SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
COMMISSION FILE NUMBER 0-27589
------------------------------
ONE VOICE TECHNOLOGIES, INC.
----------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 95-4714338
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4275 Executive Square, Ste 200, La Jolla CA 92037
-------------------------------------------------
(Address of principal Executive Offices) (Zip Code)
(858) 552-4466 (858) 552-4474
-------------- --------------
(Issuer's Telephone Number) (Issuer's Facsimile Number)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK-$.001 PAR VALUE
----------------------------
(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 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of March 31, 2007 the registrant had 619,342,244 shares of common stock,
$.001 par value, issued and outstanding.
Transitional small business disclosure format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) F-1 - F-29
Item 2. Management's Discussion and Analysis or Plan of Operation 3-14
Item 3. Controls and Procedures 14-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20-22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page No.
--------
Balance Sheets as of March 31, 2007 and December 31, 2006 F-2
Statements of Operations for the three months
ended March 31, 2007 and 2006 F-3
Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 F-4
Notes to Financial Statements F-5 - F-29
F-1
ONE VOICE TECHNOLOGIES INC.
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,303 $ 34,585
Accounts Receivable 124,992 99,111
Inventories 4,661 4,841
Prepaid expenses 122,095 28,785
------------ ------------
TOTAL CURRENT ASSETS 294,051 167,322
PROPERTY AND EQUIPMENT, NET 172,307 164,389
Software development & licensing, net 7,400 12,618
Trademarks, net 2,408 2,452
Patents, net 69,098 77,580
Deposits 18,665 18,665
Deferred debt issue costs 262,121 344,835
------------ ------------
TOTAL ASSETS $ 826,050 $ 787,861
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 375,018 $ 444,088
Accrued expenses 262,727 239,593
Settlement agreement liability 350,000 350,000
License agreement liability 1,014,500 930,000
Debt derivative liability 204,758 256,495
Warrant derivative liability 8,721,462 2,808,308
Revolving line of credit 666,280 240,000
------------ ------------
TOTAL CURRENT LIABILITIES 11,594,745 5,268,484
------------ ------------
LONG TERM LIABILITIES:
Note payable 100,000 100,000
Convertible notes payable, net 996,515 982,972
Deferred rent 13,503 12,017
------------ ------------
TOTAL LIABILITIES 12,704,763 6,363,473
------------ ------------
STOCKHOLDER'S DEFICIT:
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock; $.001 par value, 1,290,000,000 shares
authorized, 619,342,244 and 584,513,637 shares issued
and outstanding at March 31, 2007 and December
31, 2006, respectively 622,096 585,327
Additional paid-in capital 41,009,897 40,696,540
Accumulated deficit (53,510,706) (46,857,479)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (11,878,713) (5,575,612)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 826,050 $ 787,861
============ ============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-2
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
------------- -------------
(RESTATED)
Net Revenue $ 210,393 $ 61,298
Cost of goods sold 99,222 20,509
------------- -------------
GROSS PROFIT 111,171 40,789
------------- -------------
General and administrative expenses 631,605 990,975
------------- -------------
NET LOSS FROM OPERATIONS (520,434) (950,186)
OTHER INCOME / (EXPENSE)
Interest expense (270,622) (744,345)
Settlement expense, net -- (100,500)
Gain / (loss) on warrant and debt derivatives (5,861,417) (3,877,509)
Other income (expense) 46 5,683
------------- -------------
TOTAL OTHER INCOME / (EXPENSE) (6,131,993) (4,716,671)
------------- -------------
NET LOSS BEFORE INCOME TAX (6,652,427) (5,666,857)
Income tax expense 800 800
------------- -------------
NET LOSS $ (6,653,227) $ (5,667,657)
============= =============
BASIC LOSS PER SHARE $ (0.01) $ (0.01)
============= =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 595,741,000 409,119,000
============= =============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-3
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
----------- -----------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,653,227) $(5,667,657)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 25,240 31,387
Amortization of debt issue costs 82,714 --
Amortization of debt discount 148,543 431,123
(Gain) loss on debt derivative liability (51,737) 47,433
(Gain) loss on warrant derivative liability 5,913,154 4,391,707
Common stock issued in exchange for services 117,200 --
Non cash interest expense 8,903 --
Share based compensation expense 36,783 155,209
CHANGES IN CERTAIN ASSETS AND LIABILITIES
Accounts receivable (25,882) 15,480
Inventories 180 (5,208)
Prepaid expenses (93,311) (6,305)
Accounts payable (69,070) (29,806)
Accrued expenses 23,135 87,851
Deferred rent 1,487 3,841
Settlement agreement liability -- (220,000)
----------- -----------
Net cash used in operating activities (535,888) (764,945)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (19,414) (2,101)
Purchase of intangible assets -- (18,014)
----------- -----------
Net cash used in investing activities (19,414) (20,115)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - convertible notes -- 700,000
Issuance of common stock - private funding -- 60,000
License agreement liability 84,500 (30,000)
Warrant exercise 52,240 300,200
Payment for debt issue cost -- (65,500)
Issuance of notes payable, long-term debt and capital leases 426,280 --
----------- -----------
Net cash provided by financing activities 563,020 964,700
Net increase (decrease) in cash 7,718 179,640
Cash and cash equivalents, beginning of period 34,585 338,811
----------- -----------
Cash and cash equivalents, end of period $ 42,303 $ 518,451
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 10,000
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Issuance of warrant derivative in connection with private
placement and debt financing, initial valuation $ -- $ 457,198
=========== ===========
Common stock issued upon conversion of debt $ 135,000 $ 992,138
=========== ===========
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-4
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
ITEM 1a. DESCRIPTION OF BUSINESS
- -------------------------------
INTRODUCTION
- ------------
One Voice Technologies, Inc. is a voice recognition technology company with over
$43 million invested in Research and Development and deployment of products in
both the telecom and PC multi-media markets. To date, our customers include:
Telefonos de Mexico, S.A.B. de C.V. (TELMEX), Intel Corporation, Alltel
Wireless, Inland Cellular, Nex-Tec Wireless and several additional telecom
service providers throughout the United States. Our telecom solutions allow
business and consumer phone users to Voice Dial, Group Conference Call, Read and
Send E-Mail and Instant Message, all by voice. We offer PC Original Equipment
Manufacturers (OEM's) the ability to bundle a complete voice interactive
computer assistant which allows PC users to talk to their computers to quickly
play digital media (music, videos, DVD) along with reading and sending 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.
The company is traded on the NASD OTC Bulletin Board ("OTCBB") under the symbol
ONEV. One Voice is incorporated in the State of Nevada and commenced operations
on July 14, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
INTERIM FINANCIAL STATEMENTS:
- -----------------------------
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been or omitted pursuant to such rules and regulations. These financial
statements and the accompanying notes are unaudited and should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006. In the opinion of management, the financial statements herein
include adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the Company's financial position as of March 31,
2007, results of operations for the three months ended March 31, 2007 and March
31, 2006. The results of operations for the three months ended March 31, 2007
are not necessarily indicative of the operating results to be expected for the
full fiscal year or any future periods.
ORGANIZATION AND BASIS OF PRESENTATION
- --------------------------------------
One Voice Technologies, Inc., ("The Company"), is incorporated under the laws of
the State of Nevada. The Company develops voice recognition software and it
commenced operations in 1999. The Company's telecom solutions allow business and
consumer phone users to Voice Dial, Group Conference Call, Read and Send E-Mail
and Instant Message, all by voice. We offer PC Original Equipment Manufacturers
(OEM's) the ability to bundle a complete voice interactive computer assistant
which allows PC users to talk to their computers to quickly play digital media
(music, videos, DVD) along with reading and sending e-mail messages, SMS text
messaging to mobile phones, PC-to-Phone calling (VoIP) and PC-to-PC audio/video.
BASIS OF PRESENTATION
- ---------------------
The accompanying audited financial statements represent the financial activity
of One Voice Technologies, Inc. The financial statements have been prepared in
accordance with generally accepted accounting principles in the US. The
Company's fiscal year ends on December 31 each year. The financial statements
and notes are representations of the management and the Board of Directors, who
are responsible for their integrity and objectivity.
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 $53,511,000 and used
cash from operations of $ 535,888 during the three month period ended March 31,
2007. The Company also has a working capital deficit of $11,301,000 of which
$8,926,000 represents a non-cash warrant and debt derivative liabilities. The
Company also has a stockholders' deficit of $11,879,000 as of March 31, 2007.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management has instituted a cost reduction program that
included a reduction in labor and fringe costs. Historically, management has
been able to obtain capital through either the issuance of equity or debt, and
is currently seeking such financing. There can be no assurance as to the
availability or terms upon which such financing and capital might be available.
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.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to prior year's amounts to conform to
current year classifications. These reclassifications did not have an effect on
the previously reported results of operations or retained earnings.
F-5
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the amount of revenue and expense reported during
the period. Significant estimates include valuation of derivative and warrant
liabilities. Actual results could differ from those estimates.
FAIR VALUE
- ----------
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable, notes payable and
convertible debt. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable, approximates their fair value due to their
short term nature. The carrying value of notes payable and convertible debt
approximate their fair value, as interest approximates market rates.
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
CONCENTRATION
- -------------
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
REVENUE RECOGNITION
- -------------------
The Company recognizes revenue when persuasive evidence of a sale arrangement
exists, delivery has occurred or services have been rendered, the sales price is
fixed or determinable, and collectibility is reasonably assured in accordance
with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB 104").
When a customer order contains multiple items such as hardware, software, and
services which are delivered at varying times, the Company determines whether
the delivered items can be considered separate units of accounting as prescribed
under Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 states that delivered
items should be considered separate units of accounting if delivered items have
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of undelivered items, and if delivery of undelivered
items is probable and substantially in the Company's control.
In these circumstances, the Company allocates revenue to each element based on
its relative vendor specific objective evidence of fair value ("VSOE"). VSOE for
products and software is established based on the Company's approved pricing
schedules. To establish VSOE for services, the Company uses standard billing
rates based on said services. Generally, the Company is able to establish VSOE
for all elements of the sales order and bifurcate the customer order or contract
accordingly. In these instances, sales are recognized on each element
separately. However, if VSOE cannot be established or if the delivered items do
not have stand alone value to the customer without additional services provided,
the Company recognizes revenue on the contract as a whole based on either the
completed-performance or proportional-performance methods as described below.
F-6
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
In most cases, revenue from hardware and software product sales is recognized
when title passes to the customer. Based upon the Company's standard shipping
terms, FOB The Company, title passes upon shipment to the customer.
Revenue is recognized on service contracts using either the
completed-performance or proportional-performance method depending on the terms
of the service agreement. When the amount of services to be performed in the
last series of acts is so significant in relation to the entire service contract
that performance is deemed not to have occurred until the final act is completed
or when there are acceptance provisions based on customer-specified subjective
criteria, the completed-performance method is used. Once the last significant
act has been performed, revenue is recognized. The Company uses the
proportional-performance method when a service contract specifies a number of
acts to be performed and the Company has the ability to produce reasonable
estimates. The estimates used on these contracts are periodically updated during
the term of the contract and may result in the Company's revision of recognized
sales in the period in which they are identified.
In some contracts, billing terms are agreed upon based on performance milestones
such as the execution of a contract, the customer's acceptance of a list
detailing the equipment and/or vendor for products, the partial or complete
delivery of products and/or the completion of specified services. Payments
received before delivery has occurred or services have been rendered are
recorded as deferred revenue until the revenue recognition criteria are met.
Deferred revenue from maintenance or warranty contracts is recognized over the
terms of the underlying contract.
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.
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. Yearly patent renewal fees
are expensed in the year incurred.
In accordance with SFAS No. 142, the Company evaluates its operations to
ascertain if a triggering event has occurred which would impact the value of
finite-lived intangible assets (e.g., patents). Examples of such triggering
events include a significant disposal of a portion of such assets, an adverse
change in the market involving the business employing the related asset, a
significant decrease in the benefits realized from an asset
As of March 31, 2007, no such triggering event has occurred. An impairment
test involves a comparison of undiscounted cash flows against the carrying value
of the asset as an initial test. If the carrying value of such asset exceeds the
undiscounted cash flow, the asset would be deemed to be impaired. Impairment
would then be measured as the difference between the fair value of the fixed or
amortizing intangible asset and the carrying value to determine the amount of
the impairment. The Company determines fair value generally by using the
discounted cash flow method. To the extent that the carrying value is greater
than the asset's fair value, an impairment loss is recognized for the
difference.
F-7
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Convertible Notes and Financial Instruments with Embedded Features
- ------------------------------------------------------------------
The Company accounts for conversion options embedded in convertible notes in
accordance with Statement of Financial Accounting Standard ("SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). SFAS 133
generally requires Companies to bifurcate conversion features embedded in
convertible notes from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19. SFAS
133 provides for an exception to this rule when convertible notes, as host
instruments, are deemed to be conventional as that term is described in the
implementation guidance under Appendix A to SFAS 133 and further clarified in
EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19.
The Company accounts for convertible notes (if deemed conventional) in
accordance with the provisions of Emerging Issues Task Force Issue ("EITF")98-5
"Accounting for Convertible Securities with Beneficial Conversion Features,"
("EITF 98-5"), EITF 00-27 "Application of EITF 98-5 to Certain Convertible
Instruments," Accordingly, the Company records, as a discount to convertible
notes, the intrinsic value of such conversion options based upon the differences
between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the note.
Debt discounts under these arrangements are amortized over the term of the
related debt to their earliest date of redemption.
The Companys convertible notes do host conversion features and other features
that are deemed to be embedded derivatives financial instruments or beneficial
conversion features based on the commitment date fair value of the underlying
common stock.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company accounts for the issuance of common stock purchase warrants issued
and other free standing derivative financial instruments in accordance with the
provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company
classifies as equity any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the Company a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share settlement).
The Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company) (ii)
give the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement).
DEFERRED DEBT ISSUE COST
- ------------------------
The costs relating to obtaining and securing debt financing are capitalized and
is expensed over the term of the debt instrument. In the event of settlement of
such debt in advance of the maturity date, an expense is recognized for the
remaining unamortized deferred debt issue cost.
For the three months ended March 31, 2007 and the year ended December 31, 2006,
the estimated the estimated fair value of the Company's deferred debt issue cost
were $262,121 and $344,835 respectively.
F-8
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
NET LOSS PER COMMON SHARE
- -------------------------
Basic earnings per share ("EPS") 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 three months ended March 31, 2007 and 2006
is based on the weighted average number of shares of common stock outstanding
during the periods. Potentially dilutive securities include options, warrants
and convertible debt; however, such securities have not been included in the
calculation of the net loss per common share as their effect is anti dilutive.
The following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as the effect is antidilutive:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
----------------- -----------------
(RESTATED)
----------------- -----------------
NUMERATOR - BASIC AND DILUTED $ (6,653,227) $ (5,667,657)
================= =================
Denominator - basic or diluted
Weighted average common shares 595,741,000 409,119,000
Outstanding
----------------- -----------------
TOTAL 595,741,000 409,119,000
================= =================
----------------- -----------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.01)
================= =================
Antidilutive securities:
Convertible debentures 144,543,651 79,905,063
Options 55,459,000 59,121,500
Warrants 331,979,838 266,345,471
----------------- -----------------
TOTAL 531,982,489 405,372,034
================= =================
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.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 48 ("FIN 48"), ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a
comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. This interpretation is effective
for fiscal years beginning after December 15, 2006.
The Company files federal income tax returns in the U.S. The Company is no
longer subject to U.S. state, or non-U.S. income tax examinations by tax
authorities for years before 2001. Certain U.S. Federal returns for years 1999
and following are not closed by relevant statutes of limitation due to unused
net operating losses reported on those returns.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, the Company had no changes in the carrying value
of its tax assets or liabilities for any unrecognized tax benefits.
F-9
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
- ---------------------------------------
On January 1, 2006 the Company adopted "SFAS" No.123 (Revised 2004), "Share
Based Payment," ("SFAS 123R"), using the modified prospective method. In
accordance with SFAS No. 123R, the Company measures the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which an employee is required to provide service in exchange for the
award - the requisite service period. The Company determines the grant-date fair
value of employee share options using the Black-Scholes option-pricing model.
During the three months ended March 31, 2007 and 2006, the Company recorded
$37,000 and $155,000 respectively in non-cash charges for stock based
compensation.
The fair value of stock options at date of grant was estimated using the
Black-Scholes model with the following assumptions: expected volatility of
90.9%, expected term of 2.0 years, risk-free interest rate of 4.74%, and
expected dividend yield of 0%. Expected volatility is based on the historical
volatilities of the Company's common stock. The expected life of employee stock
options is determined using guidance from SAB 107. As such, the expected life of
the options and warrants is the average of the vesting term and the full
contractual term of the options and warrants. The risk free interest rate is
based on the U.S. Treasury notes for the expected life of the stock option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
STOCK WARRANT ACTIVITY
- ----------------------
During three months ended March 31, 2007 and 2006, the Company issued zero and
50,972,110 warrants to Stockholders, respectively.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants.
The Company accounts for stock options and warrants issued to third parties for
services in accordance with the provisions of the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services". Under the provisions of EITF 96-18, because none of the Company's
agreements have a disincentive for nonperformance, the Company records a charge
for the fair value of the portion of the stock options and warrants earned from
the point in time when vesting of the stock options and warrants becomes
probable. Final determination of fair value of the stock options and warrants
occurs upon actual vesting.
F-10
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development expenses include internal and external costs. Internal
costs include salaries and employment related expenses and allocated facility
costs. External expenses consist of costs associated with outsourced software
development activities. In accordance with SFAS No. 2, "Accounting for Research
Development Costs", all such costs are charged to expense as incurred. Research
and development expense were $41,000 and $225,000 for the three months ended
March 31, 2007 and 2006 respectively.
COMPREHENSIVE INCOME
- --------------------
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, are
excluded from net income. For the three months ended March 31, 2007 and 2006,
the Company's comprehensive income (loss) had equaled its net loss. Accordingly,
a statement of comprehensive loss is not presented.
COMMITMENTS AND CONTINGENCIES
- -----------------------------
Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company's legal counsel
evaluates the perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or expected to be
sought therein.
If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature of the guarantee would be
disclosed.
SEGMENT
- -------
The Company operates in a single business segment that includes the design and
development.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force
("EITF") Issue No. 06-3, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement" ("EITF No.
06-3"). The scope of EITF No. 06-3 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to, sales, use, value
added, Universal Service Fund ("USF") contributions and some excise taxes. The
Task Force affirmed its conclusion that entities should present these taxes in
the income statement on either a gross or a net basis, based on their accounting
policy, which should be disclosed pursuant to APB Opinion No. 22, "Disclosure of
Accounting Policies." If such taxes are significant and are presented on a gross
basis, the amounts of those taxes should be disclosed. The consensus on EITF No.
06-3 will be effective for interim and annual reporting periods beginning after
December 15, 2006. The Company currently does not show sales tax billed to its
customers on the income statement but records the same as a liability.
F-11
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
- --------------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective on the Company beginning July 1, 2008. The Company is
currently assessing the potential impact that the adoption of SFAS No. 157 will
have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred, e.g., debt issue costs. The fair value election
is irrevocable and generally made on an instrument-by-instrument basis, even if
a company has similar instruments that it elects not to measure based on fair
value. At the adoption date, unrealized gains and losses on existing items for
which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in
fair value are recognized in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by the Company
in the first quarter of fiscal 2009. The Company currently is determining
whether fair value accounting is appropriate for any of its eligible items and
cannot estimate the impact, if any, which SFAS 159 will have on its consolidated
results of operations and financial condition.
3. PREPAID EXPENSES
----------------
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Financial advisor fees $ 83,400 $ -
Rents 18,000
Business and health insurance 20,000 24,000
Legal fees - 4,000
Other 695 785
-------------------- --------------------
TOTAL $ 122,095 $ 28,785
4. PROPERTY AND EQUIPMENT
----------------------
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Computer equipment $ 716,135 $ 703,099
Website development 38,523 38,524
Equipment 1,562 1,562
Furniture and fixtures 46,430 46,431
Telephone equipment 5,364 5,365
Molds and tooling 120,216 113,836
-------------------- --------------------
TOTAL 928,230 908,816
-------------------- --------------------
Less accumulated depreciation (755,923) (744,427)
-------------------- --------------------
NET PROPERTY AND EQUIPMENT $ 172,307 $ 164,389
==================== ====================
Depreciation expense totaled $11,000 and $13,000 for the three months ended
March 31, 2007 and 2006, respectively.
F-12
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
5. DEFERRED DEBT ISSUE COSTS
-------------------------
These costs relate to obtaining and securing debt financing and financing
agreements. These costs are amortized over the term of the debt agreement using
the straight line method. There were no costs incurred during the three months
ended March 31, 2007. A balance of $262,000 remains as of March 31, 2007.
6. ACCRUED EXPENSES
----------------
MARCH 31, DECEMBER 31,
2007 2006
-------------------- --------------------
Accrued salaries $ 4,970 $ 10,976
Accrued vacation 63,942 57,441
Accrued interest 147,652 118,842
Accrued audit fees 40,000 50,000
Insurance 3,500 -
Other 2,663 2,334
-------------------- --------------------
TOTAL $ 262,727 $ 239,593
==================== ====================
7. SETTLEMENT AGREEMENT LIABILITY
------------------------------
On January 6, 2006, La Jolla Cove Investors, Inc. and the Company entered into a
Settlement Agreement and Mutual Release (the "Settlement Agreement") in which La
Jolla and the Company agreed to forever settle, resolve and dispose of all
claims, demands and causes of action asserted, existing or claimed to exist
between the parties because of or in any way related to the Action. Under the
Settlement Agreement, La Jolla and the Company agreed that the parties shall
bear their own costs and attorney's fees associated with the Action. In
addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the execution of
the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006 (this payment was not made)
o $50,000 was paid on September 13, 2006
Interest accrued on the $400,000 unpaid balance at 8% per annum commencing on
the date of the Settlement Agreement until paid in full. Because payment of
$400,000 was not made within 30 days of its due date (June 6, 2006), La Jolla is
entitled to enter a judgment against us for the unpaid balance, plus accrued
interest and $100,000, upon the filing of a declaration of default by La Jolla.
Upon a negotiation being reached the payment has been restructured at to an
amount of $50,000 due the 15th of each month starting September 15, 2006 with a
10 day late payment grace period. In January 23, 2007 La Jolla Cove Investors
Inc, filed suit in the Superior Court Of California entitled La Jolla Cove
Investors, Inc. ("La Jolla") vs. One Voice Technologies, Inc., Case No.
GIC850038 for in reference to the settlement agreement mentioned above. The
penalty by default of $100,000 was dismissed by the court.
Accordingly, $350,000 is accrued as a settlement liability along with accrued
interest of $39,700 as of March 31, 2007
8. LICENSE AGREEMENT LIABILITY
---------------------------
In March 2000 the Company entered into a Software License Agreement ("License
Agreement") with Philips Speech Processing, a division of Philips Electronics
North America ("Philips"). Pursuant to the License Agreement, the Company
received a world-wide, limited, nonexclusive license to certain speech
recognition software owned by Philips. The initial term of the License Agreement
was three (3) years, and the License Agreement included an extended term
provision under which the License Agreement was automatically renewable for
successive one (1) year periods, unless terminated by either party upon a
minimum of sixty (60) days written notice prior to the expiration of the initial
term or any extended term.
The License Agreement provides for the Company to pay a specified commission on
revenues from products incorporating licensed software, and includes minimum
royalty payment obligations over the initial three (3) year term of the License
Agreement in the aggregate amount of $1,100,000.
F-13
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
8. LICENSE AGREEMENT LIABILITY (CONTINUED)
---------------------------------------
Under an amendment to the License Agreement entered into in March 2002, the
initial term of the License Agreement was extended for two (2) years, and the
aggregate minimum royalty payment was increased to $1,500,000. The amendment
also included a revised payment schedule of the minimum royalty payment
obligation that provided for semi-annual payments of $250,000 (due on June 30th
and December 31st of each year). In lieu of scheduled payments, in May, 2003,
based on a verbal agreement with Philips, the Company began making monthly
payments of $15,000, of which $10,000 is being applied against the remaining
minimum royalty payment due and $5,000 is being applied as interest.
On February 1, 2007 the Company amended the Software License Agreement
originally entered into March 2000 with Philips Speech Processing, a division of
Philips Electronics North America ("Philips"). Under the amendment the following
payment two terms will be followed:
The 2006 past due amounts owed by the Company of $70,000 were allocated as
follows: The Company paid $20,000 on February 23, 2007, the remaining $50,000 is
to be paid in the form of a non-interest bearing note payable to Philips Speech
Processing.
During the period of January 1, 2007 thru June 30, 2007 the following payments
will be allocated as follows: $6,000 is to be paid monthly by the Company to
Philips Speech Processing. The monthly remaining balance of $11,500 due to
Philips Speech Processing is to be paid by the Company in the form of a non
interest-bearing note payable to Philips Speech Processing.
On July 1, 2007 and continuing thereafter, a minimum Software License fee of
$17,500 is to be paid to Philips Speech Processing on a monthly basis.
As of March 31, 2007 the note payable balance due Philips Speech Processing was
$1,014,500.
9. DERIVATIVE LIABILITY
--------------------
During the three months ended March 31, 2007 and the year ended December 31,
2006 the Company entered into convertible debt financing agreements with several
institutional investors. Embedded within these convertible financing
transactions are derivatives which require special treatment pursuant with SFAS
No. 133 and EITF 00-19. The derivatives include but are not limited to the
following characteristics:
o Beneficial conversion features
o Early redemption option
o Registration rights and associated liquidated damage
The valuation conducted as the three months ended March 31, 2007 and the year
ended December 31, 2006 the fair value of the derivative liability was $204,758
and $256,495 respectively.
10. WARRANT DERIVATIVE LIABILITY
----------------------------
During the three months ended March 31, 2006, the Company issued warrants in
connection with convertible debt agreements and private placements that required
analysis in accordance with EITF 00-19. There were no warrants issued during the
period ended March 31, 2007 EITF 00-19 specifies the conditions which must be
met in order to classify warrants issued in a company's own stock as either
equity or as a derivative liability. Evaluation of these conditions under EITF
00-19 resulted in the determination that these warrants are classified as a
derivative liability. In accordance with EITF 00-19, warrants which are
determined to be classified as derivative liabilities are marked-to-market each
reporting period, with a corresponding non-cash gain or loss charged to the
current period. The Company valued all warrant derivative liabilities as of
March 31, 2006 using a Black-Scholes option pricing model using the following
assumptions: expected dividend yield of 0.0%, expected stock price volatility of
110%, risk free interest rate of 483.% and a remaining contractual life ranging
from 0.30 years to 4.00 years. The Company valued all warrant derivative
liabilities as of March 31, 2007 using a Black-Scholes option pricing model
using the following assumptions: expected dividend yield of 0.0%, expected stock
price volatility of 114%, risk free interest rate of 4.74% and a remaining
contractual life ranging from .30 years to 3.75 years. The valuation conducted
as of March 31, 2006 resulted in a non-cash loss of $3,878,000 with a
corresponding increase in the warrant derivative liability. The valuation
conducted as of March 31, 2007 resulted in a non-cash loss of $5,913,000 with a
corresponding increase in the warrant derivative liability. As of March 31, 2007
and 2006, the fair value of the warrant derivative liability was $8,721,000 and
$2,808,000, respectively.
F-14
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
11. REVOLVING CREDIT NOTE PAYABLE
-----------------------------
On December 21, 2006, the Company completed a private placement pursuant to a
Revolving Credit Note Agreement which the Company entered into with several
institutional Investors, pursuant to which the Investors subscribed to advance
up to a maximum amount of $640,000 bearing an interest rate of 7%. The term of
the agreement shall be effective as of December 21, 2006 and shall be in full
force and effect until the earliest to occur of (a) 12 months from December 21,
2006 (B) a date not less than thirty days after Lender gives notice of
termination to the Company. In connection with the Revolving Credit Note
Agreement, the Company also issued 20,000,000 shares of its common stock to the
related investors. Interest shall be calculated daily on the outstanding
principal balance due, and is to be reimbursed to the Investors a monthly basis.
The reimbursement of the interest shall be in the form of the Company's
restricted shares of common stock. The stock is to be valued at the month end
stock closing price. The advances to the Company are to be based on an amount of
up to 75% of the face value of the current and future invoices "Receivables"
submitted for borrowing. All proceeds paid relating to the previously mentioned
invoices are to be deposited into a lockbox account belonging to Investors. The
lockbox proceeds are to be 100% applied towards any outstanding principal amount
owed by the Company. The Company's obligation to repay all principal and accrued
and unpaid interest under the convertible notes is secured by the Company's
assets pursuant to a certain Security Agreement dated February 16, 2006, which
also secures the remaining principal amount of the Company's convertible notes
in the aggregate amount of $1,592,000 which the Company issued on March 18,
2005, July 13, 2005, March 17, 2006 May 5, 2006, July 6, 2006 and August 29,
2006 to certain of the investors participating in this new private placement. On
March 20, 2007 the original Revolving Credit Note Agreement was amended. The
amendment increased the the maximum borrowing by the Company to an amount of
$740,000, an increase of $100,000. All terms and agreements of the original note
are still in full force and effect.
During the period of January 1, 2007 thru March 31, 2007 the investors elected
to convert $8,902 in accrued interest related to the credit note. Approximately
270,000 shares of the Company's restricted stock are to be issued. As of March
31, 2007 these shares have not been issued.
During the Period of January 1, 2007 thru March 31, 2007 the Company borrowed
$426,280 from the revolving note.
As of March 31, 2007 the outstanding principal amount owed to the Investors is
$666,280.
12. NOTE 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 March 31, 2006 and December 31, 2006 the principal balance on
the note payable was $100,000 with accrued interest of $29,150 and $27,178
respectively.
F-15
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13. CONVERTIBLE NOTES PAYABLE SUMMARY
---------------------------------
During the three months ended March 31, 2007 the Company did not enter
into any convertible debt financing agreements.
During the three months ended March 31, 2007 and 2006, $135,000 and
$992,000 of notes payable was converted into approximately 21,429,000
and 71,383,000 shares of the Company's common stock at an average
conversion price of $ 0.0063 and$0.014 per share.
On March 17, 2006, we completed a private placement pursuant to a
Subscription Agreement which we entered into with several institutional
investors, pursuant to which the investors subscribed to purchase an
aggregate principal amount of $700,000 in 6% secured convertible
promissory notes and one Class A common stock purchase warrant for each
one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum
payable June 1, 2006 and semi-annually thereafter, and mature 2 years
after the date of issuance. Each investor shall have the right to
convert the secured convertible notes after the date of issuance and at
any time, until paid in full into shares of our common stock. The
conversion price per share shall be the lower of (i) $0.043 or (ii) 80%
of the average of the three lowest closing bid prices for our common
stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market
or exchange where our common stock is listed or traded. The conversion
price is adjustable in the event of any stock split or reverse stock
split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion
price of the secured convertible notes will be adjusted in the event
that we spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets. Our
obligation to repay all principal and accrued and unpaid interest under
the convertible notes is secured by all of our assets pursuant to a
certain Security Agreement dated February 16, 2006, which also secures
the remaining principal amount of our convertible notes in the aggregate
amount of $1,115,000 which we issued on March 18, 2005 and July 13, 2005
to certain of the investors participating in this new private placement.
We issued an aggregate of 50,972,111 Class A common stock purchase
warrants to the investors, representing one Class A warrant issued for
each one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The Class A warrants are exercisable until four years from the closing
date at an exercise price of $0.045 per share. The exercise price of the
Class A warrants will be adjusted in the event of any stock split or
reverse stock split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the exercise
price of the warrants will be adjusted in the event that we spin off or
otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. The fair value of
the warrants of $457,000 using the Black Scholes option pricing model is
recorded as a derivative liability. The beneficial conversion feature of
approximately $243,000 will be amortized over the life of the debt using
the interest method.
F-16
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
The following as a summary of outstanding convertible debt financing agreements
as of March 31, 2007:
A SUMMARY OF CONVERTIBLE DEBT AT DECEMBER 31, 2006 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ - $ 10,000
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 13, 2008 135,000 (53,838) 81,162
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (108,727) 141,273
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (120,832) 129,168
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (46,089) 53,911
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (43,305) 61,695
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (64,957) 85,043
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (25,983) 34,017
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (43,310) 61,690
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT DECEMBER 31, 2006 $ 1,592,000 $ (609,028) $ 982,972
=============== =============== ===============
F-17
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
ONE VOICE TECHNOLOGIES INC.
CONVERTIBLE DEBT FINANCING SUMMARY (CONTINUED)
----------------------------------------------
A SUMMARY OF CONVERTIBLE DEBT AT MARCH 31, 2007 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ (2,595) $ 7,405
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (86,538) 163,462
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (96,436) 153,564
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (38,574) 61,426
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (36,873) 68,127
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (55,310) 94,690
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (22,124) 37,876
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (36,878) 68,122
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT MARCH 31, 2007 $ 1,457,000 $ (460,485) $ 996,515
=============== =============== ===============
F-18
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK
------------
o CONVERTIBLE DEBT CONVERSION
---------------------------
During the three months ended March 31, 2007, Alpha Capital
Akteingesellschaft converted approximately $135,000 of notes payable
into approximately 21,428,571 shares of the Company's common stock at
an average conversion price of $0.0063.
During the three months ended March 31, 2006, Alpha Capital
Akteingesellschaft converted approximately $291,000 of notes payable
into approximately 21,196,000 shares of the Company's common stock at
an average conversion price of $0.014. During the same period, Alpha
Capital Akteingesellschaft exercised warrants to purchase 14,300,000
shares of common stock for cash in the amount of $200,200.
During the three months ended March 31, 2006, Whalehaven Fund, Limited
converted approximately $583,000 of notes payable into approximately
41,030,000 shares of the Company's common stock at an average
conversion price of $0.014.
During the three months ended March 31, 2006, Ellis International Ltd.
converted approximately $75,000 of notes payable into approximately
5,855,000 shares of the Company's common stock at an average
conversion price of $0.013. During the same period, Ellis
International Ltd. exercised warrants to purchase 6,250,000 shares of
common stock for cash in the amount of $100,000.
During the three months ended March 31, 2006, Omega Capital Small Cap
Fund converted approximately $27,500 of notes payable into
approximately 2,167,000 shares of the Company's common stock at an
average conversion price of $0.013.
During the three months ended March 31, 2006, Osher Capital Inc.
converted approximately $15,600 of notes payable into approximately
1,134,000 shares of the Company's common stock at an average
conversion price of $0.014.
During the three months ended March 31, 2006, an accredited investor
purchased an aggregate of 3,000,000 shares of restricted common stock
for a total purchase price of $60,000. In addition, the investor
received an aggregate of 3,000,000 Class A and 3,000,000 Class B
common stock purchase warrants with an exercise price of $0.045 and
$0.06 per share respectively.
o REVOLVING CREDIT NOTE
---------------------
On May 1, 2007 the original Revolving Credit Note Agreement was
amended for the second time. The amendment increased the the maximum
borrowing by the Company to an amount of $790,000, an increase of
$50,000. All terms and agreements of the original note are still in
full force and effect.
o WARRANT EXERCISE
----------------
During the three months ended March 31, 2007 8,000,000
common stock warrants were exercised at a price of $0.00653. The
Company received approximately $52,000
o ISSUANCE OF COMMON STOCK IN EXCHANGE OF SERVICES
------------------------------------------------
During the three months ended March 31, 2007 the Company issued
approximately 5,400,000 shares of its restricted common stock
having a market value of $117,200 in exchange for services rendered.
o SHARES TO BE ISSUED IN EXCHANGE FOR INTEREST OWED
------------------------------------------------
During the period of January 1, 2007 thru March 31, 2007 the investors
elected to convert $8,902 in accrued interest related to the credit
note. Approximately 270,000 shares of the Company's restricted stock
are to be issued. As of March 31, 2007 these shares have not been
issued.
F-19
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. OTHER INCOME (EXPENSE)
----------------------
For the three months ended March 31, 2007 and 2006, other expense was
approximately $6,132,000 and $4,717,000 respectively.
Other income (expense) consisted of interest expense, settlement expense, gain
(loss) on warrant derivative liability and other income (expense), details
below.
INTEREST EXPENSE
- ----------------
INTEREST EXPENSE SUMMARY
------------------------
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
--------------- ---------------
Debt issue cost $ 82,714 $ 56,079
Discount amortization 148,541 662,478
Accrued interest 36,800 25,788
Other / penalties 2,567 -
--------------- ---------------
TOTAL $ 270,622 $ 744,345
For three months ended March 31, 2007 and 2006, interest expense was
approximately $271,000 compared to $744,000 respectively.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the three months ended March 31, 2007 and 2006, interest expense related to
debt issue costs was approximately $83,000 compared to $56,000, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the three months ended March 31, 2007, and 2006, interest expense related to
the amortization of discount was approximately $149,000 compared to $662,000
respectively.
3. Monthly accrued interest related to notes payable and convertible notes
payable financing.
This represents a future cash transaction if the convertible interest accrued is
not converted into common stock. No accrued interest related to convertible
notes payable was paid in cash during the three months ended March 31, 2007 and
2006.
For the three months ended March 31, 2007 and 2006, interest expense related to
notes payable and convertible notes payable was approximately $37,000 compared
to $26,000, respectively.
4. Other / misc. for the three months ended March 31, 2007 and 2006, was
approximately $3,000 compared to $0 respectively.
SETTLEMENT EXPENSE
- ------------------
For the three months ended March 31, 2007 and 2006, settlement expense was
approximately $0 compared to $101,000 respectively. The decrease in period 2007
over 2006 is attributable to a one time settlement for the exchange of services.
Payment was in the form of the Companys restricted common stock.
GAIN / (LOSS) ON WARRANT DERIVATIVES
- ------------------------------------
For the three months ended March 31, 2007 and 2006, losses recorded on warrant
derivatives and debt derivatives were approximately $5,861,000 compared to
$3,878,000 respectively. See Note 9 in the accompanying notes to the financial
statements.
F-20
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
OTHER INCOME (EXPENSE)
- ----------------------
For the three months ended March 31, 2007 and 2006, other / net was
approximately a loss of $0 compared to a gain of $6,000 respectively.
16. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases its facilities and certain equipment under leases that expire
at various times through 2010. The following is a schedule, by year, of future
minimum rental payments required under operating leases that have non cancelable
lease terms in excess of one year as of March 31, 2007:
Three months ended March 31, 2007
2007 145,695
2008 199,886
2009 206,081
2010 193,515
----------
$ 745,177
==========
Rent expense, net of sublease income, amounted to $54,723 and $51,718 for the
Three months ended March 31, 2007 and 2006 respectively.
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
--------------------------------------------
On July 14, 1999, the Company adopted an Incentive and Nonqualified Stock Option
Plan (the "Plan") for its employees and consultants under which a maximum of
3,000,000 options (Amendment to increase the available shares from 1,500,000 to
3,000,000 approved by the shareholders in December 2001) and approved by the
shareholders may be granted to purchase common stock of the Company. On July 29,
2005 the Company adopted the 2005 Stock Incentive Plan and reserved 60,000,000
shares of the Company's common stock for issuance under the 2005 Plan.
Two types of options may be granted under the 2005 Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is greater than 85% of the fair market value of the
common stock on the date it was reserved for issuance under the plan. Grants of
options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan vest at a rate of
at least 20% per year over a 5-year period from the date of the grant or sooner
if approved by the Board of Directors. All options issued pursuant to the Plan
are nontransferable and subject to forfeiture.
In 2005, the Company 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.
Upon termination of employment or service contract, all options vested or
non-vested expire unless the options have been exercised in full, or in part
within 90 days of such event. Management reserves the right to extend vested
options under certain circumstances, given approval by the Board of Directors.
F-21
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
--------------------------------------------------------
During the period ended December 31, 2005, the Company issued 225,000 stock
options to employees, directors for compensation at an average price of $.04.
During the period ended December 31, 2006, the Company issued 57,700,000 stock
options to employees for compensation at an average price of $.016, a total of
1,062,500 options were terminated.
No stock options were granted to employees during the period ended March 31,
2007. A total of 2,600,000 options were terminated during the period ended March
31, 2007.
The total intrinsic value of options relating to employee and director
compensation exercised during the year ended for the period ended March 31, 2007
and year ended 2006, respectively, was $0.
The total intrinsic value of vested options relating to employee and director
compensation during the period ended March 31, 2007 and year ended 2006, is
$608,783 and $0 respectively, this consists of 35,861,111 vested options at an
average exercise price of $0.016 per share. The increase of $608,783 from the
prior period is due to the Company's closing stock price at March 31, 2007 of
$0.033 per share compared to $0.0125 per share at December 31, 2006 (see
footnote 17.a for details).
For the periods ended March 31, 2007 and 2006, there was approximately $36,783
and $155,209 of total compensation expense recorded by the Company related to
share-based compensation. The decrease of $118,426 from the prior period was due
to the fact that the Company recorded 2005 stock compensation expenses during
the period ended March 31, 2006 pursuant to the adoption of new accounting
principles (see footnote 17.a for details).
The weighted average grant date fair value of options relating to employee and
director compensation granted during 2006 was $455,696.
As of March 31, 2007, there was approximately $127,218 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
with employees. Of this amount, $31,911 is expected to be recognized each year
throughout 2008.
As of March 31, 2007, there was approximately $20,340 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
with directors and contractors. Of this amount, $5,014 is expected to be
recognized each year throughout 2008.
The Companys closing stock price reported by NASDAQ listed under symbol ONEV at
March 31, 2007 was $0.033 per share.
See footnote 17 a. for a description of the Company's share-based Compensation
plan.
STOCK OPTIONS ACTIVITY
The following table is a summary of the activity for the two stock compensation
plans adopted by the Company as of March 31, 2007.
THREE MONTHS ENDED
MARCH 31, 2007
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES AVAILABLE
AUTHORIZED OUTSTANDING FOR GRANT
----------------------------------------------------------
Year 1999 plan 3,000,000 272,435 2,727,565
Year 2005 plan 60,000,000 55,186,565 4,813,435
----------------------------------------------------------
TOTAL 63,000,000 55,459,000 7,541,000
==========================================================
F-22
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
--------------------------------------------------------
A summary of the Company's stock option activity and related information is as
follows for the period ending March 31, 2007 and 2006, respectively:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------------------ -------------------- ------------------ --------------------
Outstanding at beginning of year 58,059,000 $ 0.06 1,921,500 $ 1.47
Options granted 0 N/A 57,700,000 0.016
Options exercised 0 N/A 0 N/A
Options terminated (2,600,000) 0.016 (500,000) N/A
---------------- ----------------
OPTIONS OUTSTANDING AT END OF 1ST QUARTER 55,459,000 0.065 59,121,500 0.06
---------------- ----------------
OPTIONS EXERCISABLE AT END OF 1ST QUARTER 37,486,778 $ 0.089 20,848,583 $ 0.086
The following table summarizes the number of options authorized by the plan and
available for distribution as of March 31, 2007 and 2006, respectively.
PERIOD ENDING PERIOD ENDING
MARCH 31, 2007 MARCH 31, 2006
NUMBER OF NUMBER OF
SHARES SHARES
----------- -----------
Beginning options available for grant 4,941,000 62,141,000
Add: Additional options authorized -- --
Less: Options granted -- (57,700,000)
Add: Options terminated 2,600,000 500,000
----------- -----------
ENDING OPTIONS AVAILABLE FOR DISTRIBUTION 7,541,000 4,941,000
F-23
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
--------------------------------------------------------
The following tables summarize the number of option shares, the weighted average
exercise price and the weighted average life (by years) by price range for both
total outstanding options and total exercisable options as of March 31, 2007 and
2006, respectively:
FOR THE PERIOD ENDED MARCH 31, 2007
TOTAL OUTSTANDING TOTAL EXERCISABLE
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
----------- ----------- ----- ---- ----------- ----- ----
$6.08 - $ 12.80 270,000 $ 7.170 3.44 270,000 7.170 3.44
$0.32 - $2.00 839,000 0.911 4.28 839,000 0.911 4.28
$0.016 - $0.19 54,350,000 0.017 8.78 36,377,778 0.018 8.77
--------------- ------------- -------------- --------------- ------------- --------------
TOTAL 55,459,000 $ 0.065 8.69 37,486,778 $ 0.089 8.63
FOR THE PERIOD ENDED MARCH 31, 2006
TOTAL OUTSTANDING TOTAL EXERCISABLE
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
----------- ----------- ---------- ---------- ---------- ---------- ----------
$6.08 - $ 12.80 270,000 $ 7.170 4.46 270,000 $ 7.170 4.46
$0.32 - $2.00 876,500 0.912 5.31 876,500 0.912 5.31
$0.016 - $0.19 57,975,000 0.017 9.81 19,702,083 0.018 9.79
----------- ---------- ---------- ---------- ---------- ----------
TOTAL 59,121,500 $ 0.063 9.72 20,848,583 $ 0.086 9.66
F-24
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
--------------------------------------------------------
A summary of option activity relating to employee, director and contractor
compensation as of March 31, 2007, and the intrinsic value related to the
options:
THREE MONTHS ENDED
MARCH 31,
2007
----------------------------------------------------------------------------
WEIGHTED
AVERAGE AVERAGE
OPTIONS RELATING TO EMPLOYEE, CONSULTANTS EXERCISE INTRINSIC
AND DIRECTOR COMPENSATION SHARES PRICE LIFE VALUE
------------------------- ------------------ ----------------- ---------- ---------
Outstanding at beginning of year 58,059,000 $ 0.060 8.69 $ 913,200
Options granted 0 N/A N/A 0
Options exercised 0 N/A N/A 0
Options terminated (2,600,000) 0.02 N/A (44,200)
----------------- ---------------- ---------
OPTIONS OUTSTANDING AT END OF 1ST QUARTER 55,459,000 0.065 8.69 869,000
----------------- ---------------- ---------
OPTIONS EXERCISABLE AT END OF 1ST QUARTER 37,486,778 $ 0.089 8.63 $ 608,783
A summary of the status of the Company's nonvested option shares relating
to employee and director compensation as of December 31, 2006, and changes
during the year then ended is presented below:
THREE MONTHS ENDED
MARCH 31,
2007
------------------------------------
WEIGHTED
AVERAGE
NON VESTEDOPTIONS RELATING TO EMPLOYEE, GRANT-DATE
CONSULTANTS AND DIRECTOR COMPENSATION SHARES FAIR VALUE
------------------------------------- ----------------- -----------------
Outstanding at beginning of year 37,559,028 $ 1.47
Options granted 0 N/A
Options exercised 0 N/A
Options vested (16,986,806) 0.016
Options terminated (2,600,000) 0.016
----------------- -----------------
NON VESTED AT END OF 1ST QUARTER 17,972,222 $ 0.0132
In addition to the assumptions in the above tables, the Company applies a
forfeiture-rate assumption in its estimate of fair value that is primarily based
on historical annual forfeiture rates of the Company.
2007
--------------------
Expected dividend yield 0.00%
Expected volatility 113%
Average risk-free interest rate 4.74%
Expected life (in years) 3.44 to 8.78
The above options carry vesting date's as follows: 1/3 of the options vest on
the grant date, 1/3 of the options vest one year after the grant date, the final
1/3 of the options vest two years after the grant date.
F-25
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17 a. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
- --------------------------------------------------------------
On July 14, 1999, the Company adopted an Incentive and Nonqualified Stock Option
Plan (the "Plan") for its employees and consultants under which a maximum of
3,000,000 options (Amendment to increase the available shares from 1,500,000 to
3,000,000 approved by the shareholders in December 2001) and approved by the
shareholders may be granted to purchase common stock of the Company. On July 29,
2005 the Company adopted the 2005 Stock Incentive Plan and reserved 60,000,000
shares of the Company's common stock for issuance under the 2005 Plan.
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 As of December 31, 2006, the
Company has 3 stock option plans for the benefit of officers, directors,
employees, independent contractors and consultants of the Company. These plans
include: (i) the 1998 Stock Option Plan, (ii) the 1996 Stock Option Plan, and
(iii) the 1996 Employee Compensatory Stock Option Plan. In addition to these
plans, the Company grants various other stock options, warrants and stock
directly to certain parties. The Company grants all such awards as incentive
compensation to officers, directors, and employees, and as compensation for the
services of independent contractors and consultants of the Company.
Stock options: The Company generally grants stock options to employees at
exercise prices equal to the fair market value of the Company's stock at the
dates of grant. Stock options may be granted throughout the year, vest
immediately, vest based on years of continuous service, or vest upon completion
of specified performance conditions, and expire 10 years following the initial
grant date. The Company recognizes compensation expense for the fair value of
the stock options over the requisite service period for each separate vesting
portion of the stock option award, or, for awards with performance conditions,
when the performance condition is met.
Warrant options: The Company generally grants stock options to directors and
consultants at exercise prices equal to the fair market value of the Company's
stock at the dates of grant. Stock options may be granted throughout the year,
vest immediately, vest based on years of continuous service, or vest upon
completion of specified performance conditions, and expire 10 years following
the initial grant date. The Company recognizes compensation expense for the fair
value of the stock options over the requisite service period for each separate
vesting portion of the stock option award, or, for awards with performance
conditions, when the performance condition is met.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the following table. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options and warrants have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options and warrants. The expected dividend yield assumption is based on the
Company's expectation of dividend payouts. Expected volatilities are based on
historical volatility of the Company's stock. The average risk-free interest
rate is based on the U.S. treasury yield curve in effect as of the grant date.
The expected life is primarily determined using guidance from SAB 107. As such,
the expected life of the options and warrants is the average of the vesting term
and the full contractual term of the options and warrants.
F-26
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
18. WARRANTS
--------
At March 31, 2007, the Company had warrants outstanding that allow the holders
to purchase up to 331,979,838 shares of common stock.
The number and weighted average exercise prices of the warrants for the period
ended March 31, 2007 and 2005 are as follows:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------------------ -------------------- ------------------ --------------------
Outstanding at beginning of year 339,979,838 $ 0.02 215,373,361 $ 0.05
Warrants granted 0 N/A 50,972,110 0.05
Warrants exercised (8,000,000) 0.007 0 N/A
Warrants terminated 0 N/A 0 N/A
------------------ ------------------
WARRANTS OUTSTANDING AT END OF 1ST QUARTER 331,979,838 $ 0.02 266,345,471 $ 0.05
================== ==================== ================== ====================
WARRANTS EXERCISABLE AT END OF 1ST QUARTER 331,979,838 $ 0.02 232,345,471 $ 0.05
================== ==================== ================== ====================
During the period ended March 31, 2007 a total of 8,000,000 warrants were
exercised at an average price of $0.00653. As a result the Company received cash
proceeds of $52,240.
At March 31, 2006, the weighted average remaining contractual life of the
warrants was approximately 36 months.
As an incentive to exercise warrants early, the Company reduced the exercise
price to $0.016 Per share for Series A and B warrants on March 23, 2006. As a
result, the Company raised approximately $300,200 in connection with the
re-pricing of warrants to the investors.
F-27
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS
-----------------------------------
The Company has restated previously issued 10-QSB for period ended March 31,
2006 and the consolidated financial statements for matters relating to the
proper treatment of conversion features embedded in the convertible debt
financing transactions. The restatement is pursuant to EITF Nos. 00-19, 05-02,
and SFAS No. 133. The accompanying financial statements for the period ended
March 31, 2006 have been restated to reflect the corrections. Accumulated
deficit at March 31, 2006 was decreased by $374,438 as a result of adjustments
related to the carrying value of convertible debentures, warrant liability and
other derivative liabilities, which previously either in part or as a whole,
were unrecorded liabilities in 2006.
THREE MONTHS ENDED MARCH 31, 2006
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Increase / (decrease) in interest expense $ (148,960)
Increase / (decrease) in gain on warrant and debt derivative --
Increase / (decrease) in the fair value of debt derivative liability 156,350
Increase / (decrease) in the fair value of net convertible notes 247,039
Increase / (decrease) additional paid in capital (777,827)
Increase / (decrease) accumulated deficit (374,438)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE THREE MONTHS ENDED MARCH
31, 2006 (UNAUDITED):
Total decrease of 2006 net loss $ 148,960
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED MARCH 31, 2006 FINANCIAL
STATEMENTS ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
-------- ------ --------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability - 156,350 156,350
-------------------- -------------------- -----------------------
TOTAL CURRENT LIABILITIES - 156,350 156,350
Convertible notes payable, net 90,605 247,039 337,644
-------------------- -------------------- -----------------------
TOTAL LONG TERM LIABILITIES 90,605 247,039 337,644
-------------------- -------------------- -----------------------
TOTAL LIABILITIES 90,605 403,389 493,994
==================== ==================== =======================
Additional paid in capital 40,369,813 (777,827) 39,591,986
Accumulated deficit (48,480,731) 374,438 (48,106,293)
-------------------- -------------------- -----------------------
TOTAL STOCKHOLDERS EQUITY (8,110,918) (403,389) (8,514,307)
==================== ==================== =======================
STATEMENT OF OPERATIONS
-----------------------
Interest expense (893,305) 148,960 (744,345)
Loss on warrant and debt derivative (3,877,509) - (3,877,509)
Other Income / (Expense) - - -
-------------------- -------------------- -----------------------
NET INCOME / (LOSS) (4,770,814) 148,960 (4,621,854)
==================== ==================== =======================
F-28
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
20. SUBSEQUENT EVENTS
-----------------
o FINANCING
---------
During April 1, 2007 thru May 11, 2007, the Company received advances
that were applied towards the Revolving Credit Note agreement dated
December 21, 2006 totaling $50,000.The advances were used for expenses
relating to normal monthly operating expenses incurred by the Company.
o RESTRICTED COMMON STOCK GRANTED IN EXCHANGE FOR SERVICES RENDERED
-----------------------------------------------------------------
On April 27, 2007 the Company granted a total of 1,500,000 shares of
restricted common stock having a market value of $45,000 as
compensation to an independent contractor for services provided during
the fiscal year ended December 31, 2006 audit.
o WARRANTS
On April 4, 2007 the company issued to an accredited investor a total
of 4,001,838 restricted common stock purchase warrants at a price of
$.00653 per share pursuant to a cashless exercise.
On April 23, 2007 the company issued to an accredited investor a total
of 12,578,616 restricted common stock purchase warrants at a price of
$.00636 per share. The company received cash proceeds of $80,000.
F-29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
- ------------------------------------------------------------------------------
OPERATION
- ---------
FORWARD-LOOKING STATEMENTS
- --------------------------
The information in this report contains forward-looking statements. All
statements other than statements of historical fact made in this report are
forward looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are
forward-looking statements. These forward-looking statements can be identified
by the use of words such as "believes," "estimates," "could," "possibly,"
"probably," anticipates," "projects," "expects," "may," "will," or "should" or
other variations or similar words. No assurances can be given that the future
results anticipated by the forward-looking statements will be achieved.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Our actual results may differ significantly from
management's expectations.
The following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.
OVERVIEW OF THE BUSINESS
- ------------------------
One Voice Technologies, Inc. is a voice recognition technology company with over
$43 million invested in Research and Development and deployment of more than 20
million products worldwide in seven languages. To date, our customers include:
Telefonos de Mexico, S.A.B. de C.V. (TELMEX), Intel Corporation, Alltel
Wireless, Inland Cellular, Nex-Tec Wireless and several additional telecom
service providers throughout the United States.
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 messages, all by voice. We offer PC Original Equipment
Manufacturers (OEM's) the ability to bundle a complete voice interactive
computer assistant which allows PC users to talk to their computers to quickly
play digital media (music, videos, DVD) along with read and send e-mail
messages, SMS text messaging to mobile phones, PC-to-Phone calling (VoIP) and
PC-to-PC audio/video. We feel we are strongly positioned across these markets
with our patented voice technology.
The Company believes that the presence of voice technology as an interface in
mobile communications and PC computing is of paramount importance. Voice
interface technology makes portable communications more effective and safer to
use and it makes communicating with a PC to play digital content, such as music,
videos and photos, easier for consumers. One Voice's development efforts
currently are focused on the Telecom and PC multimedia markets and more
specifically on mobile communications from a cell phone, directory assistance
and in-home digital media access.
In order to reduce expenditures, the Company has aggressively reduced its
operating expenses to a target of $160,000 per month beginning in November 2006.
This reduction has come from a series of measures including reduction in
head-count by eliminating all part-time workers, placing some full-time
employees on part-time status and reducing additional operating overhead. Given
these cost cutting measures, the Company feels it can better reach operationally
break-even by decreasing operating expenses while increasing our revenue stream.
TELECOM SECTOR
- --------------
In the Telecom sector, we believe that the Mobile Messaging market, which has
both business and consumer market applications including: e-mail, instant
messages, and SMS (Short Message Service), is extremely large and is growing at
an astonishing rate. One Voice solutions enable users to send, route and receive
text messages using voice from any type of phone (wired or wireless) anywhere in
the world.
The Company's strategy, in the telecom sector, is to continue aggressive sales
and marketing activities for our voice solutions, which we believe, may result
in increased deployments and revenue stream. The product offerings will
encompass both MobileVoice(TM) suite of solutions as well as our ADA
(Alternative to Directory Assistance(TM)).
Page 3
The Company has recently begun a trial-testing phase for our voice solutions
with Cingular Wireless. This trial is in joint cooperation with VeriSign. If
successful, this opportunity could potentially lead to Cingular Wireless
launching One Voice's services. This trial is still on-going. At this time, we
do not know if this will ever come to any material fruition.
The Company was recently selected by Lucent Technologies to jointly offer One
Voice's MobileVoice solutions in conjunction with Lucent services to national
carriers. Due to reorganizations within Lucent these efforts have been put on
hold until new management within Lucent is assigned to this effort.
The Company recently received a counter-proposal from a large carrier in India
for MobileVoice services. We are currently negotiating terms with this carrier.
The Company recently signed an agreement to deploy MobileVoice services with
Mohave Wireless. This service is anticipated to be launched to Mohave Wireless
subscribers in Summer, 2007.
The Company recently signed a deployment contract with TELMEX for deployment of
One Voice's MobileVoice solutions to the over 18 million TELMEX subscribers
throughout Mexico. The anticipated launch is June 2007 beginning with TELMEX
subsidiary TELNOR with over 750,000 subscribers in northern Mexico. National
rollout throughout Mexico is anticipated to begin in Summer 2007 to the
remaining 18 million TELMEX subscribers. We are currently bidding on additional
contracts within TELMEX for other services to be offered by TELMEX to their
subscribers. At this time, we do not know if these additional contracts will
ever come to any material fruition.
PC SECTOR
- ---------
In the PC sector, we believe that digital in-home entertainment is rapidly
growing with the wide acceptance of digital photography, MP3 music and videos,
along with plasma and LCD TV's. We believe that companies including Apple,
Microsoft and Intel are actively creating products and technology, which allow
consumers to experience the next-generation of digital entertainment. The
Company's Media Center Communicator(TM) product works with Microsoft Windows XP
Media Center Edition 2005 to add voice-navigation and a full suite of
communication features allowing consumers to talk to their Media Center PC to
play music, view photo slideshows, watch and record TV, place Voice-Over-IP
(VoIP) phone calls, read and send e-mail and Instant Message friends and family,
all by voice.
The Company's strategy, in the PC Sector, is to continue its aggressive
marketing efforts to sign-up system integrators, such as those engaged in the
business of home theatre installation and value-added resellers under the
Company's reseller program launched in 2005. The Company will continue to pursue
OEMs for bundling agreements of its Media Center Communicator product. These OEM
agreements may include revenue share business models as well as discounted
individual user license fees. The Company will continue to use industry
associations, forums and tradeshow events such as CES, CEDIA, EHX and Digital
Life to promote awareness of our products and build strategic alliances.
The Company anticipates having its Media Center Communicator bundled with a
tier-one PC manufacturer in the Fall 2007.
The Company recently was awarded a contract from Intel Corporation to co-develop
voice-enabled solutions for use with embedded and desktop devices. Intel has
selected One Voice's technology to be used as an integral part of these devices.
This contract is not anticipated generating material revenue for the Company
given the narrow niche market for these devices. The Company will continue to
offer our technology and services to Intel for additional contracts as they may
come up from time to time.
The Company has completed the design and prototyping of its Media Center remote
control and is now in discussions with retailers and distributors for purchasing
commitments. We have produced several evaluation units that are now under
evaluation by potential retailers and distributors. Given potential purchase
commitments, the Company will produce our remotes to fulfill these orders. We
anticipate the initial production run will cost approximately $50,000 to create
the machine tooling, plastics, electronics and assembly for the remotes. We will
only go into production given committed purchase orders to cover these
manufacturing costs. We anticipate this will happen in the second quarter 2007.
The Company recently was awarded a contract from AT&T/SBC to develop next
generation voice activated remote controls for set-top box devices. This
contract is initially to develop several prototype remote control devices with a
potential production contract in 2007. This initial contract is a milestone for
our company which we believe proves that our technology is in-demand by
significant customers and in conjunction with our pending patent in this area of
remote controls. Our goal is to create a market for voice enabled remote control
devices used for voice commands and VoIP (Voice-over-IP) communications (example
Skype and Vonage) that are covered in our pending patent and to license this
technology to remote control device manufacturers for use with CE devices, cable
and satellite set top boxes and Media Center computers.
Page 4
In summary, since the beginning of 2006, the company has deployed services with
telecom carriers and began recognizing recurring revenue. Management believes
the company's transition into the revenue recognition phase was very important
as it signifies acceptance of our solutions and the value they deliver to the
customer and their subscribers. For the year ending December 31, 2006, the
Company has experienced revenue growth of 387 % over the same period ending
December 31, 2005. The management team remains committed to generating near and
long term revenues significant enough to fund daily operations, building
shareholder value, expand the intellectual property portfolio and developing
cutting edge solutions and applications for the emerging speech recognition
market sector.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to impairment
of property, plant and equipment, intangible assets, deferred tax assets, fair
value of derivative liabilities and fair value of options or warrants
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.
Page 5
RESULTS OF OPERATION FOR THE THREE MONTHES ENDED MARCH 31, 2007 AND 2006.
ONE VOICE TECHNOLOGIES INC.
SELECTED STATEMENT OF OPERATIONS INFORMATION
($000'S) ($000'S) ($000'S)
THREE MONTHS ENDED PERCENTAGE
MARCH 31, MARCH 31, CHANGE CHANGE
2007 2006
---------------- ---------------- ---------------- ----------------
(RESTATED)
Net Revenue $ 210,000 $ 61,000 $ 149,000 244%
Cost of goods sold 98,000 21,000 77,000 367%
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 112,000 40,000 72,000 180%
General and administrative expenses 632,000 991,000 (359,000) -36%
Other income (expense) (6,132,000) (4,717,000) (1,415,000) 30%
---------------- ---------------- ---------------- ----------------
NET LOSS BEFORE INCOME TAX (6,652,000) (5,668,000) (984,000) 17%
================ ================ ================ ================
Income tax expense 800 800 -- --
---------------- ---------------- ---------------- ----------------
NET LOSS $ (6,652,800) $ (5,668,800) $ (984,000) 17%
REVENUES
- --------
Net revenues totaled $210,000 and $61,000 for the three months ended March 31,
2007 and 2006, respectively. Increased revenues of $149,000 (244%) between the
two periods was attributable to 4 new MobileVoice customers.
COST OF GOODS SOLD
- ------------------
Cost of goods sold for the three months ended March 31, 2007 and 2006 totaled
$98,000 and $21,000, respectively. The increase in cost of goods sold of $77,000
(367%) between the two periods was due to the reclassification of expenses
during 2007 that previously had been recorded as general and administrative
expenses. These expenses are related to licensing agreements that allow the
voice recognition products offered to be functional.
GENERAL AND ADMINISTRATIVE EXPENSE
- ----------------------------------
Operating expenses totaled $632,000 and $991,000 for the three months ended
March 31, 2007 and 2006, respectively. The decrease of $359,000 (36%) between
the two periods was due to overall budget reductions and the reclassification of
operating expenses to cost of goods sold.
SALARY AND COMPENSATION
- -----------------------
Salary and wage expenses totaled $293,000 and $409,000 for the three months
ended March 31, 2007 and 2006, respectively. The decrease of $116,000 (28%)
between the two periods was due to headcount reductions, which increased the
overall efficiency of the Company.
ACCOUNTING LEGAL AND CONSULTING
- -------------------------------
Accounting, Legal and consulting totaled $121,00 and $56,000 for the three
months ended March 31, 2007 and 2006, respectively. The increase of $65,000
(116%) between the two periods was due to increased year end 2006 audit fees due
to the transition of audit firms and filing fees incurred for the filing of the
registration statement on Form SB-2.
Page 6
OTHER INCOME (EXPENSE)
- ----------------------
Other income (expense) totaled $6,132,000 and $4,717,000 for the three months
ended March 31, 2007 and 2006, respectively. An increase of $1,415,000 (30%).
o Other income (expense) consist of interest expense, settlement
expense, gain (loss) on warrant / debt derivative liability and other
misc. Details below.
INTEREST EXPENSE
- ----------------
INTEREST EXPENSE SUMMARY
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2007 2006
---------------- ----------------
Debt issue cost $ 82,714 $ 56,079
Discount amortization 148,541 662,478
Accrued interest 36,800 25,788
Other / penalties 2,567 -
---------------- ----------------
TOTAL $ 270,622 $ 744,345
For three months ended March 31, 2007 and 2006, interest expense was
approximately $271,000 compared to $744,000 respectively.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the three months ended March 31, 2007 and 2006, interest expense
related to debt issue costs was approximately $83,000 compared to $56,000,
respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the three months ended March 31, 2007, and 2006, interest expense related to
the amortization of discount was approximately $149,000 compared to $662,000
respectively.
3. Monthly accrued interest related to notes payable and convertible notes
payable financing.
This represents a future cash transaction if the convertible interest accrued is
not converted into common stock. No accrued interest related to convertible
notes payable was paid in cash during the three months ended March 31, 2007 and
2006.
For the three months ended March 31, 2007 and 2006, interest expense related to
notes payable and convertible notes payable was approximately $37,000 compared
to $26,000, respectively.
4. Other / misc. for the three months ended March 31, 2007 and 2006, was
approximately $3,000 compared to $0 respectively.
SETTLEMENT EXPENSE
- ------------------
For the three months ended March 31, 2007 and 2006, settlement expense was
approximately $0 compared to $101,000 respectively. The decrease between the two
periods was attributable to a one time settlement for the exchange of services.
Payment was in the form of the Companys restricted common stock.
LOSS ON WARRANT DERIVATIVES
- ---------------------------
For the three months ended March 31, 2007 and 2006, losses recorded on warrant
derivatives was approximately $5,913,000 compared to $3,878,000 respectively.
See Note 10 in the accompanying notes to the financial statements.
GAIN / (LOSS) ON DEBT DERIVATIVES
- ------------------------------------
For the three months ended March 31, 2007 and 2006, gain recorded on debt
derivatives were approximately $52,000 compared to $0 respectively. See Note 9
in the accompanying notes to the financial statements.
Page 7
OTHER INCOME (EXPENSE)
- ----------------------
For the three months ended March 31, 2007 and 2006, other / net was
approximately $0 compared to a gain of $6,000 respectively. The decrease between
the two periods was attributable to a one time gain on the sale of fixed assets
during the period ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
NON-CASH EXPENSES EFFECTING OPERATING ACTIVITIES
- ------------------------------------------------
Non-cash related expenses of $6,143,000 are reflected in the period ended
March 31, 2007 net loss of $6,653,000 and consist of the following:
THREE MONTHS ENDED
MARCH 31,
2007
----------------------
NET LOSS (6,653,227)
NON-CASH RELATED EXPENSES
Depreciation and amortization 25,240
Stock compensation expense 36,783
Stock issuance for exchange of debt 33,760
Amortization of note discount 148,541
Interest payable 36,800
Gain / (loss) on warrant and debt derivatives 5,861,417
----------------------
TOTAL NON-CASH RELATED EXPENSE 6,142,541
----------------------
ADJUSTED NON-CASH NET LOSS $ (510,686)
o Depreciation and amortization expense of $25,000.
o Compensation expense relating to the issuance of stock options of
$37,000.
o Issuance of common stock in exchange for services and debt of
$34,000.
o Amortization of embedded discount relating to convertible debt
financing of $149,000.
o Accrued interest expense related to convertible debt financing
transactions of $37,000.
o Re-pricing of the warrant derivative liability and debt derivative
relating to convertible debt financing of $5,861,000.
At March 31, 2007, the Company had a working capital deficit of $11,301,000 as
compared with a working capital deficit of $5,101,000 at March 31, 2006. The
increase of $6,200,000 consists of $8,926,000 of warrant and debt derivative
liability as of March 31, 2007
Net cash used for operating activities is $536,000 for the three months ended
March 31, 2007 compared to $765,000 for the three months ended March 31, 2006.
Net cash used for investing activities is $19,000 for the three months ended
March 31, 2007 compared to $20,000 for the three months ended March 31, 2006.
Net cash used for financing activities is $563,000 for the three months ended
March 31, 2007 compared to $518,000 for the three months ended March 31, 2006.
FINANCING TRANSACTIONS
- ----------------------
NET PROCEEDS RECEIVED DUE TO FINANCING ACTIVITY
- -----------------------------------------------
2007 2006
------------ ------------
Private placement $ -- $ 60,000
Warrant exercise 52,240 --
Convertible debt financing -- 639,500
Revolving line of credit 482,000 --
------------ ------------
TOTAL PROCEEDS RECEIVED $ 534,240 $ 699,500
============ ============
Page 8
CONVERTIBLE NOTES PAYABLE SUMMARY
- ---------------------------------
During the three months ended March 31, 2007 the Company did not enter
into any convertible debt financing agreements.
During the three months ended March 31, 2007 and 2006, $135,000 and
$992,000 of notes payable was converted into approximately 21,429,000 and
71,383,000 shares of the Company's common stock at an average conversion
price of $ 0.0063 and$0.014 per share.
On March 17, 2006, the Company completed a private placement pursuant to a
Subscription Agreement which we entered into with several institutional
investors, pursuant to which the investors subscribed to purchase an
aggregate principal amount of $700,000 in 6% secured convertible
promissory notes and one Class A common stock purchase warrant for each
one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The secured convertible notes bear simple interest at 6% per annum payable
June 1, 2006 and semi-annually thereafter, and mature 2 years after the
date of issuance. Each investor shall have the right to convert the
secured convertible notes after the date of issuance and at any time,
until paid in full into shares of our common stock. The conversion price
per share shall be the lower of (i) $0.043 or (ii) 80% of the average of
the three lowest closing bid prices for our common stock for the 30
trading days prior to, but not including, the conversion date as reported
by Bloomberg, L.P. on any principal market or exchange where our common
stock is listed or traded. The conversion price is adjustable in the event
of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or
consolidation. In addition, the conversion price of the secured
convertible notes will be adjusted in the event that we spin off or
otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. Our obligation to
repay all principal and accrued and unpaid interest under the convertible
notes is secured by all of our assets pursuant to a certain Security
Agreement dated February 16, 2006, which also secures the remaining
principal amount of our convertible notes in the aggregate amount of
$1,115,000 which we issued on March 18, 2005 and July 13, 2005 to certain
of the investors participating in this new private placement.
The Company issued an aggregate of 50,972,111 Class A common stock
purchase warrants to the investors, representing one Class A warrant
issued for each one share which would be issued on the closing date
assuming full conversion of the secured convertible notes issued on the
closing date. The Class A warrants are exercisable until four years from
the closing date at an exercise price of $0.045 per share. The exercise
price of the Class A warrants will be adjusted in the event of any stock
split or reverse stock split, stock dividend, reclassification of common
stock, recapitalization, merger or consolidation. In addition, the
exercise price of the warrants will be adjusted in the event that we spin
off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets. The fair value of
the warrants of $457,000 using the Black Scholes option pricing model is
recorded as a derivative liability. The beneficial conversion feature of
approximately $243,000 will be amortized over the life of the debt using
the interest method.
Page 9
The following as a summary of outstanding convertible debt financing agreements
as of March 31, 2007:
A SUMMARY OF CONVERTIBLE DEBT AT DECEMBER 31, 2006 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ - $ 10,000
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 13, 2008 135,000 (53,838) 81,162
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (108,727) 141,273
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,905) 103,095
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (120,832) 129,168
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (46,089) 53,911
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (46,089) 59,411
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (43,305) 61,695
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (64,957) 85,043
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (25,983) 34,017
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (43,310) 61,690
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT DECEMBER 31, 2006 $ 1,592,000 $ (609,028) $ 982,972
=============== =============== ===============
Page 10
A SUMMARY OF CONVERTIBLE DEBT AT MARCH 31, 2007 IS AS FOLLOWS:
PRINCIPAL UNAMORTIZED NET
DUE DATE AMOUNT REMAINING DISCOUNT BALANCE
-------- ---------------- -------- -------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ (2,595) $ 7,405
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (86,538) 163,462
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (4,004) 103,996
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 250,000 (96,436) 153,564
--------------- --------------- ---------------
CENTURION MICROCAP
L.P. JULY 6, 2008 100,000 (38,574) 61,426
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (38,574) 66,926
--------------- --------------- ---------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (36,873) 68,127
--------------- --------------- ---------------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (55,310) 94,690
--------------- --------------- ---------------
OSHER CAPITAL AUGUST 29, 2008 60,000 (22,124) 37,876
--------------- --------------- ---------------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (36,878) 68,122
--------------- --------------- ---------------
TOTAL LONG TERM CONVERTIBLE
DEBT MARCH 31, 2007 $ 1,457,000 $ (460,485) $ 996,515
=============== =============== ===============
Page 11
COMMON STOCK
------------
CONVERTIBLE DEBT CONVERSION
---------------------------
During the three months ended March 31, 2007, Alpha Capital
Akteingesellschaft converted approximately $135,000 of notes payable
into approximately 21,428,571 shares of the Company's common stock at
an average conversion price of $0.0063.
During the three months ended March 31, 2006, Alpha Capital
Akteingesellschaft converted approximately $291,000 of notes payable
into approximately 21,196,000 shares of the Company's common stock at
an average conversion price of $0.014. During the same period, Alpha
Capital Akteingesellschaft exercised warrants to purchase 14,300,000
shares of common stock for cash in the amount of $200,200.
During the three months ended March 31, 2006, Whalehaven Fund, Limited
converted approximately $583,000 of notes payable into approximately
41,030,000 shares of the Company's common stock at an average
conversion price of $0.014.
During the three months ended March 31, 2006, Ellis International Ltd.
converted approximately $75,000 of notes payable into approximately
5,855,000 shares of the Company's common stock at an average
conversion price of $0.013. During the same period, Ellis
International Ltd. exercised warrants to purchase 6,250,000 shares of
common stock for cash in the amount of $100,000.
During the three months ended March 31, 2006, Omega Capital Small Cap
Fund converted approximately $27,500 of notes payable into
approximately 2,167,000 shares of the Company's common stock at an
average conversion price of $0.013.
During the three months ended March 31, 2006, Osher Capital Inc.
converted approximately $15,600 of notes payable into approximately
1,134,000 shares of the Company's common stock at an average
conversion price of $0.014.
During the three months ended March 31, 2006, an accredited investor
purchased an aggregate of 3,000,000 shares of restricted common stock
for a total purchase price of $60,000. In addition, the investor
received an aggregate of 3,000,000 Class A and 3,000,000 Class B
common stock purchase warrants with an exercise price of $0.045 and
$0.06 per share respectively.
o WARRANT EXERCISE
----------------
During the three months ended March 31, 2007 approximately 8,000,000
common stock warrants were exercised at a price of $0.00653. The
Company received approximately $52,000
REVOLVING CREDIT NOTE PAYABLE
- -----------------------------
On December 21, 2006, the Company completed a private placement pursuant to a
Revolving Credit Note Agreement which the Company entered into with several
institutional Investors, pursuant to which the Investors subscribed to advance
up to a maximum amount of $640,000 bearing an interest rate of 7%. The term of
the agreement shall be effective as of December 21, 2006 with a term of 1 year
ending December 20, 2007. On March 20, 2007 the original Revolving Credit Note
Agreement was amended. The amendment increased the the maximum borrowing by the
Company to an amount of $740,000. All terms and agreements of the original note
are still in full force and effect.
During the Period of January 1, 2007 thru March 31, 2007 the Company borrowed
$482,000 from the revolving note. During the same period the Company paid
$55,721 against the outstanding balance for a net borrowing of $426,279.
As of March 31, 200 the outstanding principal amount owed to the Investors is
$666,280.
Page 12
SUBSEQUENT EVENTS
- -----------------
o FINANCING
---------
During April 1, 2007 thru May 11, 2007, the Company received advances
that were applied towards the Revolving Credit Note agreement dated
December 21, 2006 totaling $50,000. The advances were used for
expenses relating to normal monthly operating expenses incurred by the
Company.
o RESTRICTED COMMON STOCK GRANTED IN EXCHANGE FOR SERVICES RENDERED
-----------------------------------------------------------------
On April 27, 2007 the Company granted a total of 1,500,000 shares of
restricted common stock as compensation to an independent contractor
for services provided during the fiscal year ended December 31, 2006
audit.
o WARRANTS
On April 4, 2007 the company issued to an accredited investor a total
of 4,001,838 restricted common stock purchase warrants at a price of
$.00653 per share pursuant to a cashless exercise.
On April 23, 2007 the company issued to an accredited investor a total
of 12,578,616 restricted common stock purchase warrants at a price of
$.00636 per share. The company received cash proceeds of $80,000.
FUTURE CAPITAL OUTLOOK
- ----------------------
The Company will continue to rely heavily on our current method of convertible
debt and equity funding, which have financed us since 2001. The losses through
the three months ended March 31, 2007 are due to minimal revenue and operating
expenses, with a majority of expenses in the areas of: salaries, accounting
fees, legal fees, debt issue costs and licensing costs. The Company faces
considerable risk in completing each of our business plan steps, including, but
not limited to: a lack of funding or available credit to continue development
and undertake product rollout; potential cost overruns; a lack of interest in
its solutions in the market on the part of wireless carriers or other customers;
potential reduction in wireless carriers which could lead to significant delays
in consummating revenue bearing contracts; and/or a shortfall of funding due to
an inability to raise capital in the securities market. Since further funding is
required, and if none is received, we would be forced to rely on our existing
cash in the bank, collection of monthly accounts receivable or secure short-term
loans. This may hinder our ability to complete our product development until
such time as necessary funds could be raised. In such a restricted cash flow
scenario, we would delay all cash intensive activities including certain product
development and strategic initiatives described above.
OFF BALANCE SHEET ARRANGEMENTS
- ------------------------------
We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
RISK FACTORS
- ------------
This section summarizes certain risks regarding our business and industry. The
following information should be considered in conjunction with the other
information included and incorporated by reference in this report on Form 10-KSB
before purchasing shares of our stock.
Page 13
WE HAVE A HISTORY OF LOSSES. WE MAY TO CONTINUE TO INCUR LOSSES, AND WE MAY
NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
Since inception, we have incurred significant losses and have negative cash
flows from operations. For the years three months ended March 31, 2007 and 2006,
the Company incurred a net loss of $6,653,000 and $5,668,000 respectively, an
increase of $985,000 (17%). A large part of the discrepancy between 2007 and
2006 is due to a non-cash loss differential of $1,984,000 in 2007 due to warrant
and debt derivative liability re-valuation.
As a result of our limited operating history and the rapidly changing nature of
the markets in which we compete, our quarterly and annual revenues and operating
results are likely to fluctuate from period to period. These fluctuations may be
caused by a number of factors, many of which are beyond our control.
For these reasons, you should not rely solely on period-to-period comparisons of
our financial results, if any, as indications of future results. Our future
operating results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of our
stock price.
In order to reduce expenditures, the Company has aggressively reduced its
operating expenses to a target of $160,000 per month beginning in November 2006.
This reduction has come from a series of measures including reduction in
head-count by eliminating all part-time workers, placing some full-time
employees on part-time status and reducing additional operating overhead. Given
these cost cutting measures, the Company feels it can better reach operationally
break-even by decreasing operating expenses while increasing our revenue stream.
ITEM 3. CONTROLS AND PROCEDURES
- --------------------------------
The Company, under the supervision and with the participation of its management,
including its Chief Executive Officer (the principal executive officer) and
Chief Financial Officer (the principal accounting and financial officer),
previously evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, during the period covered by this report, such
disclosure controls and procedures were not effective in ensuring that
information required to be disclosed by us in our periodic reports is recorded,
processed, summarized and reported, within the time periods specified for each
report and that such information is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Specifically, our disclosure controls
and procedures were not effective to detect the inappropriate application of US
GAAP rules as more fully described below. This was due to deficiencies that
existed in the design or operation of our internal control over financial
reporting that adversely affected our disclosure controls and that may be
considered to be "material weaknesses." The Public Company Accounting Oversight
Board has defined a material weakness as a "significant deficiency or
combination of significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or annual financial
statements will not be prevented or detected."
We identified deficiencies in our internal controls and disclosure controls
related to the treatment of our convertible debt and the related embedded
conversion features, which resulted in us restating our 2004 and 2005 financial
statements.
As a result of the identification of the misapplication of US GAAP rules, our
principal executive officer/principal financial officer has concluded that, as
of March 31, 2007, our disclosure controls over financial reporting were not
effective.
Page 15
The Company's management received a letter dated March 31, 2006 (the "Letter")
from Peterson & Co., LLP, its independent auditors, addressed to the Chief
Executive Officer and Chairman of the Board of Directors in connection with the
audit of our financial statements as of December 31, 2005, in which the
independent auditors identified certain matters involving internal controls and
procedures that they consider to be significant deficiencies or material
weaknesses under the standards of the Public Company Accounting Oversight Board.
These material weaknesses were: (1) lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of the Company; (2) lack of a
functioning audit committee and lack of a majority of outside directors on the
Company's board of directors, resulting in ineffective oversight in the
establishment and monitoring of required internal controls and procedures; (3)
inadequate segregation of duties consistent with control objectives; (4)
insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements; (5) ineffective personnel resources and technical
accounting expertise within the accounting function to resolve non-routine or
complex accounting matters; (6) ineffective controls over period end financial
close and reporting processes; and (7) inadequate procedures for appropriately
identifying, assessing and applying accounting principles. The aforementioned
material weaknesses were identified by the Company's independent auditors in
connection with the audit of our financial statements as of December 31, 2005
and communicated to our management through the Letter.
Management believes that the material weaknesses set forth in items (3), (4) and
(6) above did not have an affect on the Company's financial results or any
restatements which have occurred. However, management believes that the lack of
sufficient and knowledgeable personnel to maintain appropriate accounting and
financial reporting organizational structure to support the activities of the
Company, lack of a functioning audit committee and lack of a majority of outside
directors on the Company's board of directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and
procedures, ineffective personnel resources and technical accounting expertise
within the accounting function to resolve non-routine or complex accounting
matters, and inadequate procedures for appropriately identifying, assessing and
applying accounting principles resulted in the Company's determination to
restate its financial statements for the years ended December 31, 2004 and 2003.
Specifically, the material weaknesses specified in the preceding sentence
resulted in management determining that the Company's previous accounting for
its common stock purchase warrants issued from 2003 to 2004 did not comply with
Emerging Issues Task Force 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN A COMPANY'S OWN STOCK. As a
result, the Company determined that the fair value of the warrants should have
been reclassified from additional paid in capital, to a current liability, and
that the warrant fair value should have been marked to market as of the balance
sheet date with the corresponding non-cash gain or loss reflected in the results
of operations. This resulted in the Company restating its net loss for the
fiscal year ended December 31, 2004 to $(8,752,000) compared to $(5,383,000) as
previously reported, and a net loss for the fiscal year ended December 31, 2003
to $(5,839,000) compared to $(5,932,000) as previously reported. In addition,
total liabilities for the fiscal year ended December 31, 2004 and 2003 was
restated to $6,464,000 and $1,431,000 respectively, compared to $1,523,000 and
$1,140,000, respectively, as previously reported.
In accordance with Exchange Act Rules 13a-15 and 15d-15, and after receipt of
the Letter, the Company has re-evaluated, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this report. Based upon this re-evaluation the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are not effective in ensuring that
the information required to be disclosed is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rule and forms
and is accumulated and communicated to the issuer's management, including its
Chief Executive Officer (the principal executive officer) and Chief Financial
Officer (the principal accounting and financial officer) as appropriate to allow
timely decisions regarding required disclosure.
We are committed to improving our financial organization. As part of this
commitment, we will create a segregation of duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function by the end of fiscal 2007 to resolve
non-routine or complex accounting matters. In addition, we will take the
following actions to enhance our internal controls, when funds are available to
the Company, which we expect to occur by the end of fiscal 2007:
i) Appointing one or more outside directors to our board of directors who shall
be appointed to the audit committee of the Company resulting in a fully
functioning audit committee who will undertake the oversight in the
establishment and monitoring of required internal controls and procedures. All
compensation paid to board members comes in the form of stock options that
normally carry a value of less than $10,000, which vest over a period of time;
Page 16
ii) Preparing and implementing sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements,
which management estimates will cost approximately $65,000 per annum; and
iii) Hiring additional knowledgeable personnel with technical accounting
expertise to further support the current accounting personnel at the Company,
which management estimates will cost approximately $90,000 per annum. On March
12, 2007 the Company engaged an outside consulting firm that specializes in the
accounting for derivative instruments that are embedded within the Company's
financing transactions. The Company will continue to engage the firm in order to
ensure proper treatment.
Management believes that the appointment of one or more outside directors, who
shall be appointed to a fully functioning audit committee, will remedy the lack
of a functioning audit committee and a lack of a majority of outside directors
on the Company's Board. In addition, management believes that preparing and
implementing sufficient written policies and checklists will remedy the
following material weaknesses (i) insufficient written policies and procedures
for accounting and financial reporting with respect to the requirements and
application of US GAAP and SEC disclosure requirements; (ii) ineffective
controls over period end financial close and reporting processes; and (iii)
inadequate procedures for appropriately identifying, assessing and applying
accounting principles. Further, management believes that hiring additional
knowledgeable personnel with technical accounting expertise will remedy the
following material weaknesses: (A) lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of the Company; (B)
inadequate segregation of duties consistent with control objectives; and (C)
ineffective personnel resources and technical accounting expertise within the
accounting function to resolve non-routine or complex accounting matters.
Management believes that the hiring of additional personnel who have the
technical expertise and knowledge with the non-routine or technical issues the
Company has encountered in the past will result in both proper recording of
these transactions and a much more knowledgeable finance department as a whole.
Due to the fact that the Company's accounting staff consists of a controller and
an interim CFO, additional personnel will also ensure the proper segregation of
duties and provide more checks and balances within the department. Additional
personnel will also provide the cross training needed to support the Company if
personnel turn over issues within the department occur. This coupled with the
appointment of additional outside directors will greatly decrease any control
and procedure issues the company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in Internal Controls
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rules
13a-15 or 15d-15 under the Exchange Act that occurred during the small business
issuer's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Page 17
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm business. Except as disclosed
below we are currently not aware of any such legal proceedings or claims that
will have, individually or in the aggregate, a material adverse affect on
business, financial condition or operating results.
There has been no bankruptcy, receivership or similar proceedings. As previously
disclosed to the public in our reports filed with the Securities and Exchange
Commission, we were the subject of a legal proceeding in the San Diego County
Superior Court (the "Court") entitled La Jolla Cove Investors, Inc. ("La Jolla")
vs. One Voice Technologies, Inc., Case No. GIC850038 (the "Action") which was
filed with the Court for an unspecified amount of damages. La Jolla held our
convertible debentures related to our past financings. La Jolla claimed that we
failed to honor its conversion notices resulting in damages. La Jolla filed a
similar suit in 2004 and dismissed the suit after we transferred shares pursuant
to conversion notices and an interim settlement agreement. In particular, we
agreed to and did register 8,425,531 shares of our common stock to honor the
past conversion notice and an additional 8,425,531 shares pursuant to such
interim settlement agreement. Part of the resolution of the first lawsuit
restrained La Jolla from tendering additional conversion notices for a specified
period of time. During that time period, La Jolla requested that we amend the
terms of the outstanding debentures, but we refused to do so. We tendered back
the outstanding debenture amounts to La Jolla on two occasions. We secured
alternative financing and did not honor further conversion notices from La
Jolla. The Action was thereafter commenced by La Jolla.
On January 6, 2006, La Jolla and the Company entered into a Settlement Agreement
and Mutual Release (the "Settlement Agreement") in which La Jolla and we agreed
to forever settle, resolve and dispose of all claims, demands and causes of
action asserted, existing or claimed to exist between the parties because of or
in any way related to the Action. Under the Settlement Agreement, La Jolla and
the Company agreed that the parties shall bear their own costs and attorney's
fees associated with the Action. In addition, we agreed to pay to La Jolla:
o 10,000,000 restricted shares of our common stock upon the execution of
the Settlement Agreement;
o $300,000 was paid on May 5, 2006; and
o $400,000 was due on June 6, 2006. $50,000 was paid September 13, 2006
Interest accrued on the $400,000 unpaid balance at 8% per annum commencing on
the date of the Settlement Agreement until paid in full. Because payment of
$400,000 was not made within 30 days of its due date (June 6, 2006), La Jolla is
entitled to enter a judgment against us for the unpaid balance, plus accrued
interest and $100,000, upon the filing of a declaration of default by La Jolla.
We were unable to come to terms on a payment arrangement with La Jolla. La Jolla
sought to enforce a $100,000 penalty provision for past late payments.
On January 23, 2007 La Jolla Cove Investors Inc, filed suit in the Superior
Court Of California entitled La Jolla Cove Investors, Inc. ("La Jolla") vs. One
Voice Technologies, Inc., Case No. GIC850038 for in reference to the settlement
agreement mentioned above. The penalty by default of $100,000 was dismissed by
the court.
Accordingly, $350,000 is accrued as a settlement liability along with accrued
interest of $39,700 as of March 31, 2007
Page 18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
- -----------------------------------------------
The securities described below represent our securities sold by us for the
period starting January 1, 2007 and ending March 31, 2007 that were not
registered under the Securities Act of 1933, as amended, all of which were
issued by us pursuant to exemptions under the Securities Act.
SALES OF WARRANTS FOR CASH
During the period ended March 31, 2007 a total of 8,000,000 warrants were
exercised at an average price of $0.00653. As a result the Company received cash
proceeds of $52,240.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On January 5, 2007, the Company issued an aggregate of 400,000 shares of
restricted common stock to in exchange for services rendered. The services were
valued at approximately $5,200.
On January 24, 2007, the Company issued an aggregate of 5,000,000 shares of
restricted common stock to in exchange for services rendered. The services were
valued at approximately $91,000 and will be provided for over a 3 year period.
All proceeds from the above transactions were used to fund normal operating
Expenses incurred by the Company.
* All of the above offerings and sales were deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of One Voice or executive officers of
One Voice, and transfer was restricted by One Voice in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION
- --------------------------------------
Not Applicable.
ITEM 6. EXHIBITS:
- -----------------
31.1 Certification of the Chief Executive Officer and Interim Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Chief Executive Officer and Interim Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Page 19
SIGNATURES
In accordance with the requirements of the Exchange Act of 1933, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONE VOICE TECHNOLOGIES, INC.,
A NEVADA CORPORATION
DATE: May 14, 2007 BY: /S/ DEAN WEBER
----------------------------------------------
DEAN WEBER, CHAIRMAN, CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER) AND INTERIM
CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER)
Page 20