AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2007
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Amendment No. 3)
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2005
COMMISSION FILE NUMBER 0-27589
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ONE VOICE TECHNOLOGIES, INC.
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(Name of Small Business Issuer in its Charter)
NEVADA 95-4714338
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4275 Executive Square, Ste 200, La Jolla CA 92037
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(Address of principal Executive Offices) (Zip Code)
(858) 552-4466 (858) 552-4474
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(Issuer's Telephone Number) (Issuer's Facsimile Number)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK-$.001 PAR VALUE
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(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
had been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10 KSB or any
amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for the year ended December 31, 2005 were $142,285.
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 24, 2006, based on the average of the
closing bid and asked prices of one share of the Common Stock of the Company was
$15,400,000.
As of March 24, 2006 the issuer had 468,507,020 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
EXPLANATORY NOTE
One Voice Technologies, Inc. is filing this amended Annual Report on Form
10-KSB/A to amend the Annual Report on Form 10-KSB initially filed with the
Securities and Exchange Commission on April 17, 2006 to (i) incorporate restated
financial statements for the years ended December 31, 2005 and 2004 based on
adjustments to previously filed financial statements related to the accounting
treatment of embedded conversion features included in convertible debt
instruments, as described in Note 15 to the financial statements, and (ii) to
update the Controls and Procedures section with disclosure as to why certain
material weaknesses identified by our former auditor did not have effect on our
financial results or any restatements that occurred.
TABLE OF CONTENTS
Page
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PART I
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Item 1. Description of Business..........................................1
Item 2. Description of Property.........................................11
Item 3. Legal Proceedings...............................................11
Item 4. Submission of Matters to a Vote of Security Holders.............12
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters........12
Item 6. Management's Discussion and Analysis or Plan of Operation.......15
Item 7. Financial Statements............................................22
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................23
Item 8A. Controls and Procedures.........................................23
Item 8B. Other Information...............................................26
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act............27
Item 10. Executive Compensation..........................................34
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..............................36
Item 12. Certain Relationship and Related Transactions...................37
Item 13. Exhibits........................................................37
Item 14. Principal Accountant Fees and Services..........................41
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
One Voice Technologies, Inc. is a voice recognition technology company with over
$43 million invested in Research and Development and deployment of 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,
One Voice offers voice solutions for the Telecom and Interactive Multimedia
markets. Our telecom solutions allow business and consumer phone users to Voice
Dial, Group Conference Call, Read and Send E-Mail and Instant 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.
Located in San Diego, California, the Company has 12 full-time employees and 5
consultant/part-time employees. The company is traded on the NASD OTC Electronic
Bulletin Board ("OTCBB") under the symbol ONEV.OB. One Voice is incorporated in
the State of Nevada and commenced operations on July 14, 1999.
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. One Voice's development efforts
currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone and in-home digital
media access.
In the Telecom sector, we believe that the Mobile Messaging market, which has
both business and consumer market applications including: E-mail, Instant
Messages, and SMS (Short Message Service), is extremely large and is growing at
a rapid rate. Over six trillion text messages are sent globally every year, and
messaging has shown the consistent ability to generate significant revenue for
wireless carriers. One Voice 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. One Voice's 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:
- Send free-format voice-to-text messages
- Make voice-activated dialing calls
- Access their E-mail from mobile environments - using voice.
-1-
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 One Voice's MobileVoice
solution. MobileConference allows users to connect up to 64 people on a single
conference call by speaking their name, group name or phone number.
MOBILEVOICE EMAIL(TM)
A unique Voice-to-Text Email solution that let's subscribers send
free-form email messages to PCs, mobile phones or wireless alphanumeric paging
devices while on the road. Available for English and Spanish it delivers some of
the highest levels of accuracy in the industry.
MOBILEVOICE SMS(TM)
Short Message Service (SMS) has gained wide popularity in major markets
throughout the world. MobileVoice SMS is a mobile Voice-to-Text SMS solution
that let's subscribers send free-form messages from phone-to-phone with only
their voice. Subscribers can avoid triple-tapping their text messages by
dictating the message through the MobileVoice SMS interface. Subscribers can
send messages within network or to subscribers on other networks.
MOBILEVOICE INSTANT MESSAGING(TM)
Instant Messaging has long been a popular way for friends and colleagues to
communicate on their computers. MobileVoice Instant Messaging takes Instant
Messaging mobile, allowing people to chat and send quick messages using free
form dictation. Targeted at subscribers and enterprise customers, MobileVoice
Instant Messaging allows for voice based instant communications in mobile
environments.
MOBILEVOICE VOICE MAIL(TM)
MobileVoice Voice Mail lets subscribers record and send messages in their own
voice. The voice recording of a message will be sent as an Email 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:
- Voice Navigate Windows XP Media Center Edition 2005
- Send E-Mail
- Read E-Mail
- SMS Text Messaging
- Text Instant Messaging
- PC-to-PC calls
- Video conferencing
- PC-to-Phone calling
-2-
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 the One Voice network. Users can text message, talk or video
chat using Communicator's high quality, full-duplex PC-to-PC audio and video.
COMMUNICATOR SMS TEXT MESSAGING
Media Center Communicator(TM) allows the user to send a quick message to someone
on the road. Users can send SMS text messages to cellular telephones by speaking
the name of a contact or entering the cellular phone number, entering or
speaking the message and saying the "Send" command.
PATENT PROTECTION
We own exclusive rights to three United States patents on our software. We have
filed for international patent protection as well. These patents define the
primary features and unique procedures that comprise our products and solutions.
Our future success and ability to compete depends in part upon the proprietary
technology and trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
Additionally, there can be no assurances that others will not develop market and
sell products substantially equivalent to our products or utilize technologies
similar to those used by us. Although we believe that our products do not
infringe on any third-party patents and our patents offer sufficient protection,
there can be no assurance that we will not become involved in litigation
involving patents or proprietary rights. Patent and proprietary rights
litigation entails substantial legal and other costs, and there can be no
assurance that we will have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to our rights to our intellectual property may
require our management to redirect its resources to address these claims, which
could have a material adverse effect on our business, financial condition and
results of operations.
-3-
EMPLOYEES
At April 10, 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.
RISK FACTORS
This section summarizes certain risks regarding our business and industry. The
following information should be considered in conjunction with the other
information included and incorporated by reference in this report on Form 10-KSB
before purchasing shares of our stock.
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 $1,060,000 and $9,013,000, 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:
-- establish and maintain broad market acceptance of our products and
services and convert that acceptance into direct and indirect sources of
revenues;
-- maintain and enhance our brand name;
-- continue to timely and successfully develop new products, product
features and services and increase the functionality and features of existing
products;
-- successfully respond to competition, including emerging technologies and
solutions; and
-- 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.
-4-
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
As a result of our limited operating history and the rapidly changing nature of
the markets in which we compete, our quarterly and annual revenues and operating
results are likely to fluctuate from period to period. These fluctuations may be
caused by a number of factors, many of which are beyond our control. These
factors include the following, as well as others discussed elsewhere in this
section:
o how and when we introduce new products and services and enhance our
existing products and services;
o our ability to attract and retain new customers and satisfy our
customers' demands;
o the timing and success of our brand-building and marketing campaigns;
o our ability to establish and maintain strategic relationships;
o our ability to attract, train and retain key personnel;
o the demand for voice recognition applications;
o the emergence and success of new and existing competition;
o varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure, domestically
and internationally, including the hiring of new employees;
o technical difficulties with our products, system downtime, system
failures or interruptions in Internet access;
o changes in the mix of products and services that we sell to our
customers;
o costs and effects related to the acquisition of businesses or
technology and related integration; and
o costs of litigation and intellectual property protection.
In addition, because the market for our products and services is relatively new
and rapidly changing, it is difficult to predict future financial results.
For these reasons, you should not rely on period-to-period comparisons of our
financial results, if any, as indications of future results. Our future
operating results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of our
stock price.
We are in the starting stages of our business plan and are therefore more
vulnerable to unexpected or uncontrollable business and economic forces. Unknown
software errors may not be corrected in time to develop a sustainable customer
base. Unfavorable product reviews or news reports could squelch early sales
efforts. A competitor may quickly release a better version of a similar product
before we can complete our development efforts. Economic conditions such as a
national or world recession, international trade restrictions on computer
product sales, or a slowdown in new technology growth could reduce our revenues
below financially-healthy levels. The risks of a development-stage company
include the possible loss of all investment funds by investors.
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.
-5-
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products comparable or
superior to those we offer, adapt more quickly than we do to new technologies,
evolving industry trends and standards or customer requirements, or devote
greater resources to the development, promotion and sale of their products than
we do. Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
ABILITY TO COMPETE.
Our future success and ability to compete depends in part upon our proprietary
technology and our trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
We have recently been issued three patents covering the United States,
Australia, China and parts of Europe. Any patents that are issued to us could be
invalidated, circumvented or challenged. If challenged, our patents might not be
upheld or their claims could be narrowed. Our intellectual property may not be
adequate to provide us with competitive advantage or to prevent competitors from
entering the markets for our products. Additionally, our competitors could
independently develop non-infringing technologies that are competitive with,
equivalent to, and/or superior to our technology. Monitoring infringement and/or
misappropriation of intellectual property can be difficult, and there is no
guarantee that we would detect any infringement or misappropriation of our
proprietary rights. Even if we do detect infringement or misappropriation of our
proprietary rights, litigation to enforce these rights could cause us to divert
financial and other resources away from our business operations. Further, we
license our products internationally, and the laws of some foreign countries do
not protect our proprietary rights to the same extent as do the laws of the
United States.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of intellectual property rights. Although we attempt to avoid
infringing upon known proprietary rights of third parties, we may be subject to
legal proceedings and claims for alleged infringement by us or our licensees of
third-party proprietary rights, such as patents, trade secrets, trademarks or
copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third-party proprietary rights, even if not
successful or meritorious, could result in costly litigation, divert resources
and management's attention or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these
claims may be able to obtain injunctions, which could prevent us from selling
our products. Furthermore, former employers of our employees may assert that
these employees have improperly disclosed confidential or proprietary
information to us. Any of these results could harm our business. We may be
increasingly subject to infringement claims as the number of, and number of
features of, our products grow.
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.
-6-
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:
-- the ability of our products and technologies to meet and adapt to the needs
of our target markets;
-- the performance and price of our products as compared to our competitors'
products;
-- our ability to deliver customer service directly and through our resellers;
and
-- the ability of our customers to utilize our product.
OUR DISCLOSURE CONTROLS AND PROCEDURES AND OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING ARE INEFFECTIVE. IF WE ARE UNABLE TO IMPLEMENT THE REMEDIAL ACTIONS WE
HAVE PROPOSED AND GENERALLY MAINTAIN THE EFFECTIVENESS OF OUR DISCLOSURE
CONTROLS AND PROCEDURES AND INTERNAL CONTROLS, WE WILL NOT BE ABLE TO PROVIDE
RELIABLE FINANCIAL STATEMENTS WHICH WOULD MAKE ANY INVESTMENT IN OUR COMPANY
SPECULATIVE AND RISKY.
Management received a letter dated March 31, 2006 (the "Letter") from Peterson &
Co., LLP, its independent auditors, addressed to the Chief Executive Officer and
Chairman of the Board of Directors in connection with the audit of our financial
statements as of December 31, 2005, in which the independent auditors identified
certain matters involving internal controls and procedures that they consider to
be significant deficiencies or material weaknesses under the standards of the
Public Company Accounting Oversight Board. These material weaknesses were: (1)
lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (2) lack of a functioning audit committee and lack of
a majority of outside directors on the Company's board of directors, resulting
in ineffective oversight in the establishment and monitoring of required
internal controls and procedures; (3) inadequate segregation of duties
consistent with control objectives; (4) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements; (5)
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters; (6)
ineffective controls over period end financial close and reporting processes;
and (7) inadequate procedures for appropriately identifying, assessing and
applying accounting principles. The aforementioned material weaknesses were
identified by our independent auditors in connection with the audit of our
financial statements as of December 31, 2005 and communicated to our management
through the Letter.
-7-
Management believes that the material weaknesses set forth in items (3), (4) and
(6) above did not have an affect on our financial results or any restatements
which have occurred. Inadequate segregation of duties consistent with control
objectives (item (3)) was due to the fact that the Company did not have a
sufficient number of personnel within the accounting department. Management
believes that this did not have an effect on the most recent and updated
financial statements filed by the company as the adjustments made to the
financial statements were related to the application of technical accounting
guidance and resulted primarily from the lack of accounting department staff
with sufficient technical accounting expertise and experience. We believe that
even if there had been sufficient staff to remedy the segregation of duties
problem, unless one of more of the additional staff members had sufficient
technical accounting expertise, this would not have prevented the adjustments
and restatement. Management believes that the weakness due to insufficient
written policies and procedures (item (4)) did not have an effect on the most
recent and updated financial statements filed by the company as the adjustments
were related to the application of technical accounting guidance and resulted
primarily from the lack of accounting department staff with sufficient technical
accounting expertise and experience. We believe that even if there had been
sufficient written policies and procedures in place, the problem related to the
lack of accounting staff members with sufficient technical accounting expertise
would not have been resolved and this would not have prevented the adjustments
and restatement. Further, we do not feel that improper controls and procedures
over the period end process (item (6)) caused any material effects or
misstatements to the financials filed, as these inefficiencies were more
associated with timely closing, review and filing of financial statements. These
issues were due primarily to the fact that the Company had an insufficient
number of personnel within the accounting department and that it did not have
written policies and procedures to ensure the at the financial statement closing
and reporting processes were timely and effective. We believe that even if
stronger controls had been in place related to the period end financial close
and reporting processes, the problem related to the lack of accounting staff
members with sufficient technical accounting expertise would not have been
resolved and this would not have prevented the adjustments and restatement.
However, management believes that the lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of our company (Item (1)),
lack of a functioning audit committee and lack of a majority of outside
directors on our board of directors, resulting in ineffective oversight in the
establishment and monitoring of required internal controls and procedures (Item
(2)), ineffective personnel resources and technical accounting expertise within
the accounting function to resolve non-routine or complex accounting matters
(Item (5)), and inadequate procedures for appropriately identifying, assessing
and applying accounting principles (Item (7)) resulted in our determination to
restate our financial statements for the years ended December 31, 2004 and 2003.
Specifically, the material weaknesses specified in the preceding sentence
resulted in management determining that our previous accounting for our common
stock purchase warrants issued from 2003 to 2004 did not comply with Emerging
Issues Task Force 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED
TO, AND POTENTIALLY SETTLED IN A COMPANY'S OWN STOCK. As a result, we determined
that the fair value of the warrants should have been reclassified from
additional paid in capital, to a current liability, and that the warrant fair
value should have been marked to market as of the balance sheet date with the
corresponding non-cash gain or loss reflected in the results of operations. This
resulted in us restating our net loss for the fiscal year ended December 31,
2004 to $(9,013,000) compared to $(5,383,000) as previously reported, and a net
loss for the fiscal year ended December 31, 2003 to $(5,839,000) compared to
$(5,932,000) as previously reported. In addition, total liabilities for the
fiscal year ended December 31, 2004 and 2003 was restated to $6,935,000 and
$1,431,000 respectively, compared to $1,523,000 and $1,140,000, respectively, as
previously reported.
-8-
In accordance with Exchange Act Rules 13a-15 and 15d-15, and after receipt of
the Letter, we have re-evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2005, March 31, 2006 and
September 30, 2006. Based upon this re-evaluation the Chief Executive Officer
and Chief Financial Officer have concluded that our current disclosure controls
and procedures are not effective in ensuring that the information required to be
disclosed is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rule and forms and is accumulated and
communicated to the our management, including our Chief Executive Officer (the
principal executive officer) and Chief Financial Officer (the principal
accounting and financial officer) as appropriate to allow timely decisions
regarding required disclosure.
We are committed to improving our financial organization. As part of this
commitment, we will create a segregation of duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function by the end of fiscal 2007 to resolve
non-routine or complex accounting matters. In addition, we will take the
following actions to enhance our internal controls, when funds are available to
us, which we expect to occur by the end of fiscal 2007:
i) Appointing one or more outside directors to our board of directors who shall
be appointed to the audit committee resulting in a fully functioning audit
committee who will undertake the oversight in the establishment and monitoring
of required internal controls and procedures. All compensation paid to board
members comes in the form of stock options that normally carry a value of less
than $10,000, which vest over a period of time;
ii) Preparing and implementing sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements,
which management estimates will cost approximately $65,000 per annum; and
iii) Hiring additional knowledgeable personnel with technical accounting
expertise to further support the current accounting personnel, which management
estimates will cost approximately $90,000 per annum.
Management believes that the appointment of one or more outside directors, who
shall be appointed to a fully functioning audit committee, will remedy the lack
of a functioning audit committee and a lack of a majority of outside directors
on our Board. In addition, management believes that preparing and implementing
sufficient written policies and checklists will remedy the following material
weaknesses (i) insufficient written policies and procedures for accounting and
financial reporting with respect to the requirements and application of US GAAP
and SEC disclosure requirements; (ii) ineffective controls over period end
financial close and reporting processes; and (iii) inadequate procedures for
appropriately identifying, assessing and applying accounting principles.
Further, management believes that hiring additional knowledgeable personnel with
technical accounting expertise will remedy the following material weaknesses:
(A) lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (B) inadequate segregation of duties consistent with
control objectives; and (C) ineffective personnel resources and technical
accounting expertise within the accounting function to resolve non-routine or
complex accounting matters.
Management believes that the hiring of additional personnel who have the
technical expertise and knowledge with the non-routine or technical issues we
have encountered in the past will result in both proper recording of these
transactions and a much more knowledgeable finance department as a whole. Due to
the fact that our accounting staff consists of a controller and an interim CFO,
additional personnel will also ensure the proper segregation of duties and
provide more checks and balances within the department. Additional personnel
will also provide the cross training needed to support us if personnel turn over
issues within the department occur. This coupled with the appointment of
additional outside directors will greatly decrease any control and procedure
issues the company may encounter in the future.
-9-
We will continue to monitor and evaluate the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
We cannot assure you that we will be able to maintain adequate controls over our
financial processes and reporting. If we are unable to implement the remedial
actions we have not yet undertaken and generally maintain the effectiveness of
our disclosure controls and procedures and internal controls so as to insure
that all of the information required to be reported in our periodic reports was
recorded, processed, summarized, and reported, within the time periods specified
in the Commission's rules and forms, we will not be able to provide reliable
financial reports, our results of operations could be misstated and our
reputation may be harmed. Accordingly, any investment by you in our company
under these conditions could be speculative and risky.
RISKS RELATING TO OUR COMMON STOCK
OUR COMMON STOCK IS SUBJECT TO "PENNY STOCK" RULES.
The Securities and Exchange Commission (the "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:
(i) that a broker or dealer approve a person's account for transactions in
penny stocks; and
(ii) 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
(i) obtain financial information and investment experience objectives of
the person; and
(ii) 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 prepared by the
Commission relating to the penny stock market, which, in highlight form, (i)
sets forth the basis on which the broker or dealer made the suitability
determination; and (ii) 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
-10-
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 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.
FUTURE CAPITAL REQUIREMENTS
We will require and are in the process of negotiating additional funds to
finance our operations. The precise amount and timing of our funding needs
cannot be determined at this time and will largely depend upon a number of
factors, including the market demand for our products and our management of our
cash, accounts payable, inventory and other working capital items. There can be
no assurance that those funds will be available or on terms satisfactory to us.
Any inability to obtain needed funding on satisfactory terms may require us to
reduce planned capital expenditures, to scale back our product offerings or
other operations or to enter into financing agreements on terms which we would
not otherwise accept, and could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's headquarters are located at 4275 Executive Square, Suite 200, La
Jolla, California.
The Company leases its facility under a lease that expires in November 2010. The
size of our office is 5,162 square feet.
Rent expense, net of sublease income, amounted to $193,503 for the year ended
December 31, 2005.
ITEM 3. LEGAL PROCEEDINGS
There has been no bankruptcy, receivership or similar proceedings.
There have been no material reclassifications, mergers, consolidations, or
purchase or sale of a significant amount of assets not in the ordinary course of
business.
As previously disclosed to the public in our reports filed with the Securities
and Exchange Commission, we were the subject of a legal proceeding in the San
Diego County Superior Court (the "Court") entitled La Jolla Cove Investors, Inc.
("La Jolla") vs. One Voice Technologies, Inc., Case No. GIC850038 (the "Action")
which was filed with the Court for an unspecified amount of damages. La Jolla
held our convertible debentures related to our past financings. La Jolla claimed
that we failed to honor its conversion notices resulting in damages. La Jolla
filed a similar suit in 2004 and dismissed the suit after we transferred shares
pursuant to conversion notices and an interim settlement agreement. In
particular, we agreed to and did register 8,425,531 shares of our common stock
to honor the past conversion notice and an additional 8,425,531 shares pursuant
to such interim settlement agreement. Part of the resolution of the first
lawsuit restrained La Jolla from tendering additional conversion notices for a
specified period of time. During that time period, La Jolla requested that we
amend the terms of the outstanding debentures, but we refused to do so. We
tendered back the outstanding debenture amounts to La Jolla on two occasions. We
secured alternative financing and did not honor further conversion notices from
La Jolla. The Action was thereafter commenced by La Jolla.
-11-
On January 6, 2006, La Jolla and the Company entered into a Settlement Agreement
and Mutual Release (the "Settlement Agreement") in which La Jolla and we agreed
to forever settle, resolve and dispose of all claims, demands and causes of
action asserted, existing or claimed to exist between the parties because of or
in any way related to the Action. Under the Settlement Agreement, La Jolla and
the Company agreed that the parties shall bear their own costs and attorney's
fees associated with the Action. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the execution of
the Settlement Agreement;
o $300,000 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.
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.
ITEM 4. SUBMISSION FOR MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS 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 NASD OTC
Electronic Bulletin Board under the symbol ONEV.OB. The OTC Electronic Bulletin
Board is sponsored by the National Association of Securities Dealers (NASD) and
is a network of security dealers who buy and sell stocks.
-12-
The following table sets forth the high and low bid prices per share of common
Stock in the quarter indicated. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
Low High
------ -------
2004
First Quarter .02 .05
Second Quarter .01 .22
Third Quarter .08 .16
Fourth Quarter .01 .12
2005
First Quarter .04 .06
Second Quarter .03 .06
Third Quarter .03 .05
Fourth Quarter .02 .03
2006
First Quarter .02 .05
As of March 24, 2006, our common stock shares were held by 180 stockholders of
record. 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.
DIVIDEND POLICY
We have not declared any dividends to date. We have no present intention of
paying any cash dividends on our common stock in the foreseeable future, as we
intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, 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.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The securities described below represent our securities sold by us for the
period starting January 1, 2005 and ending December 31, 2005 that were not
registered under the Securities Act of 1933, as amended. Underwriters were
involved in none of these transactions.
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
On April 22, 2005, the Company 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.
-13-
On May 6, 2005, the Company 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, the Company 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, the Company held its 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. The Company 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.
* 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 or executive officers of
One Voice, and transfer was restricted by One Voice 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.
-14-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR PLAN OF OPERATION SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES. THIS ANNUAL
REPORT CONTAINS FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 WHICH ARE BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. 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 ANNUAL REPORT. SEE "RISK FACTORS."
OVERVIEW OF THE BUSINESS
One Voice Technologies, Inc. is a voice recognition technology company with over
$43 million invested in Research and Development and deployment of more than 20
million products worldwide in seven languages. To date, our customers include:
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,
One Voice offers voice solutions for the Telecom and Interactive Multimedia
markets. Our telecom solutions allow business and consumer phone users to Voice
Dial, Group Conference Call, Read and Send E-Mail and Instant 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. One Voice's development
efforts currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone, directory assistance
and in-home digital media access.
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. One
Voice 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, the Company realized it's first recurring revenues from our
MobileVoice(TM) suite of voice solutions. In addition, the Company 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.
-15-
The company's strategy, in the telecom sector, is to continue aggressive sales
and marketing activities for our voice solutions which we believe may result in
increased deployments and revenue stream. The product offerings will encompass
both MobileVoice(TM) suite of solutions as well as our ADA(TM) Alternative to
Directory Assistance(TM).
In 2005, the Company 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.
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. The company's Media Center Communicator(TM) product
works with Microsoft Windows XP Media Center Edition 2005 to add
voice-navigation and a full suite of communication features allowing consumers
to talk to their Media Center PC to play music, view photo slideshows, watch and
record TV, place Voice-Over-IP (VoIP) phone calls, read and send e-mail and
Instant Message friends and family, all by voice.
In 2005, the Company released Version 2 of the Media Center Communicator. This
version continues to deliver on the company's vision of total voice automation
of the digital home including the management of one's digital content. To
further this vision, the company has 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, the company upgraded
Version 2 of MCC to integrate with SKYPE(R) for placing VOIP calls through
television and voice enabled messaging functionality.
The Company's strategy, in the PC Sector, is to continue its aggressive
marketing efforts to sign-up system integrators, such as those engaged in the
business of home theatre installation and value-added resellers under the
company's reseller program launched in 2005. The company will continue to pursue
OEMs for bundling agreements of its' Media Center Communicator product. These
OEM agreements may include revenue share business models as well as discounted
individual user license fees. The company will continue to use industry
associations, forums and tradeshow events such as CES, CEDIA, EHX and Digital
Life to promote awareness of our products and build strategic alliances.
The company has 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 the company's Media Center Communicator(TM) product.
-16-
In summary, since the beginning of 2005, the company has deployed services with
telecom carriers and began recognizing recurring revenue. Management believes
the company's transition into the revenue recognition phase was very important
as it signifies acceptance of our solutions and the value they deliver to the
customer and their subscribers. The management team remains committed to
generating near and long term revenues significant enough to fund daily
operations, building shareholder value, expand the intellectual property
portfolio and developing cutting edge solutions and applications for the
emerging speech recognition market sector.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to impairment
of property, plant and equipment, intangible assets, deferred tax assets and
fair value computation using 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.
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 the company increasing it's 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 $2,263,000
compared to other expense of approximately $5,279,000 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 $2,420,000 for the year ended December 31, 2005, as compared to
approximately $1,952,000 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 the Company entered into
in the beginning of 2006. Gain on warrant derivative increased to approximately
$5,489,000 for the year ended December 31, 2005, as compared to a loss of
approximately $3,327,000 for the same period in 2004, due to a change in warrant
valuation.
We had a net loss of $1,060,000 or basic and diluted net loss per share of $0.01
for the year ended December 31, 2005 compared to a net loss of $9,013,000 or
basic and diluted net loss per share of $0.05 for the same period in 2004.
-17-
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, we had a working capital deficit of $3,840,000 as compared
with a working capital deficit of $6,223,000 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 the Company 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 $1,060,000 during the year ended December 31, 2005 and
had an accumulated deficit of $42,439,000. 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, 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 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, 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 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.
-18-
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
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, the Company held its first closing pursuant to a subscription
agreement it entered into with several accredited investors as of March 18,
2005, pursuant to which the investors subscribed to purchase an aggregate
principal amount of $2,000,000 in 6% convertible promissory notes, and 100 Class
A and Class B common stock purchase warrants for each 100 shares which would be
issued on each closing date assuming full conversion of the convertible notes
issued on each such closing date. The Company received $1,000,000 of the
purchase price on the initial closing date of March 18, 2005 and will receive an
additional $1,000,000 of the purchase price pursuant to the second closing. The
convertible notes bear simple interest at 6% per annum payable June 1, 2005 and
semi-annually thereafter and mature 3 years after the date of issuance. Each
investor shall have the right to convert the convertible notes after the date of
issuance at any time, until paid in full, at the election of the investor into
fully paid and 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. The Company issued an
aggregate of 29,069,768 Class A common stock purchase warrants and 29,069,768
Class B common stock purchase warrants to the investors, representing 100 Class
A and Class B warrants issued for each 100 shares which would be issued on each
closing date assuming full conversion of the convertible notes issued on each
such closing date. The Class A warrants are exercisable until four years from
the initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The holder of the Class B warrants will be
entitled to purchase one share of common stock upon exercise of the Class B
warrants for each share of common stock previously purchased upon exercise of
the Class A warrants.
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.
-19-
The Company issued an aggregate of 38,461,537 Class A common stock purchase
warrants and 38,461,537 Class B common stock purchase warrants to their
investors. The Class A warrants are exercisable until four years from the
initial closing date at an exercise price of $0.045 per share. The Class B
warrants are exercisable until four years from the initial closing date at an
exercise price of $0.06 per share. The fair value of the warrants of
approximately $675,000 using Black Scholes option pricing model and the
beneficial conversion feature of approximately $325,000 will be amortized over
the life of the debt using the interest method.
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, the Company 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.
-20-
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.
-21-
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
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-7
Statements of Cash Flows F-8 - F-9
Notes to Financial Statements F-10 - F-25
-22-
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 $42,439,000, and had a working capital deficit of $3,840,000. 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.
As discussed in Notes 1, 8 and 15, the accompanying financial statements as of
December 31, 2005 and 2004 and for the years then ended have been restated.
Squar, Milner, Peterson, Miranda - Williamson, LLP
San Diego, California
March 31, 2006, except for the effects of the restatement discussed in Notes 1,
8 and 15, as to which the date is April 16, 2007.
F-1
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2005 & 2004
ASSETS
2005 2004
------------ ------------
(Restated) (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' 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
Embedded derivative liability 108,917 471,223
Current portion of convertible debt, net -- 92,044
------------ ------------
Total current liabilities 4,267,151 6,802,716
LONG-TERM DEBT:
Long term portion of notes payable, 100,000 100,000
Long term portion of convertible debt, net 422,480 32,656
------------ ------------
Total liabilities 4,789,631 6,935,372
STOCKHOLDERS' 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 38,026,356 35,263,881
Accumulated deficit (42,438,635) (41,378,686)
------------ ------------
Total stockholders' deficit (4,048,689) (5,868,337)
------------ ------------
Total liabilities and stockholders' 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) (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 (2,419,514) (1,952,291)
Settlement expense, net (760,387) --
Gain (loss) on warrant derivative 5,488,823 (3,326,550)
Other, net (46,408) (337)
------------- -------------
NET LOSS $ (1,059,949) $ (9,012,756)
============= =============
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)
Reclassification of embedded
conversion feature to a liability (210,357) (210,357)
Net loss for the year ended
December 31, 2004 (9,012,756) (9,012,756)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 (Restated) 246,467,927 246,468 35,263,881 (41,378,686) (5,868,337)
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)
Reclassification of embedded
conversion feature to a liability (324,668) (324,668)
Net loss for the year ended
December 31, 2005 (1,059,949) (1,059,949)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 (Restated) 363,590,152 $ 363,590 $ 38,026,356 $(42,438,635) $ (4,048,689)
============ ============ ============ ============ ============
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
(Restated) (Restated)
Cash flows from operating activities:
Net loss $ (1,059,949) $ (9,012,756)
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 2,284,275 2,220,931
Warrant re-pricing 271,898 --
(Gain)loss on warrant derivative liability (5,070,081) 3,369,412
(Gain) on derivative liability (418,742) (42,862)
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) (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 $ 275,695 $ 827,626
============ ============
Common Stock issued upon conversion of debt $ 1,937,691 $ 1,554,211
============ ============
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 $42,439,000 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 $3,840,000 and a stockholders'
deficit of $4,049,000 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 OF FINANCIAL STATEMENTS
The Company has restated previously issued 2005 and 2004 financial statements
for matters relating to the proper treatment of conversion features embedded in
the convertible debt financing transactions pursuant to EITF Nos. 00-19, 05-02,
and SFAS No. 133. The accompanying financial statements for 2005 and 2004 have
been restated to reflect the adjustments (see Note 15).
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 DERIVATIVE LIABILITY
-------------------------
Proceeds received from debt issued with stock purchase warrants are allocated
between the debt and the warrants, based upon the fair values of the two
securities. The amount attributable to warrants is accounted for either as
additional paid-in capital or as a warrant derivative liability depending upon
guidance in EITF Issue No. 00-19. The resulting debt discount is amortized to
expense over the term of the debt instrument, using the interest method. In the
event of settlement of such debt in advance of the maturity date, an expense is
recognized for the remaining unamortized discount.
DEBT WITH STOCK PURCHASE WARRANTS:
Proceeds received from debt issued with stock purchase warrants are allocated
between the debt and the warrants, based upon the relative fair values of the
two securities. The balance allocated to warrants is accounted for either as
additional paid-in capital or as a warrant derivative liability. The resulting
debt discount is amortized to expense over the term of the debt instrument,
using the interest method. In the event of settlement of such debt in advance of
the maturity date, an expense is recognized for the remaining unamortized
discount.
DEBT WITH BENEFICIAL CONVERSION FEATURE:
We account for convertible debt in accordance with Financial Accounting
Standards Board Emerging Issues Task Force ("EITF") Issue No. 98-5 and Issue
00-27. These pronouncements require the use of the intrinsic value method for
recognition of the beneficial conversion feature included with indebtedness,
and requires amortization of the amount associated with the convertibility
feature over the life of the debt instrument. Upon conversion of the debt, any
unamortized beneficial conversion discount will be charged to expense.
SOFTWARE DEVELOPMENT COSTS:
The Company accounts for their software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," ("SFAS No. 86").
SFAS No. 86 requires the Company to capitalize the direct costs and allocate
overhead associated with the development of software products. Initial costs are
charged to operations as research prior to the development of a detailed program
design or a working model. Costs incurred subsequent to the product release, and
research and development performed under contract are charged to operations.
Capitalized costs are amortized over the estimated product life of four years on
the straight-line basis. The Company evaluates for impairment losses annually or
when economic circumstances necessitate. The Company will recognize an
impairment loss in the amount by which the unamortized capitalized cost of a
computer software product exceeds the net realizable value of that asset. No
impairment losses were recognized during the years ended December 31, 2005 and
2004.
Amortization expense totaled $37,000 and $338,000 for the years ended December
31, 2005 and 2004, respectively. Accumulated amortization as of December 31,
2005 amounted to $1,635,000.
F-10
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(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
------------------ ------------------
(Restated) (Restated)
Net loss, as reported $(1,059,949) $(9,012,756)
------------ ------------
Stock compensation calculated under SFAS 123 $ (1,000) $ (51,500)
------------ ------------
Pro forma net loss $(1,060,949) $(9,013,756)
------------ ------------
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:
Principal
Amount Unamortized Original
Due Date Remaining Discount Balance
----------------- ------------ ----------- -----------
(restated) (restated)
Stonestreet Limited
Partnership December 23, 2007 $ 10,000 $ (6,873) $ 3,127
------------ ----------- -----------
Alpha Capital
Aktiengesellschaft March 18, 2008 175,000 (134,073) 40,927
------------ ----------- -----------
Whalehaven Capital
Fund Limited March 18, 2008 160,000 (122,581) 37,419
------------ ----------- -----------
Alpha Capital
Aktiengesellschaft July 13, 2008 400,000 (247,040) 152,960
------------ ----------- -----------
Ellis International
Limited July 13, 2008 65,572 (41,854) 23,718
------------ ----------- -----------
Whalehaven Capital
Fund Limited July 13, 2008 400,000 (247,038) 152,962
------------ ----------- -----------
Omega Capital Small
Cap Fund July 13, 2008 25,000 (15,958) 9,042
------------ ----------- -----------
Osher Capital,
Inc. July 13, 2008 15,000 (12,675) 2,325
------------ ----------- -----------
Total Long Term convertible debt December 31, 2005 $ 1,250,572 $ (828,092) $ 422,480
============ =========== ===========
A summary of convertible debt at December 31, 2004 is as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ------------------- ---------------- ----------------
CURRENT PORTION
La Jolla Cove
Investors, Inc. December 12, 2005 $ 157,728 $ (65,684) $ 92,044
LONG-TERM PORTION
Whalehaven Fund
Limited August 18, 2007 $ 40,000 $ (30,538) $ 9,462
------------------ ---------------- ---------------
Alpha Capital
Aktiengesellschaft October 28, 2007 $ 200,000 $ (186,764) $ 13,236
------------------ ---------------- ---------------
Momona Capital
Corp. October 28, 2007 $ 21,000 $ (20,104) $ 896
------------------ ---------------- ---------------
Stonestreet Limited
Partnership October 28, 2007 $ 40,000 $ (38,295) $ 1,705
------------------ ---------------- ---------------
Ellis International
Limited October 28, 2007 $ 4,841 $ (4,634) $ 207
------------------ ---------------- ---------------
Alpha Capital
Aktiengesellschaft December 23, 2007 $ 300,000 $ (297,487) $ 2,513
------------------ ---------------- ---------------
Momona Capital
Corp. December 23, 2007 $ 54,000 $ (53,548) $ 452
------------------ ---------------- ---------------
Stonestreet Limited
Partnership December 23, 2007 $ 420,000 $ (416,483) $ 3,517
------------------ ---------------- ---------------
Ellis International
Limited December 23, 2007 $ 79,700 $ (79,032) $ 668
------------------ ---------------- ---------------
TOTAL LONG TERM PORTION $ 1,159,541 $ (1,126,885) $ 32,656
================== ================ ================
F-18
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMON STOCK:
During the twelve months ended December 31, 2005, Alpha Capital
Akteingesellschaft converted approximately $741,000 of notes payable into
approximately 25,946,000 shares of the Company's common stock at an average
conversion price of $0.029. During the same period, Alpha Capital
Akteingesellschaft exercised warrants to purchase 2,000,000 shares of common
stock for cash in the amount of $48,000.
During the twelve months ended December 31, 2005, Omega Capital Small Cap Fund
converted $65,000 of notes payable into approximately 3,489,000 shares of the
Company's common stock at an average conversion price of $0.019.
During the twelve months ended December 31, 2005, Ellis International Ltd.
converted approximately $269,000 of notes payable into approximately 11,523,000
shares of the Company's common stock at an average conversion price of $0.023.
During the same period, Ellis International exercised warrants to purchase
approximately 1,500,000 shares of common stock for cash in the amount of
$37,000.
During the twelve months ended December 31, 2005, Stonestreet Limited
Partnership converted approximately $456,000 of notes payable into approximately
13,823,000 shares of the Company's common stock at an average conversion price
of $0.033.
During the twelve months ended December 31, 2005, Whalehaven Fund, Limited
converted $41,000 of notes payable into approximately 1,026,000 shares of the
Company's common stock at an average conversion price of $0.040.
During the twelve months ended December 31, 2005, Whalehaven Capital Fund, Ltd.
converted $245,000 of notes payable into approximately 9,110,000 shares of the
Company's common stock at an average conversion price of $0.027. During the same
period, Whalehaven Capital Fund, Ltd. exercised warrants to purchase
approximately 27,000,000 shares of common stock for cash in the amount of
$540,000.
During the twelve months ended December 31, 2005, Momona Capital Corp. converted
approximately $76,000 of notes payable into approximately 1,938,000 shares of
the Company's common stock at an average conversion price of $0.039. During the
same period, Momona Capital Corp. exercised warrants to purchase 1,000,000
shares of common stock for cash in the amount of $24,000.
During the twelve months ended December 31, 2005, Osher Capital Inc. converted
approximately $45,000 of notes payable into approximately 1,715,000 shares of
the Company's common stock at an average conversion price of $0.026.
During the twelve months ended December 31, 2005, an accredited investor
purchased an aggregate of 17,000,000 shares of restricted common stock for a
total purchase price of $506,400. In addition, the investor received an
aggregate of 17,000,000 Class A and 17,000,000 Class B common stock purchase
warrants with an exercise price of $0.045 and $0.06 per share respectively.
F-19
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES:
At December 31, 2005 and December 31, 2004, the Company had net operating loss
carry forwards available to reduce future taxable income, if any, of
approximately $ 35,300,000 and $30,800,000 respectively, for Federal income tax
purposes. It also had net operating loss carry forwards available to reduce
future taxable income, if any, of approximately $ 32,500,000 and $ 28,000,000
for state purposes at December 31, 2005 and 2004 respectively. The Federal and
state net operating loss carry forwards will begin expiring in 2020 and 2007,
respectively. The carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three year period.
The expected income tax provision, computed based on the Company's pre-tax
income (loss) and the statutory Federal income tax rate, is reconciled to the
actual tax provision reflected in the accompanying financial statements as
follows:
2005 2004
------------ ------------
Expected tax provision (benefit) at statutory rates $ (615,638) $ (2,918,979)
State taxes, net of Federal benefit 528 528
Meals & Entertainment 2,364 2,923
Change in Valuation Allowance 1,702,431 1,236,748
Warrant derivative liability (2,019,636) 1,088,936
Amortization of beneficial conversion feature 966,827 590,644
Other permanent differences (36,076) --
------------ ------------
Totals $ 800 $ 800
The provision (benefit) for income taxes in 2005 and 2004 consists of the
following:
2005 2004
------------ ------------
Current:
Federal $ -- $ --
State 800 800
------------ ------------
Totals 800 800
Deferred:
Federal -- --
State -- --
------------ ------------
Totals -- --
------------ ------------
Totals $ 800 $ 800
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2005 and December 31, 2004 are shown below:
2005 2004
------------ ------------
Deferred tax assets:
Accrued vacation $ 32,113 $ 23,208
Basis Difference in Fixed Assets -- 97,713
Net operating loss 14,865,631 12,961,750
Other 34,362 1,716
------------ ------------
Totals $ 14,932,106 $ 13,084,387
------------ ------------
Deferred tax liabilities:
Deferred State Taxes (981,673) (852,573)
Fixed assets (16,188) --
------------ ------------
Totals (997,861) (852,573)
Deferred tax asset (liability) $ 13,934,245 $ 12,231,814
Valuation Allowance (13,934,245) (12,231,814)
------------ ------------
Net Deferred Tax Asset (Liability) 0 0
F-20
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under leases that expire
at various times through 2010. The following is a schedule by years of future
minimum rental payments required under operating leases that have noncancellable
lease terms in excess of one year as of December 31, 2005:
Year ending December 31,
2006 188,685
2007 194,259
2008 199,886
2009 206,081
2010 193,515
----------
$ 982,426
==========
Rent expense, net of sublease income, amounted to $193,503 for the year ended
December 31, 2005.
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN:
On July 14, 1999, the Company adopted an Incentive and Nonqualified Stock Option
Plan (the "Plan") for its employees and consultants under which a maximum of
3,000,000 options (Amendment to increase the available shares from 1,500,000 to
3,000,000 approved by the shareholders in December 2001) and approved by the
shareholders may be granted to purchase common stock of the Company. On July 29,
2005 the Company adopted the 2005 Stock Incentive Plan and reserved 60,000,000
shares of the Company's common stock for issuance under the 2005 Plan.
F-21
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED
Two types of options may be granted under the 2005 Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The Company follows SFAS No. 123 for stock options granted to
non-employees and records a consulting expense equal to the fair value of the
options at the date of grant.
During the year ended December 31, 2005 the Company granted 225,000 stock
options at an average exercise price of
$0.032 to employees and consultants of the Company. Throughout 2005, 25,000
options were terminated.
The number and weighted average exercise prices of options granted under the
plan for the years ended December 31, 2005 and 2004 are as follows:
2005 2004
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 1,721,500 $ 2.70 1,900,500 $ 1.54
Granted during the year 225,000 .04 -- --
Terminated during the year 25,000 .09 179,000 1.12
Exercised during the year -- -- -- --
Outstanding at end of the year 1,921,500 1.47 1,721,500 2.70
Exercisable at end of the year 1,720,806 1.61 1,701,361 2.70
The exercise prices for options outstanding as of December 31, 2005 range from
$0.03 to $12.80. The weighted average remaining contractual life of these
options is approximately 6 years.
F-22
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) WARRANTS:
At December 31, 2004, the Company had warrants outstanding that allow the
holders to purchase up to 215,373,361 shares of common stock.
The number and weighted average exercise prices of the warrants for the years
ended December 31, 2005 and 2004 are as follows:
2005 2004
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 79,429,673 $ 0.10 16,355,921 $ 0.22
Granted during the year 169,062,610 0.05 75,081,815 0.07
Terminated during the year 1,566,400 -- --
Exercised during the year 31,552,522 0.02 12,008,063 0.03
Outstanding at end of the year 215,373,361 0.05 79,429,673 0.10
Exercisable at end of the year 181,373,361 0.05 79,429,673 0.10
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.02 Per share for Series A warrants issued in 2005. As a result, the
Company raised approximately $540,000. In connection with the re-pricing of
warrants to the investors, the Company recorded a charge of approximately
$272,000 to reflect the additional benefit created for these investors.
At December 31, 2005, the weighted average remaining contractual life of the
warrants was approximately 42 months.
(14) SUBSEQUENT EVENTS:
Subsequent to December 31, 2005, note holders converted additional note
principal into common shares as follows:
Average
Amount Converted Exercise
Converted Shares Into Price
----------- ----------- --------
Alpha Capital Akteingesellschaft $ 150,000 11,518,586 $ 0.013
Whalehaven Capital 270,000 20,368,134 $ 0.013
Ellis Enterprise Limited 65,572 5,855,167 $ 0.013
Omega Capital 25,000 2,167,075 $ 0.013
Osher Capital 15,000 1,134,088 $ 0.013
----------- ----------- --------
$ 525,572 41,043,050 $ 0.013
=========== =========== ========
F-23
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated previously issued 2004 and 2005 financial
statements for matters relating to the proper treatment of conversion features
embedded in the convertible debt financing transactions. The restatement is
pursuant to EITF Nos. 00-19, 05-02, and SFAS No. 133. and was necessary to
record derivative liabilities determined to be embedded within the debt
agreements which are required to be bifurcated from the host agreements and
accounted for separately.
The derivatives include but are not limited to the following characteristics:
o Beneficial conversion features
o Early redemption option
o Registration rights and associated liquidated damage
The valuation conducted as of December 31, 2005 and December 31, 2004 determined
the fair value of the derivative liability was $108,917 and $471,223
respectively and resulted in a non-cash gain of $418,742 and $42,863
respectively. The accompanying financial statements for 2005 and 2004 have been
restated to reflect the corrections, as summarized below.
YEAR ENDED DECEMBER 31, 2004
----------------------------
The following is a summary of the restatements for the year ended December 31,
2004:
Increase / (decrease) in interest expense $ 302,651
Increase / (decrease) in gain on warrant and debt derivative 42,863
Increase / (decrease) in the fair value of debt derivative liability 471,223
Increase / (decrease) in the fair value of net convertible notes --
Increase / (decrease) additional paid in capital (210,357)
Increase / (decrease) accumulated deficit 260,866
The following is a summary of the restatements for the year ended December 31,
2004:
Total Increase of 2004 net loss $ 260,866
The effect on the Company's previously issued December 31, 2004 financial
statements are summarized as follows:
Year ended Year ended
December 31, December 31,
2004 2004
Previously
reported Change Restated
----------- ----------- -----------
Balance Sheet
-------------
Derivative liability -- 471,223 471,223
----------- ----------- -----------
Total current liabilities -- 471,223 471,223
----------- ----------- -----------
Total liabilities -- 471,223 471,223
=========== =========== ===========
Additional paid in capital 35,474,238 (210,357) 35,263,881
Accumulated deficit (41,117,820) (260,866) (41,378,686)
----------- ----------- -----------
Total stockholders deficit (5,643,582) (471,223) (6,114,805)
=========== =========== ===========
Statement of Operations
-----------------------
Interest expense (1,649,641) (302,651) (1,952,292)
Gain on warrant and debt derivative (3,369,412) 42,863 (3,326,549)
Other Income / (Expense) 741 (1,078) (337)
----------- ----------- -----------
Net (loss) (5,018,312) (260,866) (5,279,178)
=========== =========== ===========
F-24
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
(15) RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------
YEAR ENDED DECEMBER 31, 2005
----------------------------
The following is a summary of the restatements for the year ended December 31,
2005:
Increase / (decrease) in interest expense $ (67,602)
Increase / (decrease) in gain on warrant and debt derivative 418,742
Increase / (decrease) in the fair value of debt derivative liability 108,917
Increase / (decrease) in the fair value of net convertible notes 200,630
Increase / (decrease) additional paid in capital (535,025)
Increase / (decrease) accumulated deficit (225,478)
The following is a summary of the restatements for the year ended December 31,
2005:
Total decrease of 2005 net loss $ 486,334
The effect on the Company's previously issued December 31, 2005 financial
statements are summarized as follows:
Year ended Year ended
December 31, December 31,
2005 2005
Previously
reported Change Restated
----------- ----------- -----------
Balance Sheet
-------------
Derivative liability -- 108,917 108,917
----------- ----------- -----------
Total current liabilities -- 108,917 108,917
Convertible notes payable, net 221,850 200,630 422,480
----------- ----------- -----------
Total long term liabilities 221,850 200,630 422,480
----------- ----------- -----------
Total liabilities 221,850 309,547 531,397
=========== =========== ===========
Additional paid in capital 38,561,381 (535,025) 38,026,356
Accumulated deficit (42,664,113) 225,478 (42,438,635)
----------- ----------- -----------
Total stockholders deficit (4,102,732) (309,547) (4,412,279)
=========== =========== ===========
Statement of Operations
-----------------------
Interest expense (2,487,116) 67,602 (2,419,514)
Gain on warrant and debt derivative 5,070,081 418,742 5,488,823
Other Income / (Expense) -- --
----------- ----------- -----------
Net (loss) 2,582,965 486,344 3,069,309
=========== =========== ===========
F-25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
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.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management,
including its Chief Executive Officer (the principal executive officer) and
Chief Financial Officer (the principal accounting and financial officer),
previously evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective in
ensuring that the information required to be disclosed is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rule and forms and is accumulated and communicated to the issuer's management,
including its Chief Executive Officer (the principal executive officer) and
Chief Financial Officer (the principal accounting and financial officer) as
appropriate to allow timely decisions regarding required disclosure.
-23-
Subsequent to the original evaluation, the Company's management received a
letter dated March 31, 2006 (the "Letter") from Peterson & Co., LLP, its
independent auditors, addressed to the Chief Executive Officer and Chairman of
the Board of Directors in connection with the audit of our financial statements
as of December 31, 2005, in which the independent auditors identified certain
matters involving internal controls and procedures that they consider to be
significant deficiencies or material weaknesses under the standards of the
Public Company Accounting Oversight Board. These material weaknesses were: (1)
lack of sufficient and knowledgeable personnel to maintain appropriate
accounting and financial reporting organizational structure to support the
activities of the Company; (2) lack of a functioning audit committee and lack of
a majority of outside directors on the Company's board of directors, resulting
in ineffective oversight in the establishment and monitoring of required
internal controls and procedures; (3) inadequate segregation of duties
consistent with control objectives; (4) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements; (5)
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters; (6)
ineffective controls over period end financial close and reporting processes;
and (7) inadequate procedures for appropriately identifying, assessing and
applying accounting principles. The aforementioned material weaknesses were
identified by the Company's independent auditors in connection with the audit of
our financial statements as of December 31, 2005 and communicated to our
management through the Letter.
Management believes that the material weaknesses set forth in items (3), (4) and
(6) above did not have an affect on the Company's financial results or any
restatements which have occurred. Inadequate segregation of duties consistent
with control objectives (item (3)) was due to the fact that the Company did not
have a sufficient number of personnel within the accounting department.
Management believes that this did not have an effect on the most recent and
updated financial statements filed by the company as the adjustments made to the
financial statements were related to the application of technical accounting
guidance and resulted primarily from the lack of accounting department staff
with sufficient technical accounting expertise and experience. We believe that
even if there had been sufficient staff to remedy the segregation of duties
problem, unless one of more of the additional staff members had sufficient
technical accounting expertise, this would not have prevented the adjustments
and restatement. Management believes that the weakness due to insufficient
written policies and procedures (item (4)) did not have an effect on the most
recent and updated financial statements filed by the company as the adjustments
were related to the application of technical accounting guidance and resulted
primarily from the lack of accounting department staff with sufficient technical
accounting expertise and experience. We believe that even if there had been
sufficient written policies and procedures in place, the problem related to the
lack of accounting staff members with sufficient technical accounting expertise
would not have been resolved and this would not have prevented the adjustments
and restatement. Further, we do not feel that improper controls and procedures
over the period end process (item (6)) caused any material effects or
misstatements to the financials filed, as these inefficiencies were more
associated with timely closing, review and filing of financial statements. These
issues were due primarily to the fact that the Company had an insufficient
number of personnel within the accounting department and that it did not have
written policies and procedur es to ensure that the financial statement closing
and reporting processes were timely and effective. We believe that even if
stronger controls had been in place related to the period end financial close
and reporting processes, the problem related to the lack of accounting staff
members with sufficient technical accounting expertise would not have been
resolved and this would not have prevented the adjustments and restatement.
-24-
However, management believes that the lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of the Company (Item (1)),
lack of a functioning audit committee and lack of a majority of outside
directors on the Company's board of directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and
procedures (Item (2)), ineffective personnel resources and technical accounting
expertise within the accounting function to resolve non-routine or complex
accounting matters (Item (5)), and inadequate procedures for appropriately
identifying, assessing and applying accounting principles (Item (7)) resulted in
the Company's determination to restate its financial statements for the years
ended December 31, 2004 and 2003. Specifically, the material weaknesses
specified in the preceding sentence resulted in management determining that the
Company's previous accounting for its common stock purchase warrants issued from
2003 to 2004 did not comply with Emerging Issues Task Force 00-19, ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN A
COMPANY'S OWN STOCK. As a result, 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. This resulted in the Company restating
its net loss for the fiscal year ended December 31, 2004 to $(9,013,000)
compared to $(5,383,000) as previously reported, and a net loss for the fiscal
year ended December 31, 2003 to $(5,839,000) compared to $(5,932,000) as
previously reported. In addition, total liabilities for the fiscal year ended
December 31, 2004 and 2003 was restated to $6,935,000 and $1,431,000
respectively, compared to $1,523,000 and $1,140,000, respectively, as previously
reported. In accordance with Exchange Act Rules 13a-15 and 15d-15, and after
receipt of the Letter, the Company has re-evaluated, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based upon this re-evaluation the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures are not effective in
ensuring that the information required to be disclosed is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rule and forms and is accumulated and communicated to the issuer's management,
including its Chief Executive Officer (the principal executive officer) and
Chief Financial Officer (the principal accounting and financial officer) as
appropriate to allow timely decisions regarding required disclosure.
We are committed to improving our financial organization. As part of this
commitment, we will create a segregation of duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function by the end of fiscal 2007 to resolve
non-routine or complex accounting matters. In addition, we will take the
following actions to enhance our internal controls, when funds are available to
the Company, which we expect to occur by the end of fiscal 2007:
i) Appointing one or more outside directors to our board of directors who shall
be appointed to the audit committee of the Company resulting in a fully
functioning audit committee who will undertake the oversight in the
establishment and monitoring of required internal controls and procedures. All
compensation paid to board members comes in the form of stock options that
normally carry a value of less than $10,000, which vest over a period of time;
ii) Preparing and implementing sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements,
which management estimates will cost approximately $65,000 per annum; and
iii) Hiring additional knowledgeable personnel with technical accounting
expertise to further support the current accounting personnel at the Company,
which management estimates will cost approximately $90,000 per annum.
-25-
Management believes that the appointment of one or more outside directors, who
shall be appointed to a fully functioning audit committee, will remedy the lack
of a functioning audit committee and a lack of a majority of outside directors
on the Company's Board. In addition, management believes that preparing and
implementing sufficient written policies and checklists will remedy the
following material weaknesses (i) insufficient written policies and procedures
for accounting and financial reporting with respect to the requirements and
application of US GAAP and SEC disclosure requirements; (ii) ineffective
controls over period end financial close and reporting processes; and (iii)
inadequate procedures for appropriately identifying, assessing and applying
accounting principles. Further, management believes that hiring additional
knowledgeable personnel with technical accounting expertise will remedy the
following material weaknesses: (A) lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of the Company; (B)
inadequate segregation of duties consistent with control objectives; and (C)
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters.
Management believes that the hiring of additional personnel who have the
technical expertise and knowledge with the non-routine or technical issues the
Company has encountered in the past will result in both proper recording of
these transactions and a much more knowledgeable finance department as a whole.
Due to the fact that the Company's accounting staff consists of a controller and
an interim CFO, additional personnel will also ensure the proper segregation of
duties and provide more checks and balances within the department. Additional
personnel will also provide the cross training needed to support the Company if
personnel turn over issues within the department occur. This coupled with the
appointment of additional outside directors will greatly decrease any control
and procedure issues the company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in Internal Controls
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rules
13a-15 or 15d-15 under the Exchange Act that occurred during the small business
issuer's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
-26-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Dean Weber 43 Chairman of the Board, President, Chief
Executive Officer, Director
Bradley J. Ammon 42 Director
Rahoul Sharan 44 Director
Directors serve until the next annual meeting and until their successors are
elected and qualified. Officers are appointed to serve for one year until the
meeting of the board of directors following the annual meeting of stockholders
and until their successors have been elected and qualified. There are no family
relationships between any of our directors or officers.
Dean Weber brings an extensive background to One Voice with over 20 years of
technology and management experience. He is responsible for developing the
company's strategic vision and pioneering its products, patented technology and
business strategies. He was elected to our Board of Directors in July of 1999 as
Chairman. Before founding One Voice 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 CEO of One Voice, Mr. Weber has been instrumental in the growth
and development of the company, successfully raising over $30 million of
institutional funding, taking One Voice 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.
Rahoul Sharan brings over 18 years of finance and accounting experience to One
Voice. He was elected to our Board of Directors in July of 1999. Prior to
joining the One Voice team, Mr. Sharan was a partner of the S&P Group, which
specializes in investment financing for venture capital projects, real estate
development and construction. At S&P Group, Mr. Sharan led the successful
financing efforts for over 15 companies in several industries. Mr. Sharan was
also the President of KJN Management Ltd., which provides a broad range of
administrative, management and financial services. He also worked in public
accounting for six years with Coopers & Lybrand. At C&L, Mr. Sharan worked in
both the tax and audit groups for a wide variety of large and small clients. Mr.
Sharan holds a Bachelor of Commerce degree from the University of British
Columbia and is a member of the Institute of Chartered Accountants of British
Columbia.
-27-
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.
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of the officers, directors and
employees of the Company.
CODE OF ETHICS AND BUSINESS CONDUCT FOR OFFICERS, DIRECTORS AND EMPLOYEES OF ONE
VOICE TECHNOLOGIES, INC.
1. TREAT IN AN ETHICAL MANNER THOSE TO WHOM ONE VOICE TECHNOLOGIES, INC. HAS AN
OBLIGATION
The officers, directors and employees of ONE VOICE TECHNOLOGIES, INC.
(the "Company") are committed to honesty, just management, fairness,
providing a safe and healthy environment free from the fear of
retribution, and respecting the dignity due everyone. For the
communities in which we live and work we are committed to observe sound
environmental business practices and to act as concerned and
responsible neighbors, reflecting all aspects of good citizenship.
For our shareholders we are committed to pursuing sound growth and
earnings objectives and to exercising prudence in the use of our assets
and resources.
For our suppliers and partners we are committed to fair competition and
the sense of responsibility required of a good customer and teammate.
2. PROMOTE A POSITIVE WORK ENVIRONMENT
All employees want and deserve a workplace where they feel respected,
satisfied, and appreciated. We respect cultural diversity and will not
tolerate harassment or discrimination of any kind -- especially
involving race, color, religion, gender, age, national origin,
disability, and veteran or marital status.
Providing an environment that supports honesty, integrity, respect,
trust, responsibility, and citizenship permits us the opportunity to
achieve excellence in our workplace. While everyone who works for the
Company must contribute to the creation and maintenance of such an
environment, our executives and management personnel assume special
responsibility for fostering a work environment that is free from the
fear of retribution and will bring out the best in all of us.
Supervisors must be careful in words and conduct to avoid placing, or
seeming to place, pressure on subordinates that could cause them to
deviate from acceptable ethical behavior.
-28-
3. PROTECT YOURSELF, YOUR FELLOW EMPLOYEES, AND THE WORLD WE LIVE IN
We are committed to providing a drug-free, safe and healthy work
environment, and to observing environmentally sound business practices.
We will strive, at a minimum, to do no harm and where possible, to make
the communities in which we work a better place to live. Each of us is
responsible for compliance with environmental, health and safety laws
and regulations.
4. KEEP ACCURATE AND COMPLETE RECORDS
We must maintain accurate and complete Company records. Transactions
between the Company and outside individuals and organizations must be
promptly and accurately entered in our books in accordance with
generally accepted accounting practices and principles. No one should
rationalize or even consider misrepresenting facts or falsifying
records. It will not be tolerated and will result in disciplinary
action.
5. OBEY THE LAW
We will conduct our business in accordance with all applicable laws and
regulations. Compliance with the law does not comprise our entire
ethical responsibility. Rather, it is a minimum, absolutely essential
condition for performance of our duties. In conducting business, we
shall:
A. STRICTLY ADHERE TO ALL ANTITRUST LAWS
Officer, directors and employees must strictly adhere to all antitrust
laws. Such laws exist in the United States and in many other countries
where the Company may conduct business. These laws prohibit practices
in restraint of trade such as price fixing and boycotting suppliers or
customers. They also bar pricing intended to run a competitor out of
business; disparaging, misrepresenting, or harassing a competitor;
stealing trade secrets; bribery; and kickbacks.
B. STRICTLY COMPLY WITH ALL SECURITIES LAWS
In our role as a publicly owned company, we must always be alert to and
comply with the security laws and regulations of the United States and
other countries.
I. DO NOT ENGAGE IN SPECULATIVE OR INSIDER TRADING
Federal law and Company policy prohibits officers, directors and employees,
directly or indirectly through their families or others, from purchasing or
selling company stock while in the possession of material, non-public
information concerning the Company. This same prohibition applies to trading in
the stock of other publicly held companies on the basis of material, non-public
information. To avoid even the appearance of impropriety, Company policy also
prohibits officers, directors and employees from trading options on the open
market in Company stock under any circumstances.
Material, non-public information is any information that could reasonably be
expected to affect the price of a stock. If an officer, director or employee is
considering buying or selling a stock because of inside information they
possess, they should assume that such information is material. It is also
important for the officer, director or employee to keep in mind that if any
trade they make becomes the subject of an investigation by the government, the
trade will be viewed after-the-fact with the benefit of hindsight. Consequently,
officers, directors and employees should always carefully consider how their
trades would look from this perspective.
-29-
Two simple rules can help protect you in this area: (1) Do not use non-public
information for personal gain. (2) Do not pass along such information to someone
else who has no need to know.
This guidance also applies to the securities of other companies for which you
receive information in the course of your employment at The Company.
II. BE TIMELY AND ACCURATE IN ALL PUBLIC REPORTS
As a public company, the Company must be fair and accurate in all reports filed
with the United States Securities and Exchange Commission. Officers, directors
and management of The Company are responsible for ensuring that all reports are
filed in a timely manner and that they fairly present the financial condition
and operating results of the Company.
Securities laws are vigorously enforced. Violations may result in severe
penalties including forced sales of parts of the business and significant fines
against the Company. There may also be sanctions against individual employees
including substantial fines and prison sentences.
The principal executive officer and principal financial Officer will certify to
the accuracy of reports filed with the SEC in accordance with the Sarbanes-Oxley
Act of 2002. Officers and Directors who knowingly or willingly make false
certifications may be subject to criminal penalties or sanctions including fines
and imprisonment.
6. AVOID CONFLICTS OF INTEREST
Our officers, directors and employees have an obligation to give their complete
loyalty to the best interests of the Company. They should avoid any action that
may involve, or may appear to involve, a conflict of interest with the Company.
Officers, directors and employees should not have any financial or other
business relationships with suppliers, customers or competitors that might
impair, or even appear to impair, the independence of any judgment they may need
to make on behalf of the Company.
HERE ARE SOME WAYS A CONFLICT OF INTEREST COULD ARISE:
o Employment by a competitor, or potential competitor, regardless of the
nature of the employment, while employed by the Company.
o Acceptance of gifts, payment, or services from those seeking to do business
with the Company.
o Placement of business with a firm owned or controlled by an officer,
director or employee or his/her family.
o Ownership of, or substantial interest in, a company that is a competitor,
client or supplier.
o Acting as a consultant to a the Company customer, client or supplier.
o Seeking the services or advice of an accountant or attorney who has
provided services to the Company.
Officers, directors and employees are under a continuing obligation to disclose
any situation that presents the possibility of a conflict or disparity of
interest between the officer, director or employee and the Company. Disclosure
of any potential conflict is the key to remaining in full compliance with this
policy.
7. COMPETE ETHICALLY AND FAIRLY FOR BUSINESS OPPORTUNITIES
We must comply with the laws and regulations that pertain to the acquisition of
goods and services. We will compete fairly and ethically for all business
opportunities. In circumstances where there is reason to believe that the
release or receipt of non-public information is unauthorized, do not attempt to
obtain and do not accept such information from any source.
If you are involved in Company transactions, you must be certain that all
statements, communications, and representations are accurate and truthful.
-30-
8. AVOID ILLEGAL AND QUESTIONABLE GIFTS OR FAVORS
The sale and marketing of our products and services should always be free from
even the perception that favorable treatment was sought, received, or given in
exchange for the furnishing or receipt of business courtesies. Officers,
directors and employees of the Company will neither give nor accept business
courtesies that constitute, or could be reasonably perceived as constituting,
unfair business inducements or that would violate law, regulation or policies of
the Company, or could cause embarrassment to or reflect negatively on the
Company's reputation.
9. MAINTAIN THE INTEGRITY OF CONSULTANTS, AGENTS, AND REPRESENTATIVES
Business integrity is a key standard for the selection and retention of those
who represent the Company. Agents, representatives and consultants must certify
their willingness to comply with the Company's policies and procedures and must
never be retained to circumvent our values and principles. Paying bribes or
kickbacks, engaging in industrial espionage, obtaining the proprietary data of a
third party without authority, or gaining inside information or influence are
just a few examples of what could give us an unfair competitive advantage and
could result in violations of law.
10. PROTECT PROPRIETARY INFORMATION
Proprietary Company information may not be disclosed to anyone without proper
authorization. Keep proprietary documents protected and secure. In the course of
normal business activities, suppliers, customers and competitors may sometimes
divulge to you information that is proprietary to their business. Respect these
confidences.
11. OBTAIN AND USE COMPANY ASSETS WISELY
Personal use of Company property must always be in accordance with corporate
policy. Proper use of Company property, information resources, material,
facilities and equipment is your responsibility. Use and maintain these assets
with the utmost care and respect, guarding against waste and abuse, and never
borrow or remove Company property without management's permission.
12. FOLLOW THE LAW AND USE COMMON SENSE IN POLITICAL CONTRIBUTIONS AND
ACTIVITIES
The Company encourages its employees to become involved in civic affairs and to
participate in the political process. Employees must understand, however, that
their involvement and participation must be on an individual basis, on their own
time and at their own expense. In the United States, federal law prohibits
corporations from donating corporate funds, goods, or services, directly or
indirectly, to candidates for federal offices -- this includes employees' work
time. Local and state laws also govern political contributions and activities as
they apply to their respective jurisdictions.
13. BOARD COMMITTEES.
The Company shall establish an Audit Committee empowered to enforce this CODE OF
ETHICS. The Audit Committee will report to the Board of Directors at least once
each year regarding the general effectiveness of the Company's CODE OF ETHICS,
the Company's controls and reporting procedures and the Company's business
conduct.
The company does have an independent board member who is represented to be a
financial expert as defined by the SEC.
-31-
14. DISCIPLINARY MEASURES.
The Company shall consistently enforce its CODE OF ETHICS and Business Conduct
through appropriate means of discipline. Violations of the Code shall be
promptly reported to the Audit Committee. Pursuant to procedures adopted by it,
the Audit Committee shall determine whether violations of the Code have occurred
and, if so, shall determine the disciplinary measures to be taken against any
employee or agent of the Company who has so violated the Code.
The disciplinary measures, which may be invoked at the discretion of the Audit
Committee, include, but are not limited to, counseling, oral or written
reprimands, warnings, probation or suspension without pay, demotions, reductions
in salary, termination of employment and restitution.
Persons subject to disciplinary measures shall include, in addition to the
violator, others involved in the wrongdoing such as (i) persons who fail to use
reasonable care to detect a violation, (ii) persons who if requested to divulge
information withhold material information regarding a violation, and (iii)
supervisors who approve or condone the violations or attempt to retaliate
against employees or agents for reporting violations or violators.
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 equity securities
of the Company 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 the Company during the year ended December 31, 2005,
certain written representations and shareholders who, to the best of our
knowledge, hold 10 percent or more of our shares.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE. As set forth in the Audit Committee Charter adopted by the
Board of Directors, a copy of which is included in our Definitive Proxy
Statement filed with the SEC on November 29, 2001 as Exhibit A, the primary
function of the Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing (1) the financial
information provided to shareholders and others, (2) systems of internal
controls established by management and the Board of Directors and (3) the audit
process. The primary function of the Compensation Committee is to establish and
administer our executive compensation programs. Mr. Bradley J. Ammon is a member
of both committees and is "independent" as that term is defined in Rule
4200(a)(14) of the National Association of Securities Dealers' listing
standards.
The Audit Committee has reviewed our audited financial statements for fiscal
2005 and discussed them with management.
Our independent auditors, Peterson & Company, LLP, have communicated with the
Audit Committee matters such as the auditors' role and responsibility in
connection with an audit of our financial statements, significant accounting
policies, the reasonableness of significant judgments and accounting estimates,
significant audit adjustments, and such other matters as are required to be
communicated with the Audit Committee under generally accepted auditing
standards.
The Audit Committee has received from Peterson & Company, LLP written
disclosures regarding all relationships between Peterson & Company, LLP and its
related entities and us and our related entities that in the professional
judgment of Peterson & Company, LLP may reasonably be thought to bear on
independence. Peterson & Company, LLP has confirmed that, in its professional
judgment, it is independent of the Company within the meaning of the Securities
Act of 1933, as amended, and the Audit Committee has communicated such matters
with Peterson & Company, LLP.
The Audit Committee, based on the review and discussions above, recommended to
the Board of Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005 for filing with the Securities and Exchange Commission.
Director Bradley J. Ammon serves as the sole member of our Audit Committee. The
Board of Directors believes that Mr. Ammon qualifies as an "Audit Committee
Financial Expert" as that term is defined by applicable SEC rules.
-32-
GOVERNANCE AND NOMINATING COMMITTEE. The Board of Directors has established a
Governance and Nominating Committee for purposes of nominating directors and for
all other purposes outlined in the Governance and Nominating Committee Charter,
including nominees submitted to the Board of Directors by shareholders. The
Governance and Nominating Committee is composed of Bradley Ammon. The Board has
determined that each of the members of the Governance and Nominating Committee
is unrelated, an outside member with no other affiliation with us and
independent as defined by the American Stock Exchange.
NOMINATION OF DIRECTORS
As provided in its charter and our company's corporate governance principles,
the Governance and Nominating Committee is responsible for identifying
individuals qualified to become directors. The Governance and Nominating
Committee seeks to identify director candidates based on input provided by a
number of sources, including (1) the Governance and Nominating Committee
members, (2) our other directors, (3) our stockholders, (4) our Chief Executive
Officer or Chairman, and (5) third parties such as professional search firms. In
evaluating potential candidates for director, the Nominating and Corporate
Governance Committee considers the entirety of each candidate's credentials.
Qualifications for consideration as a director nominee may vary according to the
particular areas of expertise being sought as a complement to the existing
composition of the Board of Directors. However, at a minimum, candidates for
director must possess:
o high personal and professional ethics and integrity;
o the ability to exercise sound judgment;
o the ability to make independent analytical inquiries;
o a willingness and ability to devote adequate time and
resources to diligently perform Board and committee duties;
and
o the appropriate and relevant business experience and acumen.
In addition to these minimum qualifications, the Governance and Nominating
Committee also takes into account when considering whether to nominate a
potential director candidate the following factors:
o whether the person possesses specific industry expertise and
familiarity with general issues affecting our business;
o whether the person's nomination and election would enable the
Board to have a member that qualifies as an "audit committee
financial expert" as such term is defined by the Securities
and Exchange Commission (the "SEC") in Item 401 of Regulation
S-K;
o whether the person would qualify as an "independent" director
under the listing standards of the American Stock Exchange;
o the importance of continuity of the existing composition of
the Board of Directors to provide long term stability and
experienced oversight; and
o the importance of diversified Board membership, in terms of
both the individuals involved and their various experiences
and areas of expertise.
-33-
Governance and Nominating Committee will consider director candidates
recommended by stockholders provided such recommendations are submitted in
accordance with the procedures set forth below. In order to provide for an
orderly and informed review and selection process for director candidates, the
Board of Directors has determined that stockholders who wish to recommend
director candidates for consideration by the Governance and Nominating Committee
must comply with the following:
o The recommendation must be made in writing to the Corporate
Secretary, Dean Weber.
o The recommendation must include the candidate's name, home and
business contact information, detailed biographical data and
qualifications, information regarding any relationships
between the candidate and the Company within the last three
years and evidence of the recommending person's ownership of
our common stock.
o The recommendation shall also contain a statement from the
recommending shareholder in support of the candidate;
professional references, particularly within the context of
those relevant to Board membership, including issues of
character, judgment, diversity, age, independence, expertise,
corporate experience, length of service, other commitments and
the like; and personal references.
o A statement from the shareholder nominee indicating that such
nominee wants to serve on the Board and could be considered
"independent" under the Rules and Regulations of the American
Stock Exchange and the Securities and Exchange Commission
("SEC"), as in effect at that time.
All candidates submitted by stockholders will be evaluated by the Governance and
Nominating Committee according to the criteria discussed above and in the same
manner as all other director candidates.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and each of
our executive officers whose total annual salary and bonus for the fiscal year
ending December 31, 2005, 2004 and 2003:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compensation Stock SARs Payouts
Position Year ($) ($) ($) awards ($)
-------- ---- --- --- --- ------ --- ---
Dean Weber, CEO 2005 277,000 - - - - -
2004 252,000 - - - - -
2003 241,629 - - - - -
James Hadzicki, CFO* 2005 136,250 - - - - -
2004 120,000 - - - - -
2003 113,123 - - - - -
*Resigned as CFO on November 8, 2006.
-34-
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.
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.
COMPENSATION OF DIRECTORS
Non-employee directors receive $1,000 for each Board of Directors meeting
attended. The Company pays all out-of-pocket expenses of attendance.
AMENDED AND RESTATED 1999 STOCK OPTION PLAN
Our Amended and Restated 1999 Stock Option Plan (the 1999 Plan) authorizes us to
grant to our directors, employees, consultants and advisors both incentive and
non-qualified stock options to purchase shares of our Common Stock. As of
December 31, 2001, our Board of Directors had reserved 3,000,000 shares for
issuance under the 1999 Plan, of which 1,900,500 shares were subject to
outstanding options and 1,099,500 shares remained available for future grants.
Our Board of Directors or a committee appointed by the Board (the Plan
Administrator) administers the 1999 Plan. The Plan Administrator selects the
recipients to whom options are granted and determines the number of shares to be
awarded. Options granted under the 1999 Plan are exercisable at a price
determined by the Plan Administrator at the time of the grant, but in no event
will the option price for any incentive stock option be lower than the fair
market value for our Common Stock on the date of the grant. Options become
exercisable at such times and in such installments as the Plan Administrator
provides in the terms of each individual option agreement. In general, the Plan
Administrator is given broad discretion to issue options and to accept a wide
variety of consideration (including shares of our Common Stock and promissory
notes) in payment for the exercise price of options. The 1999 Plan was
authorized by the Board of Directors and stockholders.
2005 Incentive Stock Plan
On July 29, 2005 the Company adopted the 2005 Stock Incentive Plan and reserved
60,000,000 shares of the Company's common stock for issuance under the 2005
Plan. Two types of options may be granted under the 2005 Plan: (1) Incentive
Stock Options (also known as Qualified Stock Options) which may only be issued
to employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture. In addition, Stock Awards and
restricted Stock Purchase Offers may be granted under the 2005 Stock Incentive
Plan.
-35-
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 10, 2006 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group. Each person's address is c/o One Voice Technologies, Inc., 4275
Executive Square, Suite 200, La Jolla, California 92037.
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 (3) 2.66%
IVantage, Inc. (2) 900,200 *
James Hadzicki, CFO 2,782,300 *
Rahould Sharan, Director 1,386,000 (4) *
Bradley J. Ammon, Director 959,000 (5) *
Jocobo Kaloyan 21,050,000 (6) 4.49%
Total securities held by officers and directors
as a group (4 people): 18,501,300 3.95%
(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 April 10, 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 One Voice Technologies, Inc. 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.
-36-
(3) Includes 900,200 shares owned indirectly through IVantage, Inc. (4)
Represents options to purchase (i) 50,000 shares at an exercise price of
$6.080 per share; and (ii) 10,000 shares at an exercise price of $2.00
per share. These options are currently exercisable.
(4) Includes options to purchase (i) 50,000 shares at an exercise price of
$6.080 per share; and (ii) 10,000 shares at an exercise price of $2.00
per share; and (iii) 1,326,000 shares at an exercise price of $0.016 per
share. These options are currently exercisable.
(5) Includes options to purchase (i) 50,000 shares at an exercise price of
$8.750 per share; and (ii) 25,000 shares at an exercise price of $2.00
per share; and 884,000 shares at an exercise price of $0.016 per share.
These options are currently exercisable.
(6) Jocobo Kaloyan is an individual investor.
* Less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material related transactions during the year.
ITEM 13. EXHIBITS
Exhibit Description
------- -----------
No.
---
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.
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INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
4.1 Common Stock Purchase Warrant with Veritas SG Investments from
the January 2000 offering (incorporated by reference to Exhibit
4.1 of our Form SB-2, filed November 11, 2000).
4.2 Form of Common Stock Purchase Warrant from the March 2000
offering (incorporated by reference to Exhibit 4.1 of our Form
SB-2, filed November 11, 2000).
4.3 Securities Purchase Agreement ("SPA") with Nevelle Investors LLC
dated October 3, 2000, and Form of Debenture (Exhibit A to the
SPA), Form of Warrant (Exhibit B to the SPA), Conditional
Warrant dated October 3, 2000 (Exhibit C to the SPA) and
Registration Rights Agreement dated October 3, 2000 (Exhibit E
to the SPA), each with Nevelle Investors LLC (incorporated by
reference to Exhibit 4 to our Form 10-QSB, filed November 14,
2000).
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)
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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)
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)
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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)
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)
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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)
31.1 Certification by Chief Executive Officer and Interim Chief
Financial Officer pursuant to Sarbanes-Oxley Section 302
32.1 Certification of the Chief Executive Officer and Interim Chief
Financial Officer of One Voice Technologies, Inc. Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements and for the reviews of the
financial statements included in our annual report on Form 10-KSB and 10-QSBs
respectively, and for other services normally provided in connection with
statutory filings were $104,141 and $47,737, respectively, for the years ended
December 31, 2005 and December 31, 2004.
All Other Fees
We incurred tax fees of $4,200 and $4,925 rendered by our independent auditors
during the years ended December 31, 2005 and December 31, 2004 respectively.
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SIGNATURES
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATE: JULY 27, 2007 BY: /S/ DEAN WEBER
------------------------------------------------
DEAN WEBER, PRESIDENT, CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER), INTERIM
CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER) AND CHAIRMAN OF THE BOARD
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/S/ DEAN WEBER PRESIDENT, CHIEF EXECUTIVE JULY 27, 2007
--------------------- OFFICER (PRINCIPAL EXECUTIVE
DEAN WEBER OFFICER), INTERIM CHIEF
FINANCIAL OFFICER (PRINCIPAL
ACCOUNTING AND FINANCIAL OFFICER)
AND CHAIRMAN OF THE BOARD
/S/ Rahoul Sharan DIRECTOR JULY 27, 2007
---------------------
Rahoul Sharan
/S/ BRADLEY J. AMMON DIRECTOR JULY 27, 2007
---------------------
BRADLEY J. AMMON
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