NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
The operations of Advanced Voice Recognition Systems, Inc. (AVRS or the Company), http://www.avrsys.com, commenced in 1994 with a predecessor entity called NCC, Inc. NCC, Inc. was incorporated on March 15, 1994 in the State of Ohio. NCC, Inc. operated as a software and hardware development company that marketed voice recognition and transcription products for commercial applications.
In May 2000, WG Investments, LLC acquired the assets of NCC, Inc. and subsequently changed its name to NCC, LLC. NCC, LLC (also a predecessor to AVRS) continued the operations of NCC, Inc. until approximately December 31, 2001, when shifts in the industrys markets caused NCC, LLC to suspend its operations.
AVRS was incorporated in the State of Colorado on July 7, 2005. In September 2005, the members of NCC, LLC transferred all of their membership interests in NCC, LLC to AVRS in exchange for 93,333,333 shares (post-recapitalization) of AVRS common stock. In December 2005, the Board of Directors approved a 1.5-to-1 stock split issuing 46,666,667 common shares (post-recapitalization), which increased the number of common shares outstanding to 140million shares (post-capitalization). Following the incorporation of AVRS, the Company initiated a new business plan and has continued its operations in the voice recognition and transcription industry.
AVRS is a software development company specializing in speech recognition technologies. AVRS has successfully obtained patent protection of its proprietary technology (refer to Note 3, Intangible Assets). The Company has currently engaged a firm to investigate and asserting claims relating to certain patents including negotiating licensing agreements and the filing and prosectution of lawsuits.
Stock Exchange Agreement
On April 28, 2008, the Company entered into a Stock Exchange Agreement (the Agreement) with Samoyed Energy Corp., a Nevada corporation (Samoyed), which resulted in a reverse acquisition. The Agreement provided for the reorganization of AVRS with Samoyed. In connection with the Agreement, Samoyed acquired all of the issued and outstanding common shares of AVRS in exchange for 140 million shares of Samoyeds common stock. On May 19, 2008, at the closing of the Agreement, the former shareholders of AVRS owned approximately 85% of the outstanding common stock of Samoyed, resulting in a change in control.
For accounting purposes, this acquisition has been treated as a reverse acquisition and recapitalization of AVRS, with Samoyed the legal surviving entity. Since Samoyed had, prior to the recapitalization, minimal assets and limited operations, the recapitalization has been accounted for as the sale of 24,700,008 shares of AVRS common stock for the net liabilities of Samoyed. Therefore, the historical financial information prior to the date of the recapitalization is the financial information of AVRS. Costs of the transaction have been charged to the period in which they are incurred.
In connection with the Agreement, a shareholder of Samoyed holding an aggregate of 3.5 million shares of Samoyeds common stock made payments totaling $565,651 since 2008 in lieu of tendering shares to the Company. The Company received the final payment of $6,000 on February 15, 2012.
Stock Purchase Agreements
During the year ended December 31, 2016 the Company entered into Stock Purchase Agreements for the private sale of an aggregate of 5,800,000 shares of the common stock for aggregate proceeds of $45,325, full payment of which was received in the period. During the year ended December 31, 2015, the Company entered into Stock Purchase Agreements for the private sale of an aggregate of 5,400,000 shares of the common stock for aggregate proceeds of $32,500, all of which was received in 2015.
Agreement and Plan of Merger
On March 25, 2009, the Company entered into an Agreement and Plan of Merger (Agreement and Plan of Merger) with its wholly-owned subsidiary, NCC, LLC, a Colorado limited liability company, whereby NCC, LLC merged with and into the Company pursuant to Section 92A.180 of the Nevada Business Corporations Act. Upon consummation of the Agreement and Plan of Merger: (i) NCC, LLC ceased to exist; (ii) the Companys membership interests in NCC, LLC automatically were canceled or retired and ceased to exist, without any consideration delivered in exchange thereof; (iii) the title to all estate, property rights privileges, powers and franchise assets and/or other rights owned by NCC, LLC became vested in the Company without reversion or impairment; and (iv) all liabilities of any kind of NCC, LLC became vested in the Company.
Commitments and Contingencies
On April 20, 2015 Advanced Voice Recognition Systems, Inc. (AVRS) entered into a Material Letter Agreement with an unrelated third party (Third Party) in which they promise to pay to patent legal counsel funds to continue prosecuting Patents on behalf of AVRS. AVRS promises to pay to the Third Party, or to such other holder of this promissory note (Note) as designate, the principal, together with any additional amounts owed pursuant to the terms set forth in this Note. Interest at 2% was accrued and reported at December 31, 2016.
On August 20, 2015, Advanced Voice Recognition Systems, Inc. (AVRS) entered into a letter agreement with unrelated third party (Third Party) pursuant to which the Third Party will provide strategic advisory services to AVRS to support the common goal of the acquisition, sale, licensing, prosecution, enforcement, and settlement with respect to AVRSs intellectual property, including patents held by AVRS. The Third Party has agreed to advance costs recommended by it, including court filing fees, discovery and other litigation costs, and patent prosecution costs, up to an aggregate of $10,000,000. AVRS will be responsible for costs not recommended by the Third Party, as well as travel and ordinary business expenses incurred by AVRS. Except for the advanced costs by the Third Party, AVRS will be responsible for any contingency payments to law firms. Any and all advanced costs will only become liabilities if successful.
On November 1, 2016, Advanced Voice Recognition Systems, Inc. (
AVRS
) entered into a Contingent Fee Agreement (the
Agreement
) with Legal Representation pursuant to which they will represent AVRS in connection with investigating and asserting claims relating to certain patents, including the negotiation of license agreements and the filing and prosecution of lawsuits, against any potential infringers of rights associated with such patents (the
Patent Rights
) Legal representation will handle licensing and litigation activities under the Agreement on a contingent fee basis. The fee will depend upon whether AVRS recovers any sums by way of licensing, settlement, trial or otherwise with respect to the Patent Rights.
Note 2. Significant Accounting Policies
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may be unable to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. During the years ended December 31, 2012 and 2011, the Companys President loaned or advanced the Company funds for working capital on an as needed basis. There is no assurance that these loans or advances will continue in the future. During the twelve months ended December 31, 2016 the Company received an aggregate of $45,325 from the sale of shares in private offerings of its common stock. During the twelve months ended December 31, 2015 the Company received an aggregate of $32,500 from the sale of shares in private offerings of its common stock.
The Companys current operations are related to patent monetization and filing of additional patents. The Company has entered into a letter agreement with Dominion Harbor Group, LLC to provide strategic advisory services to AVRS . Dominion has agreed to advanced costs up to an aggregate of $10,000,000. In addition the Company has entered into a Contingent Fee Agreement with Buether Joe & Carpenter, LLC which will represent AVRS in connection with investigating and asserting claims to the AVRS patents including licensing and litigation activities. Any and all advanced costs will only become liabilities if successful.
Use of Estimates
The consolidated financial statements include our accounts and those of NCC, LLC which merged with and into AVRS, Inc. March 25, 2009. Intercompany transactions and balances have been eliminated. The accounts, results of operations and cash flows of acquired companies are included from their respective acquisition dates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. The Company had cash at December 31, 2016 of $9,454, and $8,997 cash at December 31, 2015. No amounts resulted from cash equivalents.
Financial Instruments
The carrying amounts of cash, receivables and current liabilities approximate fair value due to the short-term maturity of the instruments.
Fixed Assets
Fixed assets are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is recorded in the year of disposal.
Revenue Recognition
Revenue from the sale of inventory is recognized on the date of sale, title and risk of loss have transferred to the purchaser, the fees are fixed or determinable and collection is reasonably assured. Revenue from the performance of services is recognized when services have been completed and collection is probable. There are no multiple element sales and no history of material returns. The revenue recognition policies relate to operations performed prior to the Companys reverse acquisition.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Companys financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. The Company did not record a cumulative effect adjustment related to the adoption of ASC 740.
Research and Development Costs
Research and development costs are expensed in the period incurred.
Patents, Deferred Costs and Amortization
Patents consist of costs incurred to acquire issued patents. Amortization commences once a patent is granted. Costs incurred to acquire patents that have not been issued are reported as deferred costs. If a patent application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires. The Company amortizes its patents over the lesser of their estimated useful life or twenty years from the patent application date.
Impairment and Disposal of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the provisions of Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets now referred to as ASC 360-10
Property, Plant, and Equipment
Impairment or Disposal of Long Lived Assets subsections. ASC 306-10 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets carrying amount. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell. The Companys last impairment analysis was completed effective December 31, 2016. Impairment recorded for each of the years ending 2016 and 2015 was $0.
Loss per Common Share
The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents. Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents. At December 31, 2016 and 2015, there were no variances between the basic and diluted loss per share as there were no potentially dilutive securities outstanding.
Fair Value of Financial Instruments
The carrying amounts of cash and current liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. We do not hold or issue financial instruments for trading purposes, nor do we utilize derivative instruments.
The FASB Accounting Standards Codification (ASC) clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2:
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements. The Company believes that there would be no material effect on the presentation of the financial statements.
Note 3. Intangible and Fixed Assets
Intangible Assets
The Company monitors the anticipated outcome of legal actions, and if it determines that the success of the defense of a patent is probable, and so long as the Company believes that the future economic benefit of the patent will be increased, the Company capitalizes external legal costs incurred in the defense of the patent. Upon successful defense of litigation, the amounts previously capitalized are amortized over the remaining life of the patent.
On November 13, 1995 the Company filed a patent application with the U.S. Patent and Trademark Office, which was granted on September 28, 1999 as U.S. Patent #5,960,447, Word Tagging and Editing System for Speech Recognition. In accordance with 35 U.S.C. 154, the term for the above referenced patent shall be for a period beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed in the United States. The above referenced U.S. Patent expired on November 13, 2015.
On July 7, 2009, U.S. Patent # 7,558,730, entitled Speech Recognition and Transcription Among Users Having Heterogeneous Protocols, was issued by the U.S. Patent and Trademark Office. In accordance with 35 U.S.C. 154, the patent shall be for a term beginning on July 7, 2009 and ending 20 years from the application date of November 27, 2001, or November 27, 2021. The deferred fees were capitalized during the quarter ended September 30, 2009 and the Company began amortization.
On March 9, 2010, the U.S. Patent and Trademark Office declared interference between the Company as Senior Party and Allvoice Developments, US LLC as Junior Party. Due to the absence of a decision by the end of 2010, in the fourth quarter of 2010, AVRS impaired 100% of the deferred costs associated with the interference, resulting in a $1,068,860 impairment loss. On April 27, 2012, the BPAI entered a judgment denying the Companys motions. On May 29, 2012, AVRS filed a Request for Rehearing in the BPAI. On December 19, 2012, the BPAI entered a judgment denying the request for rehearing. The Company decided not to appeal as additional litigation would be costly and time-consuming and would divert the attention of management and key personnel from business operations.
On May 24, 2011, U.S. Patent #7,949,534, entitled Speech Recognition and Transcription Among Users Having Heterogeneous Protocols, was issued by the U.S. Patent and Trademark Office. In accordance with 35 U.S.C. 154, the patent shall be for a term beginning May 24, 2011 and ending 20 years from the application date of the parent application (U.S. Patent #7,558,730) of November 27, 2001, or November 27, 2021. The deferred fees were capitalized during the quarter ended June 30, 2011 and the Company began amortization.
On March 6, 2012, U.S. Patent #8,131,557, entitled Speech Recognition and Transcription Among Users Having Heterogeneous Protocols, was issued by the U.S. Patent and Trademark Office. In accordance with 35 U.S.C. 154, the patent shall be for a term beginning March 6, 2012 and ending 20 years from the application date of the parent application (U.S. Patent #7,558,730) of November 27, 2001, or November 27, 2021. The deferred fees were capitalized during the quarter ended March 31, 2012 and the Company began amortization.
On July 30, 2013, U.S. Patent #8,498,871, entitled Dynamic Speech Recognition and Transcription Among Users Having Heterogeneous Protocols, was issued by the U.S. Patent and Trademark Office. In accordance with 35 U.S.C. 154, the patent shall be for a term beginning on July 30, 2013 and ending 20 years from the application date of November 27, 2001, or November 27, 2021. The deferred fees were capitalized during the quarter ended September 30, 2013 and the Company began amortization.
On June 27, 2013, the Company filed two additional continuation applications 13/928/381 and 13/928,383 with the U.S. Patent and Trademark Office entitled Speech Recognition and Transcription Among Users Having Heterogeneous Protocols. On August 31, 2015, Application 13/928,381 was abandon by the Company. Deferred costs were charged to operations the quarter ended September 30, 2015.
On August 10, 2015, the Company filed a continuation application with the U.S. Patent and Trademark Office entitled Speech Recognition and Transcription Among Users Having Heterogeneous Protocols.
On September 22, 2015, U.S. Patent #9,142,217, entitled Dynamic Speech Recognition and Transcription Among Users Having Heterogeneous Protocols, was issued by the U.S. Patent and Trademark Office. In accordance with 35 U.S.C. 154, the patent shall be for a term beginning September 22, 2015 and ending 20 years from the application date of the parent application (US Patent No. 7,558,730) of November 27, 2001, or November 27, 2021. The deferred fees were capitalized during the quarter ended September 30, 2015 and the Company began amortization.
On July 30, 2015 a continuation application, 14/821,786 was filed with the U.S. Patent and Trademark Office. Costs of $1,484.67 were deferred during the third quarter of 2015. See Note 7 subsequent events.
Amortization at December 31, 2016 is as follows:
SCHEDULE OF INTANGIBLE ASSETS
Ended December 31, 2015
|
|
|
|
|
| |
U.S. Patent #
|
|
|
Carrying Value
|
|
Amortization
|
|
Balance
|
5,960,447
|
|
$
|
63,247
|
$
|
63,247
|
$
|
--
|
7,558,730
|
|
|
58,277
|
|
30,498
|
|
27,779
|
7,949,534
|
|
|
3,365
|
|
1,487
|
|
1,878
|
8,131,557
|
|
|
5,092
|
|
2,002
|
|
3,090
|
8,498,871
|
|
|
21,114
|
|
6,119
|
|
14,995
|
9,142,217
|
|
|
35,068
|
|
2,698
|
|
32,370
|
|
|
$
|
186,163
|
$
|
106,051
|
$
|
80,112
|
Ended December 31, 2016
|
|
|
|
|
| |
U.S. Patent #
|
|
|
Carrying Value
|
|
Amortization
|
|
Balance
|
5,960,447
|
|
$
|
63,247
|
$
|
63,247
|
$
|
--
|
7,558,730
|
|
|
58,277
|
|
35,190
|
|
23,087
|
7,949,534
|
|
|
3,365
|
|
1,800
|
|
1,565
|
8,131,557
|
|
|
5,092
|
|
2,524
|
|
2,568
|
8,498,871
|
|
|
21,114
|
|
8,651
|
|
12,463
|
9,142,217
|
|
|
35,068
|
|
8,093
|
|
26,975
|
|
|
$
|
186,163
|
$
|
119,505
|
$
|
66,658
|
Amortization expense totaled $13,454 and $10,757 for the years ending December 31, 2016 and 2015, respectively. Estimated aggregate amortization expense for each of the next five years is as follows:
SCHEDULE OF FUTURE AMORTIZATION
Year ending December 31,
|
|
2017
|
|
13,454
|
2018
|
|
13,454
|
2019
|
|
13,454
|
2020
|
|
13,454
|
2021
|
|
12,842
|
|
|
$ 66,658
|
Fixed Assets
Depreciation expense totaled $737 for the year ended December 31, 2016 and $1,175 for the year ended December 31, 2015.
PROPERTY PLANT AND EQUIPMENT
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
6,627
|
|
$
|
6,627
|
Computer software
|
|
|
3,640
|
|
|
3,640
|
|
|
|
10,267
|
|
|
10,267
|
Less accumulated depreciation
|
|
|
(10,267)
|
|
|
(9,530)
|
Computer software and equipment, net
|
|
$
|
|
|
$
|
737
|
Note 4. Related Party Transactions
Indebtedness to Related Parties
During the years from 2000 through 2013, certain officers advanced the Company working capital to maintain the Companys operations. The Company owed the officers $-0- and $-600- at December 31, 2016 and 2015 respectively. The Company also owed the officers aggregate of $162,383 at December 31, 2016 and 2015 for accrued payroll.
Note 5. Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows:
|
December 31,
|
|
2016
|
|
2015
|
U.S. federal statutory graduated rate
|
|
|
34.00%
|
|
34.00%
|
State income tax rate, net of federal benefit
|
|
|
0.00%
|
|
0.00%
|
Rent & services
|
|
|
-16.06%
|
|
-.3.40%
|
Costs capitalized under Section 195
|
|
|
-17.94%
|
|
-30.60%
|
|
|
|
|
Effective rate
|
|
|
0.00%
|
|
0.00%
|
|
|
|
|
The Company is considered a start-up company for income tax purposes. As of December 31, 2016, the Company had not commenced its trade operations, so all costs were capitalized under Section 195. Accordingly, the Company had no net operating loss carry forwards at December 31, 2016.
Note 6. Concentration of Risk
Beginning December 31, 2010, through December 31, 2016, all noninterest-bearing transaction accounts are fully insured, up to a balance of $250,000 at all FDIC-insured institutions. On December 31, 2016, the Company had cash balances at one FDIC insured financial institution of $9,454 in non-interest bearing accounts, which amount does not exceed the related federal deposit insurance.
Note 7. Subsequent Events
On January 6, 2017 the Company filed a continuation in the U.S. Patent and Trademark Office to patent application 14/821,786 resulting in the new application 15/400,732. Deferred costs of $1485 will remain until the patent is prosecuted and issued. Costs will be capitalized in the period that the patent is issued.
On January 16, 2017 AVRS agreed to extend the Adapt IP Letter Agreement of March 16, 2015 and the Promissory Note of April 20, 2015. Interest of $3987 has accrued through December 31, 2016
Note 8. Stockholder Equity / (Deficit)
The Company has issued shares of its common stock pursuant to certain agreements as described in Note 1.