As filed with the Securities and Exchange Commission on May 9, 2006
Registration No. 333-_____
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
ONE VOICE TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
NEVADA 95-4714338
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
7372
(Primary Standard Industrial
Classification Code Number)
4275 EXECUTIVE SQUARE, SUITE 200
LA JOLLA, CALIFORNIA 92037
(858) 552-4466
(Address and telephone number of principal executive offices and
principal place of business)
DEAN WEBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONE VOICE TECHNOLOGIES, INC.
4275 EXECUTIVE SQUARE, SUITE 200
LA JOLLA, CALIFORNIA 92037
(858) 552-4466
(Name, address and telephone number of agent for service)
Copies to:
DARRIN M. OCASIO, ESQ.
ERIC A. PINERO, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ________
2
CALCULATION OF REGISTRATION FEE
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION
OFFERING PRICE AGGREGATE FEE
PER SHARE (2) OFFERING PRICE
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
Common stock, $.001 par value issuable upon 100,050,000 (3) $.027 $2,701,350.00 $289.04
conversion of the convertible notes
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
Common stock, $.001 par value issuable upon 104,227,514 (4) $.027 $2,814,142.88 $300.11
exercise of Class A warrants
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
Common stock, $.001 par value issuable upon 84,817,715 (5) $.027 $2,290,078.31 $245.04
exercise of Class B warrants
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
Total 289,095,229 $7,805,571.19 $835.19
-------------------------------------------------- ------------------- ------------------ -------------------- ---------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders. In addition to the shares set forth in the table,
the amount to be registered includes an indeterminate number of shares issuable
upon conversion of the secured convertible notes and exercise of the warrants,
as such number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the number
of shares of common stock issuable upon conversion of the secured convertible
notes and upon exercise of the warrants. For purposes of estimating the number
of shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common stock
that we believe will be issuable upon conversion of the secured convertible
notes and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely upon
Rule 416, but will file a new registration statement to cover the resale of such
additional shares should that become necessary. In addition, should a decrease
in the exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on May 8, 2006, which was $.027 per share.
(3) Includes (i) 52,500,000 shares of common stock underlying convertible notes
issued pursuant to our March 2006 Subscription Agreement; (ii) 24,300,000 shares
of common stock underlying convertible notes issued pursuant to our May 2006
Subscription Agreement; (iii) 22,500,000 shares underlying convertible notes
issued pursuant to our 2005 Subscription Agreement; and (iv) 750,000 shares
underlying convertible notes issued pursuant to our 2004 Subscription
Agreements. In addition, includes a good faith estimate (150%) of the shares
underlying convertible notes to account for market fluctuations.
(4) Includes (i) 50,972,110 shares underlying our Class A common stock purchase
warrants issued pursuant to our March 2006 Subscription Agreement (ii)
19,968,783 shares underlying our Class A common stock purchase warrants issued
pursuant to our 2005 Subscription Agreement; and (iii) 33,286,621 shares
underlying our Class A common stock purchase warrants issued pursuant to our
2004 Subscription Agreements.
(5) Includes (i) 47,562,522 shares underlying our Class B common stock purchase
warrants issued pursuant to our 2005 Subscription Agreement; and (ii) 37,255,193
shares underlying our Class B common stock purchase warrants issued pursuant to
our 2004 Subscription Agreements.
________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
3
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 9, 2006
ONE VOICE TECHNOLOGIES, INC.
289,095,229 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 289,095,229 shares of our common stock, including up to (i) 52,500,000 shares
of common stock underlying secured convertible notes in a principal amount of
$700,000 issued pursuant to our March 2006 Subscription Agreement; (ii)
24,300,000 shares of common stock underlying secured convertible notes in a
principal amount of $324,000 issued pursuant to our May 2006 Subscription
Agreement; (iii) 22,500,000 shares of common stock underlying convertible notes
in a remaining principal amount of $300,000 issued pursuant to our 2005
Subscription Agreement; (iv) 750,000 shares of common stock underlying
convertible notes in a remaining principal amount of $10,000 issued pursuant to
our 2004 Subscription Agreements; (v) 50,972,110 shares of common stock issuable
upon the exercise of Class A common stock purchase warrants at a price of $.045
per share issued pursuant to our March 2006 Subscription Agreement, (vi)
19,968,783 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 Agreement; (vii) 33,286,621 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; (viii) 47,562,522 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 Agreement; and (xv) 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 May 8, 2006, was $.027.
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 ________, 2006.
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.
4
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 6
Prospectus Summary 7
Risk Factors 11
Use Of Proceeds 16
Market For Common Equity And Related Stockholder Matters 16
Management's Discussion And Analysis Of Financial Condition And Results Of Operations 17
Description Of Business 22
Description Of Property 25
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships And Related Transactions 29
Security Ownership Of Certain Beneficial Owners And Management 29
Description Of Securities 30
Commission's Position On Indemnification For Securities Act Liabilities 30
Plan Of Distribution 31
Selling Stockholders 32
Legal Matters 36
Experts 36
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 37
Available Information 37
Index to Consolidated Financial Statements F-1
5
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.
6
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 289,095,229 shares,
including the following:
- up to (i) 52,500,000 shares of common stock underlying secured
convertible notes in a principal amount of $700,000 issued pursuant to
our March 2006 Subscription Agreement; (ii) 24,300,000 shares of common
stock underlying secured convertible notes in a principal amount of
$324,000 issued pursuant to our May 2006 Subscription Agreement; (iii)
22,500,000 shares of common stock underlying convertible notes in a
remaining principal amount of $300,000 issued pursuant to our 2005
Subscription Agreement; and (iv) 750,000 shares of common stock
underlying secured convertible notes in a remaining principal amount of
$10,000 issued pursuant to our 2004 Subscription Agreement (includes a
good faith estimate of the shares underlying convertible notes to
account for market fluctuations and antidilution protection
adjustments, respectively),
- up to (i) 50,972,110 shares of common stock issuable upon the exercise
of Class A common stock purchase warrants at a price of $.045 per share
issued pursuant to our March 2006 Subscription Agreement, (ii)
19,968,783 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 Agreement; (iii)
33,286,621 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 Agreement; (iv)
47,562,522 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 Agreement; 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 Agreement (includes a good faith
estimate of the shares underlying warrants to account for antidilution
protection adjustments),
This number represents 61.31% of our current outstanding stock.
7
Common stock to be outstanding after the offering..........Up to 760,602,249 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 471,507,020 shares of common stock outstanding as of
May 8, 2006 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders, although
there can be no assurances that any warrants will be exercised.
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 $300,000 and $10,000, issued under our March 2005 and
2004 Subscription Agreements, 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 March 2005 Subscription Agreement.
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.
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.
8
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.
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.
9
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.
10
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 year ended December 31, 2005 and 2004, we
incurred a net loss of $1,546,000 and $8,752,000, respectively. These factors,
among others discussed in Note 1 to the financial statements, raise substantial
doubt about the ability to continue as a going concern. We expect to continue to
incur net losses until sales generate sufficient revenues to fund our continuing
operations. We may fail to achieve significant revenues from sales or achieve or
sustain profitability. There can be no assurance of when, if ever, we will be
profitable or be able to maintain profitability.
IF WE DO NOT BECOME PROFITABLE WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our future sales and profitability depend in part on our ability to
demonstrate to prospective customers the potential performance advantages of
using voice interface software. To date, commercial sales of our software have
been limited.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
Our current corporate entity commenced operations in 1999 and has a
limited operating history. We have limited financial results on which you can
assess our future success. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by growing companies in
new and rapidly evolving markets, such as voice recognition software, media
delivery systems and electronic commerce.
To address the risks and uncertainties we face, we must:
o establish and maintain broad market acceptance of our
products and services and convert that acceptance into
direct and indirect sources of revenues;
o maintain and enhance our brand name;
o continue to timely and successfully develop new products,
product features and services and increase the
functionality and features of existing products;
o successfully respond to competition, including emerging
technologies and solutions; and
o develop and maintain strategic relationships to enhance the
distribution, features and utility of our products and
services.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED.
We believe that our available short-term assets and investment income
will be sufficient to meet our operating expenses and capital expenditures
through the end of fiscal year 2006. We do not know if additional financing will
be available when needed, or if it is available, if it will be available on
acceptable terms. Insufficient funds may prevent us from implementing our
business strategy or may require us to delay, scale back or eliminate certain
contracts for the provision of voice interface software.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
As a result of our limited operating history and the rapidly changing
nature of the markets in which we compete, our quarterly and annual revenues and
operating results are likely to fluctuate from period to period. These
fluctuations may be caused by a number of factors, many of which are beyond our
control. These factors include the following, as well as others discussed
elsewhere in this section:
o how and when we introduce new products and services and
enhance our existing products and services;
o our ability to attract and retain new customers and satisfy
our customers' demands;
11
o the timing and success of our brand-building and marketing
campaigns;
o our ability to establish and maintain strategic
relationships;
o our ability to attract, train and retain key personnel;
o the demand for voice recognition applications;
o the emergence and success of new and existing competition;
o varying operating costs and capital expenditures related to
the expansion of our business operations and
infrastructure, domestically and internationally, including
the hiring of new employees;
o technical difficulties with our products, system downtime,
system failures or interruptions in Internet access;
o changes in the mix of products and services that we sell to
our customers;
o costs and effects related to the acquisition of businesses
or technology and related integration; and
o costs of litigation and intellectual property protection.
In addition, because the market for our products and services is
relatively new and rapidly changing, it is difficult to predict future financial
results.
For these reasons, you should not rely on period-to-period comparisons
of our financial results, if any, as indications of future results. Our future
operating results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of our
stock price.
We are in the starting stages of our business plan and are therefore
more vulnerable to unexpected or uncontrollable business and economic forces.
Unknown software errors may not be corrected in time to develop a sustainable
customer base. Unfavorable product reviews or news reports could squelch early
sales efforts. A competitor may quickly release a better version of a similar
product before we can complete our development efforts. Economic conditions such
as a national or world recession, international trade restrictions on computer
product sales, or a slowdown in new technology growth could reduce our revenues
below financially-healthy levels. The risks of a development-stage company
include the possible loss of all investment funds by investors.
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 May 8, 2006, we had 471,507,020 shares of common stock issued and
outstanding, secured convertible notes outstanding in the aggregate principal
amount of $1,024,000 under our March and May 2006 Subscription Agreements that
may be converted into an estimated 52,100,000 shares of common stock at current
market prices and outstanding warrants to purchase 51,972,111 shares of common
stock pursuant to our March 2006 Subscription Agreement. 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 March and May 2006 Subscription Agreements is
essentially limitless. The following is an example of the amount of shares of
our common stock that are issuable, upon conversion of our secured convertible
notes (excluding accrued interest), based on market prices 25%, 50% and 75%
below the market price, as of May 8, 2006 of $0.027.
Number of Shares
% Below Market Price Per Share Discount of 40% Issuable
-------------- --------------- --------------- -----------------
25% $.0203 $.0162 63,209,877
50% $.0135 $.0108 94,814,815
75% $.0068 $.0054 189,629,630
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common
stock at a 20% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholders convert and sell material amounts of common stock
could have an adverse effect on our stock price. In addition, not only the sale
of shares issued upon conversion or exercise of secured convertible notes and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 9.99% of our
outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In 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
14
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.
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
15
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.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive the sale price of any common stock we sell to the
selling stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to exercise the
warrants on a cashless basis one year after the closing date if the shares of
common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholders
exercise the warrants on a cashless basis, then we will not receive any proceeds
from the exercise of those warrants.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the NASDAQ SmallCap Market on October
24, 2000, under the symbol ONEV. Our common stock is currently traded on The
Over-The-Counter Bulletin Board under the symbol ONEV.OB. The Over-The-Counter
Bulletin Board is sponsored by the National Association of Securities Dealers
(NASD) and is a network of security dealers who buy and sell stocks.
For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Year Ended December 31, 2004: High Low
----------------------------- -------- --------
First Quarter $ 0.05 $ 0.02
Second Quarter $ 0.22 $ 0.01
Third Quarter $ 0.16 $ 0.08
Fourth Quarter $ 0.12 $ 0.01
Year Ending December 31, 2005:
-----------------------------
First Quarter $ 0.06 $ 0.04
Second Quarter $ 0.06 $ 0.03
Third Quarter $ 0.05 $ 0.03
Fourth Quarter $ 0.03 $ 0.02
Year Ending December 31, 2006:
-----------------------------
First Quarter $ 0.05 $ 0.02
HOLDERS
As of May 8, 2006, our common stock were held by 174 stockholders of
record and we had 471,507,020 shares of common stock issued and outstanding. We
believe that the number of beneficial owners is substantially greater than the
number of record holders because a significant portion of our outstanding common
stock is held of record in broker street names for the benefit of individual
investors. The transfer agent of our common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
We have not declared any dividends to date. We have no present
intention of paying any cash dividends on our common stock in the foreseeable
future, as we intend to use earnings, if any, to generate growth. The payment by
us of dividends, if any, in the future, rests within the discretion of our Board
of Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or
of our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
We are a voice recognition technology company with over $43 million
invested in research and development and deployment of 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 feel we are strongly positioned
across these markets with our patented voice technology.
We believe that the presence of voice technology as an interface in
mobile communications and PC computing is of paramount importance. Voice
interface technology makes portable communications products mobile, more
effective and safer to use and it makes communicating with a PC to play digital
content, such as music, videos and photos, easier for consumers. Our development
efforts currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone, directory assistance
and in-home digital media access.
TELECOM SECTOR
In the Telecom sector, 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. Over six trillion text messages are sent globally every year,
and messaging has also shown the consistent ability to generate significant
revenue for carriers. Our solutions enable users to send, intelligently route
and receive text messages using voice from any type of phone (wired or wireless)
anywhere in the world.
In 2005, we realized our first recurring revenues from our
MobileVoice(TM) suite of voice solutions. In addition, we deployed and realized
recurring revenues from our proprietary ADA(TM) Alternative to Directory
Assistance(TM) solution with deployments covering multiple regions. Management
believes we are well positioned in this sector to increase our client base,
deploy services to the wireless and landline carriers and realize continued
growth from this sector.
Our strategy, in the telecom sector, is to continue aggressive sales
and marketing activities for our voice solutions which we believe may result in
increased deployments and revenue stream. The product offerings will encompass
both MobileVoice(TM) suite of solutions as well as our ADA(TM) Alternative to
Directory Assistance(TM).
In 2005, we continued to work closely with Tata Infotech, an Indian
information technology company and part of the Tata Group, India's most trusted
and best-known industrial group, to co-develop a customized MobileVoice solution
for the Indian telecom market. We have subsequently completed the early phase of
testing and tuning of our MobileVoice platform, increasing voice recognition
rates for English speaking Indian users. Our mutual goal is to perform a pilot
test of our MobileVoice platform to telecom providers in India in early 2006
with a potential launch later this year upon successful outcome of the tests.
The wireless industry in India is one of the fastest growing markets globally
and we hope to position our products to align with this growth. We see a
tremendous opportunity to generate revenue with Tata and will continue to apply
resources to make this a successful venture in the Indian market.
17
PC SECTOR
In the PC sector, 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 allow consumers to experience the next
generation of digital entertainment. Our Media Center Communicator(TM) product
works with Microsoft Windows XP Media Center Edition 2005 to add
voice-navigation and a full suite of communication features allowing consumers
to talk to their Media Center PC to play music, view photo slideshows, watch and
record TV, place Voice-Over-IP (VoIP) phone calls, read and send e-mail and
instant message friends and family, all by voice.
In 2005, we released Version 2 of the Media Center Communicator. This
version continues to deliver on our vision of total voice automation of the
digital home including the management of one's digital content. To further this
vision, we have introduced mceSpeechTools(TM). The mceSpeechTools(TM) is a set
of tools designed for opening Media Center Communicator's API (Application
Programming Interface) to other new and existing third-party applications.
Opening up the application's API, enables other third-party applications such as
home automation, uploading MP3 media content and "movies on demand" to be voice
enabled. In addition, we upgraded Version 2 of MCC to integrate with SKYPE(R)
for placing VOIP calls through television and voice enabled messaging
functionality.
Our strategy, in the PC Sector, is to continue our aggressive marketing
efforts to sign-up system integrators, such as those engaged in the business of
home theatre installation and value-added resellers under our reseller program
launched in 2005. We will continue to pursue OEMs for bundling agreements of our
Media Center Communicator product. These OEM agreements may include revenue
share business models as well as discounted individual user license fees. We
will continue to use industry associations, forums and tradeshow events such as
CES, CEDIA, EHX and Digital Life to promote awareness of our products and build
strategic alliances.
We have recently teamed up with Intel Corporation to launch an online
training program for Intel Resellers worldwide. The Intel Reseller Channel
represents hundreds of thousands of certified resellers of Intel products and
solutions. The training program, entitled "How to Sell Intel Digital Home
Platforms" is designed to educated Intel Resellers on the products and solutions
currently available to build the ultimate Digital Home experience. This training
program will also highlight our Media Center Communicator(TM) product.
In summary, since the beginning of 2005, we have deployed services with
telecom carriers and began recognizing recurring revenue. Management believes
our 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. 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
solutions and applications for the emerging speech recognition market sector.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to impairment of property, plant and equipment, intangible assets,
deferred tax assets and fair value computations 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.
RESULTS OF OPERATIONS
DISCUSSION OF THE YEAR ENDED DECEMBER 31, 2005 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 2004.
Revenues totaled $142,000 for the year ended December 31, 2005.
Revenues of $2,100 were earned for the year ended December 31, 2004. The
recognition of increased revenues for the year ended 2005 resulted primarily
from work performed in the MobileVoice/ADA sector.
Operating expenses decreased to $3,433,000 for the year ended December
31, 2005 from $3,734,000 for the same period in 2004.
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Salary and wage expense was $1,326,000 for the year ended December 31,
2005 as compared to $1,229,000 for the same period in 2004. Advertising and
promotion expense totaled $77,000 for the year ended December 31, 2005 as
compared to $27,000 for the same period in 2004. Advertising and promotion
expense increase resulted from us increasing our travel budget. Legal and
consulting expenses decreased to approximately $231,000 for the year ended
December 31, 2005 from approximately $263,000 for the same period in 2004.
Depreciation and amortization expenses decreased to approximately $172,000 for
the year ended December 31, 2005 from approximately $499,000 for the same period
in the prior year. Amortization and depreciation expenses consisted of patent
and trademarks, computer equipment, consultant fees, and tradeshow booth.
For the year ended December 31, 2005, other income was approximately
$1,776,000 compared to other expense of approximately $5,018,000 for the same
period in 2004. Other income (expenses) consisted of interest expense,
settlement expense and gain (loss) on warrant derivative liability. Interest
expense increased to approximately $2,487,000 for the year ended December 31,
2005, as compared to approximately $1,650,000 for the same period in 2004,
primarily due to a warrant re-pricing in October 2005. Settlement expense
increased to approximately $760,000 for the year ended December 31, 2005, as
compared to $0 for the same period in 2004, due to a settlement agreement
liability we entered into in the beginning of 2006. Gain on warrant derivative
increased to approximately $5,070,000 for the year ended December 31, 2005, as
compared to a loss of approximately $3,369,000 for the same period in 2004, due
to a change in warrant valuation.
We had a net loss of $1,546,000 or basic and diluted net loss per share
of $0.01 for the year ended December 31, 2005 compared to a net loss of
$8,752,000 or basic and diluted net loss per share of $0.05 for the same period
in 2004.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, we had a working capital deficit of $3,731,000 as
compared with a working capital deficit of $5,752,000 at December 31, 2004.
Net cash used for operating activities was $3,149,000 for the year
ended December 31, 2005 compared to $2,644,000 for the year ended December 31,
2004.
Net cash used for investing activities was $58,000 for the year ended
December 31, 2005 compared to net cash used of $151,000 for the year ended
December 31, 2004.
Net cash provided by financing activities was $3,011,000 for the year
ended December 31, 2005 and resulted from sales by us of convertible debt
securities and common stock, and proceeds from the exercise of warrants during
the year. This compares to proceeds of $3,277,000 from financing activities for
the year ended December 31, 2004.
We incurred a net loss of $1,546,000 during the year ended December 31,
2005 and had an accumulated deficit of $42,664,000. Our losses through December
2005 included interest expense, amortization of software licensing agreements
and development costs and operational and promotional expenses.
FINANCING TRANSACTIONS
On August 18, 2004, we entered into a securities purchase agreement
with four accredited investors, Alpha Capital Aktiengesellschaft, Greenwich
Growth Fund Limited, Whalehaven Capital, LP and Whalehaven Fund Limited for the
issuance of 7% convertible debentures in the aggregate amount of $700,000. The
notes bear interest at 7% (effective interest rate of 146% on the aggregate
amount), mature on August 18, 2007, and are convertible into our common stock,
at the holders' option, at the lower of (i) $0.085 or (ii) 80% of the average of
the three lowest closing bid prices for the common stock on a principal market
for the 30 trading days before but not including the conversion date. The note
may not be paid, in whole or in part, before August 18, 2007 without the consent
of the holder. The full principal amount of the convertible notes is due upon
default under the terms of convertible notes. In addition, we issued an
aggregate of 7,063,774 warrants to the investors (3,531,887 Class A warrants and
3,531,887 Class B warrants). The Class A warrants are exercisable until August
18, 2009 at a purchase price of $.0935 per share. The Class B warrants are
exercisable until August 18, 2009 at a purchase price of $.10625 per share. Net
proceeds amounted to approximately $621,000, net of debt issue cash cost of
$79,000. The fair value of the warrants of $323,000 using Black Scholes option
pricing model and the beneficial conversion feature of approximately $298,000
will be amortized over the life of the debt using the interest method. Upon
conversion of the debt, unamortized debt issue costs are charged to expense.
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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.
On December 23, 2004, we entered into a securities purchase agreement
with Alpha Capital Aktiengesellschaft, Stonestreet Limited Partnership, Ellis
International Ltd. and Momona Capital Corp. for the issuance of 7% convertible
debentures in the aggregate amount of $894,000. The notes bear interest at 7%
(effective interest rate of 100% on the aggregate amount), mature on December
23, 2007 and are convertible into our common stock, at the holders' option, at
the lower of (i) $0.074 or (ii) 80% of the average of the three lowest closing
bid prices for the common stock on a principal market for the 30 trading days
before but not including the conversion date. The note may not be paid, in whole
or in part, before December 23, 2007 without the consent of the holder. The full
principal amount of the convertible note is due upon default under the terms of
convertible notes. In addition, we issued an aggregate of 22,183,622 Class A
warrants and 22,183,622 Class B warrants to the investors. The warrants are
exercisable until December 23, 2009 at a purchase price of $0.07 per share. Net
proceeds amounted to approximately $835,000, net of debt issue cash cost of
$59,000. The relative value (limited to the face amount of the debt) of all the
warrants of $682,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $210,000 will be amortized over the life of
the debt using the interest method. As of December 31, 2004, the balance owed
was $854,000 and the unamortized discount amounted to $848,000. Upon conversion
of the debt mentioned above, any unamortized debt issue costs will be charged to
expense.
On March 18, 2005, we held our first closing pursuant to a subscription
agreement we entered into with several accredited investors as of March 18,
2005, pursuant to which the investors subscribed to purchase an aggregate
principal amount of $2,000,000 in 6% convertible promissory notes, and 100 Class
A and Class B common stock purchase warrants for each 100 shares which would be
issued on each closing date assuming full conversion of the convertible notes
issued on each such closing date. We received $1,000,000 of the purchase price
on the initial closing date of March 18, 2005 and received an additional
$1,000,000 of the purchase price pursuant to the second closing (as described
below). The convertible notes bear simple interest at 6% per annum payable June
1, 2005 and semi-annually thereafter and mature 3 years after the date of
issuance. Each investor shall have the right to convert the convertible notes
after the date of issuance at any time, until paid in full, at the election of
the investor into fully paid and nonassessable shares of our common stock. The
conversion price per share shall be the lower of (i) $0.047 or (ii) 80% of the
average of the three lowest closing bid prices for our common stock for the 30
trading days prior to, but not including, the conversion date. We issued an
aggregate of 29,069,768 Class A common stock purchase warrants and 29,069,768
Class B common stock purchase warrants to the investors, representing 100 Class
A and Class B warrants issued for each 100 shares which would be issued on each
closing date assuming full conversion of the convertible notes issued on each
such closing date. The Class A warrants are exercisable until four years from
the initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The holder of the Class B warrants will be
entitled to purchase one share of common stock upon exercise of the Class B
warrants for each share of common stock previously purchased upon exercise of
the Class A warrants.
20
On July 13, 2005, we held our second closing pursuant to the
Subscription Agreement we entered into with several accredited investors dated
as of March 18, 2005. On the second closing date, we received approximately
$935,000, net of debt issue cash cost of approximately $65,000. The convertible
notes bear simple interest at 6% per annum payable upon each conversion, June 1,
2005 and semi-annually thereafter and mature 3 years after the date of issuance.
Each investor shall have the right to convert the convertible notes after the
date of issuance and at any time, until paid in full, at the election of the
investor into fully paid and nonassessable shares of our common stock. The
conversion price per share shall be the lower of (i) $0.043 or (ii) 80% of the
average of the three lowest closing bid prices for our common stock for the 30
trading days prior to, but not including, the conversion date as reported by
Bloomberg, L.P. on any principal market or exchange where our common stock is
listed or traded. We issued an aggregate of 38,461,537 Class A common stock
purchase warrants and 38,461,537 Class B common stock purchase warrants to their
investors. The Class A warrants are exercisable until four years from the
initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The fair value of the warrants of
approximately $675,000 using Black Scholes option pricing model and the
beneficial conversion feature of approximately $325,000 will be amortized over
the life of the debt using the interest method.
SUBSEQUENT EVENTS
On January 24, 2006, we issued nonstatutory options to purchase an
aggregate of 57,200,000 shares of our common stock at a price equal to $0.016
per share to certain of our employees, directors and consultants. The
aforementioned options were issued pursuant to our 2005 Stock Incentive Plan.
On February 15, 2006, we voluntarily determined to reduce the exercise
prices of 29,069,968 Class A warrants issued pursuant to the first closing of
our March 2005 Subscription Agreement from an exercise price of $0.02 to $0.014
per share.
On March 16, 2006, we held a closing with one accredited investor
pursuant to which the investor subscribed to purchase an aggregate of 3,000,000
shares of restricted common stock for a total purchase price of $60,000. In
addition, the investor received an aggregate of 3,000,000 Class A common stock
purchase warrants and 3,000,000 Class B common stock purchase warrants 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 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. 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.
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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.
We anticipate maintaining a cash balance through our financial partners
that will sustain operations up to December 2006. We 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, 2005 were due to
minimal revenue and our operating expenses, with the majority of expenses in the
areas of: salaries, legal fees, consulting fees, as well as amortization expense
relating to software development, debt issue costs and licensing costs. We face
considerable risk in completing each of our business plan steps, including, but
not limited to: a lack of funding or available credit to continue development
and undertake product rollout; potential cost overruns; a lack of interest in
its solutions in the market on the part of wireless carriers or other customers;
potential reduction in wireless carriers which could lead to significant delays
in consummating revenue bearing contracts; and/or a shortfall of funding due to
an inability to raise capital in the securities market. Since further funding is
required, and if none is received, we would be forced to rely on our existing
cash in the bank or secure short-term loans. This may hinder our ability to
complete our product development until such time as necessary funds could be
raised. In such a restricted cash flow scenario, we would delay all cash
intensive activities including certain product development and strategic
initiatives described above.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
BUSINESS
INTRODUCTION
We are a voice recognition technology company with over $43 million
invested in Research and Development and deployment of more than 20 million
products worldwide in seven languages. To date, our customers include: Walt
Disney Internet Group, Warner Home Video, Golden State Cellular, Inland
Cellular, Eloqui Wireless, Cell One of Amarillo, Panhandle Telephone
Cooperative, Plateau Wireless, West Central Wireless, Telispire PCS, NewEgg.com,
PC Alchemy, CompUSA, Dell.com and Cannon PC. Based on our patented technology,
we offer voice solutions for the Telecom and Interactive Multimedia markets. Our
telecom solutions allow business and consumer phone users to voice dial, group
conference call, read and send e-mail and instant message, all by voice. We
offer PC Original Equipment Manufacturers (OEM's) the ability to bundle a
complete voice interactive computer assistant which allows PC users to talk to
their computers to quickly play digital media (music, videos, DVD) along with
read and send e-mail messages, SMS text messaging to mobile phones, PC-to-Phone
calling (VoIP) and PC-to-PC audio/video. We believe that we are strongly
positioned across these markets with our patented voice technology.
We are listed on the Over-The-Counter Bulletin Board under the symbol
"ONEV". We are incorporated in the State of Nevada and we commenced operations
on July 14, 1999. Our principal executive offices are located at 4275 Executive
Square, Suite 200, La Jolla, California 92037, and our telephone number is (858)
552-4466.
MARKET OPPORTUNITY
We believe that the presence of voice technology as an interface in
mobile communications and PC computing is of paramount importance. Voice
interface technology makes portable communications products mobile, more
effective and safer to use and it makes communicating with a PC to play digit
content, such as music, videos and photos, easier for consumers. Our development
efforts currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone and in-home digital
media access.
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In the Telecom sector, we believe that the mobile messaging market,
which has both business and consumer market applications including: e-mail,
instant messages, and SMS (Short Message Service), is extremely large and is
growing at a rapid rate. Over six trillion text messages are sent globally every
year, and messaging has shown the consistent ability to generate significant
revenue for wireless carriers. Our solutions enable users to send, intelligently
route and receive text messages using voice from any type of phone (wired or
wireless) anywhere in the world.
In the PC sector, we believe that digital in-home entertainment is
rapidly growing with the wide acceptance of digital photography, MP3 music and
videos, along with plasma and LCD TV's. Companies including Apple, Microsoft and
Intel are actively creating products and technology, which allows consumers to
experience the next generation of digital entertainment. Our Media Center
Communicator product works with Microsoft Windows XP Media Center Edition 2005
to add voice-navigation and communication features allowing consumers to talk to
their Media Center PC to play music, view photo slideshows, watch and record TV,
place Voice-Over-IP (VoIP) phone calls, read and send e-mail and instant
messages, all by voice.
ONE VOICE PRODUCTS
MOBILEVOICE PLATFORM
Our messaging and voice-activated dialing applications are built on our
MobileVoice(TM) platform, which combines patented natural language speech
processing with the scalability, redundancy and fault-tolerance of a server
based, telco-ready architecture. The result is a completely integrated solution
that allows people to:
o Send free-format voice-to-text messages;
o Make voice-activated dialing calls; and
o Access their E-mail from mobile environments - using voice.
MOBILEVOICE ACTIVATED DIALING(TM)
MobileVoice Activated Dialing is server-based and we believe it
delivers higher levels of accuracy and reliability than other solutions on the
market today. It was designed with a high capacity for contact lists, advanced
functionality such as synchronization and import tools that interface with
Microsoft Outlook and Lotus Notes, and we believe it requires less setup time
than other solutions. It was designed to meet the challenges of today's mobile
environments while delivering high accuracy for native and non-native speaking
individuals.
We believe an opportunity exists for the adoption of MobileVice
Activated Dialing by wireless carriers, as more safety legislation is introduced
for hands free communications while operating motor vehicles. MobileVice
Activated Dialing allows a user to place calls to members of a contact list
using voice commands while employing safe driving techniques.
MOBILECONFERENCE(TM)
On-the-fly group conferencing is a new addition to our MobileVoice
solution. MobileConference allows users to connect up to 64 people on a single
conference call by speaking their name, group name or phone number.
MOBILEVOICE EMAIL(TM)
A unique Voice-to-Text Email solution that let's subscribers send
free-form email messages to PCs, mobile phones or wireless alphanumeric paging
devices while on the road. Available for English and Spanish it delivers some of
the highest levels of accuracy in the industry.
MOBILEVOICE SMS(TM)
Short Message Service (SMS) has gained wide popularity in major markets
throughout the world. MobileVoice SMS is a mobile Voice-to-Text SMS solution
that let's subscribers send free-form messages from phone-to-phone with only
their voice. Subscribers can avoid triple-tapping their text messages by
dictating the message through the MobileVoice SMS interface. Subscribers can
send messages within network or to subscribers on other networks.
MOBILEVOICE INSTANT MESSAGING(TM)
Instant messaging has long been a popular way for friends and
colleagues to communicate on their computers. MobileVoice Instant Messaging
takes instant messaging mobile, allowing people to chat and send quick messages
using free form dictation. Targeted at subscribers and enterprise customers,
MobileVoice Instant Messaging allows for voice based instant communications in
mobile environments.
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MOBILEVOICE VOICE MAIL(TM)
MobileVoice Voice Mail lets subscribers record and send messages in
their own voice. The voice recording of a message will be sent as an e-mail
attachment to the recipient or group of recipients. These messages may be
retrieved from any computer or phone.
MOBILEVOICE EMAIL READER(TM)
MobileVoice Email Reader allows subscribers to fully manage their Email
accounts from any phone. Subscribers can sort and find important messages from
specific contacts. The MobileVoice Email Reader offers management tools such as
"Reply", "Reply to "All", "Forward", "Skip" and "Delete" functionality.
Subscribers can access personal and corporate Email accounts from any phone.
MEDIACENTER COMMUNICATOR VERSION 2
Media Center Communicator Version 2 uses voice recognition to control
Windows(R) XP Media Center Edition 2005. Features include:
o Voice Navigate Windows XP Media Center Edition 2005;
o Send e-mail;
o Read e-mail;
o SMS text messaging;
o Text instant messaging;
o PC-to-PC calls;
o Video conferencing; and
o PC-to-Phone calling.
COMMUNICATOR VOICE NAVIGATION
We believe that our Media Center Communicator(TM) Version 2 makes
managing digital content easier and more efficient by using voice recognition
technology. The user can play a particular song by saying its title, watch TV,
read and send e-mail, place a phone call from a PC or instant message a friend
using intuitive voice commands. Media Center Communicator(TM) Version 2
eliminates the need to navigate through numerous drop down menus to access
favorite content which we believe makes the experience faster and more user
friendly. The request of a particular song or artist can be done without turning
on the television.
Our Media Center Communicator utilizes an open microphone solution
where the user has the ability to control his/her media center without using a
remote control. It can be set up whereby a microphone is constantly scanning the
room for a keyword that the user has set. The keyword is a personalized system
name used whenever the user wishes to make a command. The default is "One
Voice." Example: "One Voice, play artist The Rolling Stones."
COMMUNICATOR E-MAIL
Communicator's E-Mail reader will speak the user's E-Mail messages to
him/her eliminating the need to use confining keyboard and mouse interfaces. The
user has the ability to control everything using only voice. Communicator's
E-Mail reader works with widespread E-Mail accounts, including, but not limited
to, Yahoo, EarthLink, Lycos, and SBC.
COMMUNICATOR PC-TO-PHONE
Media Center Communicator's PC-to-phone calling allows full-duplex,
high quality phone calling to preset contacts or keyed entries.
COMMUNICATOR INSTANT MESSENGER
Media Center Communicator's Instant Messenger allows for online chat
sessions with other users on our network. Users can text message, talk or video
chat using Communicator's high quality, full-duplex PC-to-PC audio and video.
COMMUNICATOR SMS TEXT MESSAGING
Media Center Communicator(TM) allows the user to send a quick message
to someone on the road. Users can send SMS text messages to cellular telephones
by speaking the name of a contact or entering the cellular phone number,
entering or speaking the message and saying the "Send" command.
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PATENT PROTECTION
We own exclusive rights to three United States patents on our software.
We have filed for international patent protection as well. These patents define
the primary features and unique procedures that comprise our products and
solutions.
Our future success and ability to compete depends in part upon the
proprietary technology and trademarks, which we attempt to protect with a
combination of patent, copyright, trademark and trade secret laws, as well as
with our confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property. Additionally, there can be no assurances that others will not develop
market and sell products substantially equivalent to our products or utilize
technologies similar to those used by us. Although we believe that our products
do not infringe on any third-party patents and our patents offer sufficient
protection, there can be no assurance that we will not become involved in
litigation involving patents or proprietary rights. Patent and proprietary
rights litigation entails substantial legal and other costs, and there can be no
assurance that we will have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to our rights to our intellectual property may
require our management to redirect its resources to address these claims, which
could have a material adverse effect on our business, financial condition and
results of operations.
EMPLOYEES
At May 3, 2006, we employed 12 full-time employees and 5
consultant/part-time employees. None of these employees is subject to a
collective bargaining agreement, and there is no union representation within our
company. We maintain various employee benefit plans and believe our employee
relations are good.
DESCRIPTION OF PROPERTY
Our headquarters are located at 4275 Executive Square, Suite 200, La
Jolla, California. We lease our facility under a lease that expires in November
2010. The size of our office is 5,162 square feet. Rent expense, net of sublease
income, amounted to $193,503 for the year ended December 31, 2005.
LEGAL PROCEEDINGS
There has been no bankruptcy, receivership or similar proceedings.
There have been no material reclassifications, mergers, consolidations,
or purchase or sale of a significant amount of assets not in the ordinary course
of business.
As previously disclosed to the public in our reports filed with the
Securities and Exchange Commission, we were the subject of a legal proceeding in
the San Diego County Superior Court (the "Court") entitled La Jolla Cove
Investors, Inc. 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 we entered into a Settlement Agreement
and Mutual Release 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 we 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 by us on May 5, 2006; and
o $400,000 within 150 days of the date of the Settlement
Agreement.
25
Interest shall accrue on the $700,000 unpaid balance at 8% per annum
commencing on the date of the Settlement Agreement until paid in full. If any
payment is not made within 30 days of its due date, La Jolla may enter a
judgment against us for the then unpaid balance, plus accrued interest and
$100,000, upon the filing of a declaration of default by La Jolla.
In exchange for the aforementioned settlement payments, La Jolla shall
cause a request for dismissal with prejudice to be filed with the Court which
will dismiss the Action subject to our compliance with the terms of the
Settlement Agreement.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information about our executive
officers, key employees and directors as of May 3, 2006.
Name Age Position
---- --- --------
Dean Weber 43 Chairman of the Board, President, Chief Executive
Officer and Director
James Hadzicki 44 Chief Financial Officer
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
AND DIRECTOR. Dean Weber brings an extensive background to our company with over
20 years of technology and management experience. He is responsible for
developing our strategic vision and pioneering our products, patented technology
and business strategies. He was elected to our Board of Directors in July of
1999 as Chairman. Before founding our company in 1998, Mr. Weber played key
roles in many high profile technology companies including Northrop, United
Technologies and Xerox. Throughout his career, Mr. Weber has developed a
comprehensive knowledge of Human Computer Interaction, Cognitive Science,
Artificial Intelligence and Natural Language Processing. Mr. Weber currently has
numerous patents in Artificial Intelligence, Natural Language Processing and
other related technologies. As our CEO, Mr. Weber has been instrumental in the
growth and development of the company, successfully raising over $30 million of
institutional funding, taking us public, winning the Deloitte and Touche
Technology Fast 50 award, and has been featured in Forbes, Time, and on CNN. Mr.
Weber holds a Bachelor of Science degree in Computer Science from Central
Connecticut State University.
JAMES HADZICKI - CHIEF FINANCIAL OFFICER. James Hadzicki has been our
Vice President of Operations since June 2002. From January 2000 to June of 2002,
Mr. Hadzicki served as Director of Operations for our company. Mr. Hadzicki is
actively involved in all financial, administrative and operational decisions
regarding accounting, quarterly and annual audits, public filings and SEC
activities. Prior to joining our team, James served as the United States
Directing Manager for HPK, a multi-national marketing company. In this role, Jim
opened and oversaw seven regional offices throughout the U.S. and led many key
promotional efforts with major retailers, including Wal-Mart, K-Mart, and
Target. Mr. Hadzicki received a B.S. in New Venture Management/Entrepreneurial
Sciences from the University of Southern California in 1984.
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 is a member of our Audit Committee and
Compensation Committee and was appointed to our Board on June 9, 2000.
26
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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 2005, there were certain directors,
officers or beneficial owners of more than 10 percent of any class of our equity
securities registered pursuant to Section 12 of the Exchange Act that failed to
file on a timely basis, reports required by Section 16(a) of the Exchange Act
during the year ended December 31, 2005. With the exception of the Form 4 filed
for Dean Weber on December 5, 2005, none of our officers or Directors have filed
form 4's which they were required to file for fiscal year ended December 31,
2005. The aforementioned is based solely upon a review of Form 3, Form 4 and
Form 5 filings furnished to us during the year ended December 31, 2005, certain
written representations and shareholders who, to the best of our knowledge, hold
10 percent or more of our shares.
COMMITTEES OF THE BOARD
We currently have no audit committee, compensation committee,
nominations and governance committee of our board of directors.
DIRECTOR COMPENSATION
Non-employee directors receive $1,000 for each Board of Directors
meeting attended. We pay all out-of-pocket expenses of attendance.
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
No executive officer, director or any member of these individuals'
immediate families or any corporation or organization with whom any of these
individuals is an affiliate is or has been indebted to us since the beginning of
our last fiscal year.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and
directors.
LEGAL PROCEEDINGS
As of the date of this prospectus, there are no material proceedings to
which any of our directors, executive officers, affiliates or stockholders is a
party adverse to us.
CODE OF ETHICS
We have adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-B of the Securities Exchange Act of 1934. This Code of Ethics
applies to our chief executive officer and our senior financial officers.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation (including cash
bonuses) paid or accrued by us for our years ended December 31, 2005, 2004 and
2003 to our Chief Executive Officer and our four most highly compensated
officers other than the Chief Executive Officer at December 31, 2005.
27
SUMMARY COMPENSATION TABLE
Annual Long-term
Compensation Compensation
----------------------- --------------------------
Awards Payouts
-------------- -----------
Securities
Underlying LTIP All Other
Fiscal Salary Bonus Options/ Payouts Compensation
Name and Principal Position Year ($) ($) SARs (#) ($) ($)
------------------------------------- --------- ------------ ---------- -------------- ----------- -----------------
Dean Weber 2005 277,000 -- -- -- --
Chief Executive Officer 2004 252,000 -- -- -- --
2003 241,629 -- -- -- --
James Hadzicki 2005 136,250 -- -- -- --
Chief Financial Officer 2004 120,000 -- -- -- --
2003 113,123 -- -- -- --
OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR
No individual grants of stock options, whether or not in tandem with
stock appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director during our fiscal year ended December 31,
2005.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
No individual exercises of stock options, whether or not in tandem with
stock appreciation rights ("SARs") and freestanding SARs have been made by
executive officer or any director during our fiscal year ended December 31,
2005.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
We had no long-term incentive plans and made no stock awards during our
fiscal year ended December 31, 2005.
However, on July 29, 2005, we adopted the 2005 Stock Incentive Plan and
reserved 60,000,000 shares of our common stock for issuance under the 2005 Plan.
EMPLOYMENT AGREEMENT
On February 15, 2006, we entered into an Employment Agreement with Dean
Weber, our Chief Executive Officer. Pursuant to the Employment Agreement, we
will employ Mr. Weber unless the Agreement is terminated by either party as set
forth therein. Mr. Weber will be paid an annual base salary of $282,000 (the
"Base Salary"). In addition, Mr. Weber will be eligible to earn an annual cash
bonus as may be deemed appropriate by our Board of Directors. Further, Mr. Weber
may be awarded incentive stock options pursuant to the Company's stock option
plan as may be deemed appropriate by our Board of Directors.
If the Employment Agreement is terminated as set forth therein, Mr.
Weber will be entitled to a severance package equal to no more than 100% of his
Base Salary for up to two years after the date of termination. In addition, all
unvested stock options shall immediately vest on the date of termination. During
the term of his employment, Mr. Weber will be subject to non-competition and
non-solicitation provisions, subject to standard exceptions.
AMENDED AND RESTATED 1999 STOCK OPTION PLAN
Our Amended and Restated 1999 Stock Option Plan authorizes us to grant
to our directors, employees, consultants and advisors both incentive and
non-qualified stock options to purchase shares of our Common Stock. As of
December 31, 2001, our Board of Directors had reserved 3,000,000 shares for
issuance under the 1999 Plan, of which 1,900,500 shares were subject to
outstanding options and 1,099,500 shares remained available for future grants.
Our Board of Directors or a committee appointed by the Board (the Plan
Administrator) administers the 1999 Plan. The Plan Administrator selects the
recipients to whom options are granted and determines the number of shares to be
awarded. Options granted under the 1999 Plan are exercisable at a price
determined by the Plan Administrator at the time of the grant, but in no event
will the option price for any incentive stock option be lower than the fair
market value for our Common Stock on the date of the grant. Options become
exercisable at such times and in such installments as the Plan Administrator
provides in the terms of each individual option agreement. In general, the Plan
Administrator is given broad discretion to issue options and to accept a wide
variety of consideration (including shares of our Common Stock and promissory
notes) in payment for the exercise price of options. The 1999 Plan was
authorized by the Board of Directors and stockholders.
28
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of May 8, 2006, the number of and
percent of our common stock beneficially owned by:
o all directors and nominees, naming them,
o our executive officers,
o our directors and executive officers as a group, without
naming them, and
o persons or groups known by us to own beneficially 5% or
more of our common stock:
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them.
A person is deemed to be the beneficial owner of securities that can be
acquired by him within 60 days from May 8, 2006 upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants or convertible securities that
are held by him, but not those held by any other person, and which are
exercisable within 60 days of May 8, 2006 have been exercised and converted.
Shares Beneficially Owned (1)
Name and Address of Beneficial Owner Number Percent
------------------------------------ ------ -------
Dean Weber, CEO, President and Chairman
of the Board (2) 12,473,800 2.66%
IVantage, Inc. (2) 900,200 *
James Hadzicki, CFO 2,782,300 *
Rahould Sharan, Director 1,386,000 *
Bradley J. Ammon, Director 959,000 *
Jocobo Kaloyan 21,050,000 4.49%
Total securities held by officers and
directors as a group (4 people): 18,501,300 3.95%
______________
*Less than one percent.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of May 8, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) IVantage, Inc. is wholly owned by Dean Weber, Chairman of the Board, CEO,
and President of our company. Mr. Weber is the beneficial owner of the 900,200
shares in the name of IVantage, Inc. and those shares are also included in the
amount presented in this table for Mr. Weber.
29
DESCRIPTION OF SECURITIES
Our Amended Articles of Incorporation authorize the issuance of
990,000,000 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.
30
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which
the broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to
sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of
the applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to
sell a specified number of such shares at a stipulated
price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, or Regulation S, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholders defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions.
31
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity
and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in
penny stocks are suitable for that person and the person
has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written
agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
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.
32
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering Offering** (2) (2)
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Alpha Capital 118,923,581 25.2% Up to 47,103,551 9.99% 0 --
Atiengesellschaft(3) 118,923,581(1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Whalehaven Capital 73,328,235 15.6% Up to 47,103,551 9.99% 0 --
Fund Limited(4) 73,328,235 (1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Ellis International, 30,813,081 6.5% Up to 30,813,081 6.5% 0 --
Ltd.(5) 30,813,081(1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Omega Capital Small 11,138,909 2.4% Up to 11,138,909 2.4% 0 --
Cap Fund(6) 11,138,909(1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Osher Capital, Inc. 2,025,939 *** Up to 2,025,939 *** 0 --
(7) 2,025,939(1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Stonestreet Limited 32,704,784 6.9% Up to 32,704,784 6.9% 0 --
Partnership(8) 32,704,784
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Momona Capital 17,890,202 3.8% Up to 17,890,202 3.8% 0 --
Corp.(9) 17,890,202
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Greenwich Growth 1,009,110 *** Up to 1,009,110 *** 0 --
Fund Limited(10) 1,090,110
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
Whalehaven Fund 1,261,388 *** Up to 1,261,388 *** 0 --
(11) 1,261,388 (1)
shares of
common stock
-------------------- --------------- ----------- -------------- ------------ -------------- ----------- -----------
* This column represents an estimated number based on a conversion price as of a
recent date of May 8, 2006 of $.02 divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 9.99% limitation.
*** Less than 1%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
33
(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 May 8, 2006, the secured convertible notes would have had a conversion price
of $.02. 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. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 9.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(2) Assumes that all securities will be sold.
(3) Includes: (i) 8,100,000 shares underlying secured convertible notes issued
under our May 2006 Subscription Agreement; (ii) 18,750,000 shares underlying
secured convertible notes issued under our March 2006 Subscription Agreement;
(iii) 18,204,325 shares underlying Class A warrants issued under our March 2006
Subscription Agreement; (iv) 22,500,000 shares underlying remaining $300,000
principal amount of secured convertible notes issued under our 2005 Subscription
Agreement; (v) 12,712,522 shares underlying Class A warrants issued under our
2005 Subscription Agreement; (vi) 14,300,000 shares underlying Class B warrants
issued under our 2005 Subscription Agreement; (vii) 11,178,367 shares underlying
Class A warrants issued under our 2004 Subscription Agreements; and (viii)
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.
(4) Includes: (i) 8,100,000 shares underlying secured convertible notes issued
under our May 2006 Subscription Agreement; (ii) 18,750,000 shares underlying
secured convertible notes issued under our March 2006 Subscription Agreement;
(iii) 18,204,325 shares underlying Class A warrants issued under our March 2006
Subscription Agreement; (iv) 22,012,522 shares underlying Class B warrants
issued under our 2005 Subscription Agreement; (v) 630,694 shares underlying
Class A warrants issued under our 2004 Subscription Agreements; and (vi) 630,694
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.
(5) Includes: (i) 7,500,000 shares underlying secured convertible notes issued
under our March 2006 Subscription Agreement; (ii) 7,281,730 shares underlying
Class A warrants issued under our March 2006 Subscription Agreement; (iii)
2,191,413 shares underlying Class A warrants issued under our 2005 Subscription
Agreement; (iv) 6,250,000 shares underlying Class B warrants issued under our
2005 Subscription Agreement; (vii) 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.
(6) Includes: (i) 8,100,000 shares underlying secured convertible notes issued
under our May 2006 Subscription Agreement; and (ii) 3,038,909 shares underlying
Class A warrants issued under our 2005 Subscription Agreement. 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.
34
(7) Includes shares underlying Class A warrants issued under our 2005
Subscription Agreement. In accordance with rule 13d-3 under the securities
exchange act of 1934, Osher Capital, Inc. is a corporation that is owned by all
of its shareholders and managed by Yisroel Kluger. Yisroel Kluger may be deemed
a control person of the shares owned by such entity, with final voting power and
investment control over such shares.
(8) Includes: (i) 750,000 shares underlying 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.
(9) Includes: (i) 7,500,000 shares underlying secured convertible notes issued
under our March 2006 Subscription Agreement; (ii) 7,281,730 shares underlying
Class A warrants issued under our March 2006 Subscription Agreement; (iii)
1,339,950 shares underlying Class A warrants issued under our 2004 Subscription
Agreements; and (iv) 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.
(10) 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.
(11) Includes: (i) 630,694 shares underlying Class A warrants issued under our
2004 Subscription Agreements; and (ii) 630,694 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 Fund 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.
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.
35
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.
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 number of shares of common stock issuable upon conversion of the
secured convertible notes issued pursuant to our March and May 2006 Subscription
Agreements is determined by dividing that portion of the principal of the notes
to be converted and interest, if any, by the conversion price. For example,
assuming conversion of the $1,02,000 of secured convertible notes on May 8,
2006, at a conversion price of $0.02, the number of shares issuable upon
conversion would be:
$1,024,000/$0.02 = 51,200,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price as of May 8, 2006 of $0.027.
Number of Shares
% Below Market Price Per Share Discount of 40% Issuable
-------------- --------------- --------------- ------------------
25% $.0203 $.0162 63,209,877
50% $.0135 $.0108 94,814,815
75% $.0068 $.0054 189,629,630
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Our financial statements at December 31, 2005 and 2004 appearing in
this prospectus and registration statement have been audited by Peterson & Co.,
LLP, 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.
36
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On April 19, 2004, we notified Stonefield Josephson, Inc., ("SJ ") that
we had engaged Peterson & Co., LLP as our auditor and as a consequence, was
dismissed as our auditors. On April 12, 2004, we engaged Peterson & Co., LLP as
our independent auditor for the fiscal year ending December 31, 2004. The action
to engage Peterson & Co., LLP was taken upon the unanimous approval of the Audit
Committee of our Board of Directors.
During the two fiscal years ended December 31, 2003 and December 31,
2002 and through April 19, 2004, (i) there were no disagreements between us and
SJ on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of SJ would have caused SJ to make reference to the matter in its
reports on our financial statements, and (ii) SJ's reports did not contain an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles. During the two fiscal years
ended December 31, 2003 and 2002 and through April 19, 2004, there were no
reportable events as the term described in Item 304(a)(1)(iv) of Regulation S-B.
SJ 's opinion in its report on our financial statements for the years ended
December 31, 2002 and 2003, included an explanatory paragraph which expressed
substantial doubt with respect to our ability to continue as a going concern.
We obtained a letter from SJ addressed to the Securities and Exchange
Commission stating whether they agreed with the above statements, as it relates
to them. A copy of such letter, dated April 28, 2004, is filed as Exhibit 16.1
to the Form 8-K filed with the Commission on May 3, 2004 and is hereby
incorporated by reference.
During the two fiscal years ended December 31, 2003 and 2004, we have
not consulted with Peterson & Co. LLP regarding either:
1. the application of accounting principles to any specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements, and neither a written report was
provided to us nor oral advice was provided that Peterson & Co., LLP concluded
was an important factor considered by us in reaching a decision as to the
accounting, auditing or financial reporting issue; or
2. any matter that was either subject of disagreement or event, as
defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction
to Item 304 of Regulation S-B, or a reportable event, as that term is explained
in Item 304(a)(1)(iv)(A) of Regulation S-B.
We obtained a letter from SJ addressed to the Securities and Exchange
Commission stating whether they agreed with the above statements, as it relates
to them. A copy of such letter, dated April 28, 2004, is filed as Exhibit 16.1
to the Form 8-K filed with the Commission on May 3, 2004 and is hereby
incorporated by reference.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Itronics Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at 100 F Street N.E. Washington, D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the SEC at
100 F Street N.E. Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
37
INDEX TO FINANCIAL STATEMENTS
ONE VOICE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity (Deficit) F-4 - F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-23
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
One Voice Technologies, Inc.
We have audited the accompanying balance sheets of One Voice
Technologies, Inc. (the "Company") as of December 31, 2005 and 2004, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of One Voice
Technologies, Inc. as of December 31, 2005 and 2004, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has reported recurring losses from operations
aggregating $42,644,000, and had a working capital deficit of $3,731,000. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans as to these matters are described in Note 1.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PETERSON & CO., LLP
San Diego, California
March 31, 2006
F-1
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2005 & 2004
ASSETS
2005 2004
------------ ------------
(Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 338,811 535,642
Accounts receivable 42,696 6,274
Inventories 5,254 9,724
Prepaid expenses 40,574 27,756
------------ ------------
Total current assets 427,335 579,396
PROPERTY AND EQUIPMENT, net 84,703 177,949
OTHER ASSETS:
Software development and licensing, net 40,552 78,700
Trademarks, net 5,517 13,310
Patents, net 94,200 118,569
Deposits 18,665 2,157
Deferred debt issue costs 69,970 96,954
------------ ------------
Total assets $ 740,942 $ 1,067,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 128,630 $ 162,625
Accrued expenses 147,305 72,887
Security deposits -- 12,522
Settlement agreement liability 920,000 --
License agreement liability 930,000 1,050,000
Warrant derivative liability 2,032,299 4,941,415
Current portion of convertible debt, net -- 92,044
------------ ------------
Total current liabilities 4,158,234 6,331,493
LONG-TERM DEBT:
Long term portion of notes payable, 100,000 100,000
Long term portion of convertible debt, net 221,850 32,656
------------ ------------
Total liabilities 4,480,084 6,464,149
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock; $.001 par value, 990,000,000 and 250,000,000
Shares authorized at December 31, 2005 and 2004,
respectively; 363,590,152 and 246,467,927 shares issued
and outstanding at December 31, 2005 and 2004, respectively 363,590 246,468
Additional paid-in capital 38,561,381 35,474,238
Accumulated deficit (42,664,113) (41,117,820)
------------ ------------
Total stockholders' equity (deficit) (3,739,142) (5,397,114)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 740,942 $ 1,067,035
============ ============
The accompanying notes form an integral part of these financial statements.
F-2
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31,
2005 2004
------------- -------------
(Restated)
REVENUE $ 142,285 $ 2,105
COST OF REVENUE 31,467 1,930
------------- -------------
GROSS PROFIT 110,818 175
GENERAL AND ADMINISTRATIVE EXPENSES 3,433,281 3,733,753
------------- -------------
NET LOSS FROM OPERATIONS (3,322,463) $ (3,733,578)
OTHER INCOME (EXPENSES)
Interest expense (2,487,116) (1,649,641)
Settlement expense, net (760,387) --
Gain (loss) on warrant derivative 5,070,081 (3,369,412)
Other, net (46,408) 741
------------- -------------
NET LOSS $ (1,546,293) $ (8,751,890)
============= =============
NET LOSS PER SHARE, basic and diluted $ (.01) $ (.05)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 299,279,000 188,236,940
============= =============
The accompanying notes form an integral part of these financial statements.
F-3
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common stock Additional Total
---------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------ ------------ ------------ ------------ ----------------
Balance at December 31, 2003 (Restated) 107,130,615 $ 107,131 $ 31,851,609 $(32,365,930) $ (407,190)
Issuance of warrants in connection
with debt financing 1,281,550 1,281,550
Beneficial conversion feature
embedded in debt securities 827,626 827,626
Exercise of warrants for cash 12,008,067 12,008 1,368,121 1,380,129
Conversion of debt to
equity - Alpha Capital 25,720,939 25,721 587,172 612,893
Conversion of debt to
equity - Bristol Investments 4,317,308 4,317 96,708 101,025
Conversion of debt to
equity - Ellis Enterprise 5,229,575 5,230 165,230 170,460
Conversion of debt to
equity - Greenwich Funds 2,541,700 2,542 99,889 102,431
Conversion of debt to
equity - Whalehaven Capital 2,639,175 2,639 124,834 127,473
Conversion of debt to
equity - Whalehaven Fund 2,009,448 2,009 84,787 86,796
Conversion of debt to
equity - Momona Capital 375,994 376 14,777 15,153
Conversion of debt to
equity - Stonestreet Limited 6,067,844 6,068 239,640 245,708
Conversion of debt to
equity - La Jolla Cove 78,427,262 78,427 13,845 92,272
Reclassification of warrants to
current liabilities (1,281,550) (1,281,550)
Net loss for the year ended
December 31, 2004 (8,751,890) (8,751,890)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 (Restated) 246,467,927 246,468 35,474,238 (41,117,820) (5,397,114)
The accompanying notes form an integral part of these financial statements.
F-4
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Common stock Additional Total
---------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------ ------------ ------------ ------------ ----------------
Issuance of common stock in connection 17,000,000 17,000 -- 17,000
with private placement
Issuance of warrants in connection
with private placement 489,400 489,400
Issuance of warrants in connection
with debt financing 1,399,637 1,399,637
Beneficial conversion feature
embedded in debt securities 600,363 600,363
Exercise of warrants for cash 31,552,521 31,553 617,658 649,211
Expenses incurred in connection
with warrant re-pricing 271,898 271,898
Conversion of debt to
equity - Alpha Capital 25,945,668 25,945 714,676 740,621
Conversion of debt to
equity - Momona Capital 1,938,262 1,938 74,215 76,153
Conversion of debt to
equity - Ellis Enterprise 11,522,589 11,523 257,446 268,969
Conversion of debt to
equity - Omega Capital 3,488,833 3,489 61,511 65,000
Conversion of debt to
equity - Whalehaven Capital 9,110,077 9,110 235,769 244,879
Conversion of debt to
equity - Whalehaven Fund 1,026,466 1,026 40,032 41,058
Conversion of debt to
equity - Osher Capital 1,714,932 1,715 43,631 45,346
Conversion of debt to
equity - Stonestreet Limited 13,822,877 13,823 441,842 455,665
Reclassification of warrants to
current liabilities (2,160,935) (2,160,935)
Net loss for the year ended
December 31, 2005 (1,546,293) (1,546,293)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 363,590,152 $ 363,590 $ 38,561,381 $(42,664,113) $ (3,739,142)
============ ============ ============ ============ ============
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash flows from operating activities:
Net loss $ (1,546,293) $ (8,751,890)
------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 172,426 499,216
Loss on disposal of assets 49,332 --
Amortization of debt discount and debt issue costs 2,351,877 1,917,203
Warrant re-pricing 271,898 --
(Gain)loss on warrant derivative liability (5,070,081) 3,369,412
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (36,422) 130,726
Inventories 4,470 (9,724)
Prepaid expenses and other assets (157,844) (191,021)
Deposits (16,508) 7,769
Increase (decrease) in liabilities:
Accounts payable (33,965) (10,463)
Accrued expenses 74,418 14,468
Settlement agreement liability 920,000 --
License agreement liability (120,000) 380,000
Deposit (12,522) --
------------ ------------
Net cash used in operating activities (3,149,214) (2,644,304)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (45,768) (63,046)
Software development costs -- (22,080)
Trademarks (528) --
Patents (11,906) (65,718)
------------ ------------
Net cash used in investing activities (58,202) (150,844)
------------ ------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-6
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash flows from financing activities:
Proceeds from issuance of common stock 506,400 --
Proceeds from convertible debt 2,000,000 2,109,000
Proceeds from warrant exercise 649,210 1,369,044
Payments for debt issue costs (145,025) (200,963)
------------ ------------
Net cash provided by financing activities 3,010,585 3,277,081
------------ ------------
Net increase (decrease) in cash (196,831) 481,933
Cash and cash equivalents, beginning of year 535,642 53,709
------------ ------------
Cash and cash equivalents, end of year $ 338,811 $ 535,642
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 74,727 $ 74,621
============ ============
Income taxes paid $ 800 $ 800
============ ============
Supplemental disclosure of non-cash financing activities:
Issuance of warrant derivative in connection
with private placement and debt financing $ 2,160,935 $ 1,281,550
============ ============
Beneficial conversion feature of debt $ 600,363 $ 827,626
============ ============
Common Stock issued upon conversion of debt $ 1,937,691 $ 1,554,211
============ ============
The accompanying notes form an integral part of these financial statements.
F-7
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
One Voice Technologies, Inc. is incorporated under the laws of the State of
Nevada. The Company develops voice recognition software and it commenced
operations in 1999.
Prior to the fourth quarter of 2005, the Company's financial statements had been
prepared and presented as those of a development stage enterprise. Based on the
commercialization of its Mobile Voice product during 2005, the Company believes
that such presentation is no long necessary. Cumulative disclosures required for
development stage enterprises that were included in the previously filed
December 31, 2004 financial statements have been omitted in the comparative
financial statements presented here in.
GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred significant losses since inception of $42,664,000 and used
cash for operations of $ 3,149,000 during the year ended December 31, 2005. The
Company also has a working capital deficit of $3,731,000 and a stockholders'
deficit of $3,739,000 as of December 31, 2005. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management is
currently seeking additional equity or debt financing. Additionally, management
is currently pursuing revenue-bearing contracts utilizing various applications
of its technology including wireless technology. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
RESTATEMENT TO PRIOR YEAR FINANCIAL STATEMENTS
Subsequent to the issuance of the financial statements for the years ended
December 31, 2004 and 2003, management determined that the Company's previous
accounting for its warrants did not comply with Emerging Issues Task Force
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). As a result, the
Company determined that the fair value of the warrants should have been
reclassified from additional paid in capital, to a current liability, and that
the warrant fair value should have been marked to market as of the balance sheet
date with the corresponding non-cash gain or loss reflected in the results of
operations. Accordingly, the accompanying financial statements for the years
ended December 31, 2004 and 2003 have been restated from the amounts previously
reported.
The impact of this restatement will change net income within the various periods
covered. This correction in the accounting for its warrants had no impact on the
Company's net sales, net cash flows, cash balances or debt covenant compliance.
A summary of the significant effects of the restatements is as follows:
As Previously As
Reported Adjustments Restated
------------- ------------- -------------
Year Ended December 31, 2004
----------------------------
Net loss $ (5,382,478) $ (3,369,412) $ (8,751,890)
Net loss per share, basic and diluted $ (0.03) $ (0.02) $ (0.05)
Year Ended December 31, 2003
----------------------------
Net loss $ (5,931,972) $ 93,078 $ (5,838,894)
Net loss per share, basic and diluted $ (0.09) $ -- $ (0.09)
F-8
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company develops voice recognition based software for both the Telecom and
Interactive Multimedia PC sectors.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' disclosures to conform
to current year classifications.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the amount of revenue and expense reported during
the period. Actual results could differ from those estimates.
FAIR VALUE:
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable and notes payable and
convertible debt. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable, approximates their fair value due to their
short term nature. The carrying value of notes payable and convertible debt
approximate their fair value, as interest approximates market rates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
CONCENTRATION:
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
REVENUE RECOGNITION:
The Company recognizes revenues when earned in the period in which the service
is provided.
Service and license fees are deferred and recognized over the life of the
agreement. Revenues from the sale of products will be recognized upon shipment
of the product.
ADVERTISING AND PROMOTION COSTS:
Advertising and promotion costs are expensed as incurred. For the years ended
December 31, 2005 and 2004, advertising and promotion costs were $77,000 and
$27,000 respectively.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is being provided by
use of the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years.
F-9
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES:
Inventories are valued at the lower of cost or market based on actual cost.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). Pursuant to EITF
00-19, an evaluation of specifically identified conditions is made to determine
whether the fair value of warrants issued is required be classified as a
derivative liability. The fair value of warrants classified as derivative
liabilities is adjusted for changes in fair value at each reporting period, and
the corresponding non-cash gain or loss is recorded in current period earnings.
DEBT WITH STOCK PURCHASE WARRANTS:
Proceeds received from debt issued with stock purchase warrants are allocated
between the debt and the warrants, based upon the relative fair values of the
two securities. The balance allocated to warrants is accounted for either as
additional paid-in capital or as a warrant derivative liability. The resulting
debt discount is amortized to expense over the term of the debt instrument,
using the interest method. In the event of settlement of such debt in advance of
the maturity date, an expense is recognized for the remaining unamortized
discount.
DEBT WITH BENEFICIAL CONVERSION FEATURE:
We account for convertible debt in accordance with Financial Accounting
Standards Board Emerging Issues Task Force ("EITF") Issue No. 98-5 and Issue
00-27. These pronouncements require the use of the intrinsic value method for
recognition of the beneficial conversioin feature included with indebtedness,
and requires amortization of the amount associated with the convertibility
feature over the life of the debt instrument. Upon conversion of the debt, any
unamortized beneficial conversion discount will be charged to expense.
SOFTWARE DEVELOPMENT COSTS:
The Company accounts for their software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," ("SFAS No. 86").
SFAS No. 86 requires the Company to capitalize the direct costs and allocate
overhead associated with the development of software products. Initial costs are
charged to operations as research prior to the development of a detailed program
design or a working model. Costs incurred subsequent to the product release, and
research and development performed under contract are charged to operations.
Capitalized costs are amortized over the estimated product life of four years on
the straight-line basis. The Company evaluates for impairment losses annually or
when economic circumstances necessitate. The Company will recognize an
impairment loss in the amount by which the unamortized capitalized cost of a
computer software product exceeds the net realizable value of that asset. No
impairment losses were recognized during the years ended December 31, 2005 and
2004.
Amortization expense totaled $37,000 and $338,000 for the years ended December
31, 2005 and 2004, respectively. Accumulated amortization as of December 31,
2005 amounted to $1,635,000.
F-10
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
TRADEMARKS AND PATENTS:
The Company's trademark costs consist of legal fees paid in connection with
trademarks. The Company amortizes trademarks using the straight-line method over
the period of estimated benefit, generally four years. Amortization expense
charged for the years ended December 31, 2005 and 2004 totaled $8,000 and
$34,000, respectively. Accumulated amortization as of December 31, 2005 amounted
to $238,000.
The Company's patent costs consist of legal fees paid in connection with patents
pending. The Company amortizes patents using the straight-line method over the
period of estimated benefit, generally five years. Amortization expense charged
for the years ended December 31, 2005 and 2004 totaled $36,000 and $25,000,
respectively. Accumulated amortization as of December 31, 2005 amounted to
$93,000.
In accordance with SFAS 142, the Company periodically evaluates whether events
or circumstances have occurred that may affect the estimated useful life or the
recoverability of the remaining balance of the patent and trademarks. Impairment
of the assets is triggered when the estimated future undiscounted cash flows do
not exceed the carrying amount of the intangible asset. If the events or
circumstances indicate that the remaining balance of the assets may be
permanently impaired, such potential impairment will be measured based upon the
difference between the carrying amount of the assets and the fair value of such
assets, determined using the estimated future discounted cash flows generated.
NET LOSS PER COMMON SHARE:
Basic earnings per share is calculated using the weighted-average number of
outstanding common shares during the period. Diluted earnings per share is
calculated using the weighted-average number of outstanding common shares and
dilutive common equivalent shares outstanding during the period, using either
the as-converted method for convertible notes and convertible preferred stock or
the treasury stock method for options and warrants.
The net loss per common share for the years ended December 31, 2005 and 2004 is
based on the weighted average number of shares of common stock outstanding
during the periods. Potentially dilutive securities include options, warrants
and convertible debt; however, such securities have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
INCOME TAXES:
Deferred income taxes are reported using the asset/liability method. Deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-11
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
INCENTIVE AND STOCK BASED COMPENSATION:
Pro forma information regarding the effect on operations as required by SFAS 123
and SFAS 148, has been determined as if the Company had accounted for its
employee stock options under the fair value method of those statements. Pro
forma information, using the Black-Scholes method at the date of grant, is based
on the following assumptions:
Expected life 3 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. No expense was
recognized under APB 25. The Company's pro forma information is as follows:
December 31, 2005 December 31, 2004
------------------ ------------------
Net loss, as reported $(1,546,293) $(8,751,890)
------------ ------------
Stock compensation calculated under SFAS 123 $ (1,000) $ (51,500)
------------ ------------
Pro forma net loss $(1,547,293) $(8,803,390)
------------ ------------
Basic and diluted historical loss per share $ (0.01) $ (0.05)
------------ ------------
Pro forma basic and diluted loss per share $ (0.01) $ (0.05)
------------ ------------
RESEARCH AND DEVELOPMENT
Expenses related to the company's internal research and development efforts, are
expensed in the year incurred. Research and development expense were $701,000
and $633,000 for the years ended December 31, 2005 and 2004 respectively.
F-12
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS:
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"), which replaces APB Opinion No. 120, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 changes the requirements for accounting and reporting
a change in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an accounting
pronouncement. In the unusual instance it does not include specific transition
provisions. Specifically, SFAS No. 154 requires retrospective application to
prior periods' financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the effects of the change, the new accounting
principle must be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and a corresponding adjustment must be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of the
change, the new principle must be applied as if it were adopted prospectively
from the earliest date practicable. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. SFAS No. 154 does not change the transition provisions of any existing
pronouncements. The Company has evaluated the impact of SFAS No. 154 and does
not expect the adoption of this statement to have a significant impact on its
statement of income or financial condition. The Company will apply SFAS No. 154
in future periods, when applicable.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share-Based Payment". SFAS No. 123(R) replaces SFAS No. 123 "Accounting
for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". SFAS No. 123(R) requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award. SFAS No. 123(R) is effective for fiscal year beginning after June 15,
2005. The Company plans to adopt SFAS No. 123(R) on January 1, 2006. SFAS 123(R)
eliminates the alternative to use the intrinsic value method of accounting that
was provided in SFAS 123 as originally issued. In accordance with SFAS No. 148,
the Company has been disclosing the impact on net income and earnings per share
had the fair value based method been adopted.
(2) PROPERTY AND EQUIPMENT:
A summary is as follows: 2005 2004
------------- -------------
Computer equipment $ 687,365 $ 974,837
Website development 38,524 38,524
Equipment 1,562 197,049
Furniture and fixtures 46,431 122,020
Leasehold improvements -- 15,222
Telephone equipment 4,293 99,910
------------- -------------
778,175 1,447,562
Less accumulated depreciation
and amortization (693,472) (1,269,613)
------------- -------------
$ 84,703 $ 177,949
============= =============
Depreciation expense totaled $89,682 and $99,448 for the years ended December
31, 2005 and 2004, respectively.
F-13
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) ACCRUED LIABILITIES
Accrued expenses at December 31 consist of the following:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Accrued paid time off $ 74,961 $ 54,172
Accrued interest 72,109 18,715
Other 235 --
------------ ------------
Accrued expenses $ 147,305 $ 72,887
============ ============
(4) NOTES PAYABLE:
On August 8, 2003 the Company entered into a note payable in the amount of
$100,000, with principal and interest at 8.0% per annum, due on August 8, 2008.
At December 31, 2005 and 2004 the balance on the note payable was $100,000.
(5) LICENSE AGREEMENT LIABILITY
In March 2000 the Company entered into a Software License Agreement ("License
Agreement")with Philips Speech Processing, a division of Philips Electronics
North America ("Philips"). Pursuant to the License Agreement, the Company
received a world-wide, limited, nonexclusive license to certain speech
recognition software owned by Philips. The initial term of the License Agreement
was three (3) years, and the License Agreement included an extended term
provision under which the License Agreement was automatically renewable for
successive one (1) year periods, unless terminated by either party upon a
minimum of sixty (60) days written notice prior to the expiration of the initial
term or any extended term.
The License Agreement provides for the Company to pay a specified commission on
revenues from products incorporating licensed software, and includes minimum
royalty payment obligations over the initial three (3) year term of the License
Agreement in the aggregate amount of $1,100,000.
Under an amendment to the License Agreement entered into in March 2002, the
initial term of the License Agreement was extended for two (2) years, and the
aggregate minimum royalty payment was increased to $1,500,000. The amendment
also included a revised payment schedule of the minimum royalty payment
obligation that provided for semi-annual payments of $250,000 (due on June 30th
and December 31st of each year). In lieu of scheduled payments, in May, 2003,
based on a verbal agreement with Philips, the Company began making monthly
payments of $15,000, of which $10,000 is being applied against the remaining
minimum royalty payment due and $5,000 is being applied as interest.
As of December 31, 2005 and 2004, the outstanding minimum royalty obligations
pursuant to the License Agreement were $930,000 and $1,050,000, respectively.
F-14
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) SETTLEMENT AGREEMENT LIABILITY
On January 6, 2006, La Jolla Cove Investors, Inc. ("La Jolla") and the Company
entered into a Settlement Agreement and Mutual Release (the "Settlement
Agreement") in which La Jolla and we agreed to forever settle, resolve and
dispose of all claims, demands and causes of action asserted, existing or
claimed to exist between the parties because of or in any way related to the
Action. Under the Settlement Agreement, La Jolla and the Company agreed that the
parties shall bear their own costs and attorney's fees associated with the
Action and that the outstanding principle balance of convertible notes payable
and accrued interest owed to La Jolla in the aggregate amount $159,613, would be
extinguished. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the execution of
the Settlement Agreement;
o $300,000 within 90 days of the date of the Settlement Agreement; and
o $400,000 within 150 days of the date of the Settlement Agreement.
Interest shall accrue on the $700,000 unpaid balance at 8% per annum commencing
on the date of the Settlement Agreement until paid in full. If any payment is
not made within 30 days of its due date, La Jolla may enter a judgment against
us for the then unpaid balance, plus accrued interest and $100,000, upon the
filing of a declaration of default by La Jolla.
As the finalization of the Settlement Agreement provided additional evidence
with respect to conditions that existed at the balance sheet date, the effects
of the Settlement agreement, as discussed below, have been reflected in the
December 31, 2005 financial statements.
Balance Sheet- As of December 31, 2005, a total of $900,000 has been accrued as
a Settlement Agreement liability, and included as a current liability, based on
the cash obligation and the estimated fair value of the stock to be issued. In
addition, convertible notes and accrued interest payable have been reduced by a
total of $159,613.
Statement of Operations- A Settlement Expense totaling $760,387, which
represents the net amount of the $920,000 payout obligation and the $159,613
reduction of notes payable and accrued interest payable, has been recorded as a
component of Other Income (Expense) for the year ended December 31, 2005.
(7) WARRANT DERIVATIVE LIABILITY
During the years ended December 31, 2005 and 2004 the Company issued warrants in
connection with convertible debt agreements and private placements that required
analysis in accordance with EITF 00-19. EITF 00-19 specifies the conditions
which must be met in order to classify warrants issued in a company's own stock
as either equity or as a derivative liability. Evaluation of these conditions
under EITF 00-19 resulted in the determination that these warrants are
classified as a derivative liability. In accordance with EITF 00-19, warrants
which are determined to be classified as derivative liabilities are
marked-to-market each reporting period, with a corresponding non-cash gain or
loss charged to the current period. The Company valued all warrant derivative
liabilities as of December 31, 2005 using a Black-Scholes option pricing model
using the following assumptions: expected dividend yield of 0.0%, expected stock
price volatility of 100%, risk free interest rate of 4.35% and a remaining
contractual life ranging from 0.30 years to 4.00 years. The Company valued all
warrant derivative liabilities as of December 31, 2004 using a Black-Scholes
option pricing model using the following assumptions: expected dividend yield of
0.0%, expected stock price volatility of 215%, risk free interest rate of 5.50%
and a remaining contractual life ranging from 1.30 years to 5.00 years. The
valuation conducted as of December 31, 2005 resulted in a non-cash gain of
$5,070,000 with a corresponding decrease in the warrant derivative liability.
The valuation conducted as of December 31, 2004 resulted in a non-cash loss of
$3,369,000 with a corresponding increase in the warrant derivative liability. As
of December 31, 2005 and 2004, the fair value of the warrant derivative
liability was $2,032,000 and $4,941,000, respectively.
F-15
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE NOTES PAYABLE:
On August 18, 2004, the Company entered into a securities purchase agreement
with four accredited investors, Alpha Capital Aktiengesellschaft, Greenwich
Growth Fund Limited, Whalehaven Capital, LP and Whalehaven Fund Limited for the
issuance of 7% convertible debentures in the aggregate amount of $700,000. The
notes bear interest at 7% (effective interest rate of 146% on the aggregate
amount), mature on August 18, 2007, and are convertible into the Company's
common stock, at the holders' option, at the lower of (i) $0.085 or (ii) 80% of
the average of the three lowest closing bid prices for the common stock on a
principal market for the 30 trading days before but not including the conversion
date. The note may not be paid, in whole or in part, before August 18, 2007
without the consent of the holder. The full principal amount of the convertible
notes is due upon default under the terms of convertible notes. In addition, the
Company issued an aggregate of 7,063,774 warrants to the investors (3,531,887
Class A warrants and 3,531,887 Class B warrants).The Class A warrants are
exercisable until August 18, 2009 at a purchase price of $.0935 per share. The
Class B warrants are exercisable until August 18, 2009 at a purchase price of
$.10625 per share. Net proceeds amounted to approximately $621,000, net of debt
issue cash cost of $79,000. The fair value of the warrants of $323,000 using
Black Scholes option pricing model and the beneficial conversion feature of
approximately $298,000 have been recorded as debt discount and is being
amortized over the life of the debt using the interest method. Upon conversion
of the debt, any unamortized debt discount costs will be charged to expense.
On October 28, 2004, the Company entered into a securities purchase agreement
with four accredited investors, Alpha Capital Aktiengesellschaft, Stonestreet
Limited Partnership, Ellis International Ltd. and Momona Capital Corp. for the
issuance of 7% convertible debentures in the aggregate amount of $596,000. The
notes bear interest at 7% (effective interest rate of 100% on the aggregate
amount), mature on October 28, 2007 and are convertible into the Company's
common stock, at the holders' option, at the lower of (i) $0.074 or (ii) 80% of
the average of the three lowest closing bid prices for the common stock on a
principal market for the 30 trading days before but not including the conversion
date. The note may not be paid, in whole or in part, before October 28, 2007
without the consent of the holder. The full principal amount of the convertible
note is due upon default under the terms of convertible notes. In addition, the
Company issued an aggregate of 11,825,398 Class A warrants and 11,825,398 Class
B warrants to the investors. The warrants are exercisable until October 28, 2009
at a purchase price of $0.07 per share. Net proceeds amounted to approximately
$532,000, net of debt issue cash cost of $64,000. The relative value (limited to
the face amount of the debt) of all the warrants of $276,000 using Black Scholes
option pricing model and the beneficial conversion feature of approximately
$319,000 have been recorded as debt discount and is being amortized over the
life of the debt using the interest method. Upon conversion of the debt, any
unamortized debt discount will be charged to expense.
On December 23, 2004, the Company entered into a securities purchase agreement
with Alpha Capital Aktiengesellschaft, Stonestreet Limited Partnership, Ellis
International Ltd. and Momona Capital Corp. for the issuance of 7% convertible
debentures in the aggregate amount of $894,000. The notes bear interest at 7%
(effective interest rate of 100% on the aggregate amount), mature on December
23, 2007 and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.074 or (ii) 80% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before December 23, 2007 without the consent of the
holder. The full principal amount of the convertible note is due upon default
under the terms of convertible notes. In addition, the Company issued an
aggregate of 22,183,622 Class A warrants and 22,183,622 Class B warrants to the
investors. The warrants are exercisable until December 23, 2009 at a purchase
price of $0.07 per share. Net proceeds amounted to approximately $835,000, net
of debt issue cash cost of $59,000. The relative value (limited to the face
amount of the debt) of all the warrants of $682,000 using Black Scholes option
pricing model and the beneficial conversion feature of approximately $210,000
have been recorded as debt discount and is being amortized over the life of the
debt using the interest method. Upon conversion of the debt mentioned above, any
unamortized debt discount will be charged to expense.
F-16
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE NOTES PAYABLE:
On March 18, 2005, the Company held its first closing pursuant to a Subscription
Agreement it entered into with several accredited investors dated as of March
18, 2005, pursuant to which the investors subscribed to purchase an aggregate
principal amount of $2,000,000 in 6% convertible promissory notes, and 100 Class
A and Class B common stock purchase warrants for each 100 shares which would be
issued on each closing date assuming full conversion of the convertible notes
issued on each such closing date. Net proceeds amounted to $920,000, net of debt
issue cash cost of $80,000.
The convertible notes bear simple interest at 6% per annum payable upon each
conversion, June 1, 2005 and semi-annually thereafter and mature 3 years after
the date of issuance. Each investor shall have the right to convert the
convertible notes after the date of issuance and at any time, until paid in
full, at the election of the investor into fully paid and nonassessable shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.047 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. In addition, the company issued an
aggregate of 29,069,768 Class A common stock purchase warrants and 29,069,768
Class B common stock purchase warrants to the investors, representing 100 Class
A and Class B warrants issued for each 100 shares which would be issued on the
each closing date assuming full conversion of the convertible notes issued on
each such closing date. The Class A warrants are exercisable until four years
from the initial closing date at an exercise price of $0.045 per share. The
Class B warrants are exercisable until four years from the initial closing date
at an exercise price of $0.06 per share. The holder of the Class B warrants will
be entitled to purchase one share of common stock upon exercise of the Class B
warrants for each share of common stock previously purchased upon exercise of
the Class A warrants.
On July 13, 2005, we held our second closing pursuant to the Subscription
Agreement we entered into with several accredited investors dated as of March
18, 2005.
On the second closing date, the Company received approximately $935,000, net of
debt issue cash cost of approximately $65,000. The convertible notes bear simple
interest at 6% per annum payable upon each conversion, June 1, 2005 and
semi-annually thereafter and mature 3 years after the date of issuance. Each
investor shall have the right to convert the convertible notes after the date of
issuance and at any time, until paid in full, at the election of the investor
into fully paid and nonassessable shares of our common stock. The conversion
price per share shall be the lower of (i) $0.043 or (ii) 80% of the average of
the three lowest closing bid prices for our common stock for the 30 trading days
prior to, but not including, the conversion date as reported by Bloomberg, L.P.
on any principal market or exchange where our common stock is listed or traded.
In addition, the Company issued an aggregate of 38,461,537 Class A common stock
purchase warrants and 38,461,537 Class B common stock purchase warrants to their
investors. The Class A warrants are exercisable until four years from the
initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The fair value of the warrants of
approximately $675,000 using Black Scholes option pricing model and the
beneficial conversion feature of approximately $325,000 have been recorded as
debt discount and is being amortized over the life of the debt using the
interest method. Upon conversion of the debt, any unamortized discount will be
charged to expense.
F-17
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of convertible debt at December 31, 2005 is as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------- ----------- --------
LONG-TERM PORTION
Stonestreet Limited
Partnership December 23, 2007 $ 10,000 $ (6,873) $ 3,127
----------- ----------- --------
Alpha Capital
Aktiengesellschaft March 18, 2008 $ 175,000 $ (134,073) $ 40,927
----------- ----------- --------
Whalehaven Capital
Fund Limited March 18, 2008 $ 160,000 $ (122,581) $ 37,419
----------- ----------- --------
Alpha Capital
Aktiengesellschaft July 13, 2008 $ 400,000 $ (337,995) $ 62,005
----------- ----------- --------
Ellis International
Limited July 13, 2008 $ 65,572 $ (55,407) $ 10,165
----------- ----------- --------
Whalehaven Capital
Fund Limited July 13, 2008 $ 400,000 $ (337,993) $ 62,007
----------- ----------- --------
Omega Capital Small
Cap Fund July 13, 2008 $ 25,000 $ (21,125) $ 3,875
----------- ----------- --------
Osher Capital,
Inc July 13, 2008 $ 15,000 $ (12,675) $ 2,325
----------- ----------- --------
TOTAL LONG TERM PORTION $ 1,250,572 $(1,028,722) $221,850
=========== =========== ========
A summary of convertible debt at december 31, 2004 is as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------- ----------- --------
CURRENT PORTION
La Jolla Cove
Investors, Inc. December 12, 2005 $ 157,728 $ (65,684) $ 92,044
LONG-TERM PORTION
Whalehaven Fund
Limited August 18, 2007 $ 40,000 $ (30,538) $ 9,462
----------- ----------- --------
Alpha Capital
Aktiengesellschaft October 28, 2007 $ 200,000 $ (186,764) $ 13,236
----------- ----------- --------
Momona Capital
Corp October 28, 2007 $ 21,000 $ (20,104) $ 896
----------- ----------- --------
Stonestreet Limited
Partnership October 28, 2007 $ 40,000 $ (38,295) $ 1,705
----------- ----------- --------
Ellis International
Limited October 28, 2007 $ 4,841 $ (4,634) $ 207
----------- ----------- --------
Alpha Capital
Aktiengesellschaft December 23, 2007 $ 300,000 $ (297,487) $ 2,513
----------- ----------- --------
Momona Capital
Corp December 23, 2007 $ 54,000 $ (53,548) $ 452
----------- ----------- --------
Stonestreet Limited
Partnership December 23, 2007 $ 420,000 $ (416,483) $ 3,517
----------- ----------- --------
Ellis International
Limited December 23, 2007 $ 79,700 $ (79,032) $ 668
----------- ----------- --------
TOTAL LONG TERM PORTION $ 1,159,541 $(1,126,885) $ 32,656
=========== =========== ========
F-18
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMON STOCK:
During the twelve months ended December 31, 2005, Alpha Capital
Akteingesellschaft converted approximately $741,000 of notes payable into
approximately 25,946,000 shares of the Company's common stock at an average
conversion price of $0.029. During the same period, Alpha Capital
Akteingesellschaft exercised warrants to purchase 2,000,000 shares of common
stock for cash in the amount of $48,000.
During the twelve months ended December 31, 2005, Omega Capital Small Cap Fund
converted $65,000 of notes payable into approximately 3,489,000 shares of the
Company's common stock at an average conversion price of $0.019.
During the twelve months ended December 31, 2005, Ellis International Ltd.
converted approximately $269,000 of notes payable into approximately 11,523,000
shares of the Company's common stock at an average conversion price of $0.023.
During the same period, Ellis International exercised warrants to purchase
approximately 1,500,000 shares of common stock for cash in the amount of
$37,000.
During the twelve months ended December 31, 2005, Stonestreet Limited
Partnership converted approximately $456,000 of notes payable into approximately
13,823,000 shares of the Company's common stock at an average conversion price
of $0.033.
During the twelve months ended December 31, 2005, Whalehaven Fund, Limited
converted $41,000 of notes payable into approximately 1,026,000 shares of the
Company's common stock at an average conversion price of $0.040.
During the twelve months ended December 31, 2005, Whalehaven Capital Fund, Ltd.
converted $245,000 of notes payable into approximately 9,110,000 shares of the
Company's common stock at an average conversion price of $0.027. During the same
period, Whalehaven Capital Fund, Ltd. exercised warrants to purchase
approximately 27,000,000 shares of common stock for cash in the amount of
$540,000.
During the twelve months ended December 31, 2005, Momona Capital Corp. converted
approximately $76,000 of notes payable into approximately 1,938,000 shares of
the Company's common stock at an average conversion price of $0.039. During the
same period, Momona Capital Corp. exercised warrants to purchase 1,000,000
shares of common stock for cash in the amount of $24,000.
During the twelve months ended December 31, 2005, Osher Capital Inc. converted
approximately $45,000 of notes payable into approximately 1,715,000 shares of
the Company's common stock at an average conversion price of $0.026.
During the twelve months ended December 31, 2005, an accredited investor
purchased an aggregate of 17,000,000 shares of restricted common stock for a
total purchase price of $506,400. In addition, the investor received an
aggregate of 17,000,000 Class A and 17,000,000 Class B common stock purchase
warrants with an exercise price of $0.045 and $0.06 per share respectively.
F19
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES:
At December 31, 2005 and December 31, 2004, the Company had net operating loss
carry forwards available to reduce future taxable income, if any, of
approximately $ 35,300,000 and $30,800,000 respectively, for Federal income tax
purposes. It also had net operating loss carry forwards available to reduce
future taxable income, if any, of approximately $ 32,500,000 and $ 28,000,000
for state purposes at December 31, 2005 and 2004 respectively. The Federal and
state net operating loss carry forwards will begin expiring in 2020 and 2007,
respectively. The carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three year period.
The expected income tax provision, computed based on the Company's pre-tax
income (loss) and the statutory Federal income tax rate, is reconciled to the
actual tax provision reflected in the accompanying financial statements as
follows:
2005 2004
------------ ------------
Expected tax provision (benefit) at
statutory rates $ (615,638) $ (2,918,979)
State taxes, net of Federal benefit 528 528
Meals & Entertainment 2,364 2,923
Change in Valuation Allowance 1,702,431 1,236,748
Warrant derivative liability (2,019,636) 1,088,936
Amortization of beneficial conversion feature 966,827 590,644
Other permanent differences (36,076) --
------------ ------------
Totals $ 800 $ 800
============ ============
The provision (benefit) for income taxes in 2005 and 2004 consists of the
following:
2005 2004
------------ ------------
Current:
Federal $ -- $ --
State 800 800
------------ ------------
Totals 800 800
============ ============
Deferred:
Federal -- --
State -- --
------------ ------------
Totals -- --
------------ ------------
Totals $ 800 $ 800
============ ============
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2005 and December 31, 2004 are shown below:
2005 2004
------------ ------------
Deferred tax assets:
Accrued vacation $ 32,113 $ 23,208
Basis Difference in Fixed Assets -- 97,713
Net operating loss 14,865,631 12,961,750
Other 34,362 1,716
------------ ------------
Totals $ 14,932,106 $ 13,084,387
------------ ------------
Deferred tax liabilities:
Deferred State Taxes (981,673) (852,573)
Fixed assets (16,188) --
------------ ------------
Totals (997,861) (852,573)
Deferred tax asset (liability) $ 13,934,245 $ 12,231,814
Valuation Allowance (13,934,245) (12,231,814)
------------ ------------
Net Deferred Tax Asset (Liability) 0 0
============ ============
F-20
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under leases that expire
at various times through 2010. The following is a schedule by years of future
minimum rental payments required under operating leases that have noncancellable
lease terms in excess of one year as of December 31, 2005:
Year ending December 31,
2006 188,685
2007 194,259
2008 199,886
2009 206,081
2010 193,515
----------
$ 982,426
==========
Rent expense, net of sublease income, amounted to $193,503 for the year ended
December 31, 2005.
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN:
On July 14, 1999, the Company adopted an Incentive and Nonqualified Stock Option
Plan (the "Plan") for its employees and consultants under which a maximum of
3,000,000 options (Amendment to increase the available shares from 1,500,000 to
3,000,000 approved by the shareholders in December 2001) and approved by the
shareholders may be granted to purchase common stock of the Company. On July 29,
2005 the Company adopted the 2005 Stock Incentive Plan and reserved 60,000,000
shares of the Company's common stock for issuance under the 2005 Plan.
F-21
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED
Two types of options may be granted under the 2005 Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The Company follows SFAS No. 123 for stock options granted to
non-employees and records a consulting expense equal to the fair value of the
options at the date of grant.
During the year ended December 31, 2005 the Company granted 225,000 stock
options at an average exercise price of $0.032 to employees and consultants of
the Company. Throughout 2005, 25,000 options were terminated.
The number and weighted average exercise prices of options granted under the
plan for the years ended December 31, 2005 and 2004 are as follows:
2005 2004
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 1,721,500 $ 2.70 1,900,500 $ 1.54
Granted during the year 225,000 .04 -- --
Terminated during the year 25,000 .09 179,000 1.12
Exercised during the year -- -- -- --
Outstanding at end of the year 1,921,500 1.47 1,721,500 2.70
Exercisable at end of the year 1,720,806 1.61 1,701,361 2.70
The exercise prices for options outstanding as of December 31, 2005 range from
$0.03 to $12.80. The weighted average remaining contractual life of these
options is approximately 6 years.
F-22
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) WARRANTS:
At December 31, 2004, the Company had warrants outstanding that allow the
holders to purchase up to 215,373,361 shares of common stock.
The number and weighted average exercise prices of the warrants for the years
ended December 31, 2005 and 2004 are as follows:
2005 2004
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 79,429,673 $ 0.10 16,355,921 $ 0.22
Granted during the year 169,062,610 0.05 75,081,815 0.07
Terminated during the year 1,566,400 -- --
Exercised during the year 31,552,522 0.02 12,008,063 0.03
Outstanding at end of the year 215,373,361 0.05 79,429,673 0.10
Exercisable at end of the year 181,373,361 0.05 79,429,673 0.10
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.02 Per share for Series A warrants issued in 2005. As a result, the
Company raised approximately $540,000. In connection with the re-pricing of
warrants to the investors, the Company recorded a charge of approximately
$272,000 to reflect the additional benefit created for these investors.
At December 31, 2005, the weighted average remaining contractual life of the
warrants was approximately 42 months.
(14) SUBSEQUENT EVENTS:
Subsequent to December 31, 2005, note holders converted additional note
principal into common shares as follows:
Average
Amount Converted Exercise
Converted Shares Into Price
----------- ----------- --------
Alpha Capital Akteingesellschaft $ 150,000 11,518,586 $ 0.013
Whalehaven Capital 270,000 20,368,134 $ 0.013
Ellis Enterprise Limited 65,572 5,855,167 $ 0.013
Omega Capital 25,000 2,167,075 $ 0.013
Osher Capital 15,000 1,134,088 $ 0.013
----------- ----------- --------
$ 525,572 41,043,050 $ 0.013
=========== =========== ========
F-23
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. THIS DOCUMENT MAY ONLY BE USED WHERE
IT IS LEGAL TO SELL THE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
UP TO 289,095,229 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Cautionary Note Regarding Forward-Looking Statements 6
Prospectus Summary 7
Risk Factors 11
Use of Proceeds 16 One Voice Technologies, Inc.
Market For Common Equity And Related Stockholder
Matters 16
Management's Discussion And Analysis and Results of
Operations 17
Business 22
Description of Property 25
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships And Related Transactions 29 ________________
Security Ownership Of Certain Beneficial Owners
And Management 29 PROSPECTUS
________________
Description of Securities 30
Indemnification for Securities Act Liabilities 30
Plan of Distribution 31
Selling Stockholders 32
Legal Matters 36
Experts 36
Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure 37
Available Information 37
Index To Financial Statements F-1 May 9, 2006
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.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Following is a summary of unregistered securities issued during the period May
2003 through May 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
II-1
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.
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
II-2
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.
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.
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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 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.
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.
II-4
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.
* All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of One Voice
Technologies, Inc. or executive officers of One Voice Technologies, Inc., and
transfer was restricted by One Voice Technologies, Inc. in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
Exhibit
-------
No. Description
--- -----------
PLANS OF ACQUISITION
2.1 Merger Agreement and Plan of Reorganization with Conversational
Systems, Inc. dated June 22, 1999 (filed herewith).
ARTICLES OF INCORPORATION AND BYLAWS
3.1 Articles of Incorporation of Belridge Holdings Corp. filed with
the Nevada Secretary of State on August 23, 1995 (incorporated by
reference to Exhibit 3(i) to our Form 10-SB filed October 7,
1999).
3.2 Certificate of Amendment of Articles of Incorporation of Belridge
Holdings Corp. changing its name to Dead On, Inc. (incorporated by
reference to Exhibit 3(i) to our Form 10-SB filed October 7,
1999). The Certificate originally filed on September 25, 1998, was
canceled and re-filed with the Nevada Secretary of State on June
10, 1999.
3.3 Articles of Merger for the merger of Conversational Systems, Inc.
into Dead On, Inc. filed with the Nevada Secretary of State on
July 14, 1999 with supporting documents (incorporated by reference
to Exhibit 2 to our Form 10-SB, filed October 7, 1999). This
document changed the name of the surviving entity, Dead On, Inc.,
to ConversIt.com, Inc.
3.4 Certificate of Amendment of Articles of Incorporation of
ConversIt.com, Inc. changing its name to One Voice Technologies,
Inc. (incorporated by reference to Exhibit 2 to our Form 10-SB
filed October 7, 1999).
3.5 Bylaws of Belridge Holdings Corp. (incorporated by reference to
Exhibit 3(ii) of our Form 10-SB, filed October 7, 1999).
3.6 Amendment to Bylaws dated July 11, 2000 (excerpted) (incorporated
by reference to Exhibit 4.3 of our Form S-8, filed October 3,
2000).
3.7 Certificate of Amendment of Articles of Incorporation increasing
One Voice's common stock to 250,000,000.
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
4.1 Common Stock Purchase Warrant with Veritas SG Investments from the
January 2000 offering (incorporated by reference to Exhibit 4.1 of
our Form SB-2, filed November 11, 2000).
4.2 Form of Common Stock Purchase Warrant from the March 2000 offering
(incorporated by reference to Exhibit 4.1 of our Form SB-2, filed
November 11, 2000).
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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).
MATERIAL CONTRACTS
10.1 Employment Agreement with Dean Weber dated July 14, 1999
(incorporated by reference to Exhibit 10 to our Form 10-SB, filed
October 7, 1999). This agreement was amended on April 10, 2000, to
increase Mr. Weber's annual salary to $252,000.
10.2 Consulting Agreement with KJN Management Ltd. For the services of
James Hadzicki dated July 14, 1999 (incorporated by reference to
Exhibit 10 to our Form 10-SB, filed October 7, 1999). This
agreement was amended on April 10, 2000, to increase the annual
consulting fee to $180,000.
10.3 Software Agreement with IBM/OEM dated September 21, 1999
(incorporated by reference to Exhibit 4.4 to our Form SB-2 filed
November 20, 2000).
10.4 Software License Agreement with Philips Spech Processing dated
March 3, 2000 (incorporated by reference to Exhibit 4.4 to our
Form SB-2 filed November 20, 2000).
10.5 Amended and Restated 1999 Stock Option Plan (incorporated by
reference to Exhibit 4.4 to our Form S-8, Amendment No. 1, filed
October 4, 2000).
10.6 Subscription Agreement dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002).
10.7 Alpha Capital Note dated August 8, 2002 (incorporated by reference
to our registration statement on Form SB-2 filed September 12,
2002)
10.8 Alpha Capital Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.9 Stonestreet Note dated August 8, 2002 (incorporated by reference
to our registration statement on Form SB-2 filed September 12,
2002)
10.10 Stonestreet Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.11 Subscription Agreement dated November 14, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.12 Alpha Capital Note dated August 8, 2002 (incorporated by reference
to our registration statement on Form SB-2 filed September 12,
2002)
10.13 Alpha Capital Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.14 Ellis Note dated August 8, 2002 (incorporated by reference to our
registration statement on Form SB-2 filed September 12, 2002)
10.15 Ellis Warrant dated August 8, 2002 (incorporated by reference to
our registration statement on Form SB-2 filed September 12, 2002)
10.16 Bristol Note dated August 8, 2002 (incorporated by reference to
our registration statement on Form SB-2 filed September 12, 2002)
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)
II-6
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)
II-7
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. (filed herewith)
10.48 Form of Convertible Note of One Voice Technologies, Inc. issued to
the investors named on the signature pages thereto. (filed
herewith)
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of a prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned small business issuer relating to the offering required to be filed
pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
II-8
(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-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of La Jolla, State of California, on May 9, 2006.
ONE VOICE TECHNOLOGIES, INC.
BY: /S/ DEAN WEBER
--------------------------------------------
DEAN WEBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
BY: /S/ JAMES HADZICKI
------------------------------------------------
JAMES HADZICKI
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
/S/ DEAN WEBER PRESIDENT, CHIEF EXECUTIVE MAY 9, 2006
------------------------- OFFICER (PRINCIPAL EXECUTIVE
DEAN WEBER OFFICER) AND CHAIRMAN OF THE
BOARD
/S/ JAMES HADZICKI CHIEF FINANCIAL OFFICER MAY 9, 2006
------------------------- (PRINCIPAL ACCOUNTING AND
JAMES HADZICKI FINANCIAL OFFICER)
/S/ Rahoul Sharan DIRECTOR MAY 9, 2006
-------------------------
Rahoul Sharan
/S/ BRADLEY J. AMMON DIRECTOR MAY 9, 2006
-------------------------
BRADLEY J. AMMON
II-10