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 SEPTEMBER 30, 2007
COMMISSION FILE NUMBER 0-27589
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ONE VOICE TECHNOLOGIES, INC.
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(Name of Small Business Issuer in its Charter)
NEVADA 95-4714338
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4250 Executive Square, Ste 770, La Jolla CA 92037
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(Address of principal Executive Offices) (Zip Code)
(858) 552-4466 (858) 552-4474
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(Issuer's Telephone Number) (Issuer's Facsimile Number)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK-$.001 PAR VALUE
----------------------------
(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 October 31, 2007 the registrant had 718,217,241 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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) F-1 - F-40
Item 2. Management's Discussion and Analysis or Plan of Operation 3-15
Item 3. Controls and Procedures 16-19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
SIGNATURES 23 - 25
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page No.
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Balance Sheets as of September 30, 2007 and December 31, 2006 F-2
Statements of Operations for three and nine months
ended September 30, 2007 and 2006 F-3
Statements of Cash Flows for the nine months ended
September 30, 2007 and 2006 F-4 - F-5
Notes to Financial Statements F-6 - F-40
F-1
ONE VOICE TECHNOLOGIES INC.
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2007 2006
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,840 $ 34,585
Accounts Receivable 74,336 99,111
Inventories 4,661 4,841
Prepaid expenses 54,245 28,785
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TOTAL CURRENT ASSETS 143,082 167,322
PROPERTY AND EQUIPMENT, NET 169,308 164,389
Software development & licensing, net 2,743 12,618
Trademarks, net 2,342 2,452
Patents, net 54,725 77,580
Deposits 17,923 18,665
Deferred debt issue costs 113,393 344,835
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TOTAL ASSETS $ 503,516 $ 787,861
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 428,388 $ 444,088
Accrued expenses 346,884 239,593
Settlement agreement liability 208,594 350,000
License agreement liability 1,083,500 930,000
Note payable 29,602 --
Debt derivative liability 956,264 256,495
Warrant derivative liability 5,254,202 2,808,308
Revolving line of credit 1,046,462 240,000
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TOTAL CURRENT LIABILITIES 9,353,896 5,268,484
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LONG TERM LIABILITIES:
Note payable 168,137 100,000
Convertible notes payable, net 1,139,446 982,972
Deferred rent 1,360 12,017
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TOTAL LIABILITIES 10,662,839 6,363,473
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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, 713,274,673 and 584,513,637 shares
issued and outstanding at September 30, 2007 and
December 31, 2006, respectively 713,275 585,327
Additional paid-in capital 42,391,578 40,696,540
Escrow shares (600,000) --
Accumulated deficit (52,664,176) (46,857,479)
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TOTAL STOCKHOLDERS' DEFICIT (10,159,323) (5,575,612)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 503,516 $ 787,861
============ ============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-2
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
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(RESTATED) (RESTATED)
Net Revenue $ 157,478 $ 151,952 $ 520,017 $ 323,101
Cost of goods sold 104,537 17,449 298,757 54,509
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GROSS PROFIT 52,941 134,503 221,260 268,592
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General and administrative expenses 581,075 812,338 1,921,162 2,765,790
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NET LOSS FROM OPERATIONS (528,134) (677,835) (1,699,902) (2,497,198)
OTHER INCOME / (EXPENSE)
Interest expense (301,673) (518,549) (791,636) (1,633,596)
Gain / (loss) on warrant and debt derivatives 1,410,486 431,971 (2,943,253) 652,773
Other income (expense) (223,842) 277 (371,106) (194,293)
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TOTAL OTHER INCOME / (EXPENSE) 884,971 (86,301) (4,105,995) (1,175,116)
------------- ------------- ------------- -------------
NET INCOME / (LOSS) BEFORE INCOME TAX 356,837 (764,136) (5,805,897) (3,672,314)
Income tax expense -- -- (800) (800)
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NET INCOME / (LOSS) $ 356,837 $ (764,136) $ (5,806,697) $ (3,673,114)
============= ============= ============= =============
TOTAL BASIC INCOME /(LOSS) PER SHARE $ 0.01 $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
TOTAL DILUTED INCOME / (LOSS) PER SHARE $ 0.01 -- -- --
============= ============= ============= =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 671,670,000 506,483,000 638,368,000 462,570,000
============= ============= ============= =============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 1,266,273,000 -- -- --
============= ============= ============= =============
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-3
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
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(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,806,697) $(3,673,114)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation and amortization 63,469 90,580
Amortization of debt discount and debt issue costs 630,322 1,533,125
(Gain) loss on debt derivative liability 699,769 --
(Gain) loss on warrant derivative liability 2,445,894 (652,773)
Common stock issued in exchange for services 181,960 --
Share based compensation expense 163,060 235,034
Issuance of common stock interest conversion 8,902 --
Cashless warrant exercise 393,120 --
Gain on sale of equipment (21,940) --
License agreement (accounts payable converted into note payable) 153,500 --
CHANGES IN CERTAIN ASSETS AND LIABILITIES
Accounts receivable 24,775 16,403
Inventories 180 (1,560)
Prepaid expenses (25,460) (62,560)
Deposits 742 --
Accounts payable 86,973 167,937
Accrued expenses 107,935 270,236
Settlement agreement liability (141,406) (149,500)
Deferred rent (10,657) 9,601
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NET CASH USED IN OPERATING ACTIVITIES (1,045,559) (2,216,591)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (38,609) (90,476)
Proceeds from sale of property & equipment 25,000 --
Purchase of intangible assets -- (18,014)
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NET CASH USED IN INVESTING ACTIVITIES (13,609) (108,490)
F-4
ONE VOICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
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(RESTATED)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - convertible notes -- 1,984,000
Issuance of common stock - private funding -- 112,000
Proceeds from warrant exercise 240,300 300,200
Proceeds from convertible notes net of issue cost 195,000 --
Payment for debt issue cost (202,405) (150,013)
Proceeds from revolving credit line 806,462 --
Repayment of note payable (4,934) --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,034,423 2,246,187
Net increase (decrease) in cash (24,745) (78,894)
Cash and cash equivalents, beginning of period 34,585 338,811
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,840 $ 259,917
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 10,000
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Income taxes paid $ 800 $ 800
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
- --------------------------------------------------------
Issuance of warrant derivative in connection
with private placement and debt financing, initial valuation $ 153,369 $ 998,000
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Beneficial conversion feature of convertible debt, initial valuation $ 121,229 $ 597,000
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Common stock issued upon conversion of debt and interest $ 235,643 $ 1,480,000
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Common stock issued in connection
with reduction of settlement liability and services rendered $ 181,960 $ 320,500
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Shares in escrow issued in connection with a legal settlement $ 600,000 $ --
=========== ===========
Note payable (accounts payable converted into note payable ST and LT) $ 103,606 $ --
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SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
F-5
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
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ITEM 1a. DESCRIPTION OF BUSINESS
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INTRODUCTION
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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:
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INTERIM FINANCIAL STATEMENTS:
- -----------------------------
The accompanying audited financial statements represent the financial activity
of One Voice Technologies, Inc. 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-KSBA 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 September 30, 2007, results of operations for the three and nine
months ended September 30, 2007 and 2006. The results of operations for the
three and nine months ended September 30, 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.
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 $52,664,176 and used
cash from operations of $1,045,559 during the nine month period ended September
30, 2007. The Company also has a working capital deficit of $9,210,814 of which
$6,210,466 represents a non-cash warrant and debt derivative liabilities. The
F-6
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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Company also has a stockholders' deficit of $10,159,323 as of September 30,
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.
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.
F-7
ONE VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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.
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 September 30, 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-8
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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 nine months ended September 30, 2007 and the year ended December 31,
2006, the estimated the estimated fair value of the Company's deferred debt
issue cost were $113,393 and $344,835 respectively.
F-9
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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 income / (loss) per common share for the three and nine months ended
September 30, 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.
Potentially dilutive securities for the nine months ending September 30, 2007
and 2006 are:
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
----------- -----------
POTENTIALLY DILUTIVE SECURITIES:
Convertible debentures 253,382,767 254,584,035
Options 62,934,000 59,121,500
Warrants 278,286,081 343,034,645
------------- -------------
TOTAL ANTI-DILUTIVE SHARES 594,602,848 656,740,180
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F-10
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-11
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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 nine months ended September 30, 2007 and 2006, the Company recorded
$163,000 and $235,000 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
120.5% and 90.9%, respectively, expected term of 2.0 years, risk-free interest
rate of 4.74% and an 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
- ----------------------
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-12
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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 nine months ended September 30, 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 of its products.
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-13
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 November 15, 2007. 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 2008. 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.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards." EITF 06-11 provides for the recognition and classification of deferred
taxes associated with dividends or dividend equivalents on nonvested equity
shares or nonvested equity share units (including restricted stock units (RSUs))
that are paid to employees and charged to retained earnings. This issue is
effective for annual periods beginning after September 15, 2007. Also in June
2007, the EITF ratified EITF Issue No. 07-3, "Accounting for Advance Payments
for Goods or Services to Be Used in Future Research and Development Activities."
EITF 07-3 provides that nonrefundable advance payments made for goods or
services to be used in future research and development activities should be
deferred and capitalized until such time as the related goods or services are
delivered or are performed, at which point the amounts would be recognized as an
expense.
This issue is effective for fiscal years beginning after December 15, 2007 We
have evaluated the potential impact of these issues and anticipate that they
will have no material impact on our financial position and results of
operations.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force ("EITF")), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial statements.
F-14
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
3. PREPAID EXPENSES
----------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------ ------------
Rents 9,532 --
Business and health insurance 15,603 21,373
Engineering 5,750 --
Marketing 5,000
Audit 17,700 --
Legal fees -- 4,180
Other 660 3,232
------------ ------------
TOTAL $ 54,245 $ 28,785
============ ============
4. PROPERTY AND EQUIPMENT
----------------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- -------------
Computer equipment $ 725,898 $ 703,099
Website development 38,524 38,524
Equipment 1,562 1,562
Furniture and fixtures 9,430 46,431
Telephone equipment 5,365 5,365
Molds and tooling 120,215 113,835
------------- -------------
TOTAL 900,994 908,816
------------- -------------
Less accumulated depreciation (731,686) (744,427)
------------- -------------
NET PROPERTY AND EQUIPMENT $ 169,308 $ 164,389
============= =============
Depreciation expense totaled $31,000 and $39,000 for the nine months ended
September 30, 2007 and 2006, respectively.
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. The Company incurred expenses of $15,000 which were
related to a convertible debt financing agreement entered into dated September
7, 2007. A balance of $113,393 remains as of September 30, 2007.
6. ACCRUED EXPENSES
----------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2007 2006
-------------------- --------------------
Accrued salaries $ 37,073 $ 10,976
Accrued vacation 64,830 57,441
Accrued interest 187,129 118,842
Accrued audit fees 56,852 50,000
Marketing 1,000 2,334
-------------------- --------------------
TOTAL $ 346,884 $ 239,593
==================== ====================
F-15
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
7. SETTLEMENT AGREEMENT LIABILITY
------------------------------
On August 23, 2007, One Voice Technologies, Inc. (the "Company") entered
into a Settlement Agreement and Mutual Release with La Jolla Cove Investors,
Inc. ("LJCI") pursuant to which we agreed with LJCI 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 a legal
proceeding in the San Diego County Superior Court (the "Court") entitled La
Jolla Cove Investors, Inc. vs. One Voice Technologies, Inc., Case No. GIC850038
(the "Action"). LJCI received a judgment in its favor against the Company in
connection with the Action whereby the Company owes LJCI an amount equal to
$408,594.48 (the "Owed Amount"). Under the Settlement Agreement, the parties
reached a final resolution with respect to such Owed Amount whereby (i) LJCI
shall receive $200,000 within 15 days of the date of the Agreement and (ii) the
difference between the Owed Amount and $200,000 shall be payable at a later date
(the "Remaining Owed Amount"). The payment of the Remaining Owed Amount shall be
made to LJCI in the following manner:
o Concurrently with the execution of the Agreement, the Company shall
transfer to an independent escrow agent, on behalf of LJCI, all
right, title and interest to 30,000,000 shares of Common Stock of
the Company (the "Escrow Shares"), issued in 30 increments of
1,000,000 shares. On the one year anniversary of the Agreement,
1,000,000 Escrow Shares shall be released to LJCI whereby LJCI shall
be able to sell such shares in open market transactions provided
such sales do not exceed more than 14% of the corresponding daily
volume of such shares on the trading market on which the Company's
securities are sold. LJCI shall continue to receive the Escrow
Shares, provided they satisfy the volume limitation set forth above
and LJCI's ownership of the Company's common stock does not exceed
4.99% of the Company's then issued and outstanding shares of common
stock, until the Remaining Owed Amount is satisfied;
o Upon notice from LJCI that the Remaining Owed Amount has been
satisfied by the sale of the Escrow Shares either (i) Alpha Capital
Ansalt ("Alpha") shall have the ability within 15 business days to
purchase any remaining Escrow Shares at a 20% discount to the
current market price of the shares or (ii) if Alpha does not
exercise its right to purchase the shares, the Company shall have
the ability to redeem the remaining Escrow Shares within 5 business
days.
o At anytime while the Remaining Owed Amount is outstanding, the
Company or Alpha may pay in cash to LJCI an amount equal to the
Remaining Owed Amount and either (i) Alpha shall have the ability
within 15 business days to purchase any remaining Escrow Shares at a
20% discount to the current market price of the shares or (ii) if
Alpha does not exercise its right to purchase the shares, the
Company shall have the ability to redeem the remaining Escrow Shares
within 5 business days.
LJCI has contractually agreed to restrict their ability to exercise the
Escrow Shares such that the number of shares of the Company common stock held by
it does not exceed 4.99% of the Company's then issued and outstanding shares of
common stock.
Upon receipt of the Owed Amount, LJCI will file a Satisfaction of Judgment
in the appropriate court and grant the Company a release from any and all
actions related to the Action.
F-16
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
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.
The License Agreement has been amended as follows:
The first amendment to the License Agreement was entered into during March 2002.
o The initial term of the License Agreement was extended for two
(2) years.
o The aggregate minimum royalty payment was increased from
$1,100,000 to $1,500,000.
The amendment also included a revised payment schedule of the minimum royalty
payment obligation due 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 the Company and 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.
The second amendment to the License Agreement was entered into on February 1,
2007.
The following payment terms are as follows:
The 2006 past due amounts owed by the Company of $70,000 were allocated as
follows:
o The Company paid $20,000 on February 23, 2007 to Philips.
o The remaining balance of $50,000 is to to be paid in the form
of a non-interest bearing note payable to Philips Speech
Processing.
o During the period of January 1, 2007 thru September 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.
o On October 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 September 30, 2007 the note payable balance due Philips Speech Processing
was $1,083,500.
9. SHORT TERM NOTE PAYABLE
------------------------
On June 8, 2007 the Company entered into agreement with Maguire
Properties-Regents Square LLC. ("Landlord"). The agreement relates to past due
office rents owed by the Company to the Landlord. The landlord has agreed to
accept payment in the form of a promissory note for $103,605.59. The promissory
note has a term of 42 months and bears an interest rate of 10.0% per annum, due
December 1, 2010. Monthly payments of $2,933.78 are to be paid to the Landlord.
All rent expenses related to the note have been fully expensed in the proper
periods.
As of September 30, 2007 the short term note payable balance due Maguire
Properties-Regents Square LLC. was $29,602 with the remaining balance
classified as long term notes payable.
F-17
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
9. DEBT DERIVATIVE LIABILITY
-------------------------
Since inception, the Company has entered into several 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 clauses
As a result of the valuation conducted as of September 30, 2007 the Company has
incurred a net non-cash loss of ($650,728) for the nine months.
The valuation at September 30, 2007 and the year ended December 31, 2006
resulted in the fair value of the debt derivative liability being $956,264 and
$256,495 respectively.
10. WARRANT DERIVATIVE LIABILITY
----------------------------
Since inception, the Company has issued warrants in
connection with convertible debt financing agreements and private placements
that required analysis in accordance with EITF 00-19. EITF 00-19 specifies the
conditions which must be met in order to classify warrants issued in a company's
own stock as either equity or as a derivative liability. Evaluation of these
conditions under EITF 00-19 resulted in the determination that these warrants
are classified as a derivative liability. In accordance with EITF 00-19,
warrants which are determined to be classified as derivative liabilities are
marked-to-market each reporting period, with a corresponding non-cash gain or
loss charged to the current period. The Company valued all warrant derivative
liabilities as of September 30, 2007 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 4.74% and a remaining
contractual life ranging from .12 years to 3.94 years.
As a result of the valuation conducted, the Company incurred a net non-cash loss
of ($2,292,525) for the nine months.
The valuation at September 30, 2007 and the year ended December 31, 2006 the
resulted in the fair value of the warrant derivative liability being $5,254,202
and $2,808,308 respectively.
F-18
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.
The original Revolving Credit Note agreement has been amended five times during
the nine months ended September 30, 2007. The amendments increased the maximum
borrowing by the Company to an amount of $1,280,000. On the second amendment the
principal and interest payment terms by the Company to the lender had changed.
The original note payment terms were that all outstanding principal and interest
was to be paid in cash by the Company upon maturity of the note.
Second amended payment terms are as follows:
The amendment provided an option to convert the outstanding balance into common
shares of the the Company's common stock. The following conversion privileges
apply:
The lender may elect to convert at a conversion rate of the lower of (i)$0.015
or (ii)80% of the lowest 3 day trading price of the past 30 trading days.
Since inception the Company has borrowed $1,105,000 against the revolving note.
During the same period the Company paid $58,538 against the outstanding balance
for a total net borrowing of $1,046,462 since inception. All borrowings are used
to cover recurring operating expenses by the Company.
As of September 30, 2007 the outstanding principal amount owed to the Investors
is $1,046,462. Interest accrued on the outstanding principal is $32,566 as of
September 30, 2007.
F-19
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
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.
On June 8, 2007 the Company entered into agreement with Maguire
Properties-Regents Square LLC. ("Landlord"). The agreement relates to past due
office rents owed by the Company to the Landlord. The landlord has agreed to
accept payment in the form of a promissory note for $103,605.59. The promissory
note has a term of 42 months and bears an interest rate of 10.0% per annum, due
December 1, 2010. Monthly payments of $2,933.78 are to be paid to the Landlord.
All rent expenses related to the note have been fully expensed in the proper
periods. As of September 30, 2007 the long term note payable balance due Maguire
Properties-Regents Square LLC. was $68,137 with the remaining balance classified
as short term notes payable.
At September 30, 2007 and December 31, 2006 the principal balance on the notes
payable was $168,137 and $100,000, respectively. Accrued interest as of
September 30, 2007 is $33,651.
13. CONVERTIBLE NOTES PAYABLE SUMMARY
---------------------------------
NINE MONTHS ENDED
ISSUANCE SUMMARY
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Principal $ 420,000 $ 2,005,000
Warrants issued A&B 10,000,000 140,917,090
NINE MONTHS ENDED
CONVERSION SUMMARY
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Principal Converted $ 235,643 $ 1,480,037
Shares converted 28,338,000 119,907,000
Average share conversion price $ 0.0083 $ 0.0123
F-20
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13 A. CONVERTIBLE NOTES PAYABLE DETAIL (CONTINUED)
--------------------------------------------
During the nine months ended September 30, 2007 and 2006, $235,643 and
$1,480,037 of notes payable and accrued interest was converted into
28,338,257 and 119,907,277 shares of the Company's common stock at an
average conversion price of $ 0.0083 and$0.012 per share.
On March 17, 2006, the Company completed a private placement pursuant to
a Subscription Agreement which the Company 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.
On May 5, 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 $324,000 in 6% secured convertible
promissory notes. The secured convertible notes bear simple interest at
6% per annum payable June 1, 2006 and semi-annually thereafter, and
mature 2 years after the date of issuance. Each investor shall have the
right to convert the secured convertible notes after the date of
issuance and at any time, until paid in full into shares of our common
stock. The conversion price per share shall be the lower of (i) $0.043
or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 30 trading days prior to, but not including,
the conversion date as reported by Bloomberg, L.P. on any principal
market or exchange where our common stock is listed or traded. The
conversion price is adjustable in the event of any stock split or
reverse stock split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion
price of the secured convertible notes will be adjusted in the event
that we spin off or otherwise divest ourselves of a material part of
our business or operations or dispose all or a portion of our assets.
F-21
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13 A. CONVERTIBLE NOTES PAYABLE DETAIL
--------------------------------
On July 6, 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 $550,000 in 6% secured convertible
promissory notes and one Class A common stock purchase warrant 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 August 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) $0.015 or (ii) 80%
of the average of the three lowest closing bid prices for our common
stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market
or exchange where our common stock is listed or traded. The conversion
price is adjustable in the event of any stock split or reverse stock
split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion
price of the secured convertible notes will be adjusted in the event
that we spin off or otherwise divest ourselves of a material part of
our business or operations or dispose all or a portion of our assets.
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 $1,827,354 which we 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.
We issued an aggregate of 48,530,839 Class A common stock purchase
warrants to the investors, representing one Class A warrant issued for
each one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The Class A warrants are exercisable until four years from the closing
date at an exercise price of $0.015 per share. The exercise price of
the Class A warrants will be adjusted in the event of any stock split
or reverse stock split, stock dividend, reclassification of common
stock, recapitalization, merger or consolidation. In addition, the
exercise price of the warrants will be adjusted in the event that we
spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets. The
fair value of the warrants of $298,000 using the Black Scholes option
pricing model is recorded as a derivative liability. The beneficial
conversion feature of approximately $226,000 will be amortized over the
life of the debt using the interest method.
On August 29, 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 $420,000 in 6% secured convertible
promissory notes and one Class A common stock purchase warrant which
would be issued on the closing date assuming full conversion of the
secured convertible notes issued on the closing date.
F-22
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13 A. CONVERTIBLE NOTES PAYABLE DETAIL (CONTINUED)
--------------------------------------------
The secured convertible notes bear simple interest at 6% per annum
payable September 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) $0.015 or (ii) 80%
of the average of the three lowest closing bid prices for our common
stock for the 30 trading days prior to, but not including, the
conversion date as reported by Bloomberg, L.P. on any principal market
or exchange where our common stock is listed or traded. The conversion
price is adjustable in the event of any stock split or reverse stock
split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion
price of the secured convertible notes will be adjusted in the event
that we spin off or otherwise divest ourselves of a material part of
our business or operations or dispose all or a portion of our assets.
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 $1,827,354 which we 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.
We issued an aggregate of 42,708,334 Class A common stock purchase
warrants to the investors, representing one Class A warrant issued for
each one share which would be issued on the closing date assuming full
conversion of the secured convertible notes issued on the closing date.
The Class A warrants are exercisable until four years from the closing
date at an exercise price of $0.015 per share. The exercise price of
the Class A warrants will be adjusted in the event of any stock split
or reverse stock split, stock dividend, reclassification of common
stock, recapitalization, merger or consolidation. In addition, the
exercise price of the warrants will be adjusted in the event that we
spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets. The
fair value of the warrants of $186,000 using the Black Scholes option
pricing model is recorded as a derivative liability. The beneficial
conversion feature of approximately $18,000 will be amortized over the
life of the debt using the interest method.
On September 7, 2007, the Company entered into a subscription agreement
(the "Agreement") with accredited investors and/or qualified
institutional investors (the "Investors") pursuant to which the
investors subscribed to purchase an aggregate principal amount of
$420,000 in convertible promissory notes for an aggregate purchase
price of $210,000. The Company also issued 10,000,000 Class A common
stock purchase warrants to the Investors. The Class A warrants are
exercisable until four years from the closing date at an exercise price
of $0.02 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 initial discount of $210,000 will be
expensed over the term of the agreement using the straight line method.
The fair value of the warrants of $153,369 using the Black Scholes
option pricing model is recorded as a derivative liability. The
proceeds of the offering were used to make payment towards a legal
Settlement Agreement.
F-23
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
13 A. CONVERTIBLE NOTES PAYABLE DETAIL (CONTINUED)
--------------------------------------------
The secured convertible notes mature 1 year after the date of
issuance. Each investor shall have the right to convert the secured
convertible notes after the date of issuance and at any time, until
paid in full, at the election of the investor into fully paid and
nonassessable shares of our common stock. The conversion price per
share shall be the lower of (i) $0.015 or (ii) 80% of the average of
the three lowest closing bid prices for our common stock for the 30
trading days prior to, but not including, the conversion date as
reported by Bloomberg, L.P. on any principal market or exchange where
our common stock is listed or traded. The conversion price is
adjustable in the event of any stock split or reverse stock split,
stock dividend, reclassification of common stock, recapitalization,
merger or consolidation. In addition, the conversion price of the
secured convertible notes will be adjusted in the event that we spin
off or otherwise divest ourselves of a material part of our business or
operations or dispose all or a portion of our assets.
The following as a summary of outstanding convertible debt financing agreements
as of September 30, 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-24
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
ONE VOICE TECHNOLOGIES INC.
CONVERTIBLE DEBT FINANCING SUMMARY (CONTINUED)
----------------------------------------------
A SUMMARY OF CONVERTIBLE DEBT AT SEPTEMBER 30, 2007 IS AS FOLLOWS:
PRINCIPAL
AMOUNT UNAMORTIZED NET
DUE DATE REMAINING DISCOUNT BALANCE
----------------- ----------- ----------- -----------
STONESTREET LIMITED
PARTNERSHIP DECEMBER 23, 2007 $ 10,000 $ (817) $ 9,183
----------- ----------- -----------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MARCH 17, 2008 250,000 (41,420) 208,580
----------- ----------- -----------
ALPHA CAPITAL
AKTIENGESELLSCHAFT MAY 5, 2008 108,000 (2,172) 105,828
----------- ----------- -----------
WHALEHAVEN CAPITAL
FUND LIMITED MAY 5, 2008 108,000 (2,172) 105,828
----------- ----------- -----------
ALPHA CAPITAL
AKTIENGESELLSCHAFT JULY 6, 2008 105,500 (23,296) 82,204
----------- ----------- -----------
BRISTOL INVESTMENT FUND
LTD JULY 6, 2008 160,000 (39,805) 120,195
----------- ----------- -----------
CENTURION MICROCAP
L.P JULY 6, 2008 100,000 (23,296) 76,704
----------- ----------- -----------
WHALEHAVEN CAPITAL
FUND LIMITED JULY 6, 2008 105,500 (23,296) 82,204
----------- ----------- -----------
ALPHA CAPITAL
AKTIENGESELLSCHAFT AUGUST 29, 2008 105,000 (23,797) 81,203
----------- ----------- -----------
ELLIS INTERNATIONAL
LIMITED AUGUST 29, 2008 150,000 (35,695) 114,305
----------- ----------- -----------
OSHER CAPITAL AUGUST 29, 2008 50,000 (12,147) 37,853
----------- ----------- -----------
WHALEHAVEN CAPITAL
FUND LIMITED AUGUST 29, 2008 105,000 (23,797) 81,203
----------- ----------- -----------
ALPHA CAPITAL
AKTIENGESELLSCHAFT SEPTEMBER 7, 2007 110,000 (101,056) 8,944
----------- ----------- -----------
WHALEHAVEN CAPITAL
FUND LIMITED SEPTEMBER 7, 2007 110,000 (101,056) 8,944
----------- ----------- -----------
OSHER CAPITAL SEPTEMBER 7, 2007 100,000 (91,868) 8,132
----------- ----------- -----------
CENTURION MICROCAP
L.P SEPTEMBER 7, 2007 100,000 (91,864) 8,136
----------- ----------- -----------
----------- ----------- -----------
TOTAL LONG TERM CONVERTIBLE
DEBT SEPTEMBER 30, 2007 $ 1,777,000 $ (637,554) $ 1,139,446
=========== =========== ===========
F-25
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK
------------
The following is a summary of transactions that had an impact on equity:
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
AVERAGE AVERAGE
SHARES SHARE SHARES SHARE
ISSUED PRICE VALUE ISSUED PRICE VALUE
----------- ------ --------- ----------- ------ ---------
Debt conversions 28,338,257 0.0083 235,643 119,907,277 0.0123 1,480,037
Issuance of stock in exchange for services 9,340,435 0.0195 181,960 3,000,000 0.0335 100,500
Warrant exercise 61,098,313 0.0104 633,419 20,550,000 0.0146 300,200
Private placement -- N/A -- 17,000,000 N/A 332,000
Shares in escrow 30,000,000 0.0200 600,000 -- N/A --
----------- ------ --------- ----------- ------ ---------
Total 128,777,005 0.0128 1,651,022 160,457,277 0.0138 2,212,737
o CONVERTIBLE DEBT CONVERSION
---------------------------
During the nine months ended September 30, 2007, Alpha Capital
Akteingesellschaft converted $135,000 of notes payable and accrued
interest into 21,428,571 shares of the Company's common stock at an
average conversion price of $0.0063.
During the nine months ended September 30, 2007, Bristol Investment
Fund converted $90,000 of notes payable and accrued interest into
6,000,000 shares of the Company's common stock at an average
conversion price of $0.012.
During the nine months ended September 30, 2007, Osher Capital Inc.
converted $10,643 of notes payable and accrued interest into 909,686
shares of the Company's common stock at an average conversion price of
$0.014.
During the nine months ended September 30, 2006, Alpha Capital
Akteingesellschaft converted approximately $372,590 of notes payable
and accrued interest into approximately 31,528,942 shares of the
Company's common stock at an average conversion price of $0.02.
During the nine months ended September 30, 2006, Whalehaven Fund,
Limited converted $756,600 of notes payable and accrued interest into
56,317,420 shares of the Company's common stock at an average
conversion price of $0.013.
During the nine months ended September 30, 2006, Ellis International
Ltd. converted $148,592 of notes payable and accrued interest into
12,965,167 shares of the Company's common stock at an average
conversion price of $0.012.
During the nine months ended September 30, 2006, Omega Capital Small
Cap Fund converted $120,450 of notes payable and accrued interest into
11,854,575 shares of the Company's common stock at an average
conversion price of $0.01.
During the nine months ended September 30, 2006, Osher Capital Inc.
converted $15,575 of notes payable and accrued interest into 1,134,088
shares of the Company's common stock at an average conversion price of
$0.014.
During the nine months ended September 30, 2006, Momona Capital Corp.
converted $66,231 of notes payable and accrued interest into 6,107,085
shares of the Company's common stock at an average conversion price of
$0.011.
F-26
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
14. COMMON STOCK (CONTINUED)
------------------------
o WARRANT EXERCISE
----------------
During the nine months ended September 30, 2007 a total of 37,126,855
warrants were exercised at an average price of $0.0065. As a result
the Company received cash proceeds of $240,300.
During the nine months ended September 30, 2006 a total of 20,550,000
warrants were exercised at an average price of $0.015. As a result the
Company received cash proceeds of $300,200.
ISSUANCE OF WARRANTS ON A CASHLESS BASIS
From time to time warrants can be exercised on a cashless basis if
certain conditions exist. If warrants are held for a certain period of
time and there is no effective registration statement for these
warrants, the holder of these warrants may exercise them on a cashless
basis. The result is the Company issuing restricted shares pursuant to
rule 144 or 144K. The number of shares issued are discounted according
the subscription agreement formula. EX: The Company issues 1,250,000
restricted shares and the holder forfeits 1,500,000 shares.
During the nine months ended September 30, 2007 approximately
23,971,458 warrants were issued on a cashless basis and 34,566,902
warrants were forfeited. The Additional shares of 10,595,444 were
forfeited due the the discounted feature of the cashes exercise.
o PRIVATE PLACEMENT
-----------------
During the nine months ended September 30, 2007 the Company did not
engage in any private placement activity.
During the nine months ended September 30, 2006, accredited investors
purchased an aggregate of 17,000,000 shares of restricted common stock
for a total purchase price of $332,000. 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 ISSUANCE OF COMMON STOCK IN EXCHANGE OF SERVICES
------------------------------------------------
During the nine months ended September 30, 2007 the Company issued
9,340,435 shares of its restricted common stock having a market value
of $181,960 in exchange for services rendered.
During the nine months ended September 30, 2006 the Company issued
3,000,000 shares of its restricted common stock having a market value
of $100,500 in exchange for a settlement of debt.
o SHARES IN ESCROW
----------------
On August 23, 2007 the Company issued 30,000,000 shares of the
Company's restricted common stock valued at $600,000. The shares were
put into an independent 3rddparty escrow account on behalf of La Jolla
Cove Investors Inc. These shares relate to a legal settlement on August
23, 2007 between the Company and La Jolla Cove Investors Inc.
See Note 7 in the accompanying notes to the financial statements for
additional details.
o SHARES TO BE ISSUED IN EXCHANGE FOR INTEREST OWED
------------------------------------------------
During the period of January 1, 2007 thru September 30, 2007 the
investors elected to convert $8,902 in accrued interest related to the
revolving credit note. Approximately 270,000 shares of the Company's
restricted stock are to be issued. As of September 30, 2007 these
shares have not yet been issued.
F-27
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. OTHER INCOME (EXPENSE)
----------------------
For the nine months ended September 30, 2007 and 2006, other expense was
($4,105,995) and ($1,175,116) respectively.
OTHER INCOME / (EXPENSE) SUMMARY
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
----------- -----------
Interest expense $ (791,636) $(1,633,596)
Gain / (loss) on warrant and debt derivative (2,943,253) 652,773
Other income / (expense) (371,106) (194,293)
----------- -----------
TOTAL $(4,105,995) $(1,175,116)
Other income (expense) consisted of interest expense, gain
(loss) on warrant and debt derivative liability and other income (expense),
details below.
INTEREST EXPENSE
- ----------------
INTEREST EXPENSE SUMMARY
------------------------
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
--------------- ---------------
Debt issue cost $ 276,443 $ 114,296
Discount amortization 383,881 1,418,829
Accrued interest 127,911 119,371
Other / penalties 3,401 (18,900)
--------------- --------------
TOTAL $ 791,636 $ 1,633,596
F-28
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. OTHER INCOME (EXPENSE) (CONTINUED)
----------------------------------
For nine months ended September 30, 2007 and 2006, interest expense was $791,636
compared to $1,633,596 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 nine months ended September 30, 2007 and 2006, interest expense related
to debt issue costs was $276,443 compared to $114,296, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the nine months ended September 30, 2007, and 2006, interest expense related
to the amortization of discount was $383,881 compared to $1,418,829,
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 nine months ended September 30, 2007
and 2006.
For the nine months ended September 30, 2007 and 2006, interest expense related
to notes payable and convertible notes payable was $127,911 compared to
$119,371, respectively.
4. Other / misc. (Income) / Expense for the nine months ended September 30, 2007
and 2006, was an expense of $3,401 compared to an income ($18,900),
respectively.
GAIN / (LOSS) ON WARRANT AND DEBT DERIVATIVES
- ---------------------------------------------
For the nine months ended September 30, 2007 and 2006, losses recorded on
warrant derivatives and debt derivatives was ($2,943,253) compared to gain of
$652,773 respectively.
See Note 9 and 10 in the accompanying notes to the
financial statements for additional details.
F-29
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
15. OTHER INCOME (EXPENSE) (CONTINUED)
----------------------------------
For the nine months ended September 30, 2007 and 2006, other / net was a loss of
($371,106) compared to ($194,293) respectively.
Other expense of $371,106 for the period ended September 30, 2007
consisted primarily of warrants being issued pursuant to a cashless
exercise during the nine months ended September 30, 2007.
See Note 14 in the accompanying notes to the financial statements for additional
details.
Other expense for the period ended September 30, 2006 of $194,293 is
attributable to a one time settlement for the exchange of services. Payment was
in the form of the Companys restricted common stock.
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 September 30, 2007:
2007 25,817
2008 106,276
2009 109,618
2010 112,960
----------
$ 354,671
==========
Rent expense, net of sublease income, amounted to $115,956 and $169,790 for the
nine months ended September 30, 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-30
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
--------------------------------------------------------
On September 12, 2007 the Company granted 15,000,000 stock options to its
employees and Board of Directors. The stock options issued are pursuant to the
2005 stock option plan.
A total of 10,125,000 options were terminated during the nine months ended
September 30, 2007.
The total intrinsic value of vested options relating to employee and director
compensation during the period ended September 30, 2007 and 2006, is $936,000
and $0 respectively, this consists of 37,441,778 vested options at an average
exercise price of $0.079 per share. The increase of $969,000 from the prior
period is due to the Company's closing stock price at September 28, 2007 of
$0.026 per share compared to $0.0128 per share at December 29, 2006 (see
footnote 17.a for details).
For the periods ended September 30, 2007 and 2006, there was approximately
$163,060 and $235,034 of total compensation expense recorded by the Company
related to share-based compensation.
As of September 30, 2007, there was approximately $153,755 of total unrecognized
compensation cost related to share-based compensation arrangements with
employees. Of this amount, $76,948 is expected to be recognized throughout 2008.
As of September 30, 2007, there was approximately $25,659 of total unrecognized
compensation cost related to share-based compensation arrangements with
directors and contractors. Of this amount, $12,971 is expected to be recognized
throughout 2008.
The Companys closing stock price reported by NASDAQ listed under symbol ONEV at
September 28, 2007 was $0.026 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 September 30, 2007.
SIX MONTHS ENDED
SEPTEMBER 30, 2007
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES AVAILABLE
AUTHORIZED OUTSTANDING FOR GRANT
----------------------------------------------------------
Year 1999 plan 3,000,000 3,000,000 --
Year 2005 plan 60,000,000 59,934,000 66,000
----------------------------------------------------------
TOTAL 63,000,000 62,934,000 66,000
==========================================================
F-31
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 September 30, 2007 and 2006, respectively:
NINE MONTHS ENDED
SEPTEMBER 30,
2007
----------------------------------------
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
------------------ --------------------
Outstanding at beginning of year 58,059,000 $ 0.06
Options granted 15,000,000 0.019
Options exercised 0 N/A
Options terminated (10,125,000) N/A
----------------
OPTIONS OUTSTANDING AT END OF 3RD QUARTER 62,934,000 0.054
----------------
OPTIONS EXERCISABLE AT END OF 3RD QUARTER 37,411,778 $ 0.079
The following table summarizes the number of options authorized by the plan and
available for distribution as of September 30, 2007 and 2006, respectively.
PERIOD ENDING PERIOD ENDING
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
NUMBER OF NUMBER OF
SHARES SHARES
----------- -----------
Beginning options available for grant 4,941,000 61,078,500
Add: Additional options authorized -- --
Less: Options granted (15,000,000) (57,200,000)
Add: Options terminated 10,125,000 --
----------- -----------
ENDING OPTIONS AVAILABLE FOR DISTRIBUTION 66,000 3,878,500
F-32
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 September 30, 2007
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
---------------------------------------
TOTAL OUTSTANDING TOTAL EXERCISABLE
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE LIFE # OF SHARES PRICE LIFE
------------- ----------- ---------- ---------- ---------- ---------- ----------
$6.08 - $ 12.80 240,000 $ 7.158 2.89 240,000 $ 7.158 2.89
$0.32 - $2.00 694,000 0.867 3.78 694,000 0.867 3.78
$0.016 - $0.19 62,000,000 0.017 7.48 36,477,778 0.017 7.82
---------- ---------- ---------- ---------- ---------- ----------
TOTAL 62,934,000 $ 0.054 7.42 37,411,778 $ 0.079 7.71
F-33
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 September 30, 2007, and the intrinsic value related to the
options:
NINE MONTHS ENDED
SEPTEMBER 30,
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 7.42 $ 1,141,400
Options granted 15,000,000 0.019 4.96 390,000
Options exercised 0 N/A N/A --
Options terminated (10,125,000) N/A N/A N/A
------------ ---------- ----------- ------------
OPTIONS OUTSTANDING AT END OF 3RD QUARTER 62,934,000 0.054 7.42 1,531,400
------------ ---------- ----------- ------------
OPTIONS EXERCISABLE AT END OF 3RD QUARTER 37,411,778 $ 0.079 7.71 $ 936,000
NOTE: ASSUMES ONLY OPTIONS ABOVE WATER ARE TO BE EXERCISED.
CALCULATION IS BASED ON CLOSING STICK PRICE OF $ .026 PER SHARE DATED
SEPTEMBER 28, 2007.
A summary of the status of the Company's non-vested option shares relating to
employee and director compensation as of December 31, 2006, and changes during
the period ended September 30, 2007 is presented below:
NINE MONTHS ENDED
SEPTEMBER 30,
2007
------------------------------------
WEIGHTED
AVERAGE
NON VESTED OPTIONS RELATING TO EMPLOYEE, GRANT-DATE
CONSULTANTS AND DIRECTOR COMPENSATION SHARES FAIR VALUE
------------------------------------- ----------------- -----------------
Outstanding at beginning of year 58,059,000 $ 0.06
Options granted 15,000,000 0.019
Options exercised 0 N/A
Options vested (37,411,778) 0.089
Options terminated (10,125,000) 0.016
----------------- -----------------
NON VESTED AT END OF 3RD QUARTER 25,522,222 $ 0.016
F-34
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17 a. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
---------------------------------------------------------------
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) 2.89 to 7.42
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.
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 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.
F-35
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
17 a. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
---------------------------------------------------------------
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.
18. WARRANTS
--------
At September 30, 2007, the Company had warrants outstanding that allow the
holders to purchase up to 278,286,081 shares of common stock.
At September 30, 2007, the weighted average remaining contractual life of the
warrants was approximately 27 months.
The number and weighted average exercise prices of the warrants for the period
ended September 30, 2007 and 2006 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
--------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
----------------- ------------------ ------------------- ---------------
Outstanding at beginning of year 339,979,838 $0.020 215,373,361 $0.10
Warrants granted 10,000,000 N/A 148,211,284 0.05
Warrants exercised / forfeited (71,693,757) 0.005 (20,550,000) 0.015
Warrants terminated 0 N/A 0 N/A
----------------- -------------------
WARRANTS OUTSTANDING AT END OF 3RD QUARTER 278,286,081 $0.016 343,034,645 $0.05
================= ================== =================== ===============
WARRANTS EXERCISABLE AT END OF 3RD QUARTER 278,286,081 $0.016 343,034,645 $0.05
================= ================== =================== ===============
During the nine months ended September 30, 2007 a total of 61,098,313 warrants
were exercised at an average price of $0.065. As a result the Company received
cash proceeds of $240,300. A total of 10,595,444 warrants were forfeited due to
warrants being exercised in a cashless basis.
See Note 14 in the accompanying notes to the financial statements for additional
details.
During the nine months ended September 30, 2007 and 2006, the Company issued
10,000,000 and 140,919,090 warrants to Stockholders, respectively.
F-36
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, June 30, 2006 and September 30, 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, June 30, 2006 and September 30,
2006 have been restated to reflect the corrections. Accumulated deficit as of
September 30, 2006 was decreased by $548,531 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 during the nine months ended September 30, 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-37
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE SIX MONTHS ENDED June 30,
2006 (UNAUDITED):
Increase / (decrease) in interest expense $(176,543)
Increase / (Decrease) in derivative expense --
Increase / (decrease) in the fair value of debt derivative liability 178,305
Increase / (decrease) in the fair value of net convertible notes 308,015
Increase / (decrease) additional paid in capital (888,341)
Increase / (decrease) accumulated deficit (402,021)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE SIX MONTHS ENDED June 30,
2006 (UNAUDITED):
Total decrease of 2006 net loss $ 176,543
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED June 30, 2006 FINANCIAL STATEMENTS
ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
----------- ----------- -----------
(unaudited) (unaudited)
(unaudited)
BALANCE SHEET
Derivative liability -- 178,305 178,305
----------- ----------- -----------
TOTAL CURRENT LIABILITIES -- 178,305 178,305
Convertible Note Discount 420,666 308,015 728,681
----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 420,666 308,015 728,681
----------- ----------- -----------
TOTAL LIABILITIES 420,666 486,320 906,986
=========== =========== ===========
Additional paid in capital 40,650,563 (888,341) 39,762,222
Accumulated deficit (45,573,090) 402,021 (45,171,069)
----------- ----------- -----------
TOTAL STOCKHOLDERS EQUITY (4,922,527) (486,320) (5,408,847)
=========== =========== ===========
STATEMENT OF OPERATIONS - THREE MONTHS
Interest Income / (Expense) (221,742) 27,583 (194,159)
Gain / (Loss) derivative's 4,098,311 -- 4,098,311
Other Income / (Expense) -- -- --
----------- ----------- -----------
NET INCOME / (LOSS) 3,876,569 27,583 3,904,152
=========== =========== ===========
STATEMENT OF OPERATIONS - SIX MONTHS
Interest Income / (Expense) (1,115,047) 176,543 (938,504)
Gain / (Loss) derivative's 220,802 -- 220,802
Other Income / (Expense) -- -- --
----------- ----------- -----------
NET INCOME / (LOSS) (894,245) 176,543 (717,702)
=========== =========== ===========
F-38
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
19. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 31, 2006
- -----------------------------------------------------
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 31, 2006 (UNAUDITED):
Increase / (decrease) in interest expense $ (323,053)
Increase / (Decrease) in derivative expense -
Increase / (decrease) in the fair value of debt derivative liability 244,034
Increase / (decrease) in the fair value of net convertible notes 339,353
Increase / (decrease) additional paid in capital (1,131,918)
Increase / (decrease) accumulated deficit (548,531)
THE FOLLOWING IS A SUMMARY OF THE RESTATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 31, 2006 (UNAUDITED):
Total decrease of 2006 net loss $ 548,531
THE EFFECT ON THE COMPANY'S PREVIOUSLY ISSUED SEPTEMBER 31, 2006 FINANCIAL
STATEMENTS ARE SUMMARIZED AS FOLLOWS:
PREVIOUSLY
REPORTED CHANGE RESTATED
----------- ----------- -----------
(unaudited) (unaudited)
BALANCE SHEET
-------------
Derivative liability -- 244,034 244,034
----------- ----------- -----------
TOTAL CURRENT LIABILITIES -- 244,034 244,034
Convertible Note Discount 678,524 339,353 1,017,877
----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 678,524 339,353 1,017,877
----------- ----------- -----------
TOTAL LIABILITIES 678,524 583,387 1,261,911
=========== =========== ===========
Additional paid in capital 41,389,124 (1,131,918) 40,257,206
Accumulated deficit (46,337,229) 548,531 (45,788,698)
----------- ----------- -----------
TOTAL STOCKHOLDERS EQUITY (4,948,105) (583,387) (5,531,492)
=========== =========== ===========
STATEMENT OF OPERATIONS - THREE MONTHS
--------------------------------------
Interest Income / (Expense) (518,549) 146,510 (372,039)
Gain / (Loss) derivative's 431,971 -- 431,971
Other Income / (Expense) -- -- --
----------- ----------- -----------
NET INCOME / (LOSS) (86,578) 146,510 59,932
=========== =========== ===========
STATEMENT OF OPERATIONS - NINE MONTHS
-------------------------------------
Interest Income / (Expense) (1,633,596) 323,053 (1,310,543)
Gain / (Loss) derivative's 652,773 -- 652,773
Other Income / (Expense) -- -- --
----------- ----------- -----------
NET INCOME / (LOSS) (980,823) 323,053 (657,770)
=========== =========== ===========
F-39
ONE VOICE TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
20. SUBSEQUENT EVENTS
-----------------
o CONVERTBLE DEBT CONVERSIONS
During the period of October 1, 2007 through November 5, 2007
accredited investors converted $217,840 of convertible debt into
18,604,542 shares of the Company's restricted common stock.
o WARRANT EXERCISE
On October 29, 2007, the company issued a
total of 1,000,000 restricted common stock purchase warrants to an
accredited investor for $6,530.00. The shares were issued at a price
of $.00653 per share.
F-40
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, the Government
of India, Fry's Electronics, Alltel Wireless, Inland Cellular, Nex-Tec Wireless,
Rural Independent Networks 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.
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 recently signed a deployment contract with TELMEX for deployment of
One Voice's MobileVoice solutions to the over 19 million TELMEX subscribers
throughout Mexico. The MobileVoice service was launched to TELNOR subscribers, a
TELMEX subsidiary, on June 18, 2007 as a TELNOR branded service called IRIS. For
information on IRIS visit http://www.yosoyiris.com or http://www.telnor.com. The
IRIS marketing campaign also began in June 2007. The MobileVoice (IRIS) service
has tested and performed very well as anticipated, with full launch to TELNOR
subscribers which occurred on October 5, 2007. We are working closely with
TELNOR to ensure the IRIS service is very successful and the feedback to date
has been very positive. As additional marketing steps, TELNOR is scheduled to
begin TV advertisements beginning in December along with including IRIS in all
new TELNOR accounts as a standard service. Additionally, TELNOR will include
IRIS as a standard service to all DSL subscribers. We feel these marketing steps
will outperform TELMEX expectations, which would lead to a national TELMEX
launch. We anticipate a national TELMEX launch occurring in Q1, 2008. We have
recently sent volume pricing to TELMEX in preparation for this launch. TELMEX is
very positive regarding the IRIS service and we feel confident that a national
launch will occur.
In October 2007 both the Company and Mantec Consultants ("Mantec") entered into
a contract with Mahanagar Telephone Nigam Ltd. ("MTNL") of India to provide
MobileVoice services to MTNL's over 6 million subscribers. Mantec is One Voice's
local sales associate in India. MTNL is owned and operated by the Government of
India. The Company and Mantec are currently working on deployment of hardware
and systems integration with MTNL. According to MTNL, the MobileVoice service
will be made available to MTNL's existing 6.13 million subscribers for
MobileVoice email by phone service and the total expected customers for this
service is .92 million within the first two years. MTNL has set the monthly
subscription price of $1.25 USD monthly per subscriber out of which the Company
has a 30% share. We anticipate the MTNL revenue stream to grow as we launch
additional MobileVoice services including voice dialing, group call and
voice-to-SMS services. In order to expedite the launch with MTNL we decided to
initially launch email by phone and the revenue projections given by the
marketing department of MTNL reflect the email by phone service only. We
anticipate this revenue projection to grow as additional MobileVoice services
are launched to MTNL subscribers.
The Company recently signed an agreement to deploy MobileVoice services with
Mohave Wireless. This service is anticipated to be launched to Mohave Wireless
subscribers sometime in December, 2007. The MobileVoice service will be included
as a standard service for all Mohave Wireless subscribers.
The Company recently signed a Teaming Agreement with Motorola to work together
to broaden Motorola's offerings to Motorola customers. These offering could
include solutions such as One Voice's MobileVoice along with media control and
voice search. We are currently working with Motorola on joint proposals to
Motorola carrier customers along with adding voice search capabilities to
existing Motorola multi-media products for access to a mobile phone users' music
library from their mobile phone.
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 and Microsoft Windows Vista 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 has been working with a tier-one PC manufacturer to develop a PC
based voice control solution. This solution is based on the Company's Media
Center Communicator product but is targeted to music access using voice control
as an initial product offering.
The Company recently launched is Media Center Communicator product designed for
Microsoft Windows Vista operating system. Additionally, the Company recently
signed distribution agreements with Navarre Corporation and Ingram Micro as
software distributors for Media Center Communicator. Additionally, One Voice's
Media Center Communicator is now available in-store at Fry's Electronics and
online at CompUSA.com, Buy.com along with several others.
On August 15, 2007 the Company signed a Memorandum of Understanding ("MOU") with
Intel Corporation in which both companies will work together to add One Voice's
voice technology to a Linux based handheld device. The Company sees a potential
opportunity with this mass consumer electronics (CE) device and will apply the
necessary resources to co-develop this project.
Page 4
In summary, since the beginning of 2007, the Company has deployed services with
telecom carriers and began recognizing recurring a revenue stream. Management
believes the Company's transition into the revenue recognition phase is very
important as it signifies acceptance of our solutions and the value they deliver
to the customer and their subscribers. For the nine months ended September 30,
2007, the Company has experienced revenue growth of $196,917 or 61%
respectively.
The management team remains committed to generating short and long-term revenues
significant enough to fund daily operations, expand the intellectual property
portfolio and development of cutting edge solutions and applications for the
emerging speech recognition market sector which should build shareholder value.
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.
The following is a discussion that relates to certain financial transactions and
the results of operations for the three months ended September 30, 2007 and
2006.
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006.
ONE VOICE TECHNOLOGIES INC.
SELECTED STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED FAV/ (UN FAV) PERCENTAGE
SEPTEMBER 30, SEPTEMBER 30, CHANGE CHANGE
2007 2006
----------- ----------- ----------- ----------
(RESTATED)
Net Revenue $ 157,478 $ 151,952 $ 5,526 4%
Cost of goods sold 104,537 17,449 (87,088) -499%
----------- ----------- ----------- ----------
GROSS PROFIT 52,941 134,503 (81,562) -61%
General and administrative expenses 581,075 812,338 231,263 28%
Other income (expense) 884,971 (86,301) 971,272 1,125%
----------- ----------- ----------- ----------
NET INCOME BEFORE INCOME TAX 356,837 (764,136) 1,120,973 147%
Income tax expense -- -- -- 0%
----------- ----------- ----------- ----------
Net income (loss) $ 356,837 $ (764,136) $ 1,120,973 147%
=========== =========== =========== ==========
Page 5
REVENUES
- --------
Net revenues totaled $157,478 and $151,951 for the three months ended September
30, 2007 and 2006, respectively. Increased revenues of $5,527 4%.
COST OF GOODS SOLD
- ------------------
Cost of goods sold for the three months ended September 30, 2007 and 2006
totaled $104,537 and $17,449, respectively. The increase in cost of goods sold
of $87,088 499% 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 specifically relate to licensing
agreements and telecommunication expenses that allow the voice recognition
products offered to be functional. The increase in cost of goods sold is offset
by a corresponding decrease in general and administrative expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
- ----------------------------------
Operating expenses totaled $581,075 and $812,338 for the three months ended
September 30, 2007 and 2006, respectively. The decrease of $231,263 28% between
the two periods was due to overall budget reductions in 2007 and the
reclassification of operating expenses to cost of goods sold as mentioned above.
SALARY AND COMPENSATION
- -----------------------
Salary and wage expenses totaled $284,861 and $873,056 for the three months
ended September 30, 2007 and 2006, respectively. The decrease of $588,195 68%
between the two periods was due to headcount reductions, which increased the
overall efficiency of the Company.
ACCOUNTING AND LEGAL
- --------------------
Accounting, Legal and consulting totaled $86,870 and $49,118 for the three
months ended September 30, 2007 and 2006, respectively. The increase of $37,752
77% between the two periods was due SB-2 filing fees, legal fees relating to
patent renewals and legal fees related to the legal settlement agreement with La
Jolla Cove Investors Inc. Legal expenses are expected to decrease due to the
settlement with La Cove Investors Inc.
Refer to note 7. Settlement agreement liability in the accompanying financial
footnote section for details.
OTHER INCOME (EXPENSE)
- ----------------------
Other income totaled $884,971 and expense of ($86,301) for the three months
ended September 30, 2007 and 2006, respectively. A expense decrease of $971,272
1,125%.
OTHER INCOME / (EXPENSE) SUMMARY
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
----------- -----------
Interest expense $ (301,673) $ (518,549)
Gain on warrant and debt derivative 1,410,486 431,971
Other income / (expense) (223,842) 277
----------- -----------
TOTAL OTHER INCOME $ 884,971 $ (86,301)
Page 6
Other income (expense) consist of interest expense,
gain (loss) on warrant / debt derivative liability and other misc.
Details below.
INTEREST EXPENSE
- ----------------
INTEREST EXPENSE SUMMARY
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
---------------- ----------------
Debt issue cost $ 114,221 $ 44,317
Discount amortization 141,747 452,569
Accrued interest 45,705 40,563
Other / penalties -- (18,900)
---------------- ----------------
TOTAL $ 301,673 $ 518,549
For three months ended September 30, 2007 and 2006, interest expense was
$301,673 compared to $518,549 respectively. The decrease of $216,876 42% between
the two periods was due to:
o the timing of debt conversions which effect both issue cost
and discount amortization expenses.
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
Upon conversion of convertible debt into equity, both the debt issue cost and
discount costs associated are prorated accordingly and expensed immediately. If
no conversions occur, the debt issue cost and discount costs are expensed over
the life of the convertible debt using the straight line method.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the three months ended September 30, 2007 and 2006, interest expense related
to debt issue costs was $114,221 compared to $44,317, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the three months ended September 30, 2007, and 2006, interest expense
related to the amortization of discount was $141,747 compared to $452,569
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 has been paid in cash during the three months ended September 30,
2007 and 2006.
For the three months ended September 30, 2007 and 2006, interest expense related
to notes payable and convertible notes payable was $45,705 compared to $40,563,
respectively.
Page 7
4. Other / misc. for the three months ended September 30, 2007 and 2006, was
approximately $0 compared to income of ($18,900) respectively. The income of
$18,900 in 2006 relates to interest expenses being properly re-classed to
general and administrative expense in 2006.
(LOSS) ON DEBT DERIVATIVES
- --------------------------
For the three months ended September 30, 2007 losses recorded on debt
derivatives were ($605,090) and $0 was recorded during the periods ended
September 30, 2007 and 2006 respectively.
See Note 9 in the accompanying notes to the financial statements for a full
description of the nature of these transactions.
GAIN ON WARRANT DERIVATIVES
- ---------------------------
For the three months ended September 30, 2007 and 2006, gains recorded on
warrant derivatives were $2,015,576 compared to a gain of $431,971 respectively.
See Note 10 in the accompanying notes to the financial statements for a full
description of the nature of these transactions.
OTHER INCOME (EXPENSE)
- ----------------------
For the three months ended September 30, 2007 and 2006, other expense net was
approximately ($223,842) compared to other income of $277 respectively. The
increase over the prior period was due to warrants being exercised pursuant to a
cashless exercise.
See Note 14 in the accompanying notes to the financial statements for a full
description of the nature of this transactions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
NON-CASH (INCOME) / EXPENSES EFFECTING OPERATING ACTIVITIES
- ------------------------------------------------
Non-cash related (income) / expense items of ($849,087) are reflected in the
three months ended September 30, 2007, consist of the following items:
THREE MONTHS ENDED
SEPTEMBER 30,
2007
-----------
Depreciation and amortization 17,611
Stock compensation expense 89,494
Stock issuance for exchange of debt 33,000
Amortization of note discount 141,747
Interest payable related to convertible debt 45,705
(Gain) on warrant and debt derivatives (1,410,486)
Cashless warrant
exercise 233,842
-----------
TOTAL NON-CASH RELATED (INCOME) (849,087)
The above information is intended to illustrate the impact that these specific
expenses have on the Company's net income / (loss) . There are no cash
transactions that related to these expenses. More specifically, this table is
shown to demonstrate the impact that the re-valuation of warrant and debt
derivatives have on the income statement. Please note that this table is not in
conformity with auditing standards generally accepted in the United States of
America.
Page 8
At September 30, 2007, the Company had a working capital deficit of $9,210,814
as compared with a working capital deficit of $5,101,162 at December 31, 2006.
The increase in deficit of $4,109,652 consists primarily of the following:
o Increase in derivative liability of $2,145,663
o Increase in accrued expenses of $107,291
o Increase in revolving line of credit of $804,462
o Increase in license agreement liability of $153,500
Net cash used for operating activities is $1,045,559 for the nine months ended
September 30, 2007 compared to $2,216,591 for the nine months ended September
30, 2006.
Net cash used for investing activities is $13,609 for the nine months ended
September 30, 2007 compared to $108,490 for the nine months ended September 30,
2006.
Net cash provided by financing activities is $1,034,423 for the nine months
ended September 30, 2007 compared to $2,246,187 for the nine months ended
September 30, 2006. See details below.
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.
The original Revolving Credit Note agreement has been amended five times during
the nine months ended September 30, 2007. The amendments increased the maximum
borrowing by the Company to an amount of $1,280,000.
Since inception the Company has borrowed $1,105,000 against the revolving note.
During the same period the Company paid $58,538 against the outstanding balance
for a total net borrowing of $1,046,462 since inception. All borrowings are used
to cover recurring operating expenses by the Company.
As of September 30, 2007 the outstanding principal amount owed to the Investors
is $1,046,462. Interest accrued on the outstanding principal is $32,566 as of
September 30, 2007.
See Note 11 in the accompanying notes to the financial statements for additional
detail.
Page 9
The following is a discussion that relates to certain financial transactions and
the results for the nine months ended September 30, 2007 and 2006.
NINE MONTHS ENDED FAV/ (UN FAV) PERCENTAGE
SEPTEMBER 30, SEPTEMBER 30, CHANGE CHANGE
2007 2006
----------- ----------- ----------- -----------
(RESTATED)
Net Revenue $ 520,017 $ 323,101 $ 196,916 61%
Cost of goods sold 298,757 54,509 244,248 -448%
----------- ----------- ----------- -----------
GROSS PROFIT 221,260 268,592 (47,332) -18%
General and administrative expenses 1,921,162 2,765,790 844,628 31%
Other income (expense) (4,105,995) (1,175,116) (2,930,879) -249%
----------- ----------- ----------- -----------
NET LOSS BEFORE INCOME TAX (5,805,897) (3,672,314) (2,133,583) -58%
Income tax expense 800 800 -- 0%
----------- ----------- ----------- -----------
Net loss $(5,806,697) $(3,673,114) $(2,133,583) -58%
=========== =========== =========== ===========
REVENUES
- --------
Net revenues totaled $520,017 and $323,101 for the nine months ended September
30, 2007 and 2006, respectively. Increased revenues of $196,916 61% between the
two periods was attributable to 3 new MobileVoice customers.
COST OF GOODS SOLD
- ------------------
Cost of goods sold for the nine months ended September 30, 2007 and 2006 totaled
$298,757 and $54,509, respectively. The increase in cost of goods sold of
$244,248 448% 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 specifically relate to licensing
agreements and telecommunication expenses that allow the voice recognition
products offered to be functional. The increase in cost of goods sold is offset
by a corresponding decrease in general and administrative expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
- ----------------------------------
Operating expenses totaled $1,921,162 and $2,765,791 for the nine months ended
September 30, 2007 and 2006, respectively. The decrease of $844,629 31% between
the two periods was due to overall budget reductions and the reclassification of
operating expenses to cost of goods sold as mentioned above.
SALARY AND COMPENSATION
- -----------------------
Salary and wage expenses totaled $873,056 and $1,164,421 for the nine months
ended September 30, 2007 and 2006, respectively. The decrease of $291,365 25%
between the two periods was due to headcount reductions.
Page 10
ACCOUNTING AND LEGAL
- --------------------
Accounting, Legal and consulting totaled $302,383 and $188,897 for the nine
months ended September 30, 2007 and 2006, respectively. The increase of $113,486
60% between the two periods was due to the following:
o 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. In previous years the audit fees were being expenses as incurred, in
2007 all fees are being properly accrued based on conservative estimates. The
SB-2 filings continue to need the consent of both the prior auditors and the
current auditors, the need for both auditors consent will be eliminated by year
end 2007.
o Legal fees relating to patent renewals and legal fees related to the
legal settlement agreement with La Jolla Cove Investors Inc. Legal expenses are
expected to decrease due to the settlement with La Cove Investors Inc.
Refer to note 7. Settlement agreement liability in the accompanying financial
footnote section for details.
OTHER INCOME (EXPENSE)
- ----------------------
Other expense totaled $(4,105,995) and an expense of $(1,175,116) for the nine
months ended September 30, 2007 and 2006, respectively. An expense increase of
$2,930,879 249%.
OTHER INCOME / (EXPENSE) SUMMARY
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
----------- -----------
Interest expense $ (791,636) $(1,633,596)
Gain / (loss) on warrant and debt derivative (2,943,253) 652,773
Other income / (expense) (371,106) (194,293)
----------- -----------
$(4,105,995) $(1,175,116)
o Other income (expense) consist of interest expense, settlement / other
expense, gain (loss) on warrant / debt derivative liability and other
misc. Details below.
INTEREST EXPENSE
- ----------------
INTEREST EXPENSE SUMMARY
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
---------------- ----------------
Debt issue cost $ 276,443 $ 114,296
Discount amortization 383,881 1,418,829
Accrued interest 127,911 119,371
Other / penalties 3,401 (18,900)
---------------- ----------------
TOTAL $ 791,636 $ 1,633,596
For three months ended September 30, 2007 and 2006, interest expense was
approximately $791,636 compared to $1,633,596 respectively. The decrease of
$841,960 52% between the two periods was due to an overall increase of
convertible debt conversions in 2006. Upon conversion of debt the amortization
of debt issue cost and discount is accelerated accordingly. For the period ended
September 30, 2007 and 2006, $235,643 and $1,480,037 of debt was converted into
common stock respectively.
Page 11
Interest expense is composed of three very distinct transactions, which vary in
their financial treatment.
Upon conversion of convertible debt into equity, both the debt issue cost and
discount costs associated are prorated accordingly and expensed immediately. If
no conversions occur, the debt issue cost and discount costs are expensed over
the life of the convertible debt using the straight line method.
1. Monthly amortization of debt issue costs related to securing convertible debt
financing.
This represents a cash related transaction.
For the nine months ended September 30, 2007 and 2006, interest expense related
to debt issue costs was $276,443 compared to $114,296, respectively.
2. Monthly amortization of the embedded discount features within convertible
debt financing.
This represents a non-cash transaction.
For the six months ended September 30, 2007, and 2006, interest expense related
to the amortization of discount was $383,881 compared to $1,418,829
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 has been paid in cash during the nine months ended September 30,
2007 and 2006.
For the nine months ended September 30, 2007 and 2006, interest expense related
to notes payable and convertible notes payable was $127,911 compared to
$119,371, respectively.
4. Other / misc. for the nine months ended September 30, 2007 and 2006, was
approximately an expense of $3,401 compared to income of $18,900 respectively.
The income of $18,900 in 2006 relates to interest expenses being properly
re-classed to general and administrative expense in 2006.
LOSS ON DEBT DERIVATIVES
- ------------------------
For the nine months ended September 30, 2007 and 2006, losses recorded on debt
derivatives were approximately $(650,728) compared to $0 respectively.
See Note 9 in the accompanying notes to the financial statements for a full
description of the nature of these transactions.
Page 12
LOSS ON WARRANT DERIVATIVES
- ---------------------------
For the nine months ended September 30, 2007 and 2006, losses recorded on
warrant derivatives was approximately $(2,292,525) compared to a gain of
$652,773 respectively.
See Note 10 in the accompanying notes to the financial statements for a full
description of the nature of these transactions.
OTHER INCOME (EXPENSE)
- ----------------------
For the nine months ended September 30, 2007 and 2006, other expense was
approximately ($371,106) compared to ($194,293) respectively.
Other expense of $371,106 for the period ended September 30, 2007
consisted primarily of warrants being issued pursuant to a cashless
exercise during the nine months ended September 30, 2007.
See Note 14 in the accompanying notes to the financial statements for additional
details.
Other expense for the period ended September 30, 2006 of $194,293 is
attributable to a one time settlement for the exchange of services. Payment was
in the form of the Companys restricted common stock.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
NON-CASH EXPENSES EFFECTING OPERATING ACTIVITIES
- ------------------------------------------------
Non-cash related (income) / expense items of $4,256,653 are reflected in the
nine months ended September 30, 2007, consist of the following items:
NINE MONTHS ENDED
SEPTEMBER 30,
2007
-----------
Depreciation and amortization 63,469
Stock compensation expense 163,060
Stock issuance for exchange of debt 781,960
Amortization of note discount 383,881
Interest payable related to convertible debt 127,911
Loss on warrant and debt derivatives 2,943,253
Loss on cashless warrant exercise 393,119
-----------
TOTAL NON-CASH RELATED EXPENSE 4,856,653
The above information is intended to illustrate the impact that these specific
expenses have on the Company's net income / (loss). There are no cash
transactions that related to these expenses. More specifically, this table is
shown to demonstrate the impact that the re-valuation of warrant and debt
derivatives have on the income statement. Please note that this table is not in
conformity with auditing standards generally accepted in the United States of
America.
Page 13
FINANCING TRANSACTIONS
- ----------------------
The following is a discussion that summarizes the net financing and conversion
activities for the nine months ended September 30, 2007 and 2006.
NET CASH PROCEEDS RECEIVED DUE TO FINANCING ACTIVITY
- ----------------------------------------------------
Nine months ended
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Private placement $ -- $ 112,000
Warrant exercise 240,300 300,200
Convertible debt financing net of debt issue cost 195,000 1,833,987
Discount on convertible debt financing (202,405) --
Revolving line of credit net of paydown 806,462 --
------------ ------------
TOTAL FINANCING ACTIVITY $ 1,039,357 $ 2,246,187
============ ============
CONVERTIBLE NOTES PAYABLE SUMMARY
- ---------------------------------
NINE MONTHS ENDED
ISSUANCE SUMMARY
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Principal $ 420,000 $ 2,005,000
Warrants issued A&B 10,000,000 140,917,090
NINE MONTHS ENDED
CONVERSION SUMMARY
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Principal Converted $ 235,643 $ 1,480,037
Shares converted 28,338,000 119,907,000
Average share conversion price $ 0.0083 $ 0.0123
See Note 13 a. in the accompanying notes to the financial statements for
additional detail.
Page 14
COMMON STOCK
- ------------
The following is a summary of transactions that had an impact on equity:
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
AVERAGE AVERAGE
SHARES SHARE SHARES SHARE
ISSUED PRICE VALUE ISSUED PRICE VALUE
----------- ------ ----------- ----------- ------ -----------
Debt conversions 28,338,257 0.0083 235,643 119,907,277 0.0123 1,480,037
Issuance of stock in exchange for services 9,340,435 0.0195 181,960 3,000,000 0.0335 100,500
Warrant exercise 61,098,313 0.0104 633,419 20,550,000 0.0146 300,200
Private placement -- N/A -- 17,000,000 N/A 332,000
Shares in escrow 30,000,000 0.0200 600,000 -- N/A --
----------- ------ ----------- ----------- ------ -----------
Total 128,777,005 0.0128 1,651,022 160,457,277 0.0138 2,212,737
See Note 13 a. in the accompanying notes to the financial statements for
additional detail.
FUTURE CAPITAL OUTLOOK
- ----------------------
The Company will continue to rely heavily on our current method of convertible
debt and equity funding along with the proceeds borrowed from the revolving line
of credit, which have financed the Company since 2001. The losses through the
nine months ended September 30, 2007 are due to minimal revenues and recurring
operating expenses, with a majority of expenses in the areas of: salaries,
accounting fees, legal fees 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 common stock.
WE HAVE A HISTORY OF LOSSES. WE MAY 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 nine months ended September 30, 2007 and 2006,
the Company incurred a net loss of $5,806,697 and $3,673,114 respectively, an
increase of $2,133,583 58%. A large part of the discrepancy between 2007 and
2006 is due to a non-cash loss differential of ($3,596,026) between 2007 and
2006 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
and is currently operating within the target. 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,
reducing license agreement costs 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 by acquiring additional customers contracts.
Page 15
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. Furthermore, based on this 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 since our annual report on Form 10-KSBA for the year ended
December 31, 2006, was filed late. We are in the process of determining how
filing delays may be avoided in the future.
Our deficiencies with regards to our ability to detect inappropriate application
of US GAAP rules 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.
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.
Page 16
Management believes that the material weaknesses set forth in items (3), (4) and
(6) above did not have an affect on the Company's financial results or any
restatements which have occurred. Inadequate segregation of duties consistent
with control objectives (item (3)) was due to the fact that the Company did not
have a sufficient number of personnel within the accounting department.
Management believes that this did not have an effect on the most recent and
updated financial statements filed by the Company as the adjustments made to the
financial statements were related to the application of technical accounting
guidance and resulted primarily from the lack of accounting department staff
with sufficient technical accounting expertise and experience. We believe that
even if there had been sufficient staff to remedy the segregation of duties
problem, unless one of more of the additional staff members had sufficient
technical accounting expertise, this would not have prevented the adjustments
and restatement. Management believes that the weakness due to insufficient
written policies and procedures (item (4)) did not have an effect on the most
recent and updated financial statements filed by the Company as the adjustments
were related to the application of technical accounting guidance and resulted
primarily from the lack of accounting department staff with sufficient technical
accounting expertise and experience. We believe that even if there had been
sufficient written policies and procedures in place, the problem related to the
lack of accounting staff members with sufficient technical accounting expertise
would not have been resolved and this would not have prevented the adjustments
and restatement. Further, we do not feel that improper controls and procedures
over the period end process (item (6)) caused any material effects or
misstatements to the financials filed, as these inefficiencies were more
associated with timely closing, review and filing of financial statements. These
issues were due primarily to the fact that the Company had an insufficient
number of personnel within the accounting department and that it did not have
written policies and procedures to ensure that the financial statement closing
and reporting processes were timely and effective. We believe that even if
stronger controls had been in place related to the period end financial close
and reporting processes, the problem related to the lack of accounting staff
members with sufficient technical accounting expertise would not have been
resolved and this would not have prevented the adjustments and restatement.
However, management believes that the lack of sufficient and knowledgeable
personnel to maintain appropriate accounting and financial reporting
organizational structure to support the activities of the Company (Item (1)),
lack of a functioning audit committee and lack of a majority of outside
directors on the Company's board of directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and
procedures (Item (2)), ineffective personnel resources and technical accounting
expertise within the accounting function to resolve non-routine or complex
accounting matters (Item (5)), and inadequate procedures for appropriately
identifying, assessing and applying accounting principles (Item (7)) resulted in
the Company's determination to restate its financial statements for the years
ended December 31, 2004 and 2003. Specifically, the material weaknesses
specified in the preceding sentence resulted in management determining that the
Company's previous accounting for its common stock purchase warrants issued from
2003 to 2004 did not comply with Emerging Issues Task Force 00-19, ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN A
COMPANY'S OWN STOCK. As a result, the Company determined that the fair value of
the warrants should have been reclassified from additional paid in capital, to a
current liability, and that the warrant fair value should have been marked to
market as of the balance sheet date with the corresponding non-cash gain or loss
reflected in the results of operations. This resulted in the Company restating
its net loss for the fiscal year ended December 31, 2004 to $(8,752,000)
compared to $(5,383,000) as previously reported, and a net loss for the fiscal
year ended December 31, 2003 to $(5,839,000) compared to $(5,932,000) as
previously reported. In addition, total liabilities for the fiscal year ended
December 31, 2004 and 2003 was restated to $6,464,000 and $1,431,000
respectively, compared to $1,523,000 and $1,140,000, respectively, as previously
reported.
Page 17
In accordance with Exchange Act Rules 13a-15 and 15d-15, and after receipt of
the Letter, the Company has re-evaluated, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this report. Based upon this re-evaluation the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are not effective in ensuring that
the information required to be disclosed is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rule and forms
and is accumulated and communicated to the issuer's management, including its
Chief Executive Officer (the principal executive officer) and Chief Financial
Officer (the principal accounting and financial officer) as appropriate to allow
timely decisions regarding required disclosure.
We are committed to improving our financial organization. As part of this
commitment, we will create a segregation of duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function by the end of fiscal 2007 to resolve
non-routine or complex accounting matters. In addition, we will take the
following actions to enhance our internal controls, when funds are available to
the Company, which we expect to occur by the end of fiscal 2007:
i) Appointing one or more outside directors to our board of directors who shall
be appointed to the audit committee of the Company resulting in a fully
functioning audit committee who will undertake the oversight in the
establishment and monitoring of required internal controls and procedures. All
compensation paid to board members comes in the form of stock options that
normally carry a value of less than $10,000, which vest over a period of time;
ii) Preparing and implementing sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements,
which management estimates will cost approximately $50,000.; 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 $40,000 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.
Page 18
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 19
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.
On August 23, 2007, the Company entered into a Settlement Agreement and Mutual
Release with La Jolla Cove Investors, Inc. ("LJCI") pursuant to which we agreed
with LJCI 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 a legal proceeding in the San Diego County
Superior Court (the "Court") entitled La Jolla Cove Investors, Inc. vs. One
Voice Technologies, Inc., Case No. GIC850038 (the "Action") for a total amount
owed of $408,594.48 (the "Owed Amount"). Under the Settlement Agreement dated
August 23, 2007, the parties reached a final resolution with respect to such
Owed Amount whereby (i) LJCI shall receive $200,000 within 15 days of the date
of the Agreement and (ii) the difference between the Owed Amount and $200,000
shall be payable at a later date (the "Remaining Owed Amount"). The payment of
the Remaining Owed Amount shall be made to LJCI in the following manner:
o Concurrently with the execution of the Agreement, the Company shall
transfer to an independent escrow agent, on behalf of LJCI, all
right, title and interest to 30,000,000 shares of Common Stock of
the Company (the "Escrow Shares"), issued in 30 increments of
1,000,000 shares. On the one year anniversary of the Agreement,
1,000,000 Escrow Shares shall be released to LJCI whereby LJCI shall
be able to sell such shares in open market transactions provided
such sales do not exceed more than 14% of the corresponding daily
volume of such shares on the trading market on which the Company's
securities are sold. LJCI shall continue to receive the Escrow
Shares, provided they satisfy the volume limitation set forth above
and LJCI's ownership of the Company's common stock does not exceed
4.99% of the Company's then issued and outstanding shares of common
stock, until the Remaining Owed Amount is satisfied;
o Upon notice from LJCI that the Remaining Owed Amount has been
satisfied by the sale of the Escrow Shares either (i) Alpha Capital
Ansalt ("Alpha") shall have the ability within 15 business days to
purchase any remaining Escrow Shares at a 20% discount to the
current market price of the shares or (ii) if Alpha does not
exercise its right to purchase the shares, the Company shall have
the ability to redeem the remaining Escrow Shares within 5 business
days.
o At anytime while the Remaining Owed Amount is outstanding, the
Company or Alpha may pay in cash to LJCI an amount equal to the
Remaining Owed Amount and either (i) Alpha shall have the ability
within 15 business days to purchase any remaining Escrow Shares at a
20% discount to the current market price of the shares or (ii) if
Alpha does not exercise its right to purchase the shares, the
Company shall have the ability to redeem the remaining Escrow Shares
within 5 business days.
LJCI has contractually agreed to restrict their ability to exercise the
Escrow Shares such that the number of shares of the Company common stock held by
it does not exceed 4.99% of the Company's then issued and outstanding shares of
common stock.
Upon receipt of the Owed Amount, LJCI will file a Satisfaction of Judgment
in the appropriate court and grant the Company a release from any and all
actions related to the Action.
Page 20
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 September 30, 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 nine months ended September 30, 2007 a total of 37,126,855 warrants
were exercised at an average price of $0.0065. As a result the Company received
cash proceeds of $240,300.
All proceeds from the above transactions were used to fund normal operating
expenses incurred by the Company.
ISSUANCE OF WARRANTS ON A CASHLESS BASIS
From time to time warrants can be exercised on a cashless basis if certain
conditions exist. If warrants are held for a certain period of time and there is
no effective registration statement for these warrants, the holder of these
warrants may exercise them on a cashless basis. The result is the Company
issuing restricted shares pursuant to rule 144 or 144K, no cash is received by
the Company. The number of shares issued are discounted according the
subscription agreement formula. EX: The Company issues 1,000,000 restricted
shares and the holder forfeits 1,500,000 of their warrants.
During the nine months ended September 30, 2007 approximately 23,971,458
warrants were issued on a cashless basis and 34,566,902 warrants were forfeited.
SHARES IN ESCROW
- ----------------
On August 23, 2007 the Company issued 30,000,000 shares of the Company's
restricted common stock valued at $600,000. The shares were put into an
independent 3rddparty escrow account on behalf of La Jolla Cove Investors Inc.
These shares relate to a legal settlement on August 23, 2007 between the Company
and La Jolla Cove Investors Inc.
See Note 7 in the accompanying notes to the financial statements for additional
details.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
During the nine months ended the Company issued a total of 9,340,435 Shares of
restricted common stock to in exchange for services rendered. The services are
related to monthly licensing fees and outside consulting fees. The services were
valued at approximately $181,960.
The above transactions were granted in lieu of cash payment to satisfy the debt.
* 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.
Page 21
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 22
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: November 16, 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 23