SECURITIES AND EXCHANGE COMMISSION
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, 2004
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.)
6333 Greenwich Drive, Ste 240, San Diego CA 92122
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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(g) of the Exchange Act:
COMMON STOCK-$.001 PAR VALUE
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(Title of Class)
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, 2004 were $2,105.
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 28, 2005, based on the average of the
closing bid and asked prices of one share of the Common Stock of the Company was
$9,900,000.
As of March 28, 2005 the issuer had 272,410,644 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. (the "Company") is filing this Amendment No. 3 (the
"Amendment") to its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004, as filed with the Securities and Exchange Commission on April
1, 2005 (the "Annual Report") to amend and restate Items 6 and 7 of the Annual
Report due to the following:
Subsequent to the issuance of the financial statements for the years ended
December 31, 2004 and 2003, management determined that the Company's previous
accounting for its warrants did not comply with Emerging Issues Task Force
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). As a result, the
Company determined that the fair value of the warrants should have been
reclassified from additional paid in capital, to a current liability, and that
the warrant fair value should have been marked to market as of the balance sheet
date with the corresponding non-cash gain or loss reflected in the results of
operations. Accordingly, the previously reported financial statements for the
years ended December 31, 2004 and 2003 have been restated. Specific effects of
the restatements on the previously reported financial statements are described
in Note 14 to the financial statements.
The complete text of Items 6 and 7 are included in this Amendment pursuant to
Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
In addition, the Amendment includes the certifications required pursuant to
Rules 13a-14(a)/15d-14(a) and Rules 13a-14(b)/15d-14(b) of the Exchange Act,
which have been re-executed and re-filed as of the date of this Amendment. The
certifications of our Chief Executive Officer (principal executive officer) and
Chief Finance Officer (principal financial officer) are attached to this
Amendment as Exhibits 31.1, 31.2, 32.1, and 32.2.
With the exception of the amended and restated financial information relative to
(i) the revision of the Going Concern section of Note 1, the revision of pro
forma disclosures in the incentive and stock based compensation section in Note
2, the revision of Note 9, Income Taxes, and the inclusion of Note 14,
Restatement to Financial Statements, (ii) the re-issuance of Report of
Independent Registered Public Accounting Firm, (iii) the adjustments to the
balance sheets, statements of operations, stockholders' equity and cash flows
and (iv) the adjustments to the results of operations section included in
Management's Discussion and Analysis of Financial Condition or Plan of
Operations, this Amendment continues to speak as of the date of the Annual
Report and we have not updated the disclosure contained herein to reflect events
that have occurred since the filing of the Annual Report.
-i-
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
One Voice Technologies, Inc. is a voice recognition technology company with over
$30 million invested in Research and Development and deployment of more than 20
million products worldwide in seven languages. To date, our customers include:
ABS Computer Technologies, Golden State Cellular, Inland Cellular, Niveus Media,
Panhandle Telephone Cooperative, Plateau Wireless, Tata Infotech, Telispire PCS,
Walt Disney Internet Group, Warner Home Video and West Central Wireless. 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 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.
Since the beginning of 2004, One Voice has made solid progress in closing deals
with several telecom carriers and select PC OEM's. Both Golden State Cellular
and Inland Cellular have launched our MobileVoice service, to their subscribers,
in December 2004 and we anticipate West Central Wireless to launch our
MobileVoice service, to their subscribers, in April, 2005. These three carrier
launches of our MobileVoice product show the commercial readiness along with the
start of revenue generation from our MobileVoice product.
Additionally, since the beginning of 2004 One Voice has been awarded two patents
in China and two patents covering 18 European countries. These patents extend
our Intellectual Property (IP) coverage from the United States, Australia, China
and throughout select European countries, giving One Voice added protection of
our technology.
Our corporate focus for 2004 and 2005 is to generate monthly recurring revenue
from our MobileVoice product in the telecom sector and to generate sales from
our Media Center Communicator product in the PC sector. As a small company with
limit resources we have not actively focused on contracts that will not generate
substantial revenue. Accordingly, we have cancelled our contract with San Diego
State University (SDSU) since SDSU did not provide adequate on-campus marketing
as agreed upon. One Voice could not provide on-campus marketing/sales support so
it was in our best interest to discontinue the agreement. Our company's focus
must remain on substantial revenue bearing deals where our partners (such as a
telecom carrier or PC OEM) will actively market our products and services to
their customers/subscribers. In addition, we have not pursued Montan Telecom nor
carriers in Mexico since these opportunities will likely not generate
substantial revenue in the near-term. We feel this strategy is in the best
interest of our shareholders. Therefore, we will continue to focus efforts on
domestic telecom carriers and PC OEM's for our products sales/distribution. We
anticipate that by the end of 2005, One Voice will have contracts with telecom
carriers with an aggregate base of over 2 million subscribers domestically.
In 2004, One Voice was selected by Tata Infotech, a leading Indian IT 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 high growth
Indian telecom market. We have subsequently worked closely with members of their
team to tune our MobileVoice platform to increase 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 2005 with a potential
launch in 2006. 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 substantial revenue with Tata and
will continue to apply resources to make this a successful venture in the Indian
market.
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We are very excited to have been selected by Microsoft in May 2004 to be
showcased in their Windows Hardware Showcase at the 2004 Windows Hardware
Engineering Conference (WinHEC). At WinHEC, Microsoft demonstrated our Media
Center Communicator product running on their Windows XP Media Center Edition
2004 operating system. Since Microsoft's recent, October 12, 2004, launch of
their updated Windows XP Media Center Edition 2005 product, One Voice has
finalized and launched our Media Center Communicator product which now works
with this update to Windows XP Media Center 2005. Our Communicator product adds
voice-recognition capabilities to the Windows XP Media Center 2005 product. In
January, 2005 our Media Center Communicator was demonstrated by both Microsoft
and Intel at the annual Consumer Electronics Show (CES) held in Las Vegas,
Nevada. Additionally, our Media Center Communicator product was demonstrated by
Intel on a nationwide media tour which included several on-air news broadcasts.
Intel recently demonstrated our Media Center Communicator at their annual Intel
Developers Forum (IDF) held in San Francisco, CA. One Voice was also selected by
the CTIA Wireless organization to showcase our Media Center Communicator in
their Wireless Home at the annual CTIA Wireless 2005 tradeshow.
In summary, since the beginning of 2004 One Voice has closed several contracts
with telecom carriers and we will begin seeing revenue generated starting with
the launch by Golden State Cellular, Inland Cellular and West Central Wireless.
We were selected by Microsoft to showcase our Media Center Communicator at both
WinHEC and CES and Intel showcased our Media Center Communicator at CES and
Intel Developer Forum. Additionally, we have launched our Media Center
Communicator product to add voice recognition to the Windows XP Media Center
operating system. Our focus is to generate revenue and we are committed to
building shareholder value in our company.
Critical Accounting Policies
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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, 2004 compared with the year ended
December 31, 2003.
Revenues totaled $2,105 for the year ended December 31, 2004. Revenues of
$50,000 were earned for the year ended December 31, 2003. The recognition of
revenues for the year ended 2003 resulted primarily from work performed in the
DVD/Multimedia sector.
Operating expenses decreased to $3,733,753 for the year ended December 31, 2004
from $3,665,261 for the same period in 2003. The decrease in operating expenses
over the same period in 2003 was a direct result of a decrease of all major
expense categories for the period as compared to the year prior. Salary and wage
expense was $1,229,002 for the year ended December 31, 2004 as compared to
approximately $1,195,000 for the same period in 2003. The increase in 2004 as
compared to 2003 arose primarily from the addition of a marketing employee.
Advertising and promotion expense totaled $27,262 for the year ended December
31, 2004 as compared to $11,770 for the same period in 2003. Advertising and
promotion expense increase resulted from the company increasing it's travel
budget. Legal and consulting expenses decreased to approximately $263,000 for
the year ended December 31, 2004 from approximately $314,000 for the same period
in 2003. Depreciation and amortization expenses decreased to approximately
$499,000 for the year ended December 31, 2004 from approximately $664,000 for
the same period in the prior year. Amortization and Depreciation expenses
consisted of patent and trademarks, computer equipment, consultant fees, and
tradeshow booth. Interest expense decreased to approximately $1,650,000 in 2004,
as compared to approximately $2,311,000 in 2003, primarily due to a decrease in
the number of convertible debenture financings that the Company engaged in and
the conversion of previously outstanding debt into common stock.
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We had a net loss of $8,751,890 or basic and diluted net loss per share of $0.05
for the year ended December 31, 2004 compared to a net loss of $5,838,894 or
basic and diluted net loss per share of $0.09 for the same period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had a working capital deficit of $5,752,097 as compared
with a working capital deficit of $1,082,259 at December 31, 2003.
Net cash used for operating activities was $2,671,305 for the year ended
December 31, 2004 compared to $2,559,083 for the year ended December 31, 2003.
From inception on January 1, 1999 to December 31, 2004, net cash used for
operating activities was $24,203,229.
Net cash used for investing activities was $150,844 for the year ended December
31, 2004 compared to net cash used of $143,213 for the year ended December 31,
2003. From inception on January 1, 1999 to December 31, 2004, net cash used for
investing activities was $4,931,212.
Net cash provided by financing activities was $3,304,082 for the year ended
December 31, 2004 compared to $2,006,850 for the year ended December 31, 2003.
From inception on January 1, 1999 to December 31, 2004 net cash provided by
financing activities was $29,670,083.
We incurred a net loss of $8,751,890 during the year ended December 31, 2004 and
had an accumulated deficit of $41,117,820. Our losses through December 2004
included interest expense, amortization of software licensing agreements and
development costs and operational and promotional expenses. Sales of our
convertible debt securities have allowed us to maintain a positive cash flow
balance from financing activities.
On April 13, 2003, the Company entered into a securities purchase agreement with
four accredited investors, Alpha Capital Aktiengesellschaft, Ellis Enterprises
Ltd., Greenwich Growth Fund Limited, and 01144 Limited for the issuance of 4%
convertible debentures in the aggregate amount of $600,000. The notes bear
interest at 4% (effective interest rate in excess of 100%), mature on April 13,
2005, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.1166 or (ii) 80% of the average of the five
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before April 13, 2005 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued an
aggregate of 350,004 warrants to the investors. The warrants are exercisable
until April 13, 2008 at a purchase price of $.1272 per share. Net proceeds
amounted to approximately $540,000, net of debt issue cash cost of $60,000. The
fair value of the warrants of $25,000 using Black Scholes option pricing model
and the beneficial conversion feature of approximately $515,000 have been
amortized over the life of the debt using the interest method. Upon conversion
of the debt, any unamortized debt issue costs was charged to interest expense.
On June 30, 2003, the Company entered into a securities purchase agreement with
two accredited investors, Alpha Capital Aktiengesellschaft, and Bristol
Investment Fund Limited for the issuance of 4% convertible debentures in the
aggregate amount of $500,000. The notes bear interest at 4% (effective interest
rate in excess of 100% on the aggregate amount), mature on June 20, 2005, and
are convertible into the Company's common stock, at the holders' option, at the
lower of (i) $0.1023 or (ii) 80% of the average of the five lowest closing bid
prices for the common stock on a principal market for the 30 trading days before
but not including the conversion date. The note may not be paid, in whole or in
part, before June 30, 2005 without the consent of the holder. The full principal
amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, the Company issued an aggregate of 291,670
warrants to the investors. The warrants are exercisable until June 30, 2008 at a
purchase price of $.1116 per share. Net proceeds amounted to approximately
$437,500, net of debt issue cash cost of $62,500. The fair value of the warrants
of $11,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $143,000 was amortized as interest expense
over the life of the debt using the interest method. Upon conversion of the
debt, any unamortized debt issue costs was charged to interest expense.
-3-
On September 17, 2003, the Company entered into a securities purchase agreement
with three accredited investors, Alpha Capital Aktiengesellschaft, Bristol
Investment Fund Limited and Ellis Enterprises Ltd for the issuance of 6%
convertible debentures in the amount of $375,000. The notes bear interest at 6%
(effective interest rate of 80% on the aggregate amount), mature on September
17, 2004, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.0474 or (ii) 78% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before September 17, 2004 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued 4,746,837
warrants to the investors. The warrants are exercisable until September 17, 2010
at a purchase price of $.0474 per share. Net proceeds amounted to approximately
$334,500, net of debt issue cash cost of $40,500. The relative value (limited to
the face amount of the debt) of all the warrants of $164,000 using Black Scholes
option pricing model, cash cost of $40,500 and the beneficial conversion feature
of approximately $170,500 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
On November 10, 2003, the Company entered into a securities purchase agreement
with three accredited investors, Alpha Capital Aktiengesellschaft, Bristol
Investment Fund Limited and Ellis Enterprises Ltd for the issuance of 6%
convertible debentures in the amount of $375,000. The notes bear interest at 6%
(effective interest rate of 80% on the aggregate amount), mature on November 10,
2004, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.0474 or (ii) 78% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before November 10, 2004 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued 4,746,837
warrants to the investors. The warrants are exercisable until November 10, 2010
at a purchase price of $.0474 per share. Net proceeds amounted to approximately
$345,000, net of debt issue cash cost of $30,000. The relative value (limited to
the face amount of the debt) of all the warrants of $127,000 using Black Scholes
option pricing model, cash cost of $30,000 and the beneficial conversion feature
of approximately $211,000 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
On December 12, 2003, the Company entered into a securities purchase agreement
with La Jolla Cove Investors, Inc. for the issuance of a 7.75% convertible
debenture in the aggregate amount of $250,000. The note bears interest at 7.75%,
matures on December 12, 2005, and is convertible into the Company's common
stock, at the holders' option. The number of common shares this debenture may be
converted is equal to the dollar amount of the debenture being converted
multiplied by eleven, minus the product of the Conversion Price multiplied by
ten times the dollar amount of the Debenture being converted, and the entire
forgoing result shall be divided by the Conversion Price. The Conversion Price
is defined as the lower of (i) $0.25 or (ii) 80% of the average of the three
lowest volume weighted average prices during the twenty (20) trading days prior
to Holder's election to convert. Beginning in the first full calendar month
after the Registration Statement is declared effective, Holder shall convert at
least 7%, but no more than 15% (such 15% maximum amount to be cumulative from
the deadline), of the face value of the debenture per calendar month into common
shares of the company, provided that the common shares are available, registered
and freely tradable. In addition, the Company issued an aggregate of 2,500,000
warrants to the investors. The warrants are exercisable until December 12, 2006
at a purchase price of $1.00 per share. Holder will exercise at least 7%, but no
more than 15% (such 15% maximum amount to be cumulative from the Deadline), of
the Warrants per calendar month, provided that the Common Shares are available,
registered and freely tradable. The 15% monthly maximum amount shall not be
applicable if the Current Market Price of the Common Stock at anytime during the
applicable month is higher than the Current Market Price of the Common Stock on
the Closing Date. In the event Holder does not exercise at least 7% of the
Warrants in any particular calendar month, Holder shall not be entitled to
collect interest on the Debenture for that month. The fair value of the warrants
of $18,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $219,000 will be amortized as interest
expense over the life of the debt using the interest method. Upon conversion of
the debt mentioned here, any unamortized debt issue costs will be charged to
expense. As of December 31, 2003 the principal balance amounted to $250,000 and
the unamortized debt discount amounted to approximately $243,000.
-4-
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.
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.
Convertible notes payable had a face value of $1,317,000 at December 31, 2004.
Convertible notes payable had a face value of $655,000 at December 31, 2003.
We anticipate maintaining a cash balance through our financial partner that will
sustain operations up to December 2005. We continue to rely heavily on our
current method of convertible debt and equity funding, which have financed us
since 2001, until we are operationally breakeven. The losses through the year
ended December 31, 2004 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
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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.
SUBSEQUENT EVENTS
Subsequent to December 31, 2004, the following note holders converted principal
into common shares. Alpha Capital Akteingesellschaft converted $350,000 of note
principal into 9,724,106 common shares at an average conversion price of $0.037.
Whalehaven Fund Ltd. converted $40,000 of note principal into 1,026,466 common
shares at an average conversion price of $0.039. Ellis International Limited
converted $84,500 of note principal into 2,097,779 common shares at an average
conversion price of $0.04. Stonestreet Limited Partnership converted $200,000 of
note principal into 5,928,797 common shares at an average conversion price of
$0.034. Momona Capital Corp. converted $75,000 of note principal into 1,938,262
common shares at an average conversion price of $0.038.
On March 18, 2005, we held our first closing pursuant to a Subscription
Agreement we 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. We issued the aforementioned securities to the
investors pursuant to Rule 506 of Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Act"), and/or Section 4(2) of the Act.
$1,000,000 of the purchase price was paid to us by the investors on the initial
closing date of March 18, 2005 and $1,000,000 of the purchase price will be paid
to us pursuant to the second closing, which will take place on the 5th day after
the actual effectiveness of the registration statement which we are required to
file with the Securities and Exchange Commission registering the shares of our
common stock, par value $.001 per share, issuable upon conversion of the
promissory notes and exercise of the warrants.
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.
We issued an aggregate of 29,069,768 Class A common stock purchase warrants and
29,069,768 Class B common stock purchase warrants to the investors, representing
100 Class A and Class B warrants issued for each 100 shares which would be
issued on 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.
-6-
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS (RESTATED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNING FIRM F-1
FINANCIAL STATEMENTS (as restated):
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-23
-7-
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
One Voice Technologies
We have audited the accompanying balance sheets of One Voice Technologies, Inc.
(a Development Stage Enterprise) as of December 31, 2004 and 2003, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years then ended and for the period January 1, 1999 (inception) to
December 31, 2004. 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 (a
Development Stage Enterprise) as of December 31, 2004 and 2003, and the results
of its operations and its cash flows for the years then ended and for the period
January 1, 1999 (inception) to December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, One Voice Technologies (a
Development Stage Enterprise) has reported accumulated losses during the
development stage and had a working capital deficiency as of December 31, 2004.
These factors raise substantial doubt the about the Company's ability to
continue as a going concern. Management's plans as to these matters are
described in Note 1. The 2004 financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As discussed in Note 14, the accompanying financial statements as of December
31, 2004 and 2003 and for the years then ended have been restated.
/s/ Peterson & Co., LLP
San Diego, California
March 7, 2005, except for Notes 1, 2, and 14,
for which the date is March 31, 2006
F-1
ONE VOICE TECHNOLOGIES, INC.
BALANCE SHEETS - DECEMBER 31, 2004 & 2003
ASSETS
2004 2003
(As restated (As restated
see Note 14) see Note 14)
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 535,642 $ 53,709
Other receivable 6,274 137,000
Inventories 9,724 -
Other current assets 27,756 37,698
------------- -------------
Total current assets 579,396 228,407
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 177,949 214,351
OTHER ASSETS:
Software development costs, net 77,865 393,857
Software licensing, net 835 2,839
Trademarks, net 13,310 47,667
Patents, net 118,569 78,186
Deposits 2,157 9,926
Deferred debt issue costs 96,954 48,200
------------- -------------
Total assets $ 1,067,035 $ 1,023,433
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 162,625 $ 173,088
Accrued expense 72,887 58,419
Security deposits 12,522 12,522
License agreement liability 1,050,000 670,000
Warrant derivative liability 4,941,415 290,483
Current portion of convertible notes payable, net 92,044 106,154
------------- -------------
Total current liabilities 6,331,493 1,310,666
LONG-TERM DEBT:
Long term portion of notes payable, net 100,000 100,000
Long term portion of convertible notes payable 32,656 19,957
------------- -------------
Total liabilities 6,464,149 1,430,623
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock; $.001 par value, 990,000,000 and 250,000,000
Shares authorized at December 31, 2004 and 2003,
respectively; 246,467,927 and 107,130,165 shares issued
and outstanding at December 31, 2004 and 2003, respectively 246,468 107,131
Additional paid-in capital 35,474,238 31,851,609
Deficit accumulated during development stage (41,117,820) (32,365,930)
------------- -------------
Total stockholders' equity (deficit) (5,397,114) (407,190)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 1,067,035 $ 1,023,433
============= =============
The accompanying notes form an integral part of these financial statements.
F-2
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2004 2003 2004
(As restated (As restated (As restated
see Note 14) see Note 14) see Note 14)
------------- ------------- -------------
REVENUE $ 2,105 $ 50,000 $ 702,426
COST OF REVENUE 1,930 6,000 207,605
------------- ------------- -------------
GROSS PROFIT 175 44,000 494,821
GENERAL AND ADMINISTRATIVE EXPENSES (3,733,753) (3,665,261) (31,066,642)
------------- ------------- -------------
NET LOSS FROM OPERATIONS (3,733,578) (3,621,261) (30,571,821)
OTHER INCOME (EXPENSE)
Interest Expense (1,649,641) (2,310,711) (7,270,406)
Gain (Loss) on warrant derivative (3,369,412) 93,078 (3,276,334)
Other 741 -- 741
------------- ------------- -------------
NET LOSS $ (8,751,890) $ (5,838,894) $(41,117,820)
============= ============= =============
NET LOSS PER SHARE, basic and diluted $ (.05) $ (.09)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 188,236,940 65,729,000
============= =============
The accompanying notes form an integral part of these financial statements.
F-3
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity (deficit)
------------- ------------- ------------- ------------- -------------
Balance at January 1, 1999 12,720,000 $ 12,720 $ $ $ 12,720
Net proceeds from issuance of
common stock in connection
with merger 7,000,000 7,000 106,236 113,236
Net proceeds from issuance of
common stock 1,500,000 1,500 2,544,422 2,545,922
Net issuance of common stock in
exchange for services 150,000 150 299,850 300,000
Redemption of common stock (10,000,000) (10,000) (10,000)
Net loss for the year ended
December 31, 1999 (1,782,215) (1,782,215)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 11,370,000 11,370 2,950,508 (1,782,215) 1,179,663
Net proceeds from issuance of
common stock and warrants 312,500 313 1,779,523 1,779,836
Net proceeds from issuance of
common stock and warrants 988,560 988 12,145,193 12,146,181
Issuance of warrants in exchange
for services 55,000 55,000
Issuance of options in exchange
for services 199,311 199,311
Issuance of warrants in connection
with financing 1,576,309 1,576,309
Net loss for the year ended
December 31, 2000 (9,397,620) (9,397,620)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000 12,671,060 12,671 18,705,844 (11,179,835) 7,538,680
(Continued)
The accompanying notes form an integral part of these financial statements.
F-4
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity (deficit)
------------- ------------- ------------- ------------- -------------
Conversion of debt to equity, net
of unamortized debt discount 3,220,765 3,220 571,867 575,087
Issuance of options in
exchange for services 58,864 58,864
Issuance of stock and warrants
in connection with settlement 110,000 110 247,940 248,050
Proceeds from sale of common stock
and warrants, net of offering costs 702,350 702 839,318 840,020
Issuance of warrants in connection
with debt financing 92,400 92,400
Beneficial conversion feature
embedded in debt securities 417,450 417,450
Conversion of debt to equity -
Laurus Master Fund 3,402,600 3,403 595,399 598,802
Conversion of debt to equity -
Stonestreet Capital 2,973,780 2,974 506,137 509,111
Net loss for the year ended
December 31, 2001 (8,778,279) (8,778,279)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 23,080,555 23,080 22,035,219 (19,958,114) 2,100,185
Conversion of debt to equity 2,624,447 2,624 309,714 312,338
Issuance of warrants in connection
with debt financing 577,879 577,879
Beneficial conversion feature
embedded in debt securities 1,948,765 1,948,765
Issuance of options in exchange
for services 107,276 107,276
(Continued)
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity (deficit)
------------- ------------- ------------- ------------- -------------
Issuance of common stock 2,666,667 2,667 721,166 723,833
Cashless exercise of warrants 10,512 11 (11) --
Exercise of warrants for cash 20,000 20 3,380 3,400
Re-pricing adjustment for
warrants outstanding -- -- 9,000 9,000
Shares issued in re-pricing-
Stonestreet Capital 833,334 833 174,167 175,000
Conversion of debt to equity -
Laurus Master Fund 2,110,129 2,110 703,345 705,455
Conversion of debt to equity -
Stonestreet Capital 4,294,596 4,294 899,405 903,699
Conversion of debt to
equity - Alpha Capital 2,767,752 2,768 342,232 345,000
Conversion of debt to
equity - Ellis Enterprise 300,842 301 39,699 40,000
Conversion of debt to
equity - Bristol Investments 225,699 226 29,774 30,000
Net loss for the year ended
December 31, 2002 (6,568,922) (6,568,922)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 38,934,533 $ 38,934 $ 27,901,010 $(26,527,036) $ 1,412,908
Issuance of warrants in connection
with debt financing 384,255 384,255
Beneficial conversion feature
embedded in debt securities 1,291,535 1,291,535
Issuance of options in exchange
For services 12,543 12,543
Conversion of debt to
equity - Alpha Capital 32,644,593 32,645 1,294,342 1,326,987
Conversion of debt to
equity - Bristol Investments 17,340,192 17,341 707,392 724,733
Conversion of debt to
equity - Ellis Enterprise 12,426,253 12,426 497,472 509,898
Conversion of debt to
equity - Greenwich Funds 3,849,278 3,849 97,762 101,611
Conversion of debt to
equity - 0114 Limited 1,935,766 1,936 48,859 50,795
Reclassification of warrants to
current liabilities (383,561) (383,561)
Net loss for the year ended
December 31, 2003 (5,838,894) (5,838,894)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2003 107,130,615 $ 107,131 $ 31,851,609 $(32,365,930) $ (407,190)
(As restated, see Note 14)
F-6
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity (deficit)
------------- ------------- ------------- ------------- -------------
Issuance of warrants in connection
with debt financing 1,281,550 1,281,550
Beneficial conversion feature
embedded in debt securities 707,488 707,488
Exercise of warrants for cash 12,008,067 12,008 1,368,121 1,380,129
Debt issue costs 120,138 120,138
Conversion of debt to
equity - Alpha Capital 25,720,939 25,721 587,172 612,893
Conversion of debt to
equity - Bristol Investments 4,317,308 4,317 96,708 101,025
Conversion of debt to
equity - Ellis Enterprise 5,229,575 5,230 165,230 170,460
Conversion of debt to
equity - Greenwich Funds 2,541,700 2,542 99,889 102,431
Conversion of debt to
equity - Whalehaven Capital 2,639,175 2,639 124,834 127,473
Conversion of debt to
equity - Whalehaven Fund 2,009,448 2,009 84,787 86,796
Conversion of debt to
equity - Momona Capital 375,994 376 14,777 15,153
Conversion of debt to
equity - Stonestreet Limited 6,067,844 6,068 239,640 245,708
Conversion of debt to
equity - La Jolla Cove 78,427,262 78,427 13,845 92,272
Reclassification of warrants to
current liabilities (1,281,550) (1,281,550)
Net loss for the year ended
December 31, 2004 (8,751,890) (8,751,890)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2004 246,467,927 $ 246,468 $ 35,474,238 $(41,117,820) $ (5,397,114)
(As restated, see Note 14) ============= ============= ============= ============= =============
The accompanying notes form an integral part of these financial statements.
F-7
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2004 2003 2004
(As restated (As restated (As restated
see Note 14) see Note 14) see Note 14)
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (8,751,890) $ (5,838,894) $(41,117,820)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 499,216 664,302 4,336,076
Loss on disposal of assets -- -- 23,340
Amortization of discount and finance cost 1,737,993 2,308,154 7,442,629
Options issued in exchange for services -- 12,543 459,393
Warrants issued in exchange for services -- -- 221,650
Non-cash (gain) loss on warranty
Derivative liability 3,369,412 (93,078) 3,276,334
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Other receivable 130,726 (107,112) (6,274)
Inventories (9,724) -- (9,724)
Prepaid expenses 9,942 25,849 (27,756)
Deposits 7,769 36,971 (2,157)
Deferred debt issue costs (48,754) (48,200) (96,954)
Increase (decrease) in liabilities:
Accounts payable (10,463) 480,382 162,625
Accrued expenses 14,468 -- 72,887
License agreement liability 380,000 -- 1,050,000
Deposit -- -- 12,522
------------- ------------- -------------
Net cash used in operating activities (2,671,305) (2,559,083) (24,203,229)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (63,046) (31,201) (1,492,063)
Software licensing -- -- (1,145,322)
Software development costs (22,080) (76,438) (1,675,601)
Trademarks (262) (242,731)
Patents (65,718) (35,312) (175,495)
Loan fees -- -- (200,000)
------------- ------------- -------------
Net cash used in investing activities (150,844) (143,213) (4,931,212)
------------- ------------- -------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-8
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2004 2003 2004
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- -- 18,465,148
Proceeds from convertible note payable, net 1,935,038 1,906,850 9,745,891
Proceeds from notes payable -- 100,000 100,000
Proceeds from warrant exercise 1,369,044 -- 1,369,044
Retirement of common stock, net -- -- (10,000)
------------- ------------- -------------
Net cash provided by financing activities 3,304,082 2,006,850 29,670,083
------------- ------------- -------------
Net increase (decrease) in cash 481,933 (695,446) 535,642
Cash and cash equivalents, beginning of year 53,709 745,155 --
------------- ------------- -------------
Cash and cash equivalents, end of year $ 535,642 $ 49,709 $ 535,642
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 74,621 $ 35,189 $ 80,444
============= ============= =============
Income taxes paid $ 800 $ 800 $ 7,487
============= ============= =============
Supplemental disclosure of non-cash financing activities:
Options issued in exchange for services $ -- $ 12,543 $ 377,993
============= ============= =============
Shares issued for re-pricing of conversion rate $ -- $ -- $ 175,000
============= ============= =============
Common shares and warrants issued for settlement $ -- $ -- $ 303,050
============= ============= =============
Issuance of warrant derivative in connection
with private placement and debt financing $ 1,281,550 $ 384,255 $ 5,571,703
============= ============= =============
Beneficial conversion feature of debt $ 707,488 $ 1,291,535 $ 4,365,238
============= ============= =============
Common Stock issued upon conversion of debt $ 1,554,211 $ 2,714,024 $ 8,287,727
============= ============= =============
F-9
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
One Voice Technologies, Inc. is incorporated under the laws of the State of
Nevada. The Company commenced operations in 1999.
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 $37,841,486 and used
cash for operations of $ 2,671,305 during the year ended December 31, 2004. The
Company also has a working capital deficit of $810,682 and a stockholders'
deficit of $455,699 as of December 31, 2004. These factors raise substantial
doubt about the Company's ability to continue as a going concern unless the
Company enters into a significant revenue-bearing contract. Management is
currently seeking additional equity or debt financing. Additionally, management
is currently pursuing revenue-bearing contracts utilizing various applications
of its technology including wireless technology. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
BUSINESS ACTIVITY:
The Company develops voice recognition based software for both the Telecom and
Interactive Multimedia PC sectors.
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 certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
DEVELOPMENT STAGE ENTERPRISE:
The Company is a development stage company as defined by Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." All losses accumulated since inception of One Voice Technologies,
Inc. have been considered as part of the Company's development stage activities.
FAIR VALUE:
The Company's financial instruments consist principally of accounts payable and
notes payable as defined by Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments." The carrying value of
the financial instruments, none of which are held for trading purposes,
approximates their fair value due to the short-term nature of these instruments.
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.
F-10
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION:
The Company recognizes revenues when earned in the period in which the service
is provided. The Company's revenue recognition policies are in accordance with
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-4 and
SOP 98-9. Any revenues from software arrangements with multiple elements are
allocated to each element of the arrangement based on the relative fair values
using specific objective evidence as defined in the SOPs. If no such objective
evidence exists, revenues from the arrangements are not recognized until the
entire arrangement is completed and accepted by the customer. Once the amount of
the revenue for each element is determined, the Company recognizes revenues as
each element is completed and accepted by the customer. For arrangements that
require significant production, modification or customization of software, the
entire arrangement is accounted for by the percentage of completion method, in
conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1.
Service and license fees are deferred and recognized over the life of the
agreement. Revenues from the sale of products 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, 2004 and 2003, advertising and promotion costs were $27,262 and
$11,770 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.
INVENTORIES:
Inventories are valued at the lower of cost or market based on actual cost.
DEBT WITH STOCK PURCHASE WARRANTS:
The proceeds received from debt issued with stock purchase warrants is allocated
between the debt and the warrants, based upon the relative fair values of the
two securities, with the balance allocated to warrants being accounted for as
additional paid-in capital. 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 based upon the difference between the then carrying amount (i.e.,
face amount less unamortized discount) and amount of payment.
DEBT WITH BENEFICIAL CONVERSION FEATURE:
In January 2001, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 00-27 effective for convertible debt instruments issued after
November 16, 2000. This pronouncement requires the use of the intrinsic value
method for recognition of the detachable and embedded equity features included
with indebtedness, and requires amortization of the amount associated with the
convertibility feature over the life of the debt instrument rather than the
period for which the instrument first becomes convertible. The discount is
amortized using the effective interest rate method over the life of the debt.
Upon conversion of the debt, any unamortized debt issue costs will be charged to
expense.
F-11
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 if 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, 2004 and
2003.
Amortization expense totaled $338,072 and $407,481 for the years ended December
31, 2004 and 2003, respectively. Accumulated amortization as of December 31,
2004 amounted to $1,597,736.
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, 2004 and 2003 totaled $34,357 and
$59,017, respectively. Accumulated amortization as of December 31, 2004 amounted
to $229,421.
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, 2004 and 2003 totaled $25,335 and $18,971,
respectively. Accumulated amortization as of December 31, 2004 amounted to
$56,926.
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, 2004 and 2003 is
based on the weighted average number of shares of common stock outstanding
during the periods. Potentially dilutive securities include options, warrants
and convertible preferred stock; however, such securities have not been included
in the calculation of the net loss per common share as their effect is
antidilutive.
F-12
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
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.
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 that statement. Pro forma
information, using the Black-Scholes method at the date of grant, is based on
the following assumptions:
Expected life 2.7 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. No expense was
recognized under APB 25. The Company's pro forma information is as follows:
December 31, 2004 December 31, 2003
------------------ ------------------
Net loss, as restated $(8,751,890) $(5,838,894)
------------ ------------
Stock compensation calculated under SFAS 123 $ (51,500) $ (419,000)
------------ ------------
Pro forma net loss as restated $(8,803,390) $(6,257,894)
------------ ------------
Basic and diluted historical loss per share $ (0.05) $ (0.09)
------------ ------------
Pro forma basic and diluted loss per share $ (0.05) $ (0.10)
------------ ------------
NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (an interpretation of Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial Statements). Interpretation 46 addresses
consolidation by business enterprises of entities to which the usual condition
of consolidation described in ARB-51 does not apply. The Interpretation changes
the criteria by which one company includes another entity in its consolidated
financial statements. The general requirement to consolidate under ARB-51 is
based on the presumption that an enterprise's financial statements should
include all of the entities in which it has a controlling financial interest
(i.e., majority voting interest). Interpretation 46 requires a variable interest
entity to be consolidated by a company that does not have a majority voting
interest, but nevertheless, is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity.
F-13
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
In December 2003 the FASB concluded to revise certain elements of FIN 46,
primarily to clarify the required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46, that was issued in January 2003. FIN-46R
exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. In general, for all entities that were previously considered special
purpose entities, FIN 46 should be applied in periods ending after December 15,
2003. Otherwise, FIN 46 is to be applied for registrants who file under
Regulation SX in periods ending after March 15, 2004, and for registrants who
file under Regulation SB, in periods ending after December 15, 2004. The Company
does not expect the adoption to have a material impact on the Company's
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The Company does not expect
the adoption of SFAS No. 149 to have a material impact on its consolidated
financial position, results of operations or stockholders' equity.
In May 2003, the FASB Issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
clarifies the accounting treatment for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective for public entities at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on the Company's
financial position, results of operations or stockholders' equity.
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 period beginning after June 15, 2005.
The Company plans to adopt SFAS No. 123(R) on July 1, 2005, the beginning of its
third fiscal quarter. 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.
F-14
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY AND EQUIPMENT:
A summary is as follows: 2004 2003
------------- -------------
Computer equipment $ 553,844 $ 495,126
Website development 38,524 35,974
Equipment 197,049 197,048
Furniture and fixtures 122,020 120,243
Web host computer equipment 420,993 420,993
Leasehold improvements 15,222 15,222
Telephone equipment 99,910 99,910
------------- -------------
1,447,562 1,384,516
Less accumulated depreciation and amortization 1,269,612 1,170,165
------------- -------------
$ 177,950 $ 214,351
============= =============
Depreciation expense totaled $99,448 and $94,866 for the years ended December
31, 2004 and 2003, respectively.
(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, 2004 and 2003 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 Phillips Speech Processing, a division of Philips Electronics
North America ("Phillips"). Pursuant to the License Agreement, the Company
received a world-wide, limited, nonexclusive license to certain speech
recognition software owned by Phillips. 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.
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) during 2002, 2003 and 2004. In lieu of scheduled
payments, in May, 2003, based on a verbal agreement with Phillips, 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, 2004 and 2003, the outstanding minimum royalty obligations
pursuant to the License Agreement were $1,050,000 and $670,000, respectively.
F-15
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) CONVERTIBLE NOTES PAYABLE:
On April 13, 2003, the Company entered into a securities purchase agreement with
four accredited investors, Alpha Capital Aktiengesellschaft, Ellis Enterprises
Ltd., Greenwich Growth Fund Limited, and 01144 Limited for the issuance of 4%
convertible debentures in the aggregate amount of $600,000. The notes bear
interest at 4% (effective interest rate in excess of 100%), mature on April 13,
2005, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.1166 or (ii) 80% of the average of the five
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before April 13, 2005 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued an
aggregate of 350,004 warrants to the investors. The warrants are exercisable
until April 13, 2008 at a purchase price of $.1272 per share. Net proceeds
amounted to approximately $540,000, net of debt issue cash cost of $60,000. The
fair value of the warrants of $25,000 using Black Scholes option pricing model
and the beneficial conversion feature of approximately $515,000 have been
amortized over the life of the debt using the interest method. Upon conversion
of the debt, any unamortized debt issue costs was charged to interest expense.
On June 30, 2003, the Company entered into a securities purchase agreement with
two accredited investors, Alpha Capital Aktiengesellschaft, and Bristol
Investment Fund Limited for the issuance of 4% convertible debentures in the
aggregate amount of $500,000. The notes bear interest at 4% (effective interest
rate in excess of 100% on the aggregate amount), mature on June 20, 2005, and
are convertible into the Company's common stock, at the holders' option, at the
lower of (i) $0.1023 or (ii) 80% of the average of the five lowest closing bid
prices for the common stock on a principal market for the 30 trading days before
but not including the conversion date. The note may not be paid, in whole or in
part, before June 30, 2005 without the consent of the holder. The full principal
amount of the convertible notes is due upon default under the terms of
convertible notes. In addition, the Company issued an aggregate of 291,670
warrants to the investors. The warrants are exercisable until June 30, 2008 at a
purchase price of $.1116 per share. Net proceeds amounted to approximately
$437,500, net of debt issue cash cost of $62,500. The fair value of the warrants
of $11,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $143,000 was amortized as interest expense
over the life of the debt using the interest method. Upon conversion of the
debt, any unamortized debt issue costs was charged to interest expense.
On September 17, 2003, the Company entered into a securities purchase agreement
with three accredited investors, Alpha Capital Aktiengesellschaft, Bristol
Investment Fund Limited and Ellis Enterprises Ltd for the issuance of 6%
convertible debentures in the amount of $375,000. The notes bear interest at 6%
(effective interest rate of 80% on the aggregate amount), mature on September
17, 2004, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.0474 or (ii) 78% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before September 17, 2004 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued 4,746,837
warrants to the investors. The warrants are exercisable until September 17, 2010
at a purchase price of $.0474 per share. Net proceeds amounted to approximately
$334,500, net of debt issue cash cost of $40,500. The relative value (limited to
the face amount of the debt) of all the warrants of $164,000 using Black Scholes
option pricing model, cash cost of $40,500 and the beneficial conversion feature
of approximately $170,500 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
F-16
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On November 10, 2003, the Company entered into a securities purchase agreement
with three accredited investors, Alpha Capital Aktiengesellschaft, Bristol
Investment Fund Limited and Ellis Enterprises Ltd for the issuance of 6%
convertible debentures in the amount of $375,000. The notes bear interest at 6%
(effective interest rate of 80% on the aggregate amount), mature on November 10,
2004, and are convertible into the Company's common stock, at the holders'
option, at the lower of (i) $0.0474 or (ii) 78% of the average of the three
lowest closing bid prices for the common stock on a principal market for the 30
trading days before but not including the conversion date. The note may not be
paid, in whole or in part, before November 10, 2004 without the consent of the
holder. The full principal amount of the convertible notes is due upon default
under the terms of convertible notes. In addition, the Company issued 4,746,837
warrants to the investors. The warrants are exercisable until November 10, 2010
at a purchase price of $.0474 per share. Net proceeds amounted to approximately
$345,000, net of debt issue cash cost of $30,000. The relative value (limited to
the face amount of the debt) of all the warrants of $127,000 using Black Scholes
option pricing model, cash cost of $30,000 and the beneficial conversion feature
of approximately $211,000 will be amortized over the life of the debt using the
interest method. Upon conversion of the debt mentioned above, any unamortized
debt issue costs will be charged to expense.
On December 12, 2003, the Company entered into a securities purchase agreement
with La Jolla Cove Investors, Inc. for the issuance of a 7.75% convertible
debenture in the aggregate amount of $250,000. The note bears interest at 7.75%,
matures on December 12, 2005, and is convertible into the Company's common
stock, at the holders' option. The number of common shares this debenture may be
converted is equal to the dollar amount of the debenture being converted
multiplied by eleven, minus the product of the Conversion Price multiplied by
ten times the dollar amount of the Debenture being converted, and the entire
forgoing result shall be divided by the Conversion Price. The Conversion Price
is defined as the lower of (i) $0.25 or (ii) 80% of the average of the three
lowest volume weighted average prices during the twenty (20) trading days prior
to Holder's election to convert. Beginning in the first full calendar month
after the Registration Statement is declared effective, Holder shall convert at
least 7%, but no more than 15% (such 15% maximum amount to be cumulative from
the deadline), of the face value of the debenture per calendar month into common
shares of the company, provided that the common shares are available, registered
and freely tradable. In addition, the Company issued an aggregate of 2,500,000
warrants to the investors. The warrants are exercisable until December 12, 2006
at a purchase price of $1.00 per share. Holder will exercise at least 7%, but no
more than 15% (such 15% maximum amount to be cumulative from the Deadline), of
the Warrants per calendar month, provided that the Common Shares are available,
registered and freely tradable. The 15% monthly maximum amount shall not be
applicable if the Current Market Price of the Common Stock at anytime during the
applicable month is higher than the Current Market Price of the Common Stock on
the Closing Date. In the event Holder does not exercise at least 7% of the
Warrants in any particular calendar month, Holder shall not be entitled to
collect interest on the Debenture for that month. The fair value of the warrants
of $18,000 using Black Scholes option pricing model and the beneficial
conversion feature of approximately $219,000 will be amortized as interest
expense over the life of the debt using the interest method. Upon conversion of
the debt mentioned here, any unamortized debt issue costs will be charged to
expense. As of December 31, 2003 the principal balance amounted to $250,000 and
the unamortized debt discount amounted to approximately $243,000.
F-17
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of convertible notes payable balance 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-19
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMON STOCK:
During the year ended December 31, 2003, the note holders converted the
principal outstanding at December 31, 2002 of $1,235,000 plus accrued interest,
into 19,008,757 common shares.
During the year ended December 31, 2003, Alpha Capital Aktiengesellschaft, Ellis
Enterprises Ltd., Greenwich Growth Fund Limited, and 01144 Limited had converted
all of its April 13, 2003 notes aggregating $700,000 plus interest into
20,675,854 common shares at an average conversion price of $0.03 per share.
During the year ended December 31, 2003, Alpha Capital Aktiengesellschaft and
Bristol Investments had converted all of its June 30, 2003 notes aggregating
$500,000 plus interest into 16,990,200 common shares at an average conversion
price of $0.03 per share.
During the year ended December 31, 2003, Alpha Capital Aktiengesellschaft,
Bristol Investments and Ellis Enterprises had converted $345,000 of principal
from the September 17, 2003 notes plus interest into 11,521,271 common shares at
an average conversion price of $0.03 per share.
During the year ended December 31, 2004, La Jolla Cove Investors, Inc. exercised
warrants to purchase 922,720 shares of common stock for cash in the amount of
$922,720 and converted $92,272 of the 7.75% convertible note into 78,427,262
shares of common stock at an average exercise and conversion price of $0.001 per
share.
During the year ended December 31, 2004, Alpha Capital Aktiengesellschaft had
converted the remaining $100,000 plus interest of its September 17, 2003 note
aggregating $300,000 into 4,385,123 common shares at an average conversion price
of $0.023 per share.
During the year ended December 31, 2004, Alpha Capital Aktiengesellschaft,
Bristol Investments and Ellis Enterprises had converted the remaining $305,000
plus interest of its November 10, 2003 notes aggregating $375,000 into
20,855,601 common shares at an average conversion price of $0.015 per share.
During the year ended December 31, 2004, Alpha Capital Aktiengesellschaft,
Greenwich Growth Fund Limited, Whalehaven Capital and Whalehaven Fund had
converted $660,000 plus interest of its August 18, 2004 notes aggregating
$700,000 into 14,352,422 common shares at an average conversion price of $0.046
per share.
During the year ended December 31, 2004, Stonestreet Limited Partnership, Ellis
Enterprises And Momona Capital had converted $330,160 plus interest of its
October 28, 2004 notes aggregating $396,000 into 8,308,838 common shares at an
average conversion price of $0.04 per share.
During the year ended December 31, 2004, Ellis Enterprises had converted $40,300
of its December 23, 2004 note aggregating $120,000 into 1,000,000 common shares
at an average conversion price of $0.04 per share.
During the year ended December 31, 2004, warrants to purchase 11,085,347 shares
of common stock were exercised for cash in the amount of $1,369,044.
F-20
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) RESEARCH AND DEVELOPMENT:
The Company performs internal research and development efforts. Research and
development expense represented $617,648 and $633,176 for the years ended
December 31, 2004 and 2003 respectively.
(9) INCOME TAXES:
At December 31, 2004 and December 31, 2003, the Company had net operating loss
carry forwards available to reduce future taxable income, if any, of
approximately $30,800,000 and $27,350,000 for Federal income tax purposes. It
also had net operating loss carry forwards available to reduce future taxable
income, if any, of approximately $28,000,000 and $24,500,000 for state
purposes. The Federal and state net operating loss carry forwards will begin
expiring in 2020 and 2007, respectively. The carry forwards 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:
2004 2003
------------ ------------
Expected tax provision (benefit) at statutory rates $ (2,918,979) $ (1,984,951)
State taxes, net of Federal benefit 528 528
Meals & Entertainment 2,923 1,119
Change in Valuation Allowance 1,236,748 1,227,704
Warrant derivative liability 1,088,936 (31,647)
Amortization of Beneficial Conversion Feature 590,644 788,047
------------ ------------
Totals $ 800 $ 800
============ ============
The provision (benefit) for income taxes in 2004 and 2003 consists of the
following: 2004 2003
------------ ------------
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, 2004 and December 31, 2003 are shown below:
2004 2003
------------ ------------
Deferred tax assets:
Accrued vacation $ 23,208 $ 19,594
Basis Difference in Fixed Assets 97,713 35,326
Net operating loss 12,961,750 11,469,519
Other 1,716 1,716
------------ ------------
Totals $ 13,084,387 $ 11,526,155
------------ ------------
Deferred tax liabilities:
Deferred State Taxes (852,573) (743,268)
------------ ------------
Deferred tax asset (liability) $ 12,231,814 $ 10,782,887
Valuation Allowance (12,231,814) (10,782,887)
------------ ------------
Net Deferred Tax Asset (Liability) 0 0
============ ============
F-21
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under leases that expire at various times
through October 2005. The following is a schedule by years of future minimum
rental payments required under operating leases that have noncancellable lease
terms in excess of one year as of December 31, 2004:
Year ending December 31,
2005 191,500
----------
Less sublease income 60,000
----------
$ 131,500
==========
Rent expense, net of sublease income of $60,000 amounted to $198,000 for the
year ended December 31, 2004.
(11) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN:
On July 14, 1999, the Company enacted 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.
In October 2003, we held our Annual Shareholders' Meeting. Pursuant to the
meeting, our shareholders voted in favor and approved the Fourth Amended and
Restated Stock Option Plan pursuant to which the number of shares authorized
under the Plan was increased from 3,000,000 to 13,000,000.
(11) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED
Two types of options may be granted under the 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 years ended December 31, 2004 and 2003, the Company granted 0 and
275,000 stock options exercisable respectively at an exercise price of $0.11 to
employees of the Company, of which, 250,000 options were terminated in 2003.
F-22
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The number and weighted average exercise prices of options granted under the
plan for the years ended December 31, 2004 and 2003 are as follows:
2004 2003
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 1,900,500 $ 1.54 3,173,625 $ 1.58
Granted during the year -- -- 275,000 0.12
Terminated during the year 179,000 1.12 1,548,125 1.38
Exercised during the year -- -- -- --
Outstanding at end of the year 1,721,500 2.70 1,900,500 1.54
Exercisable at end of the year 1,552,750 2.70 1,534,400 1.85
(12) WARRANTS:
At December 31, 2004, the Company had warrants outstanding that allow the
holders to purchase up to 78,494,252 shares of common stock.
The number and weighted average exercise prices of the warrants for the years
ended December 31, 2004 and 2003 are as follows:
2004 2003
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 16,099,643 $ 0.46 3,464,297 $ 1.26
Granted during the year 75,081,815 .08 12,635,346 .24
Terminated during the year 179,143 -- -- --
Exercised during the year 12,008,063 .11 -- --
Outstanding at end of the year 78,994,252 0.46 16,099,643 0.46
Exercisable at end of the year 78,994,252 0.46 16,099,643 0.46
(13) SUBSEQUENT EVENT:
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.
$1,000,000 of the purchase price was paid to us by the investors on the initial
closing date of March 18, 2005 and $1,000,000 of the purchase price will be paid
to us pursuant to the second closing, which will take place on the 5th day after
the actual effectiveness of the registration statement which we are required to
file with the Securities and Exchange Commission registering the shares of our
common stock, par value $.001 per share, issuable upon conversion of the
promissory notes and exercise of the warrants.
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.
F-23
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
We issued an aggregate of 29,069,768 Class A common stock purchase warrants and
29,069,768 Class B common stock purchase warrants to the investors, representing
100 Class A and Class B warrants issued for each 100 shares which would be
issued on 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.
Subsequent to December 31, 2004, note holders converted additional note
principal into common shares as follows:
Average
Amount Converted Exercise
Converted Shares Into Price
----------- ----------- --------
Alpha Capital Akteingesellschaft $ 350,000 9,724,106 $ 0.037
Whalehaven Fund Ltd. 40,000 1,026,466 $ 0.039
Ellis Enterprise Limited 84,500 2,097,779 $ 0.040
Stonestreet Limited Partnership 200,000 5,928,797 $ 0.034
Momona Capital Corp. 75,000 1,938,262 $ 0.038
----------- ----------- --------
$ 749,500 20,715,410 $ 0.038
=========== =========== ========
(14) - Restatement TO FINANCIAL STATEMENTS
Subsequent to the issuance of the financial statements for the years ended
December 31, 2004 and 2003, management determined that the Company's previous
accounting for its warrants did not comply with Emerging Issues Task Force
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). As a result, the
Company determined that the fair value of the warrants should have been
reclassified from additional paid in capital, to a current liability, and that
the warrant fair value should have been marked to market as of the balance sheet
date with the corresponding non-cash gain or loss reflected in the results of
operations. Accordingly, the accompanying financial statements for the years
ended December 31, 2004 and 2003 have been restated from the amounts previously
reported.
The impact of this restatement will change net income within the various periods
covered. This correction in the accounting for its warrants had no impact on the
Company's net sales, net cash flows, cash balances or debt covenant compliance.
F-24
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the significant effects of the restatements is as follows:
As Previously As
Reported Adjustments Restated
---------------- ---------------- ----------------
As of December 31, 2004
-----------------------
Warrant derivative liability (current) $ -- $ 4,941,415 $ 4,941,415
Total current liabilities 1,390,078 4,941,415 6,331,493
Additional paid in capital 37,139,319 (1,665,081) 35,474,238
Accumulated deficit (37,841,486) (3,276,334) (41,117,820)
Total shareholders' equity (deficit) (455,699) (4,941,415) (5,397,114)
Total liabilities and shareholder' equity 1,067,035 -- 1,067,035
Year Ended December 31, 2004
----------------------------
Gain (loss) on warrant derivative $ -- $ (3,369,412) $ (3,369,412)
Net loss (5,382,478) (3,369,412) (8,751,890)
Net loss per share, basic and diluted $ (0.03) $ (0.02) $ (0.05)
As of December 31, 2003
-----------------------
Warrant derivative liability (current) $ -- $ 290,483 $ 290,483
Total current liabilities 1,020,183 290,483 1,310,666
Additional paid in capital 32,235,170 (383,561) 31,851,609
Accumulated deficit (32,459,008) 93,078 (32,365,930)
Total shareholders' equity (deficit) (116,707) (290,483) (407,190)
Total liabilities and shareholder' equity 1,023,433 -- 1,023,433
Year Ended December 31, 2003
----------------------------
Gain (loss) on warrant derivative $ -- $ 93,078 $ 93,078
Net loss (5,931,972) 93,078 (5,838,894)
Net loss per share, basic and diluted $ (0.09) $ -- $ (0.09)
F-25
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.
ONE VOICE TECHNOLOGIES, INC.
DATE: APRIL 17, 2006 BY: /S/ DEAN WEBER
----------------------------------------------
DEAN WEBER, PRESIDENT, CHIEF EXECUTIVE OFFICER
& DIRECTOR
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 CHIEF EXECUTIVE OFFICER APRIL 17, 2006
------------------------- AND DIRECTOR
DEAN WEBER
/S/ JAMES HADZICKI CHIEF FINANCIAL OFFICER APRIL 17, 2006
-------------------------
JAMES HADZICKI
/S/ BRADLEY J. AMMON DIRECTOR APRIL 17, 2006
-------------------------
BRADLEY J. AMMON
-8-