest shall be calculated daily on the outstanding
principal balance due, and is to be reimbursed to the Investors a monthly basis.
The reimbursement of the interest shall be in the form of the Company's
restricted shares of common stock. The stock is to be valued at the month end
stock closing price. The advances to the Company are to be based on an amount of
up to 75% of the face value of the current and future invoices "Receivables"
submitted for borrowing. All proceeds paid relating to the previously mentioned
invoices are to be deposited into a lockbox account belonging to Investors. The
lockbox proceeds are to be 100% applied towards any outstanding principal amount
owed by the Company. The Company's obligation to repay all principal and accrued
and unpaid interest under the convertible notes is secured by the Company's
assets pursuant to a certain Security Agreement dated February 16, 2006, which
also secures the remaining principal amount of the Company's convertible notes
in the aggregate amount of $1,592,000 which the Company 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. On
March 20, 2007 the original Revolving Credit Note Agreement was amended. The
amendment increased the the maximum borrowing by the Company to an amount of
$740,000, an increase of $100,000. All terms and agreements of the original note
are still in full force and effect.
During the period of January 1, 2007 thru March 31, 2007 the investors elected
to convert $8,902 in accrued interest related to the credit note. Approximately
270,000 shares of the Company's restricted stock are to be issued. As of March
31, 2007 these shares have not been issued.
During the Period of January 1, 2007 thru March 31, 2007 the Company borrowed
$426,280 from the revolving note.
As of March 31, 2007 the outstanding principal amount owed to the Investors is
$666,280.
12. NOTE 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 March 31, 2006 and December 31, 2006 the principal balance on the note
payable was $100,000 with accrued interest of $29,150 and $27,178 respectively.
F-57
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE SUMMARY
During the three months ended March 31, 2007 the Company did not enter into any
convertible debt financing agreements.
During the three months ended March 31, 2007 and 2006, $135,000 and $992,000 of
notes payable was converted into approximately 21,429,000 and 71,383,000 shares
of the Company's common stock at an average conversion price of $ 0.0063
and$0.014 per share.
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 $1,115,000 which we
issued on March 18, 2005 and July 13, 2005 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.
F-58
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
The following as a summary of outstanding convertible debt financing agreements
as of March 31, 2007:
A SUMMARY OF CONVERTIBLE DEBT AT DECEMBER 31, 2006 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ - $ 10,000
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 13, 2008 135,000 (53,838) 81,162
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (108,727) 141,273
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (120,832) 129,168
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (46,089) 53,911
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (43,305) 61,695
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (64,957) 85,043
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (25,983) 34,017
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (43,310) 61,690
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT DECEMBER 31, 2006 $ 1,592,000 $ (609,028) $ 982,972
=============== =============== ===============
F-59
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
ONE VOICE TECHNOLOGIES INC. CONVERTIBLE DEBT FINANCING SUMMARY (CONTINUED)
----------------------------------------------
A SUMMARY OF CONVERTIBLE DEBT AT MARCH 31, 2007 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ (2,595) $ 7,405
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (86,538) 163,462
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (96,436) 153,564
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (38,574) 61,426
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (36,873) 68,127
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (55,310) 94,690
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (22,124) 37,876
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (36,878) 68,122
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT MARCH 31, 2007 $ 1,457,000 $ (460,485) $ 996,515
=============== =============== ===============
F-60
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK
o CONVERTIBLE DEBT CONVERSION
During the three months ended March 31, 2007, Alpha Capital Akteingesellschaft
converted approximately $135,000 of notes payable into approximately 21,428,571
shares of the Company's common stock at an average conversion price of $0.0063.
During the three months ended March 31, 2006, Alpha Capital Akteingesellschaft
converted approximately $291,000 of notes payable into approximately 21,196,000
shares of the Company's common stock at an average conversion price of $0.014.
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 three months ended March 31, 2006, Whalehaven Fund, Limited converted
approximately $583,000 of notes payable into approximately 41,030,000 shares of
the Company's common stock at an average conversion price of $0.014.
During the three months ended March 31, 2006, Ellis International Ltd. converted
approximately $75,000 of notes payable into approximately 5,855,000 shares of
the Company's common stock at an average conversion price of $0.013. 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 three months ended March 31, 2006, Omega Capital Small Cap Fund
converted approximately $27,500 of notes payable into approximately 2,167,000
shares of the Company's common stock at an average conversion price of $0.013.
During the three months ended March 31, 2006, Osher Capital Inc. converted
approximately $15,600 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 three months ended March 31, 2006, an accredited investor purchased
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 and 3,000,000 Class B common stock purchase warrants with an exercise
price of $0.045 and $0.06 per share respectively.
o REVOLVING CREDIT NOTE
On May 1, 2007 the original Revolving Credit Note Agreement was amended for the
second time. The amendment increased the the maximum borrowing by the Company to
an amount of $790,000, an increase of $50,000. All terms and agreements of the
original note are still in full force and effect.
o WARRANT EXERCISE
During the three months ended March 31, 2007 8,000,000 common stock warrants
were exercised at a price of $0.00653. The Company received approximately
$52,000
O ISSUANCE OF COMMON STOCK IN EXCHANGE OF SERVICES
During the three months ended March 31, 2007 the Company issued approximately
5,400,000 shares of its restricted common stock having a market value of
$117,200 in exchange for services rendered.
o SHARES TO BE ISSUED IN EXCHANGE FOR INTEREST OWED
During the period of January 1, 2007 thru March 31, 2007 the investors elected
to convert $8,902 in accrued interest related to the credit note. Approximately
270,000 shares of the Company's restricted stock are to be issued. As of March
31, 2007 these shares have not been issued.
F-61
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. OTHER INCOME (EXPENSE)
For the three months ended March 31, 2007 and 2006, other expense was
approximately $6,132,000 and $4,717,000 respectively.
Other income (expense) consisted of interest expense, settlement expense, gain
(loss) on warrant derivative liability and other income (expense), details
below.
INTEREST EXPENSE
INTEREST EXPENSE SUMMARY
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
--------------- ---------------
Debt issue cost $ 82,714 $ 56,079
Discount amortization 148,541 662,478
Accrued interest 36,800 25,788
Other / penalties 2,567 -
--------------- ---------------
TOTAL $ 270,622 $ 744,345
For three months ended March 31, 2007 and 2006, interest expense was
approximately $271,000 compared to $744,000 respectively.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the three months ended March 31, 2007 and 2006, interest expense related to
debt issue costs was approximately $83,000 compared to $56,000, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the three months ended March 31, 2007, and 2006, interest expense related to
the amortization of discount was approximately $149,000 compared to $662,000
respectively.
3. Monthly accrued interest related to notes payable and convertible notes
payable financing.
This represents a future cash transaction if the convertible interest accrued is
not converted into common stock. No accrued interest related to convertible
notes payable was paid in cash during the three months ended March 31, 2007 and
2006.
For the three months ended March 31, 2007 and 2006, interest expense related to
notes payable and convertible notes payable was approximately $37,000 compared
to $26,000, respectively.
4. Other / misc. for the three months ended March 31, 2007 and 2006, was
approximately $3,000 compared to $0 respectively.
SETTLEMENT EXPENSE
For the three months ended March 31, 2007 and 2006, settlement expense was
approximately $0 compared to $101,000 respectively. The decrease in period 2007
over 2006 is attributable to a one time settlement for the exchange of services.
Payment was in the form of the Companys restricted common stock.
GAIN / (LOSS) ON WARRANT DERIVATIVES
For the three months ended March 31, 2007 and 2006, losses recorded on warrant
derivatives and debt derivatives were approximately $5,861,000 compared to
$3,878,000 respectively. See Note 9 in the accompanying notes to the financial
statements.
F-62
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
OTHER INCOME (EXPENSE)
For the three months ended March 31, 2007 and 2006, other / net was
approximately a loss of $0 compared to a gain of $6,000 respectively.
16. 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 year, of future
minimum rental payments required under operating leases that have non cancelable
lease terms in excess of one year as of March 31, 2007:
Three months ended March 31, 2007
2007 145,695
2008 199,886
2009 206,081
2010 193,515
----------
$ 745,177
==========
Rent expense, net of sublease income, amounted to $54,723 and $51,718 for the
Three months ended March 31, 2007 and 2006 respectively.
17. 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.
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 2005, the Company 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.
Upon termination of employment or service contract, all options vested or
non-vested expire unless the options have been exercised in full, or in part
within 90 days of such event. Management reserves the right to extend vested
options under certain circumstances, given approval by the Board of Directors.
F-63
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
During the period ended December 31, 2005, the Company issued 225,000 stock
options to employees, directors for compensation at an average price of $.04.
During the period ended December 31, 2006, the Company issued 57,700,000 stock
options to employees for compensation at an average price of $.016, a total of
1,062,500 options were terminated.
No stock options were granted to employees during the period ended March 31,
2007. A total of 2,600,000 options were terminated during the period ended March
31, 2007.
The total intrinsic value of options relating to employee and director
compensation exercised during the year ended for the period ended March 31, 2007
and year ended 2006, respectively, was $0.
The total intrinsic value of vested options relating to employee and director
compensation during the period ended March 31, 2007 and year ended 2006, is
$608,783 and $0 respectively, this consists of 35,861,111 vested options at an
average exercise price of $0.016 per share. The increase of $608,783 from the
prior period is due to the Company's closing stock price at March 31, 2007 of
$0.033 per share compared to $0.0125 per share at December 31, 2006 (see
footnote 17.a for details).
For the periods ended March 31, 2007 and 2006, there was approximately $36,783
and $155,209 of total compensation expense recorded by the Company related to
share-based compensation. The decrease of $118,426 from the prior period was due
to the fact that the Company recorded 2005 stock compensation expenses during
the period ended March 31, 2006 pursuant to the adoption of new accounting
principles (see footnote 17.a for details).
The weighted average grant date fair value of options relating to employee and
director compensation granted during 2006 was $455,696.
As of March 31, 2007, there was approximately $127,218 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
with employees. Of this amount, $31,911 is expected to be recognized each year
throughout 2008.
As of March 31, 2007, there was approximately $20,340 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with directors and contractors. Of this amount, $5,014 is expected to be
recognized each year throughout 2008.
The Companys closing stock price reported by NASDAQ listed under symbol ONEV at
March 31, 2007 was $0.033 per share.
See footnote 17 a. for a description of the Company's share-based Compensation
plan.
STOCK OPTIONS ACTIVITY
The following table is a summary of the activity for the two stock compensation
plans adopted by the Company as of March 31, 2007.
THREE MONTHS ENDED
MARCH 31, 2007
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES AVAILABLE
AUTHORIZED OUTSTANDING FOR GRANT
----------------------------------------------------------
Year 1999 plan 3,000,000 272,435 2,727,565
Year 2005 plan 60,000,000 55,186,565 4,813,435
----------------------------------------------------------
TOTAL 63,000,000 55,459,000 7,541,000
==========================================================
F-64
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity and related information is as
follows for the period ending March 31, 2007 and 2006, respectively:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------------------ -------------------- ------------------ --------------------
Outstanding at beginning of year 58,059,000 $ 0.06 1,921,500 $ 1.47
Options granted 0 N/A 57,700,000 0.016
Options exercised 0 N/A 0 N/A
Options terminated (2,600,000) 0.016 (500,000) N/A
---------------- ----------------
OPTIONS OUTSTANDING AT END OF 1ST QUARTER 55,459,000 0.065 59,121,500 0.06
---------------- ----------------
OPTIONS EXERCISABLE AT END OF 1ST QUARTER 37,486,778 $ 0.089 20,848,583 $ 0.086
The following table summarizes the number of options authorized by the plan and
available for distribution as of March 31, 2007 and 2006, respectively.
PERIOD ENDING PERIOD ENDING
MARCH 31, 2007 MARCH 31, 2006
NUMBER OF NUMBER OF
SHARES SHARES
----------- -----------
Beginning options available for grant 4,941,000 62,141,000
Add: Additional options authorized -- --
Less: Options granted -- (57,700,000)
Add: Options terminated 2,600,000 500,000
----------- -----------
ENDING OPTIONS AVAILABLE FOR DISTRIBUTION 7,541,000 4,941,000
F-65
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
The following tables summarize the number of option shares, the weighted average
exercise price and the weighted average life (by years) by price range for both
total outstanding options and total exercisable options as of March 31, 2007 and
2006, respectively:
FOR THE PERIOD ENDED MARCH 31, 2007
TOTAL OUTSTANDING TOTAL EXERCISABLE
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
----------- ----------- ----- ---- ----------- ----- ----
$6.08 - $ 12.80 270,000 $ 7.170 3.44 270,000 7.170 3.44
$0.32 - $2.00 839,000 0.911 4.28 839,000 0.911 4.28
$0.016 - $0.19 54,350,000 0.017 8.78 36,377,778 0.018 8.77
--------------- ------------- -------------- --------------- ------------- --------------
TOTAL 55,459,000 $ 0.065 8.69 37,486,778 $ 0.089 8.63
FOR THE PERIOD ENDED MARCH 31, 2006
TOTAL OUTSTANDING TOTAL EXERCISABLE
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
----------- ----------- ---------- ---------- ---------- ---------- ----------
$6.08 - $ 12.80 270,000 $ 7.170 4.46 270,000 $ 7.170 4.46
$0.32 - $2.00 876,500 0.912 5.31 876,500 0.912 5.31
$0.016 - $0.19 57,975,000 0.017 9.81 19,702,083 0.018 9.79
----------- ---------- ---------- ---------- ---------- ----------
TOTAL 59,121,500 $ 0.063 9.72 20,848,583 $ 0.086 9.66
F-66
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
A summary of option activity relating to employee, director and contractor
compensation as of March 31, 2007, and the intrinsic value related to the
options:
THREE MONTHS ENDED
MARCH 31,
2007
----------------------------------------------------------------------------
WEIGHTED
AVERAGE AVERAGE
OPTIONS RELATING TO EMPLOYEE, CONSULTANTS EXERCISE INTRINSIC
AND DIRECTOR COMPENSATION SHARES PRICE LIFE VALUE
------------------------- ------------------ ----------------- ---------- ---------
Outstanding at beginning of year 58,059,000 $ 0.060 8.69 $ 913,200
Options granted 0 N/A N/A 0
Options exercised 0 N/A N/A 0
Options terminated (2,600,000) 0.02 N/A (44,200)
----------------- ---------------- ---------
OPTIONS OUTSTANDING AT END OF 1ST QUARTER 55,459,000 0.065 8.69 869,000
----------------- ---------------- ---------
OPTIONS EXERCISABLE AT END OF 1ST QUARTER 37,486,778 $ 0.089 8.63 $ 608,783
A summary of the status of the Company's nonvested option shares relating to
employee and director compensation as of December 31, 2006, and changes during
the year then ended is presented below:
THREE MONTHS ENDED
MARCH 31,
2007
------------------------------------
WEIGHTED
AVERAGE
NON VESTED OPTIONS RELATING TO EMPLOYEE, GRANT-DATE
CONSULTANTS AND DIRECTOR COMPENSATION SHARES FAIR VALUE
------------------------------------- ----------------- -----------------
Outstanding at beginning of year 37,559,028 $ 1.47
Options granted 0 N/A
Options exercised 0 N/A
Options vested (16,986,806) 0.016
Options terminated (2,600,000) 0.016
----------------- -----------------
NON VESTED AT END OF 1ST QUARTER 17,972,222 $ 0.0132
In addition to the assumptions in the above tables, the Company applies a
forfeiture-rate assumption in its estimate of fair value that is primarily based
on historical annual forfeiture rates of the Company.
2007
--------------------
Expected dividend yield 0.00%
Expected volatility 113%
Average risk-free interest rate 4.74%
Expected life (in years) 3.44 to 8.78
The above options carry vesting date's as follows: 1/3 of the options vest on
the grant date, 1/3 of the options vest one year after the grant date, the final
1/3 of the options vest two years after the grant date.
F-67
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17 A. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
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.
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 As of December 31, 2006, the
Company has 3 stock option plans for the benefit of officers, directors,
employees, independent contractors and consultants of the Company. These plans
include: (i) the 1998 Stock Option Plan, (ii) the 1996 Stock Option Plan, and
(iii) the 1996 Employee Compensatory Stock Option Plan. In addition to these
plans, the Company grants various other stock options, warrants and stock
directly to certain parties. The Company grants all such awards as incentive
compensation to officers, directors, and employees, and as compensation for the
services of independent contractors and consultants of the Company.
Stock options: The Company generally grants stock options to employees at
exercise prices equal to the fair market value of the Company's stock at the
dates of grant. Stock options may be granted throughout the year, vest
immediately, vest based on years of continuous service, or vest upon completion
of specified performance conditions, and expire 10 years following the initial
grant date. The Company recognizes compensation expense for the fair value of
the stock options over the requisite service period for each separate vesting
portion of the stock option award, or, for awards with performance conditions,
when the performance condition is met.
Warrant options: The Company generally grants stock options to directors and
consultants at exercise prices equal to the fair market value of the Company's
stock at the dates of grant. Stock options may be granted throughout the year,
vest immediately, vest based on years of continuous service, or vest upon
completion of specified performance conditions, and expire 10 years following
the initial grant date. The Company recognizes compensation expense for the fair
value of the stock options over the requisite service period for each separate
vesting portion of the stock option award, or, for awards with performance
conditions, when the performance condition is met.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants.
F-68
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
18. WARRANTS
At March 31, 2007, the Company had warrants outstanding that allow the holders
to purchase up to 331,979,838 shares of common stock.
The number and weighted average exercise prices of the warrants for the period
ended March 31, 2007 and 2005 are as follows:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------------------ -------------------- ------------------ --------------------
Outstanding at beginning of year 339,979,838 $ 0.02 215,373,361 $ 0.05
Warrants granted 0 N/A 50,972,110 0.05
Warrants exercised (8,000,000) 0.007 0 N/A
Warrants terminated 0 N/A 0 N/A
------------------ ------------------
WARRANTS OUTSTANDING AT END OF 1ST QUARTER 331,979,838 $ 0.02 266,345,471 $ 0.05
================== ==================== ================== ====================
WARRANTS EXERCISABLE AT END OF 1ST QUARTER 331,979,838 $ 0.02 232,345,471 $ 0.05
================== ==================== ================== ====================
During the period ended March 31, 2007 a total of 8,000,000 warrants were
exercised at an average price of $0.00653. As a result the Company received cash
proceeds of $52,240.
At March 31, 2006, the weighted average remaining contractual life of the
warrants was approximately 36 months.
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.016 Per share for Series A and B warrants on March 23, 2006. As a
result, the Company raised approximately $300,200 in connection with the
re-pricing of warrants to the investors.
F-69
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated previously issued 10-QSB for period ended March 31,
2006 and the consolidated financial statements for matters relating to the
proper treatment of conversion features embedded in the convertible debt
financing transactions. The restatement is pursuant to EITF Nos. 00-19, 05-02,
and SFAS No. 133. The accompanying financial statements for the period ended
March 31, 2006 have been restated to reflect the corrections. Accumulated
deficit at March 31, 2006 was decreased by $374,438 as a result of adjustments
related to the carrying value of convertible debentures, warrant liability and
other derivative liabilities, which previously either in part or as a whole,
were unrecorded liabilities in 2006.
THREE MONTHS ENDED MARCH 31, 2006
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Increase / (decrease) in interest expense $ (148,960)
Increase / (decrease) in gain on warrant and debt derivative --
Increase / (decrease) in the fair value of debt derivative liability 156,350
Increase / (decrease) in the fair value of net convertible notes 247,039
Increase / (decrease) additional paid in capital (777,827)
Increase / (decrease) accumulated deficit (374,438)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Total decrease of 2006 net loss $148,960
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED MARCH 31, 2006 FINANCIAL
STATEMENTS ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
-------- ------ --------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability - 156,350 156,350
-------------------- -------------------- -----------------------
TOTAL CURRENT LIABILITIES - 156,350 156,350
Convertible notes payable, net 90,605 247,039 337,644
-------------------- -------------------- -----------------------
TOTAL LONG TERM LIABILITIES 90,605 247,039 337,644
-------------------- -------------------- -----------------------
TOTAL LIABILITIES 90,605 403,389 493,994
==================== ==================== =======================
Additional paid in capital 40,369,813 (777,827) 39,591,986
Accumulated deficit (48,480,731) 374,438 (48,106,293)
-------------------- -------------------- -----------------------
TOTAL STOCKHOLDERS EQUITY (8,110,918) (403,389) (8,514,307)
==================== ==================== =======================
STATEMENT OF OPERATIONS
-----------------------
Interest expense (893,305) 148,960 (744,345)
Loss on warrant and debt derivative (3,877,509) - (3,877,509)
Other Income / (Expense) - - -
-------------------- -------------------- -----------------------
NET INCOME / (LOSS) (4,770,814) 148,960 (4,621,854)
==================== ==================== =======================
F-70
ONE VOICE TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
20. SUBSEQUENT EVENTS
o FINANCING
During April 1, 2007 thru May 11, 2007, the Company received advances that were
applied towards the Revolving Credit Note agreement dated December 21, 2006
totaling $50,000.The advances were used for expenses relating to normal monthly
operating expenses incurred by the Company.
O RESTRICTED COMMON STOCK GRANTED IN EXCHANGE FOR SERVICES RENDERED
On April 27, 2007 the Company granted a total of 1,500,000 shares of restricted
common stock having a market value of $45,000 as compensation to an independent
contractor for services provided during the fiscal year ended December 31, 2006
audit.
o WARRANTS
On April 4, 2007 the company issued to an accredited investor a total of
4,001,838 restricted common stock purchase warrants at a price of $.00653 per
share pursuant to a cashless exercise.
On April 23, 2007 the company issued to an accredited investor a total of
12,578,616 restricted common stock purchase warrants at a price of $.00636 per
share. The company received cash proceeds of $80,000.
F-71
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 $835.19
Accounting fees and expenses 20,000*
Legal fees and expenses 25,000*
Miscellaneous 164.81*
-------
TOTAL $46,000*
=======
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Following is a summary of unregistered securities issued during the period May
2003 through June 2006.
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, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 non assessable 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.
On June 27, 2006 the Company entered into a Subscription Agreement with one
accredited investor pursuant to which the Company 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, the Company completed a private placement pursuant to a
Subscription Agreement which the Company 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 Company
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.
The Company 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, the Company 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 non assessable
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.
The Company issued an aggregate of 41,414,141 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 twelve months ended December 31, 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, the Company issued an aggregate of 20,000,000 shares of
restricted common stock to the investors of our 8% revolving credit notes on a
pro rata basis.
II-6
On January 5, 2007, the Company issued an aggregate of 400,000 shares of
restricted common stock to in exchange for services rendered. The services were
valued at approximately $5,200.
On January 24, 2007, the Company issued an aggregate of 5,000,000 shares of
restricted common stock to in exchange for services rendered. The services were
valued at approximately $91,000 and will be provided for over a 3 year period.
During the period ended March 31, 2007 a total of 8,000,000 warrants were
exercised at an average price of $0.00653. As a result the Company received cash
proceeds of $52,240.
On April 4, 2007, the Company issued a total of 4,001,838 warrants pursuant to a
cashless exercise under rule 144.
On April 23, 2007 a total of 8,000,000 warrants were exercised at an average
price of $0.00653. As a result the Company received cash proceeds of $80,000.
On April 27, 2007, the Company issued 1,500,000 shares of restricted common
stock to in exchange for services rendered.
* 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.
PLANS OF ACQUISITION
2.1 Merger Agreement and Plan of Reorganization with Conversational Systems,
Inc. dated June 22, 1999.
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.
II-7
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).
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).
OPINIONS
5.1 Opinion of Sichenzia Ross Friedman Ference LLP (filed as an exhibit to the
Registration Statement on Form SB-2, filed with the Commission on June 6, 2006)
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. On November 8, 2006 the
agreement was mutually terminated.
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 Speech 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)
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)
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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)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).
10.50 Loan Agreement Loan Agreement 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 January 3, 2007).
10.51 Form of Revolving Credit Note of One Voice Technologies, Inc.
(incorporated by reference to our current report on Form 8-K filed January 3,
2007).
23.1 Consent of PMB Helin Donovan, L.L.P. (filed herewith)
23.2 Consent of Squar, Milner, Peterson, Miranda & Williamson, LLP (filed
herewith)
23.3 Consent of Sichenzia Ross Friedman Ference LLP (included in exhibit 5.1)
24.1 Power of Attorney (included on page II-10)
II-10
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;
(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-11
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 of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in La Jolla,
California, on June 8, 2007.
ONE VOICE TECHNOLOGIES, INC.
June 8, 2007 By: /s/ Dean Weber
----------------------------------------
Dean Weber
President, Chief Executive Officer
(Principal Executive Officer),
Interim Chief Financial Officer
(Principal Accounting and Financial Officer)
and Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Dean Weber his true and lawful attorneys-in-fact,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and all amendments
(including post-effective amendments) to this registration statement and to sign
a registration statement pursuant to Section 462(b) of the Securities Act of
1933, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated: Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------------------------- ---------------------------------- -------------
/s/ Dean Weber President, Chief Executive Officer June 8, 2007
---------------------- (Principal Executive Officer),
Dean Weber Interim Chief Financial Officer
(Principal Accounting and Financial
Officer) and Chairman of the Board
/s/ Rahoul Sharan Director June 8, 2007
----------------------
Rahoul Sharan
Director June 8, 2007
----------------------
Bradley J. Ammon
II-12