Notes to Audited Financial Statements
Note 1. Nature of Operations
Company Overview
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 industry’s 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 140 million shares (post-capitalization). Following the incorporation of AVRS, the Company initiated a new business plan and intends to continue 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 prosecution 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 Samoyed’s 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 Samoyed’s 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, 2020 the Company entered into Stock Purchase Agreements for the private sale to four persons or entities of an aggregate of 2,166,667 shares of the common stock for aggregate proceeds of $22,600, full payment of which was received in the period. During the year ended December 31, 2019, the Company entered into Stock Purchase Agreements to six persons for the private sale of an aggregate of 11,200,000 shares of the common stock for aggregate proceeds of $69,002, full payment of which was received in the period.
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, 2020.
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 AVRS’s 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 June 28, 2017 AVRS and the Third Party agreed to terminate the August 20, 2015
Letter Agreement. AVRS did not incur any material early termination penalties in connection of the early termination of the agreement.
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. On June 6, 2017 AVRS and Legal Representation revised the Contingent Fee Agreement as it related to the termination of the August 20, 2015 Letter Agreement which was to provide advisory services, court filing fees, discovery and other litigation costs. The revised Contingent Fee Agreement assumed the responsibility for the costs and expenses in the Terminated August 20, 2015 Letter Agreement and provides for the payment of twenty percent (20%) of all gross Licensing Agreement Proceeds and thirty percent (30%) of all Litigation Proceeds received by AVRS. In addition if the Litigation Proceeds agreed to or received by AVRS at any time are $100,000 or less then Legal Representative shall receive forty percent (40%) of the Litigation Proceeds.
On November 6, 2017 Advanced Voice Recognition Systems, Inc (“AVRS”) received notice that Meyers & Associates, LLC filed Complaint number 2017CV32482 in Arapahoe County District Court on October 30, 2017. The Complaint relates to purported legal fees owed by AVRS. On January 31, 2018 AVRS entered into a Settlement Agreement and Promissory Note with Meyers & Associates, LLC. AVRS promises to pay the principal sum of Fifty-Two Thousand Three Hundred Eighty-Five Dollars and Forty-Six Cents ($52,385.46) as well as accrued interest. AVRS shall pay $1,000 per month on the first day of each month beginning February 1, 2018 and continuing through July 1, 2018 and pay all remaining unpaid principal and accrued interest (12% annual) on August 1, 2018. All payments have been made.
On August 1, 2018 AVRS and Meyers & Associates entered into an Agreement to Amend Promissory Note. AVRS shall pay $6,000 on or before August 1, 2018, shall pay $1,500 on the first day of each month beginning September 1, 2018 and continuing through November 1, 2018 and shall pay all remaining unpaid principal and accrued interest on December 1, 2018. All payments have been made.
On November 21, 2018 AVRS and Meyers & Associates entered into a Second Agreement to Amend Promissory Note. AVRS shall pay $20,000 on or before November 21, 2018, shall pay $1,500 on the first day of each month beginning January 1, 2019 and continuing through June 1, 2019 and shall pay all remaining principle and interest on July 1, 2019. On June 7, 2019 the Company made the final payment of $11,047. The note is paid in full. A $1,500 gain from early extinguishment of Note Payable was reported as income on June 30, 2019.
On June 21, 2018, Advanced Voice Recognition Systems, Inc. (“AVRS”) and Buether Joe & Carpenter, LLC (“BJC) entered into a Letter of Engagement for Legal Services Limited Scope Agreement (“Agreement”) with Schmeiser, Olsen & Watts LLP (“the Firm”) pursuant to which the Firm will serve as local counsel in the United States District Court, District of Arizona. The Firm has been hired to represent AVRS as local counsel in connection with forthcoming litigation in the U.S. District Court, District of Arizona. AVRS may terminate the Agreement at any time.
On September 24, 2018, Advanced Voice Recognition Systems, Inc., a Nevada corporation (“AVRS”, “we” or “us”), entered into Promissory Note with Walter Geldenhuys, who is our President, Chief Executive Officer and Chief Financial Officer, and who serves as a member of our Board of Directors. The Promissory Note is effective as of September 24, 2018 in the principal amount of $9,000 with a maturity date of the Promissory Note September 24, 2019. Interest at 4% per annum was charged and accrued at December 31, 2018. The Company repaid $2500 of the note on December 10, 2018. Interest at 4% per annum was charged and accrued at December 31, 2019. During 2019 the Company repaid $6,500, paying the note in full on December 27, 2019.
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. Liabilities exceed assets and there is a capital deficiency of $262,623 and no significant revenues. 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 Company’s 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 twelve months ended December 31, 2020 the Company received an aggregate of $22,600 from the sale of shares in private offerings of its common stock. During the twelve months ended December 31, 2019 the Company received an aggregate of $69,002 from the sale of shares in private offerings of its common stock.
The Company’s 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. On June 28, 2017 the Company and Dominion agreed to terminate the August 20, 2015 Letter Agreement. The Company did not incur any material early termination penalties. In addition the Company has revised the 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. On June 6, 2017 AVRS and BJC revised the Contingent
Fee Agreement as it related to the termination of the August 20, 2015 Dominion Harbor Letter Agreement. There is no guarantee that AVRS will be able to provide the capital required for the Company to continue as a going concern.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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, 2020 of $348 and $6,241 at December 31, 2019. No amounts resulted from cash equivalents.
Note 3. Intangible 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 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 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 abandoned by the Company. Deferred costs were charged to operations the quarter ended September 30, 2015.
On September 22, 2015, U.S. Patent #9,142,217, 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 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 April 3, 2018, U.S. Patent #9,934,786, 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 April 3, 2018 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 costs were capitalized during the quarter ended June 30, 2018 and the Company began amortization.
Amortization at December 31, 2019 is as follows:
SCHEDULE OF INTANGIBLE ASSETS
Ended December 31, 2019
|
|
|
|
|
|
|
U.S. Patent #
|
|
|
Carrying Value
|
|
Amortization
|
|
Balance
|
7,558,730
|
|
|
58,277
|
|
49,266
|
|
9,011
|
7,949,534
|
|
|
3,365
|
|
2,739
|
|
626
|
8,131,557
|
|
|
5,092
|
|
4,090
|
|
1,002
|
8,498,871
|
|
|
21,114
|
|
16,247
|
|
4,867
|
9,142,217
|
|
|
35,068
|
|
24,278
|
|
10,790
|
9,934,786
|
|
|
4,575
|
|
2,184
|
|
2,391
|
|
|
$
|
127,491
|
$
|
98,804
|
$
|
28,687
|
Amortization at December 31, 2020 is as follows:
Ended December 31, 2020
|
|
|
|
|
|
|
U.S. Patent #
|
|
|
Carrying Value
|
|
Amortization
|
|
Balance
|
7,558,730
|
|
$
|
58,277
|
|
53,958
|
|
4,319
|
7,949,534
|
|
|
3,365
|
|
3,052
|
|
313
|
8,131,557
|
|
|
5,092
|
|
4,612
|
|
480
|
8,498,871
|
|
|
21,114
|
|
18,779
|
|
2,335
|
9,142,217
|
|
|
35,068
|
|
29,674
|
|
5,394
|
9,934,786
|
|
|
4,575
|
|
3,432
|
|
1,143
|
|
|
$
|
127,491
|
$
|
113,507
|
$
|
13,984
|
Amortization expense totaled $14,703 and $14,703 for the years ended December 31, 2020 and 2019. Estimated aggregate amortization expense for each of the next two years is as follows:
SCHEDULE OF FUTURE AMORTIZATION
Year ending December 31,
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|
|
|
|
|
2021
|
|
13,984
|
|
$
|
13,984
|
Note 4. Related Party Transactions
Related Parties Transactions and Indebtedness
During the years from 2000 through 2013, certain officers advanced the Company working capital to maintain the Company’s operations. The Company owed the officers -0- and $6,500 at December 31, 2020 and 2019 respectively. The Company also owed the officers aggregate of $162,382 at December 31, 2020 and December 31, 2019 for accrued payroll. During the period of year ending December 31, 2020, and December 31, 2019 the Company paid gross payroll of $7,839 and $4,916 to the CEO and for payroll expenses. On September 24, 2018, Walter Geldenhuys, who is our President, Chief Executive Officer and Chief Financial Officer, and who serves as a member of our Board of Directors loaned the Company $9,000. This loan was paid in full December 27, 2019. Beginning September 2020 and continuing through December, 31 2020 Diana Jakowchuk, who serves as our Secretary Treasurer, advanced the Company $4,533. During the year ending December 31, 2020, AVRS completed Stock Purchase Agreements totaling 2,166,667 shares of AVRS stock to four shareholders. All shares were paid in the period ending December 31, 2020, for a total amount of $22,600. At period ending December 31, 2020 one shareholder owned 8.83% of the issued and outstanding stock.
Note 5. Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows.
INCOME TAXES
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
U.S. federal statutory graduated rate
|
|
21.00 %
|
|
21.00 %
|
State income tax rate, net of federal benefit
|
|
0.00 %
|
|
0.00 %
|
Contributed services
|
|
00.00 %
|
|
00.00 %
|
Costs capitalized under Section 195
|
|
-21.00 %
|
|
-21.00 %
|
Effective rate
|
|
0.00 %
|
|
0.00 %
|
The Company is considered a start-up company for income tax purposes. As of December 31, 2020, 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, 2020.
Note 6 . Concentration of Risk
Beginning March 31, 2010, through December 31, 2020, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of $250,000, at all FDIC-insured institutions. On December 31, 2020, the Company had cash balances at one FDIC insured financial institution of $348 in non-interest-bearing accounts that were fully insured by the FDIC.
Note 7. Note Payable & Accounts Payable
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 10% was accrued and reported at December 31, 2020.
On November 21, 2018 AVRS and Meyers & Associates entered into a Second Agreement to Amend Promissory Note. AVRS shall pay $20,000 on or before November 21, 2018, shall pay $1,500 on the first day of each month beginning January 1, 2019 and continuing through June 1, 2019 and shall pay all remaining principle and interest on July 1, 2019. On June 7, 2019 the Company made the final payment of $11,047. The note is paid in full. A $1,500 gain from early extinguishment of Note Payable was reported as income on June 30, 2019.
On September 24, 2018, Advanced Voice Recognition Systems, Inc., a Nevada corporation (“AVRS”, “we” or “us”), entered into Promissory Note with Walter Geldenhuys, who is our President, Chief Executive Officer and Chief Financial Officer, and who serves as a member of our Board of Directors. The Promissory Note is effective as of September 24, 2018 in the principal amount of $9,000 with a maturity date of the Promissory Note September 24, 2019. Interest at 4% per annum was charged and accrued at December 31, 2018. The Company repaid $2,500 of the note on December 10, 2018. During 2019 the Company repaid $6,500, paying the note in full on December 27, 2019. Interest at 4% per annum was charged and accrued at December 31, 2019.
Note 8.Stockholder Equity / (Deficit)
The Company has issued shares of its common stock pursuant to certain agreements as described in Note 1.
Note 9. Subsequent Events
Our Secretary / Treasurer, Diana Jakowchuk continues to advance the Company funds. As of March 18, 2021, Ms. Jakowchuk has advanced a total of $6,378.75.
On January 13, 2021, the United States Patent and Trademark Office Patent Trial and Appeal Board (PTAB) issued a Final Written Decision under 35 U.S.C. § 318(a) in Inter Partes Review petitioned by Apple Inc. The decision found that claims 15 and 17 of AVRS’s U.S. Patent No. 7,558,730 B2 were invalid under 35 U.S.C. § 103(a).
On March 17, 2021, AVRS filed an appeal to the United States Court of Appeals for the Federal Circuit Docket Number 2021-1745. AVRS appeals the Patent Trial and Appeal Boards (“PTAB”) Final Written Decision on January 13, 2021 in the Inter Partes Review (IPR 2019-01352) petitioned by Apple, Inc of U. S. Patent No. 7,558,730.