AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 3)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2006
COMMISSION FILE NO. 0-27589
ONE VOICE TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 95-4714338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4275 EXECUTIVE SQUARE, STE. 200, LA JOLLA, CA 92037
(Address of Principal Executive Offices)
(858) 552-4466
(Issuer's Telephone Number)
(858) 552-4474
(Issuer's Facsimile Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of August 17, 2006, the registrant had 513,568,601 shares of common stock,
$.001 par value, issued and outstanding.
Transitional small business disclosure format (check one): Yes [ ] No [X]
EXPLANATORY NOTE
One Voice Technologies, Inc. is filing this amended Quarterly Report on Form
10-QSB/A to amend the Quarterly Report on Form 10-QSB initially filed with the
Securities and Exchange Commission on August 21, 2006 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
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) F-1 - F-13
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 21
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page No.
--------
Balance Sheets as of June 30, 2006 and December 31, 2005 F-2
Statements of Operations for the three and six months
ended June 30, 2006 and 2005 F-3
Statements of Cash Flows for the three and six months
ended June 30, 2006 and 2005 F-4
Notes to Financial Statements F-6
F-1
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2006 2005
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,376 $ 338,811
Accounts receivable 70,897 42,696
Inventories 11,538 5,254
Other current assets 45,330 40,574
------------ ------------
Total current assets 160,141 427,335
PROPERTY AND EQUIPMENT, net 74,435 84,703
Software development and Licensing, net 26,151 40,552
Trademarks, net 3,462 5,517
Patents, net 91,853 94,200
Deposits 18,665 18,665
Deferred debt issue costs 84,992 69,970
------------ ------------
Total assets $ 459,699 $ 740,942
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 325,755 128,630
Accrued expenses 246,839 147,305
Settlement agreement liability 500,000 920,000
License agreement liability 930,000 930,000
Warrant derivative liability 2,325,695 2,032,299
------------ ------------
Total current liabilities 4,328,289 4,158,234
LONG TERM DEBT:
Long term portion of notes payable 100,000 100,000
Long term portion of convertible debt, net 420,666 221,850
Deferred rent 6,721 --
------------ ------------
Total liabilities 4,855,676 4,480,084
STOCKHOLDERS' DEFICIT:
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock; $.001 par value, 990,000,000 shares
authorized, 474,533,757 and 363,590,152 shares issued
and outstanding at June 30, 2006 and December
31, 2005, respectively 474,550 363,590
Shares to be issued 52,000 --
Additional paid-in capital 40,650,563 38,561,381
Accumulated deficit (45,573,090) (42,664,113)
------------ ------------
Total stockholders' deficit (4,395,977) (3,739,142)
------------ ------------
Total liabilities and stockholders' deficit $ 459,699 $ 740,942
============ ============
See accompanying notes
F-2
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
REVENUE $ 109,851 $ 23,937 $ 171,149 $ 34,300
COST OF REVENUE 16,552 3,725 37,061 4,853
------------- ------------- ------------- -------------
GROSS PROFIT 93,299 20,212 134,088 29,447
GENERAL AND ADMINISTRATIVE EXPENSES 962,475 620,438 1,953,450 1,636,940
------------- ------------- ------------- -------------
NET LOSS FROM OPERATIONS (869,176) (600,226) (1,819,362) (1,607,493)
OTHER INCOME (EXPENSES)
Interest expense (221,742) (568,182) (1,115,047) (1,625,279)
Settlement expense (100,000) -- (200,500) --
Gain on warrant derivative 4,098,311 -- 220,802 --
Other, net 247 1,039 5,130 587
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 2,907,640 $ (1,167,369) $ (2,908,977) $ (3,232,185)
============= ============= ============= =============
BASIC EARNINGS(LOSS) PER SHARE $ .01 $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 471,037,000 280,726,000 440,249,000 270,987,000
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE $ .01 $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 824,275,000 280,726,000 440,249,000 270,987,000
============= ============= ============= =============
See accompanying notes.
F-3
ONE VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,908,977) $(3,232,185)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation and amortization 62,896 95,746
Amortization of debt discount and debt issue costs 1,032,232 1,782,253
Gain on warrant derivative liability (220,802) --
Share based compensation expense 194,636 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (28,202) (4,263)
Inventories (6,284) 4,469
Prepaid expenses and other assets (4,756) (9,383)
Deposits -- (14,025)
Deffered debt issue costs -- 35,763
Deferred rent 6,721 --
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 197,125 (7,353)
Accrued expenses 151,100 36,617
Settlement agreement liability (99,500) --
License agreement liability -- (60,000)
Deposit -- (7,292)
----------- -----------
Net cash used in operating activities (1,623,811) (1,379,653)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,810) (23,316)
Additions to patent costs (18,014) (7,523)
----------- -----------
Net cash used in investing activities (33,824) (30,839)
----------- -----------
F-4
(Continued)
Six Months Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 60,000 --
Proceeds from convertible debt 1,024,000 919,988
Payments for debt issue costs (85,000) --
Proceeds from shares to be issued 52,000 --
Proceeds from warrant exercise 300,200 108,960
----------- -----------
Net cash provided by financing activities 1,351,200 1,028,948
----------- -----------
NET DECREASE IN CASH (306,435) (381,544)
CASH AND CASH EQUIVALENTS, beginning of period 338,811 535,642
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 32,376 $ 154,098
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 10,000 $ 44,727
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Issuance of warrant derivative in connection
with private placement and debt financing $ 514,198 $ 724,305
=========== ===========
Beneficial conversion feature of debt $ 353,316 $ 275,695
=========== ===========
Common Stock issued upon conversion of debt $ 1,028,635 $ 1,410,266
=========== ===========
Common Stock issued in connection $ 320,500 $ --
with reduction of settlement liability =========== ===========
See accompanying notes.
F-5
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
One Voice Technologies, Inc. is incorporated under the laws of the
State of Nevada. The Company develops voice recognition software.
Prior to the fourth quarter of 2005, the Company's financial statements
had been prepared and presented as those of a development stage
enterprise. Based on the commercialization of its Mobile Voice product
during 2005, the Company believes that such presentation is no long
necessary.
Located in La Jolla, 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 commenced operations on July 14, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements include all adjustments which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the periods presented. Interim results
are not necessarily indicative of the results to be expected for the
full year ending December 31, 2006. The financial statements should be
read in conjunction with the financial statements included in the
Company's annual report on Form 10-KSB for the year ended December 31,
2005.
GOING CONCERN:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred significant losses since
inception of $45,573,000 and used cash for operations of $1,624,000
during the 6 months ended June 30, 2006. The Company also has a working
capital deficit of $4,168,000 and a stockholders' deficit of $4,396,000
as of June 30, 2006. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management is
currently seeking additional equity or debt financing and is pursuing
revenue-bearing contracts utilizing various applications of its
technology including wireless technology. The financial statements do
not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2006, the Financial Accounting Standards Board ("FASB")
released Statement No. 155, Accounting for Certain Hybrid Financial
Instruments, ("SFAS No. 155") was released. SFAS No.155 is an amendment
of Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities , and Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 155 establishes, among other items, the accounting for certain
derivative instruments embedded within other types of financial
instruments; and, eliminates a restriction on the passive derivative
instruments that a qualifying special-purpose entity may hold.
Effective for the Company beginning January 1, 2007, SFAS No. 155 is
not expected to have any impact on the Company's financial position,
results of operations or cash flows.
In March 2006, the FASB released Statement No. 156, Accounting for
Servicing of Financial Assets, an amendment of FASB Statement No. 140,
("SFAS No. 156") was released. SFAS No. 156 amends SFAS No. 140 to
require that all separately recognized servicing assets and liabilities
in accordance with SFAS No. 140 be initially measured at fair value, if
practicable. Furthermore, this standard permits, but does not require,
fair value measurement for separately recognized servicing assets and
liabilities in subsequent reporting periods. SFAS No. 156 is also
effective for the Company beginning January 1, 2007; however, the
standard is not expected to have an impact on the Company's financial
position, results of operation or cash flows.
F-6
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In the first quarter of 2006, the Company adopted Statement No. 154,
Accounting for Changes and Error Corrections--a replacement of APB
Opinion No. 20 and FASB Statement No. 3, ("SFAS No. 154") which changed
the requirements for the accounting for and reporting of a voluntary
change in accounting principle. The Company also adopted Statement No.
151, Inventory Costs--an amendment of ARB No. 43, Chapter 4 ("SFAS No.
151") which, among other changes, requires certain abnormal
expenditures to be recognized as expenses in the current period versus
capitalized as a component of inventory. The adoption of SFAS No. 154
did not impact the results presented and the impact on any future
periods will depend on the nature and significance of any future
accounting changes subject to the provisions of the statement. The
adoption of SFAS No. 151 did not have any impact on the Company's
financial position, results of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109" (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax
positions and requires that a Company recognizes in its financial
statements the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. Tha adoption of FIN 48
is not expected to have any impact on The Company's financial position.
Note 3 Earnings (Loss) Per Share
The following table illustrates the calculation of basic and diluted earnings
(loss) per common share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
BASIC
Net income (loss) $ 2,908,000 $ (1,167,000) $ (2,909,000) $ (3,232,000)
============= ============= ============= =============
Basic weighted-average common shares outstanding 471,037,000 280,726,000 440,249,000 270,987,000
============= ============= ============= =============
Basic earnings (loss) per common share $ 0.01 $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
DILUTED
Net income (loss) $ 2,908,000 $ (1,167,000) $ (2,909,000) $ (3,232,000)
============= ============= ============= =============
Weighted-average common shares outstanding 471,037,000 280,726,000 440,249,000 270,987,000
Add:
Exercise of warrants 250,218,000 -- -- --
Conversion of debt 103,964,000 -- -- --
------------- ------------- ------------- -------------
Diluted weighted-average shares outstanding 824,275,000 280,726,000 440,249,000 270,987,000
============= ============= ============= =============
Diluted earnings (loss) per common share $ 0.01 $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Due to the net losses for the three months ended June 30, 2005 and six
month ended June 30, 2006 and 2005, potentially dilutive securities have
been excluded in the calculation of diluted loss per share because their
inclusion would be anti-dilutive. Accordingly, basic and diluted loss per
share for the three month period ended June 30, 2005 and six month periods
presented are the same. Additionally, there were no dividends paid during
these reporting periods. Potentially dilutive securities excluded in the
calculation of diluted loss per common share include options to purchase
1,846,500 shares of common stock outstanding for the three months ended
June 30, 2005 and for the six-month period ended June 30, 2006 and 2005,
respectively, which had an exercise price greater than the average market
price for the common shares.
Options to purchase 59,621,500 shares of common stock were outstanding
during the three months ended June 30, 2006 but were not included in the
computation of diluted earnings per share because the option exercise
price was greater than the average market price of the common shares and
therefore, the effect would be anti-dilutive.
F-7
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(4) SETTLEMENT AGREEMENT LIABILITY:
On January 6, 2006, La Jolla Cove Investors, Inc. and the Company
entered into a Settlement Agreement and Mutual Release (the "Settlement
Agreement") in which La Jolla and we agreed to forever settle, resolve
and dispose of all claims, demands and causes of action asserted,
existing or claimed to exist between the parties because of or in any
way related to the Action. Under the Settlement Agreement, La Jolla and
the Company agreed that the parties shall bear their own costs and
attorney's fees associated with the Action. In addition, we agreed to
pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the
execution of the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006 (this payment was not made)
Interest accrued on the $400,000 unpaid balance at 8% per annum
commencing on the date of the Settlement Agreement until paid in full.
Because payment of $400,000 was not made within 30 days of its due date
(June 6, 2006), La Jolla is entitled to enter a judgment against us for
the unpaid balance, plus accrued interest and $100,000, upon the filing
of a declaration of default by La Jolla. We are currently negotiating
with La Jolla to restructure that payment obligation and avoid entry of
a judgment. Accordingly, $500,000 is accrued as a settlement liability
as of June 30, 2006.
(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, through December 31, 2004 (due on June 30th and
December 31st of each year). In lieu of scheduled payments, in May,
2003, based on a verbal agreement with Philips, the Company began
making monthly payments of $15,000, of which $10,000 is being applied
against the remaining minimum royalty payment due and $5,000 is being
applied against interest.
Under an amendment to the License Agreement entered into in January
2006, the term of the License Agreement was extended for five (5) years
through December 31, 2010, and the monthly minimum royalty payment was
set at $17,500. The amendment also granted the Company a five (5) year
interest-free period to repay the $930,000 currently outstanding. In
addition to minimum monthly royalty payments, the company is required
to make additional payments to Philips once it has become operationally
break-even. The additional monthly payments are capped at $200,000 per
calendar year. As of June 30, 2006 and December 31,2005, the
outstanding minimum royalty obligations pursuant to the License
Agreement was $930,000.
F-8
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(6) WARRANT DERIVATIVE LIABILITY
Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in
a Company's Own Stock ("EITF 00-19") specifies the conditions which
must be met in order to classify warrants issued in a company's own
stock as either equity or as a derivative liability. Evaluation of
these conditions under EITF 00-19 resulted in the determination that
these warrants should be classified as a derivative liability. In
accordance with EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked-to-market each
reporting period, with a corresponding non-cash gain or loss charged to
the current period. The Company valued all warrant derivative
liabilities as of June 30, 2006 using a Black-Scholes option pricing
model using the following assumptions: expected dividend yield of 0.0%,
expected stock price volatility of 118%, risk free interest rate of
5.13% and a remaining contractual life ranging from 1.78 years to 3.70
years. The Company valued all warrant derivative liabilities as of
December 31, 2005 using a Black-Scholes option pricing model using the
following assumptions: expected dividend yield of 0.0%, expected stock
price volatility of 100%, risk free interest rate of 4.35% and a
remaining contractual life ranging from 0.30 years to 4.00 years. The
valuation conducted as of June 30, 2006 resulted in a non-cash gain of
$221,000 with a corresponding decrease in the warrant derivative
liability. As of June 30, 2006, the fair value of the warrant
derivative liability was $2,325,695 respectively.
(7) NOTES PAYABLE:
On August 8, 2003 the Company issued a promissory note in the aggregate
principal amount of $100,000, paying interest at 8.0% per annum, due on
August 8, 2008. At June 30, 2006 the balance on the note payable was
$100,000.
(8) CONVERTIBLE NOTES PAYABLE:
On March 17, 2006, we completed a private placement pursuant to a
Subscription Agreement which we entered into with several institutional
investors, pursuant to which the investors subscribed to purchase an
aggregate principal amount of $700,000 in 6% secured convertible
promissory notes and one Class A common stock purchase warrant for each
one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum
payable June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to
convert the secured convertible notes after the date of issuance and at
any time, until paid in full into shares of our common stock. The
conversion price per share shall be the lower of (i) $0.043 or (ii) 80%
of the average of the three lowest closing bid prices for our common
stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market
or exchange where our common stock is listed or traded. The conversion
price is adjustable in the event of any stock split or reverse stock
split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion
price of the secured convertible notes will be adjusted in the event
that we spin off or otherwise divest ourselves of a material part of
our business or operations or dispose all or a portion of our assets.
Our obligation to repay all principal and accrued and unpaid interest
under the convertible notes is secured by all of our assets pursuant to
a certain Security Agreement dated February 16, 2006, which also
secures the remaining principal amount of our convertible notes in the
aggregate amount of $1,115,000 which we issued on March 18, 2005 and
July 13, 2005 to certain of the investors participating in this new
private placement.
We issued an aggregate of 50,972,111 Class A common stock purchase
warrants to the investors, representing one Class A warrant issued for
each one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The Class A warrants are exercisable until four years from the closing
date at an exercise price of $0.045 per share. The exercise price of
the Class A warrants will be adjusted in the event of any stock split
or reverse stock split, stock dividend, reclassification of common
stock, recapitalization, merger or consolidation. In addition, the
exercise price of the warrants will be adjusted in the event that we
spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets. The
fair value of the warrants of $457,000 using the Black Scholes option
pricing model is recorded as a derivative liability. The beneficial
conversion feature of approximately $243,000 will be amortized over the
life of the debt using the interest method.
F-9
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
On May 5, 2006 we completed a private placement pursuant to a
Subscription Agreement which we entered into with several institutional
investors, pursuant to which the investors subscribed to purchase an
aggregate principal amount of $324,000 in 6% secured convertible
promissory notes. The secured convertible notes bear simple interest at
6% per annum payable June 1, 2006 and semi-annually thereafter, and
mature 2 years after the date of issuance. Each investor shall have the
right to convert the secured convertible notes after the date of
issuance and at any time, until paid in full into shares of our common
stock. The conversion price per share shall be the lower of (i) $0.043
or (ii) 80% of the average of the three lowest closing bid prices for
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.
During the six months ended June 30, 2006, $1,029,000 of notes payable
was converted into approximately 74,410,000 shares of the Company's
common stock at an average conversion price of $0.014 per share.
Convertible notes payable at June 30, 2006 consists of the following:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ----------------- ---------------- --------------
LONG-TERM PORTION
Stonestreet Limited
Partnership December 23, 2007 $ 10,000 $ (5,206) $ 4,794
----------------- --------------- --------------
Alpha Capital
Aktiengesellschaft March 18, 2008 $ 25,000 $ (14,987) $ 10,013
----------------- --------------- --------------
Alpha Capital
Aktiengesellschaft July 13, 2008 $ 275,000 $ (186,537) $ 88,463
----------------- --------------- --------------
Alpha Capital
Aktiengesellschaft March 17, 2008 $ 250,000 $ (214,046) $ 35,954
----------------- --------------- --------------
Ellis International
Limited March 17, 2008 $ 73,665 $ (63,073) $ 10,592
----------------- --------------- --------------
Whalehaven Capital
Fund Limited March 17, 2008 $ 250,000 $ (214,046) $ 35,954
----------------- --------------- --------------
Momona Capital
Corp. March 17, 2008 $ 90,000 $ (77,056) $ 12,944
----------------- --------------- --------------
Alpha Capital
Aktiengesellschaft May 5, 2008 $ 108,000 $ (34,016) $ 73,984
----------------- --------------- --------------
Whalehaven Capital
Fund Limited May 5, 2008 $ 108,000 $ (34,016) $ 73,984
----------------- --------------- -------------
Omega Capital
Small Cap Fund May 5, 2008 $ 108,000 $ (34,016) $ 73,984
----------------- --------------- -------------
TOTAL LONG TERM PORTION $ 1,297,665 $ (876,999) $ 420,666
================= =============== ==============
F-10
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(9) COMMON STOCK:
During the six months ended June 30, 2006, Alpha Capital
Akteingesellschaft converted approximately $291,000 of notes payable
into approximately 21,196,000 shares of the Company's common stock at
an average conversion price of $0.014. During the same period, Alpha
Capital Akteingesellschaft exercised warrants to purchase 14,300,000
shares of common stock for cash in the amount of $200,200.
During the six months ended June 30, 2006, Whalehaven Fund, Limited
converted approximately $583,000 of notes payable into approximately
41,030,000 shares of the Company's common stock at an average
conversion price of $0.014.
During the six months ended June 30, 2006, Momona Capital Corp.
converted approximately $10,000 of notes payable into approximately
846,500 shares of the Company's common stock at an average conversion
price of $0.012.
During the six months ended June 30, 2006, Ellis International Ltd.
converted approximately $101,000 of notes payable into approximately
8,035,000 shares of the Company's common stock at an average conversion
price of $0.013. During the same period, Ellis International Ltd.
exercised warrants to purchase 6,250,000 shares of common stock for
cash in the amount of $100,000.
During the six months ended June 30, 2006, Omega Capital Small Cap Fund
converted approximately $28,000 of notes payable into approximately
2,167,000 shares of the Company's common stock at an average conversion
price of $0.013.
During the six months ended June 30, 2006, Osher Capital Inc. converted
approximately $16,000 of notes payable into approximately 1,134,000
shares of the Company's common stock at an average conversion price of
$0.014.
During the six months ended June 30, 2006, an accredited investor
purchased an aggregate of 3,000,000 shares of restricted common stock
for a total purchase price of $60,000. In addition, the investor
received an aggregate of 3,000,000 Class A and 3,000,000 Class B common
stock purchase warrants with an exercise price of $0.045 and $0.06 per
share respectively.
During the six months ended June 30, 2006, an accredited investor
agreed to purchase an aggregate of 4,000,000 shares of restricted
common stock for a total purchase price of $52,000. The shares were
issued subsequent to June 30, 2006.
(10) ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 2006 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.123 (Revised 2004), "Share Based
Payment," ("SFAS 123"), using the modified prospective method. In
accordance with SFAS No. 123, the Company measures the cost of employee
services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over
the period during which an employee is required to provide service in
exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using
the Black-Scholes option-pricing model.
Under the modified prospective approach, SFAS 123 applies to new awards
and to awards that were outstanding on January 1, 2006 that are
subsequently modified, repurchased or cancelled. Under the modified
prospective approach, compensation cost recognized for the first
quarter of fiscal 2006 includes compensation cost for all share-based
payments granted prior to, but not yet vested on, January 1, 2006,
based on the grant-date fair value estimated in accordance with the pro
forma provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123R.
Prior periods were not restated to reflect the impact of adopting the
new standard. During the six months ended June 30, 2006, the Company
recorded $194,636 in non-cash charges for the implementation of SFAS
123R. As of June 30, 2006, there was approximately $277,700 of total
unrecognized compensation costs related to unvested options.
F-11
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The fair value of stock options at date of grant was estimated using
the Back-Scholes model with the following assumptions: expected
volatility of 90.9%, expected term of 2.0 years, risk-free interest
rate of 5.27%, and expected dividend yield of 0%. Expected volatility
is based on the historical volatilities of the Company's common stock.
The expected life of employee stock options is determined using
historical data of employee exercises and represents the period of time
that stock options are expected to be outstanding. The risk free
interest rate is based on the U.S. Treasury Moody AAA for the expected
life of the stock option.
The following table summarizes the stock option transactions during the six
months ended June 30, 2006:
June 30, 2006
-----------------------------------------------------
Weighted
average
Weighted remaining
average contractual
exercise life
Shares price (in years)
-------- ------------------ ----------
Options outstanding 1/1/2006 1,921,500 $ 1.47 5.63
Options granted 57,700,000 $ 0.016 9.58
Options exercised -- -- --
Options terminated -- -- --
Options outstanding 6/30/2006 59,621,500 $ .06 9.44
Options exercisable 6/30/2006 20,911,083 $ .15 9.44
Prior to January 1, 2006, the Company accounted for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Had compensation cost for the plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS No. 123," the Company's net earnings and earnings per share
would have been:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------- -------------
Net loss, as reported $ (1,167,369) $ (3,232,185)
Deduct: total stock based
employee compensation expense
determined under fair value based
methods for all options, net of (200) (300)
related tax effects -- --
Pro forma net loss (1,167,569) (3,232,485)
Earnings per share:
Basic- as reported $ (0.01) $ (0.01)
============= =============
Basic- pro forma $ (0.01) $ (0.01)
============= =============
Weighted average
common equivalent
shares outstanding
basic and diluted 280,726,000 270,987,000
============= ============
The pro forma compensation costs presented above were determined using the
weighted average fair values of options granted under the Company's stock option
plans. The fair value of the grants was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions. See the 2005
assumptions below:
Expected life 3 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
F-12
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(11) SUBSEQUENT EVENTS:
On July 6, 2006, we completed a private placement pursuant to a
Subscription Agreement which we entered into with several accredited
and/or qualified institutional investors, pursuant to which the
investors subscribed to purchase an aggregate principal amount of
$550,000 in 6% secured convertible promissory notes and 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) $0.015 or (ii) 80% of the average of the three lowest closing bid
prices for our common stock for the 30 trading days prior to, but not
including, the conversion date as reported by Bloomberg, L.P. on any
principal market or exchange where our common stock is listed or
traded. The conversion price is adjustable in the event of any stock
split or reverse stock split, stock dividend, reclassification of
common stock, recapitalization, merger or consolidation. In addition,
the conversion price of the secured convertible notes will be adjusted
in the event that we spin off or otherwise divest ourselves of a
material part of our business or operations or dispose all or a portion
of our assets.
We issued an aggregate of 48,530,839 Class A common stock purchase
warrants to the investors, representing one Class A warrant issued for
each one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The Class A warrants are exercisable until four years from the closing
date at an exercise price of $0.015 per share. The exercise price of
the Class A warrants will be adjusted in the event of any stock split
or reverse stock split, stock dividend, reclassification of common
stock, recapitalization, merger or consolidation. In addition, the
exercise price of the warrants will be adjusted in the event that we
spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets.
F-13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO STATEMENTS CONCERNING ANTICIPATED
TRENDS IN REVENUES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. THERE IS ABSOLUTELY NO ASSURANCE
THAT WE WILL ACHIEVE THE RESULTS EXPRESSED OR IMPLIED IN FORWARD LOOKING
STATEMENTS.
OVERVIEW 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. 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, we believe that the Mobile Messaging market, which has
both business and consumer market applications including: E-mail, Instant
Messages, and SMS (Short Message Service), is extremely large and is growing at
an astonishing rate. Billions of text messages are sent globally every year, and
messaging has also shown the consistent ability to generate significant revenue
for carriers. 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.
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).
The Company recently signed an agreement with Tata Consultancy Services (TCS) in
which TCS will begin selling and hosting One Voice's MobileVoice services in
India and the rest of Asia. The Telecom Group within TCS, with annual revenues
of $490M USD, has existing carrier customers throughout these regions and our
goal is to jointly win carrier contracts and have our MobileVoice solution
hosted and managed by TCS in India.
The Company recently signed an agreement with VeriSign, Inc. in which VeriSign
has begun testing One Voice's MobileVoice services at a select VeriSign carrier
customer. Our goal is to jointly win contracts for MobileVoice services and
eventually have our MobileVoice service managed and hosted by VeriSign in the
United States and Latin America.
PC SECTOR
In the PC sector, we believe that digital in-home entertainment is rapidly
growing with the wide acceptance of digital photography, MP3 music and videos,
along with plasma and LCD TV's. We believe that companies including Apple,
Microsoft and Intel are actively creating products and technology, which allow
consumers to experience the next generation of digital entertainment. The
Company's Media Center Communicator(TM) product works with Microsoft Windows XP
Media Center Edition 2005 to add voice-navigation and a full suite of
communication features allowing consumers to talk to their Media Center PC to
play music, view photo slideshows, watch and record TV, place Voice-Over-IP
(VoIP) phone calls, read and send e-mail and Instant Message friends and family,
all by voice.
The Company's strategy, in the PC Sector, is to continue its aggressive
marketing efforts to sign-up system integrators, such as those engaged in the
business of home theatre installation and value-added resellers under the
Company's reseller program launched in 2005. The Company will continue to pursue
OEMs for bundling agreements of its' Media Center Communicator product. These
OEM agreements may include revenue share business models as well as discounted
individual user license fees. The Company will continue to use industry
associations, forums and tradeshow events such as CES, CEDIA, EHX and Digital
Life to promote awareness of our products and build strategic alliances.
14
The Company is scheduled to have its Media Center Communicator bundled with a
tier-one PC manufacturer potentially this January, 2007 to coincide with the
Windows Vista launch for new PC purchases.
The Company recently gained certification by Microsoft to produce a Windows XP
Media Center 2005 remote control device. This One Voice remote contains the
standard Media Center remote buttons, such as Play, Pause, etc., with the
addition of a unique TALK button which allows users to control the Media Center
functionality using One Voice's voice recognition technology. In addition, this
TALK button allows users to place VoIP (Voice-Over-IP) phone calls as if they
were using a regular telephone. One Voice has a patent pending on this remote.
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
The following table sets forth selected information from the statements of
operations for the three months ended June 30, 2006 and 2005.
SELECTED STATEMENT OF OPERATIONS INFORMATION
Three Months Ended
June 30,
2006 2005
----------- -----------
Gross revenues $ 109,851 $ 23,937
Cost of sales (16,552) (3,725)
General and administrative expenses (962,475) (620,438)
Other income (expenses) 3,776,816 (567,143)
----------- -----------
Net Income (loss) $ 2,907,640 $(1,167,369)
=========== ===========
DISCUSSION OF THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE
MONTHS ENDED JUNE 30, 2005.
Gross revenues amounted to $110,000 and $24,000 for the three months ended June
30, 2006 and 2005, respectively. The increase in revenues compared with the
prior year period resulted from the addition of three MobileVoice customers and
one Alternative to Directory Assistance customer.
General and administrative expenses increased to $962,000 for the three months
ended June 30, 2006 from $620,000 for the same period in 2005. Salary and wage
expense was $367,000 for the three months ended June 30, 2006 as compared to
$346,000 for the same period in 2005. Depreciation and amortization expenses
decreased to $31,000 for the three months ended June 30, 2006 from $45,000 for
the same period in the prior year, primarily due to the retirement of fixed
assets. Amortization and Depreciation expenses consisted of patent and
trademarks, computer equipment and software development fees. Interest expense
decreased to $222,000 in 2006, as compared to $568,000 in 2005
We had a net income of $2,908,000, or basic and diluted net income per share of
$0.01, for the three months ended June 30, 2006 compared to a net loss of
$1,167,000, or basic and diluted net loss per share of $0.01, for the same
period in 2005.
SIX MONTH PERIOD IN 2006 COMPARED WITH SIX MONTH PERIOD IN 2005
Net revenue totaled $171,000 for the six months ended June 30, 2006. Net
revenues totaled $34,000 for the six months ended June 30, 2005.
15
General and administrative expenses increased to $1,953,000 for the six months
ended June 30, 2006 ("2006 Period") from $1,637,000 for the six months ended
June 30, 2005 ("2005 Period"). The net increase in operating expenses over the
2005 Period was a result of the increase in stock option/Compensation expense
and an increase in License fee expense. Additionally, salary and wage expense
increased to $749,000 for the 2006 Period as compared to $674,000 for the 2005
Period. Depreciation and amortization decreased to $63,000 for the 2006 Period
from $96,000 for the 2005 Period.
Other income/(expense) decreased to $1,090,000 for the six months ended June 30,
2006 ("2006 Period") from $1,625,000 for the six months ended June 30, 2005
("2005 Period"). The net decrease in other income/(expense) over the 2005 Period
was a direct result of a non-cash interest expense associated with debt
financing. Non-cash interest expense associated with debt financing decreased to
$1,115,000 for the 2006 Period, as compared to $1,625,000 for the 2005 Period.
We had a net loss of $2,909,000 or basic and diluted net loss per share of $0.01
For the six months ended June 30, 2006 compared to a net loss of $3,232,000 or
basic and diluted net loss per share of $0.01 for the six months ended June 30,
2005.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had a negative working capital of $4,168,000 as compared to
a negative working capital of $3,731,000 at December 31, 2005.
On May 5, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several accredited and/or qualified
institutional investors pursuant to which the investors subscribed to purchase
an aggregate principal amount of $324,000 in 6% secured convertible promissory
notes.
The secured convertible notes bear simple interest at 6% per annum payable upon
each conversion, June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance at any time, until paid in
full, at the election of the investor into fully paid and nonassessable shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.043 or (ii) 80% of the average of the three lowest closing bid prices for our
common stock for the 30 trading days prior to, but not including, the conversion
date as reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. The conversion price is adjustable in the
event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the conversion price of the secured convertible notes will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets. Our
obligation to repay all principal, and accrued and unpaid interest under the
convertible notes is secured by all of our assets pursuant to a certain Security
Agreement dated as of February 16, 2006, which also secures the remaining
principal amount of our convertible notes in the aggregate amount of $1,815,000
which we issued on March 18, 2005, July 13, 2005 and March 20, 2006 to certain
of the investors participating in this new private placement.
Net cash used in operating activities was $1,624,000 for the 2006 Period
compared to $1,380,000 for the 2005 Period. We believe that our average monthly
cash requirements approximate $270,000.
Net cash used in investing activities was $34,000 for the 2006 Period compared
to $31,000 for the 2005 Period. During the six months ended June 30, 2006, cash
was primarily used for capitalized computer equipment and patents.
Net cash provided by financing activities was $1,351,000 for the 2006 Period
compared to $1,029,000 for 2005 Period.
We incurred a net loss of $2,909,000 during the 2006 Period and had an
accumulated deficit of $45,573,000. Our losses through June 30, 2006 included
interest and amortization expenses, development costs and operational and
promotional expenses.
16
We anticipate maintaining a cash balance through our financial partners that
will sustain operations through December 2006. We continue to rely heavily on
our current method of convertible debt and equity funding, which has financed us
since 2001, until we are operationally cash flow positive. The losses through
the quarter ended June 30, 2006 were due to minimal revenue and our operating
expenses, with the majority of expenses in the areas of: salaries, legal fees,
consulting fees, as well as amortization expense relating to software
development, debt issue costs and beneficial conversion features. We face
considerable risk in completing each of our business plan steps, including, but
not limited to: a lack of funding or available credit to continue development
and undertake product rollout; potential cost overruns; a lack of interest in
its solutions in the market on the part of wireless carriers or other customers;
potential reduction in wireless carriers which could lead to significant delays
in consummating revenue bearing contracts; and/or a shortfall of funding due to
an inability to raise capital in the securities market. Since further funding is
required, and if none is received, we would be forced to rely on our existing
cash in the bank or secure short-term loans. This may hinder our ability to
complete our product development until such time as necessary funds could be
raised. In such a restricted cash flow scenario, we would delay all cash
intensive activities including certain product development and strategic
initiatives described above.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Item 3. 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.
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.
17
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.
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 $(8,752,000)
compared to $(5,383,000) as previously reported, and a net loss for the fiscal
year ended December 31, 2003 to $(5,839,000) compared to $(5,932,000) as
previously reported. In addition, total liabilities for the fiscal year ended
December 31, 2004 and 2003 was restated to $6,464,000 and $1,431,000
respectively, compared to $1,523,000 and $1,140,000, respectively, as previously
reported.
In accordance with Exchange Act Rules 13a-15 and 15d-15, and after receipt of
the Letter, 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:
18
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.
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.
19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no bankruptcy, receivership or similar proceedings.
There have been no material reclassifications, mergers, consolidations, or
purchase or sale of a significant amount of assets not in the ordinary course of
business.
As previously disclosed to the public in our reports filed with the Securities
and Exchange Commission, we were the subject of a legal proceeding in the San
Diego County Superior Court (the "Court") entitled La Jolla Cove Investors, Inc.
("La Jolla") vs. One Voice Technologies, Inc., Case No. GIC850038 (the "Action")
which was filed with the Court for an unspecified amount of damages. La Jolla
held our convertible debentures related to our past financings. La Jolla claimed
that we failed to honor its conversion notices resulting in damages. La Jolla
filed a similar suit in 2004 and dismissed the suit after we transferred shares
pursuant to conversion notices and an interim settlement agreement. In
particular, we agreed to and did register 8,425,531 shares of our common stock
to honor the past conversion notice and an additional 8,425,531 shares pursuant
to such interim settlement agreement. Part of the resolution of the first
lawsuit restrained La Jolla from tendering additional conversion notices for a
specified period of time. During that time period, La Jolla requested that we
amend the terms of the outstanding debentures, but we refused to do so. We
tendered back the outstanding debenture amounts to La Jolla on two occasions. We
secured alternative financing and did not honor further conversion notices from
La Jolla. The Action was thereafter commenced by La Jolla.
On January 6, 2006, La Jolla and the Company entered into a Settlement Agreement
and Mutual Release (the "Settlement Agreement") in which La Jolla and we agreed
to forever settle, resolve and dispose of all claims, demands and causes of
action asserted, existing or claimed to exist between the parties because of or
in any way related to the Action. Under the Settlement Agreement, La Jolla and
the Company agreed that the parties shall bear their own costs and attorney's
fees associated with the Action. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the
execution of the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006.
20
Interest accrued on the $400,000 unpaid balance at 8% per annum commencing on
the date of the Settlement Agreement until paid in full. Because payment of
$400,000 was not made within 30 days of its due date (June 6, 2006), La Jolla is
entitled to enter a judgment against us for the unpaid balance, plus accrued
interest and $100,000, upon the filing of a declaration of default by La Jolla.
We are currently negotiating with La Jolla to restructure that payment
obligation and avoid entry of a judgment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The securities described below represent our securities sold by us for the
period starting April 1, 2006 and ending June 30, 2006 that were not registered
under the Securities Act of 1933, as amended, all of which were issued by us
pursuant to exemptions under the Securities Act. Underwriters were involved in
none of these transactions.
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
During the six months ended June 30, 2006, an accredited investor agreed to
purchase an aggregate of 4,000,000 shares of restricted common stock for a total
purchase price of $52,000. The shares were issued subsequent to June 30, 2006.
SALES OF DEBT AND WARRANTS FOR CASH
On May 5, 2006, we completed a private placement pursuant to a Subscription
Agreement which we entered into with several institutional investors, pursuant
to which the investors subscribed to purchase an aggregate principal amount of
$324,000 in 6% secured convertible promissory notes.
The secured convertible notes bear simple interest at 6% per annum payable June
1, 2006 and semi-annually thereafter, and mature 2 years after the date of
issuance. Each investor shall have the right to convert the secured convertible
notes after the date of issuance and at any time, until paid in full into shares
of our common stock. The conversion price per share shall be the lower of (i)
$0.043 or (ii) 80% of the average of the three lowest closing bid prices for 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.
OPTION GRANTS
There were no options granted during the second quarter.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On April 20, 2006, the Company issued 3,000,000 restricted common shares in
exchange for an agreement to provide consulting services and a release on
potential claims.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS:
Exhibit Number Description
-------------- -----------
31.1 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.
32.1 Certification Chief Executive Officer and Interim Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
In accordance with the requirements of the Exchange Act of 1933, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONE VOICE TECHNOLOGIES, INC., A NEVADA CORPORATION
DATE: JULY 27, 2007 BY: /S/ DEAN WEBER
--------------------------------------------
DEAN WEBER, CHAIRMAN, PRESIDENT & CHIEF
EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE
OFFICER) AND INTERIM CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
21