AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NO. 0-27589
ONE VOICE TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 95-4714338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6333 GREENWICH DRIVE, STE. 240, SAN DIEGO, CA 92122
(Address of Principal Executive Offices)
(858) 552-4466
(Issuer's Telephone Number)
(858) 552-4474
(Issuer's Facsimile Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of November 12, 2003, the registrant had 101,603,878 shares of common stock,
$.001 par value, issued and outstanding.
Transitional small business disclosure format (check one): Yes ____ No __X__
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. Page No.
--------
Balance Sheet F-3
Statements of Operations F-4
Statement of Stockholders' Equity F-5 - F-8
Statements of Cash Flows F-9 - F-10
Notes to Financial Statements F-11 - F-16
2
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 155,891
Account receivable, collected in November 2003 50,000
Prepaid expenses 50,076
----------------
Total current assets $ 255,967
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 225,420
OTHER ASSETS:
Software licensing, net of accumulated amortization 3,341
Software development costs, net of accumulated amortization 491,081
Deposits 36,921
Trademarks, net of accumulated amortization 62,425
Patents 83,684
----------------
Total other assets 677,452
---------------
$ 1,158,839
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -
accounts payable and accrued expenses $ 754,454
NON-CURRENT LIABILITIES:
SECURITY DEPOSITS 12,522
8% NOTE PAYABLE, due August 8, 2008, unsecured 100,000
4% CONVERTIBLE NOTE PAYABLE, due August 20, 2005 $ 50,000
Less unamortized discount (11,526)
----------------
38,474
6% CONVERTIBLE NOTE PAYABLE, due September 17, 2004 350,000
Less unamortized discount (337,361)
----------------
12,639
---------------
Total non-current liabilities 163,635
---------------
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -
Common stock; $.001 par value, 250,000,000 shares
authorized, 94,832,168 shares issued and outstanding 94,832
Additional paid-in capital 31,229,519
Deficit accumulated during development stage (31,083,601)
----------------
Total stockholders' equity 240,750
---------------
$ 1,158,839
===============
The accompanying notes form an integral part of these financial statements.
F-3
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED FROM INCEPTION ON
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JANUARY 1, 1999 TO
2003 2002 2003 2002 SEPTEMBER 30, 2003
--------------------------------- ----------------------------------- ---------------------
REVENUE $ 50,000 $ 314,931 $ 50,000 $ 30,000 $ 700,321
COST OF REVENUE 6,000 30,364 6,000 180 205,675
------------------------------- --------------------------------- -------------
GROSS PROFIT 44,000 284,567 44,000 29,820 494,646
------------------------------- --------------------------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES 4,600,565 5,550,482 1,699,466 1,521,718 31,578,247
------------------------------- --------------------------------- -------------
NET LOSS $ (4,556,565) $ (5,265,915) $ (1,655,466) $ (1,491,898) $(31,083,601)
=============================== ================================= =============
NET LOSS PER SHARE, basic and diluted $ (0.08) $ (0.18) $ (0.02) $ (0.05)
=============================== =================================
WEIGHTED AVERAGE COMMON EQUIVALENT
SHARES OUTSTANDING - BASIC AND DILUTED 53,974,000 29,922,324 80,350,000 32,667,295
=============================== =================================
The accompanying notes form an integral part of these financial statements.
F-4
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
accumulated
Common stock Additional during Total
------------ paid-in development stockholders'
Shares Amount capital stage equity
------ ------ ------- ----- ------
Balance at January 1, 1999 12,720,000 $ 12,720 $ - $ - $ 12,720
Net proceeds from issuance of
common stock in connection
with merger 7,000,000 7,000 106,236 - 113,236
Net proceeds from issuance of
common stock 1,500,000 1,500 2,544,422 - 2,545,922
Net issuance of common stock in
exchange for services 150,000 150 299,850 - 300,000
Redemption of common stock (10,000,000) (10,000) (10,000)
Net loss for the year ended
December 31, 1999 - - - (1,782,215) (1,782,215)
--------------- --------------- ---------------- ---------------- ---------------
Balance at December 31, 1999 11,370,000 11,370 2,950,508 (1,782,215) 1,179,663
Net proceeds from issuance of
common stock and warrants 312,500 313 1,779,523 - 1,779,836
Net proceeds from issuance of
common stock and warrants 988,560 988 12,145,193 - 12,146,181
Issuance of warrants in exchange
for services - - 55,000 - 55,000
Issuance of options in exchange
for services - - 199,311 - 199,311
Issuance of warrants in connection
with financing - - 1,576,309 - 1,576,309
Net loss for the year ended
December 31, 2000 - - - (9,397,620) (9,397,620)
--------------- --------------- ---------------- ---------------- ---------------
Balance at December 31, 2000 12,671,060 12,671 18,705,844 (11,179,835) 7,538,680
(Continued)
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
------------ paid-in development stockholders'
Shares Amount capital stage equity
------ ------ ------- ----- ------
Conversion of debt to equity, net
of unamortized debt discount 3,220,765 3,220 571,867 - 575,087
Issuance of options in
exchange for services - - 58,864 - 58,864
Issuance of stock and warrants
in connection with settlement 110,000 110 247,940 - 248,050
Proceeds from sale of common stock
and warrants, net of offering costs 702,350 702 839,318 - 840,020
Issuance of warrants in connection
with debt financing - - 92,400 - 92,400
Beneficial conversion feature
embedded in debt securities - - 417,450 - 417,450
Conversion of debt to equity -
Laurus Master Fund 3,402,600 3,403 595,399 - 598,802
Conversion of debt to equity -
Stonestreet Capital 2,973,780 2,974 506,137 - 509,111
Net loss for the year ended
December 31, 2001 - - - (8,778,279) (8,778,279)
--------------- --------------- ---------------- ---------------- ---------------
Balance at December 31, 2001 23,080,555 23,080 22,035,219 (19,958,114) 2,100,185
Conversion of debt to equity 2,624,447 2,624 309,714 - 312,338
Issuance of warrants in connection
with debt financing - - 577,879 - 577,879
Beneficial conversion feature
embedded in debt securities - - 1,948,765 - 1,948,765
Issuance of options in exchange
for services - - 107,276 - 107,276
(Continued)
The accompanying notes form an integral part of these financial statements.
F-6
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
------------ paid-in development stockholders'
Shares Amount capital stage equity
------ ------ ------- ----- ------
Issuance of common stock 2,666,667 2,667 721,166 - 723,833
Cashless exercise of warrants 10,512 11 (11) - -
Exercise of warrants for cash 20,000 20 3,380 - 3,400
Re-pricing adjustment for
warrants outstanding - - 9,000 - 9,000
Shares issued in re-pricing-
Stonestreet Capital 833,334 833 174,167 - 175,000
Conversion of debt to equity -
Laurus Master Fund 2,110,129 2,110 703,345 - 705,455
Conversion of debt to equity -
Stonestreet Capital 4,294,596 4,294 899,405 - 903,699
Conversion of debt to
equity - Alpha Capital 2,767,752 2,768 342,232 - 345,000
Conversion of debt to
equity - Ellis Enterprise 300,842 301 39,699 - 40,000
Conversion of debt to
equity - Bristol Investments 225,699 226 29,774 - 30,000
Net loss for the year ended
December 31, 2002 - - - (6,568,922) (6,568,922)
--------------- --------------- ---------------- ---------------- ---------------
Balance at December 31, 2002 38,934,533 38,934 27,901,010 (26,527,036) 1,412,908
Issuance of options in exchange
for services (unaudited) - - 12,543 - 12,543
Conversion of debt to equity -
Alpha Capital (unaudited) 28,881,198 28,881 1,197,464 - 1,226,345
(Continued)
The accompanying notes form an integral part of these financial statements.
F-7
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
------------ paid-in development stockholders'
Shares Amount capital stage equity
------ ------ ------- ----- ------
Conversion of debt to equity -
Ellis Enterprise (unaudited) 10,109,546 10,110 429,789 - 439,899
Conversion of debt to equity -
Bristol Investments (unaudited) 11,121,847 11,122 512,218 - 523,340
Conversion of debt to equity -
Greenwich Growth (unaudited) 3,849,278 3,849 97,762 - 101,611
Conversion of debt to equity -
O1144 Limited (unaudited) 1,935,766 1,936 48,859 - 50,795
Issuance of warrants in connection
with debt financing (unaudited) - - 197,471 - 197,471
Beneficial conversion feature
embedded in debt securities (unaudited) - - 832,403 - 832,403
Net loss for the nine months
September 30, 2003 (unaudited) - - - (4,556,565) (4,556,565)
--------------- --------------- ---------------- ---------------- ---------------
Balance at
September 30, 2003 (unaudited) 94,832,168 $ 94,832 $ 31,229,519 $ (31,083,601) $ 240,750
=============== =============== ================ ================ ===============
The accompanying notes form an integral part of these financial statements.
F-8
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
From inception on
Nine months ended Nine months ended January 1, 1999 to
September 30, 2003 September 30, 2002 September 30, 2003
------------------ ------------------ ------------------
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net loss $ (4,556,565) $ (5,265,915) $(31,083,601)
------------- ------------- -------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 511,071 637,600 3,683,566
Loss on disposal of assets -- 114 523,340
Amortization of discount on note payable 1,809,301 1,869,858 5,205,831
Options issued in exchange for services 12,543 107,276 459,393
Warrants issued in exchange for services -- -- 221,650
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable, trade (20,112) -- (20,112)
Licensing revenue receivable -- 219 (279,343)
Advertising revenue receivable -- -- 249,455
Inventory -- 30,067 --
Prepaid mailing lists -- -- (750,000)
Prepaid expenses 13,479 (27,438) (50,046)
Deposits 9,975 (1,008) (36,922)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 324,804 (90,363) 754,450
Security deposits 12,522 -- 12,522
Deferred revenue -- 250,000
------------- ------------- -------------
Total adjustments 2,673,583 2,526,325 10,223,784
------------- ------------- -------------
Net cash used for operating activities (1,882,982) (2,739,590) (20,859,817)
------------- ------------- -------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-9
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
From inception on
Nine months ended Nine months ended January 1, 1999 to
September 30, 2003 September 30, 2002 September 30, 2003
------------------ ------------------ ------------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (12,977) 847 (1,410,796)
Software licensing -- (6,013) (1,145,322)
Software development costs (70,481) (3,680) (1,647,564)
Trademarks (262) (3,585) (242,731)
Patents (35,312) (12,150) (109,777)
Loan fees -- -- (200,000)
------------- ------------- -------------
Net cash used for investing activities (119,032) (24,581) (4,756,190)
------------- ------------- -------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING
ACTIVITIES:
Proceeds from issuance of common stock, net -- 727,233 18,465,148
Retirement of common stock, net -- -- (10,000)
Proceeds from loans payable, officer-stockholder -- -- (200,000)
Proceeds from notes and loans payable 100,000 -- 300,000
Proceeds from convertible note payable 1,312,750 1,903,000 7,216,750
------------- ------------- -------------
Net cash provided by financing activities 1,412,750 2,630,233 25,771,898
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (589,264) (133,938) 155,891
CASH AND CASH EQUIVALENTS, beginning of period 745,155 735,489 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 155,891 $ 601,551 $ 155,891
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 31,510 $ $ 484,911
============= ============= =============
Income taxes paid $ 800 $ 800 $ 6,623
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Options issued in exchange for services $ 12,543 $ 107,276 $ 377,993
============= ============= =============
Shares Issued for re-pricing of conversion rate $ -- $ 175,000 $ 175,000
============= ============= =============
Common shares and warrants issued for
settlement $ -- $ -- $ 303,050
============= ============= =============
Warrants issued in connection with financing $ 197,471 $ 451,716 $ 4,103,369
============= ============= =============
Beneficial conversion feature of convertible debt $ 832,403 $ 1,317,016 $ 3,198,618
============= ============= =============
Common stock issued in exchange for debt $ 2,341,990 $ 1,860,062 $ 6,361,482
============= ============= =============
The accompanying notes form an integral part of these financial statements.
F-10
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(1) ORGANIZATION:
One Voice Technologies, Inc. (formerly Conversational Systems,
Inc.) was incorporated under the laws of the State of
California on April 8, 1991. The Company commenced operations
in 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements include all adjustments
(consisting of only normal recurring accruals), which are, in
the opinion of management, necessary for a fair presentation
of the results of operations for the periods presented.
Interim results are not necessarily indicative of the results
to be expected for the full year ending December 31, 2003. The
financial statements should be read in conjunction with the
financial statements included in the annual report of One
Voice Technologies, Inc. (the "Company") on Form 10-KSB for
the year ended December 31, 2002.
GOING CONCERN:
The Company's financial statements have been presented on the
basis 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
incurred a net loss of $4,556,565 during the nine months ended
September 30, 2003 and had an accumulated deficit of
$31,083,601. The Company had a working capital deficit of
$498,487 at September 30, 2003. Cash flows used for operations
amounted to $1,882,982 for the nine months ended September 30,
2003. These factors raise substantial doubt about the
Company's ability to continue as a going concern unless the
Company enters into a significant revenue-bearing contract.
Management is currently seeking additional equity or debt
financing. Additionally, management is currently pursuing
revenue-bearing contracts utilizing various applications of
its technology including wireless technology. The financial
statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going
concern.
BUSINESS ACTIVITY:
One Voice Technologies, Inc. is a developer of 4th Generation
voice solutions for the Wireless, Telematics, TV/Internet
appliance and Interactive Multimedia markets.
F-11
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
The Company recognizes revenues when earned in the period in
which the service is provided. The Company's revenue
recognition policies are in compliance with all applicable
accounting regulations, including American Institute of
Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, Software Revenue Recognition, as amended by SOP
98-4 and SOP 98-9. Any revenues from software arrangements
with multiple elements are allocated to each element of the
arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. If no such
objective evidence exists, revenues from the arrangements are
not recognized until the entire arrangement is completed and
accepted by the customer. Once the amount of the revenue for
each element is determined, the Company recognizes revenues as
each element is completed and accepted by the customer. For
arrangements that require significant production, modification
or customization of software, the entire arrangement is
accounted for by the percentage of completion method, in
conformity with Accounting Research Bulletin ("ARB") No. 45
and SOP 81-1.
Service and license fees are deferred and recognized over the
life of the agreement. Revenues from the sale of products are
recognized upon shipment of the product.
INCENTIVE AND STOCK NONQUALIFIED OPTION PLAN:
Pro forma information regarding the effect on operations as
required by SFAS 123 and SFAS 148, has been determined as if
the Company had accounted for its employee stock options under
the fair value method of that statement. Pro forma
information, using the Black-Scholes method at the date of
grant, is based on the following assumptions:
Expected life 2.7 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
This option valuation model requires input of highly
subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of fair value of
its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated
fair value of the options is amortized to expense over the
option's vesting period. No expense was recognized under APB
25. The Company's pro forma information is as follows:
F-12
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCENTIVE AND STOCK NONQUALIFIED OPTION PLAN, CONTINUED:
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss, as reported $(4,556,565) $(5,265,915)
------------ ------------
Stock compensation calculated under SFAS 123 $ (360,000) $ (408,000)
------------ ------------
Pro forma net loss $(4,916,565) $(5,673,915)
------------ ------------
Basic and diluted historical loss per share $ (0.08) $ (0.18)
------------ ------------
Pro forma basic and diluted loss per share $ (0.09) $ (0.19)
------------ ------------
RECENT ACCOUNTING PRONOUNCEMENTS:
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", effective for
contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30,
2003. In addition, except as stated below, all provisions of this
Statement should be applied prospectively. The provisions of this
Statement that relate to Statement 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective
effective dates. In addition, paragraphs 7(a) and 23(a), which relate
to forward purchases or sales of securities or other securities that do
not yet exist, should be applied to both existing contracts and new
contracts entered into after June 30, 2003. The Company does not
participate in such transactions, however, is evaluating the effect of
this new pronouncement, if any, and will adopt FASB 149 within the
prescribed time.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity", effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with
the current definition of liabilities in FASB Concepts Statement No. 6,
Elements of Financial Statements. The adoption of this new
pronouncement did not have a material impact to the financial
statements of the Company.
(3) CONVERTIBLE NOTES PAYABLE:
Issuance of Debt
----------------
On June 30, 2003, the Company 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.
F-13
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
(3) CONVERTIBLE NOTES PAYABLE, CONTINUED:
Issuance of Debt, continued
---------------------------
The notes bear interest at 4% (effective interest rate of 80% on the
aggregate amount), mature on June 20, 2005, and are convertible into
the Company's 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, the
Company 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 $450,000, net
of debt issue cash cost of $50,000. Pursuant to this offering, the
Company received $300,000 in the second quarter and received the
remaining $200,000 by August 20, 2003. The fair value of the warrants
of $14,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $195,000 is being amortized over
the life of the debt using the interest method.
On September 17, 2003, the Company 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
aggregate amount of $750,000. The notes bear interest at 6% (effective
interest rate of 80% on the aggregate amount), mature on September 17,
2004, and are convertible into the Company's 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, the Company issued an
aggregate of 9,493,672 warrants to the investors. The warrants are
exercisable until September 17, 2010 at a purchase price of $.0474 per
share. Net proceeds will amount to approximately $690,000, net of debt
issue cash cost of $60,000. Pursuant to this offering, the Company has
already received $335,000 and anticipates receiving the remaining
$355,000 by November 18, 2003. The relative value (limited to the face
amount of the debt) of all the warrants of $327,000 using Black Scholes
option pricing model and the beneficial conversion feature of
approximately $423,000 will be amortized over the life of the debt
using the interest method. As of September 30, 2003, the Company has
only recorded the relative value (limited to the face amount of the
incurred debt) of the warrants of $164,000 using Black Scholes option
pricing model and the beneficial conversion feature of $171,000. Upon
conversion of the debt mentioned above, any unamortized debt issue
costs will be charged to expense.
During the three months ended September 30, 2003, the following note
holders converted debt to equity as follows:
Alpha Capital Aktiengesellschaft converted approximately $609,000 of
principal and accrued interest at an average conversion price of $0.031
into 19,764,319 common shares.
Bristol Investment Fund, Limited converted approximately $251,000 of
principal and accrued interest at an average conversion price of $0.034
into 7,394,675 common shares.
Ellis Enterprise Limited converted approximately $228,000 of principal
and accrued interest at an average conversion price of $0.032 into
7,054,254 common shares.
F-14
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
(3) CONVERTIBLE NOTES PAYABLE, CONTINUED:
Issuance of Debt, Continued
---------------------------
Greenwich Growth Fund Limited converted approximately $101,500 of
principal and accrued interest at an average conversion price of $0.026
into 3,849,278 common shares.
O1144 Limited converted approximately $51,000 of principal and accrued
interest at an average conversion price of $0.026 into 1,935,766 common
shares.
A summary of convertible notes payable at stated interest rate of 4%
and 6% are as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
---- ------ -------- -------
Alpha Capital
Aktiengesellschaft August 20, 2005 $ 50,000 $ (11,526) $ 38,474
Alpha Capital
Aktiengesellschaft September 17, 2004 150,000 (144,584) 5,416
Ellis Enterprise Limited September 17, 2004 50,000 (48,193) 1,807
Bristol Investments
Fund, Limited September 17, 2004 150,000 (144,584) 5,416
---------------- ---------------- ----------------
$ 400,000 $ (348,887) $ 51,113
================ ================ ================
F-15
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
(4) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under leases that expire at various
times through October 2005. The following is a schedule by years of
future minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of September
30, 2003:
Year ending December 31,
2003 $ 76,153
2004 313,291
2005 266,053
-------------------
655,497
Less sublease income 70,000
-------------------
$ 585,497
===================
Rent expense, net of sublease income of $63,900 amounted to $63,911 and
$54,000 for the quarters ended September 30, 2003 and 2002,
respectively.
Legal Matters
-------------
During 2002, the Company was notified of potential claims aggregating
$160,000. Management believes that it has adequate defense for such
unsubstantiated claims and accordingly, since the amounts are estimable
but highly improbable, these amounts have not been recorded in these
financial statements.
(5) SUBSEQUENT EVENT:
During October and November 2003, Bristol Investments, Ellis
Enterprise, and Alpha Capital Converted approximately $210,000 of
principal and accrued interest at an average conversion price of $0.031
into approximately 6,787,000 common shares.
On October 10, 2003 at the annual meeting, the shareholders of the
Company approved the increase in the total number of authorized shares
from 100,000,000 common shares to 250,000,000 common shares.
F-16
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO STATEMENTS CONCERNING ANTICIPATED
TRENDS IN REVENUES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. THERE IS ABSOLUTELY NO ASSURANCE
THAT WE WILL ACHIEVE THE RESULTS EXPRESSED OR IMPLIED IN FORWARD LOOKING
STATEMENTS.
OVERVIEW
One Voice Technologies, Inc. is a voice recognition technology company with over
$26 million invested in Research and Development and deployment of more than 20
million products worldwide in seven languages. To date, our customers include
Warner Brothers and Disney with strong technology and business partnerships with
Philips Electronics and IBM. Based on our patented technology, One Voice offers
voice solutions for the Telecom, Enterprise, PC, and Interactive Multimedia
markets. Our 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 these solutions through both domestic and international wireless and
wireline carriers along with reseller channels for corporations with a mobile
workforce. We offer PC manufacturers the ability to bundle a complete voice
interactive computer assistant which allows PC users to talk to their computers
to quickly launch applications, websites, read and send E-mails and dictate
letters. We feel we are strongly positioned across these markets with our
patented voice technology.
In the Telecom sector, as stated in the October 9, 2003 press release, we are
moving forward with Nextel de Mexico on a subscriber launch. The launch date has
not yet been determined and is conditioned on Nextel de Mexico's internal
review. Nextel de Mexico is the regional operator of Nextel International, whose
other regions include Argentina, Brazil, Chile and Peru. This agreement covers
deployment only in Mexico and will be followed by a formal contract outlining
complete service level commitments, support, infrastructure, costs, etc. We are
currently negotiating an agreement with Radiomovil Dipsa, S.A. De C.V.
("Telcel"), the largest wireless carrier in Mexico, to perform a free
three-month market trial of our MobileVoice solution. This free three-month
market trial is scheduled to begin in Q1' 2004 after which time Telcel will have
the option to purchase the MobileVoice solution. We are in discussions regarding
our MobileVoice solution with two additional carriers in Mexico along with four
carriers domestically but these discussions are in the preliminary stages and no
commitments have been made. Regarding T-Mobile Austria, in August we upgraded
their MobileVoice system from English to German. We are in discussions with
T-Mobile Austria's product team regarding their decision on launching the
service to their subscribers. There is no timeframe yet regarding when a
decision will be made from T-Mobile Austria. We are in discussions with one
other carrier in Austria regarding our MobileVoice solution and their interest
in launching this service to their subscribers but these discussions are in the
preliminary stages and no commitments have been made.
In the Enterprise sector, Procter & Gamble ("P&G"), the Fortune 50 Company that
has been evaluating our MobileVoice system, has previously expressed interest in
purchasing our MobileVoice system but this decision has been significantly
delayed due to the fact that P&G has recently outsourced the majority of its IT
infrastructure to Hewlett Packard ("HP"). This transition has caused major
delays in approval of our MobileVoice solution, which it is our understanding
requires approval now from both P&G and HP. We anticipate a decision in Q1'
2004.
In the PC sector we are actively working with four major PC manufacturers
regarding our Windows XP Media Center Edition software. We have initial project
approval from one of these four PC manufacturers but we have several more
approval levels before they commit to bundling our software on their PC's. We
anticipate this full approval process to be completed in Q1' 2004.
In October 2003, we announced that we had signed a deal with the Walt Disney
Internet Group (http://www.dig.com) to provide speech recognition technology to
be incorporated in one of their upcoming educational software titles.
In October 2003, we held our Annual Shareholders' Meeting. The meeting was well
attended by shareholders, company officers and directors. Agenda items included
a proxy report, a review of 2003 results, plans for 2004 and concluded with
demonstrations of the MobileVoice system in English, Spanish and German along
with a demonstration of the new One Voice Media Center Edition PC based
software.
The shareholders ratified all matters presented in the proxy. This includes
approval of the fourth amended and restated stock option plan, approval to amend
the Company's Certificate of Incorporation to increase the authorized number of
shares of common stock and approval of the Board of Directors for 2003. The
independent auditors, Stonefield Josephson, Inc., were also ratified as the
company's auditor for the fiscal year ending December 31, 2003.
17
RESULTS OF OPERATIONS
The following table sets forth selected information from the statements of
operations for the three months ended September 30, 2003 and 2002.
SELECTED STATEMENT OF OPERATIONS INFORMATION
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
-----------------------------------------------------------------------
Net Revenues $ 50,000 $ 30,000
-----------------------------------------------------------------------
Operating expenses $ 1,699,466 $ 1,521,718
-----------------------------------------------------------------------
Net loss $ (1,655,466) $(1,491,898)
-----------------------------------------------------------------------
DISCUSSION OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2002.
Net revenue totaled $50,000 for the three months ended September 30, 2003. Net
revenues of $30,000 were earned for the three months ended September 30, 2002.
Revenue during the three months ended September 30, 2003 resulted from the sale
of our product and work performed for a studio.
Operating expenses increased to $1,699,466 for the three months ended September
30, 2003 from $1,521,718 for the same period in 2002. The increase in operating
expenses over the same quarter in 2002 was a direct result of a decrease of all
major expense categories and an increase in interest expense for the period as
compared to the year prior. Salary and wage expense was $268,225 for the three
months ended September 30, 2003 as compared to $355,606 for the same period in
2002. The decrease in 2003 as compared to 2002 arose primarily from the
decreased labor force, which we have restructured to accommodate our new
direction into the telecom, telematics and TV/Internet appliance initiatives.
Legal and consulting expenses decreased to $52,579 for the three months ended
September 30, 2003 from $60,208 for the same period in 2002. Depreciation and
amortization expenses decreased to $159,983 for the three months ended September
30, 2003 from $213,082 for the same period in the prior year, primarily due to
the full depreciation of some computer equipment in 2002. Amortization and
Depreciation expenses consisted of patent and trademarks, computer equipment,
consultant fees, and tradeshow booth. Interest expense increased to $874,394 in
2003, as compared to $478,335 in 2002.
We had a net loss of $1,655,466 or basic and diluted net loss per share of $0.02
for the three months ended September 30, 2003 compared to $1,491,898 or basic
and diluted net loss per share of $0.05 for the same period in 2002.
SELECTED STATEMENT OF OPERATIONS INFORMATION
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
--------------------------------------------------------------------------------
Net Revenue $ 50,000 $ 314,931
--------------------------------------------------------------------------------
Operating expenses $ 4,600,565 $ 5,550,482
--------------------------------------------------------------------------------
Net loss $(4,556,565) $(5,265,915)
--------------------------------------------------------------------------------
18
Net revenue totaled $50,000 for the nine months ended September 30, 2003. Net
revenue of $314,931 was earned for the nine months ended September 30, 2002. The
recognition of revenues in the first nine months of 2002 resulted primarily from
product licensing and work performed for Warner Home Video.
Operating expenses decreased to $4,600,565 for the nine months ended September
30, 2003 from $5,550,482 for the same period in 2002. The net decrease in
operating expenses over the same quarter in 2002 was a result in part due to
concerted effor to reduce operating expenses, the decreased non-cash interest
expense associated with debt financings and other expense categories, which
decreased for the period as compared to the year prior. Non-cash interest
expense decreased to $1,809,301 for the nine months ended September 30, 2003, as
compared to $1,869,858 for the same period in 2002. Salary and wage expense
decreased to $927,847 for the nine months ended September 30, 2003 as compared
to $1,110,075 for the same period in 2002. The decrease in 2003 as compared to
2002 arose primarily from the decreased labor force, which we have restructured
to accommodate our new direction into the telecom, telematics and TV/Internet
appliance initiatives. Advertising and promotion expense totaled $0 for the nine
months ended September 30, 2003 as compared to $14,290 for the same period in
2002. Advertising and promotion expense reduction resulted from the company
discontinuing all direct to consumer marketing campaigns and focusing on other
distribution channels. Professional fees and consulting expenses decreased to
$198,217 for the nine months ended September 30, 2003 from $365,122 for the same
period in 2002. Depreciation and amortization expenses decreased to $511,071 for
the nine months ended September 30, 2003 from $637,600 for the same period in
the prior year, primarily due to the full amortization of some computer
equipment. Amortization and Depreciation expenses consisted of patent and
trademarks, computer equipment and consultant fees.
We had a net loss of $4,556,565 or basic and diluted net loss per share of $0.08
for the nine months ended September 30, 2003 compared to $5,265,915 or basic and
diluted net loss per share of $0.18 for the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had negative working capital of $498,487 as compared
with $179,255 at September 30, 2002.
Net cash used for operating activities was $554,721 for the quarter ended
September 30, 2003 compared to $740,658 for the quarter ended September 30,
2002. During the nine months ended September 30, 2003, net cash used for
operating activities was $1,882,982 compared to $2,739,590 for the nine months
ended September 30, 2002. From inception on January 1, 1999 to September 30,
2003, net cash used for operating activities was $20,859,817.
Net cash used for investing activities was $18,426 for the quarter ended
September 30, 2003 compared to $8,427 for the quarter ended September 30, 2002.
During the nine months ended September 30, 2003, net cash used for investing
activities was $119,032 compared to $24,581 for the nine months ended September
30, 2002. From inception on January 1, 1999 to September 30, 2003, net cash used
for investing activities was $4,756,190.
Net cash provided by financing activities was $616,000 for the quarter ended
September 30, 2003 compared to $580,400 for the quarter ended September 30,
2002. During the nine months ended September 30, 2003, net cash provided by
financing activities was $1,412,750 compared to $2,630,233 for the nine months
ended September 30, 2002. From inception on January 1, 1999 to September 30,
2003 net cash provided by financing activities was $25,771,898.
We incurred a net loss of $1,655,466 during the quarter ended September 30,
2003, and had an accumulated deficit of $31,083,601. Our losses through
September 2003 included interest expense, amortization of software licensing
agreements and development costs and operational and promotional expenses. Sales
of our debt securities with embedded equity features have allowed us to maintain
a positive cash flow balance from financing activities.
19
We face considerable risk in completing each of our business plan steps,
including, but not limited to: a lack of funding or available credit to continue
development and undertake product rollout; potential cost overruns; a lack of
interest in our solutions in the market on the part of wireless carriers or
other customers; potential reduction in wireless carriers which could lead to
significant delays in consummating revenue bearing contracts; and/or a shortfall
of funding due to an inability to raise capital in the securities market. Since
further funding is required, and if none is received, we would be forced to rely
on our existing cash in the bank or secure short-term loans. This may hinder our
ability to complete our product development until such time as necessary funds
could be raised. In such a restricted cash flow scenario, we would delay all
cash intensive activities including certain product development and strategic
initiatives described above.
We have secured financing that we believe will sustain operations up to December
2003 and we continue to work closely with our current investors to secure
additional funding. We continue to rely heavily on our current funding sources,
which have financed us since 2001, until we are operationally breakeven. The
losses through the quarter ended September 30, 2003 were due to minimal revenue
and our operating expenses, with the majority of expenses in the areas of:
salaries, legal fees, licensing fees, as well as amortization expense relating
to software development and debt issue costs.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and the Chief Accounting Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Accounting Officer, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls at September 30,
2003.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The securities described below represent our securities sold by us for the
period starting from June 30, 2003 to November 12, 2003 that were not registered
under the Securities Act of 1933, as amended, all of which were issued by us
pursuant to exemptions under the Securities Act. Underwriters were involved in
none of these transactions.
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
None.
SALES OF DEBT AND WARRANTS FOR CASH
On June 30, 2003, the Company 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 of 80% on the aggregate amount), mature on June 20, 2005, and are
convertible into the Company's 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, the Company 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
$450,000, net of debt issue cash cost of $50,000. Pursuant to this offering, the
Company received $300,000 in the second quarter and received the remaining
$200,000 by August 20, 2003.
20
On September 17, 2003, the Company 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 aggregate amount of $750,000. The notes bear
interest at 6% (effective interest rate of 80% on the aggregate amount), mature
on September 17, 2004, and are convertible into the Company's 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, the Company
issued an aggregate of 9,493,672 warrants to the investors. The warrants are
exercisable until September 17, 2010 at a purchase price of $.0474 per share.
Net proceeds will amount to approximately $690,000, net of debt issue cash cost
of $60,000. Pursuant to this offering, the Company has already received $335,000
and received the remaining $355,000 on November 12, 2003.
OPTION GRANTS
There was no option grants during the third quarter.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON 8-K:
(a) Exhibits.
Exhibit Number Description
-------------- -----------
31.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 2003.
21
SIGNATURES
In accordance with the requirements of the Exchange Act of 1933, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONE VOICE TECHNOLOGIES, INC., A NEVADA CORPORATION
DATE: NOVEMBER 14, 2003 BY: /S/ DEAN WEBER
----------------------------------------------
DEAN WEBER, CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND ACTING CHIEF FINANCIAL OFFICER
22