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EX-31.2 - EXHIBIT 31.2 - Advanced Voice Recognition Systems, Incex31x2.htm
EX-31.1 - EXHIBIT 31.1 - Advanced Voice Recognition Systems, Incex31x1.htm
EX-31.1 - EXHIBIT 32.1 - Advanced Voice Recognition Systems, Incex32x2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended      December 31, 2009      
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
 
Commission file number 000-52390
 
ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

NEVADA
98-0511932
State or other jurisdiction of incorporation or
organization
(I.R.S. Employer Identification No.)
   

7659 E. Wood Drive
Scottsdale, Arizona
85260
(Address of principal executive offices)
(Zip Code)
   
 
Registrant's telephone number, including area code is (480) 704-4183
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class: NONE                        Name of each exchange on which registered: NONE
 
Securities registered pursuant to section 12(g) of the Act
 
Common Stock $0.001 Par Value
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: o  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. x  Yes    o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes    o  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one)
       
Large accelerated filer o
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x
       
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o  Yes    x  No

The aggregate market value of the of the outstanding common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $11,078,773 based upon the last reported sales price on the OTCBB for such date. For purposes of this disclosure, shares of Common Stock held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.

The number of shares of the registrant’s common stock, as of February 26, 2010 was 165,400,008.



 

ADVANCED VOICE RECOGNITION SYSTEMS, INC.
 
 
TABLE OF CONTENTS
 
 
PAGE
 
     
PART I
         
     
Item 1.
Business
   
1
 
Item 2.
Property
   
4
 
Item 3.
Legal Proceedings
   
4
 
Item 4.
Submission of Matters to a Vote of Security Holders
   
4
 
     
PART II
         
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   
4
 
Item 6.
Selected Financial Data
   
5
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation
   
5
 
Item 8.
Financial Statements and Supplementary Data
   
7
 
Item 9.
Controls and Procedures
   
22
 
     
PART III
         
     
Item 10.
Directors, Executive Officers and Corporate Governance
   
23
 
Item 11.
Executive Compensation
   
24
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   
26
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
   
27
 
Item 14.
Principal Accounting Fees and Services
   
27
 
     
PART IV
         
     
Item 15
Exhibits, Financial Statement Schedules
   
28
 
     
     
     



ii


 
 
Cautionary Statement Regarding Forward Looking Statements
 
The statements contained in this prospectus that are not historical are “forward-looking statements”, which can be identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently.
 
The forward-looking statements contained in this Annual Report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Annual Report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to various factors listed in this Annual Report. All forward-looking statements speak only as of the date of this Annual Report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
 
 

PART I
 
Item 1. Business.

General Overview.

Advanced Voice Recognition Systems, Inc. (the “Company”, “we” or “us”), was incorporated in the State of Nevada on August 31, 2005 as Samoyed Energy Corp., an oil and gas company. In May 2008, we consummated a stock exchange with the shareholders of Advanced Voice Recognition Systems, Inc., a Colorado corporation (“AVRS”), and consequently, AVRS became our wholly-owned subsidiary. In May 2008, we also transferred our oil and gas assets to Stone Canyon Resources, Inc. In June 2008, AVRS merged with and into us and we changed our name to “Advanced Voice Recognition Systems, Inc.” As a result of the stock exchange and the transfer of our oil and gas assets, our current operations are those of AVRS, and our fiscal year became that of AVRS and now ends on December 31st.

Our common stock has been quoted on the Over-the-Counter Bulletin Board, also referred to as the OTCBB, since April 2007. Prior to June 19, 2008, our ticker symbol was “SMYD”, and on June 19, 2008, following our name change, our ticker symbol changed to “AVOI”. Our website is located at www.avrsys.com.

AVRS was incorporated on July 7, 2005. In May 2000, WG Investments, LLC, a Colorado limited liability company formed that same year, acquired all of the assets of NCC, Inc., an Ohio corporation, and all rights, title and interests in and to U.S. Patent #5,960,447. Promptly following the acquisition, the members of WG Investments, LLC voted to change its name to NCC, LLC. In 2005, the members of NCC, LLC exchanged their membership interests in NCC, LLC for shares of common stock of AVRS.

On March 25, 2009, we entered into an Agreement and Plan of Merger (“Agreement and Plan of Merger”) with our wholly-owned subsidiary, NCC, LLC, a Colorado limited liability company, whereby NCC, LLC merged with and into us 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) our member 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 us without reversion or impairment; and (iv) all liabilities of any kind of NCC, LLC became vested in us. As a result, we own U.S. Patent #5,960,447.   Additionally, we own U.S. Patent #7,558,730.

We are a software development company headquartered in Scottsdale, Arizona, with an office in Mitchell, South Dakota. We specialize in creating interface and application solutions for speech recognition technologies. Our speech recognition software and related firmware was first introduced in 1994 at an industry trade show.  We currently have limited capital resources.  We are not currently engaged in marketing any products.  Our principal assets are our patents.  Our business strategy will be to attempt to interest other companies in entering into license agreements or other strategic relationships and to support and defend our patents through infringement and interference proceedings, as appropriate.
 
 
1
 

Industry Overview

We believe that speech recognition technology has a multitude of potential applications, and that automatic speech recognition (ASR) products have not provided an effective solution.

Speech recognition technology, which provides for the conversion of speech into written text, is the threshold feature of our solutions. Our technology focuses on improving speech recognition technology by increasing speech conversion precision, with the goal of achieving near 100% accuracy and allowing the user to speak naturally. We also focus on improving user productivity and profitability by enabling the user to effectively utilize the written text produced by speech recognition technology (the End-Text) in multiple applications specific to the user’s business purposes and goals.

We believe our main competitors are Microsoft, Nuance, IBM, and Google Voice. We also will compete with several smaller niche suppliers. We intend to differentiate our solutions from those of our competitors by focusing on efficient correction using traditional methods that will minimize the burden on the user.

Principal Proposed Products or Services

We are in the development stage and have not achieved any revenues from product sales. In addition, we will need substantial additional capital to achieve our marketing objectives as described below.

Speech Recognition Software and Related Firmware

Our principal proposed product is speech recognition software and related firmware which allows for dictation into a broad range of applications, including DOS applications running in Windows, UNIX and mainframe applications accessed through terminal emulation programs, various custom applications , and all Windows 3.x, 95, 98, 2000, XP and Vista programs. Through this product, we seek to provide full functionality including audio proofreading, deferred and delegated correction and additional capabilities that we believe are not available with other products. This product allows for deferred dictation, where the text is saved with the associated audio, and the users can resume when stopped and can play back dictated content. Similarly, the recognized text and associated audio can be saved to be used when text is corrected.

AVRS Enterprise Solutions

Through our AVRS Enterprise™ solutions utilizing the speech recognition software and related firmware, we hope to provide exceptional ease of use, security, scalability, centralized system administration, and flexible and efficient communications. We believe that the primary benefit that our AVRS Enterprise™ solutions will offer is the elimination of typing and the efficient use of personnel for correction and proofreading. We believe that dictation rates of over 300 words per minute are attainable through the three components of our speech recognition software and related firmware: Transaction Manager, Transcription Server, and the Dictation/Correction Assistant Clients.  Additionally, AVRS Enterprise™ Solutions may provide useful in mobile search and voicemail to text.

Market

We intend to target vertical markets that require individuals and organizations to create reports, letters, e-mail, data entry, manuals, books, and virtually any other document or end product involving written data. These organizations include corporations, hospitals, medical product and service providers, governmental entities, legal professionals, sales and service organizations law enforcement agencies and mobile search and voicemail to text.

Medical Market

We principally intend to target the medical industry, which we believe presently has the highest level of individuals utilizing dictation methods to assist in satisfying reporting requirements and documentation needs. We intend to focus sales and marketing efforts on existing local and regional medical transcription, medical billing and equipment companies.

Legal, Law Enforcement, Insurance and Sales Markets

In addition to the medical field, we plan to concurrently target the legal profession, law enforcement, insurance and sales automation markets, which we believe have automatic dictation needs similar to those in the medical industry.

Original Equipment Manufacturer (OEM)

We anticipate that we will work with the OEM markets, targeting both software developers and hardware manufacturers. We may approach the larger OEM companies with a joint marketing approach strategy while using a direct sale basis to approach small and medium-sized OEMs.
 
 

 2

Hardware Manufacturers

We also anticipate targeting hardware manufacturers, both on a direct basis and through joint sales and marketing programs. We intend to offer technology and patent licenses to manufacturers of medical devices, digital dictation systems, recorders, workstation PCs, mobile phones, PDAs, WAPs, and intelligent electronics. Alternatively, we may offer these manufacturers limited versions of our speech recognition software and related firmware product line for embedding into hardware. We expect to develop joint sales and marketing programs for mainframe, thin-client, telephony and other large hardware processing systems.

Distribution

Product development of the speech recognition software and related firmware was the primary focus for the first six years following its introduction into the software market. Early forms of the speech recognition software and related firmware were marketed through a network of approximately 200 small dealers specializing in speech recognition technology.
 
Our business model has been revised and we plan to collect royalty payments based on actual usage of the speech recognition software and related firmware in various applications, and to implement our marketing strategy using the following marketing vehicles:
 
 
Internet
 
Trade shows
 
Industry trade journal advertising
 
Industry trade journal product reviews, reports, and papers
 
Target market trade and professional journals
 
Media interviews (TV, radio, newspapers)
 
Editorial visitations
 
Press releases
 
Direct mail
 
Brochures, sales literature
 
Seminars

Intellectual Property

Our primary assets are United States Patent # 5,960,447 and United States Patent #7,558,730.  U.S. Patent #5,960,447 is for a word tagging and editing system for speech recognition filed on November 13, 1995 and issued on September 28, 1999. In accordance with 35 USC 154, the term for the above-referenced patent began on September 28, 1999 and ends 20 years from the date on which the application for the patent was filed in the United States. Therefore, the patent will expire on November 13, 2015.

A word tagging and editing system for speech recognition receives recognized speech text from a speech recognition engine, and creates tagging information that follows the speech text as it is received by a word processing program or other program. The body of text to be edited in connection with the word processing program may be selected and cut and pasted and otherwise manipulated, and the tags follow within the audio data file created initially by the speech recognition engine. The sound bite may be replayed to the user through a speaker. The practical results include that the user may confirm the correctness of a particular recognized word, in real time whilst editing text in the word processor. If the recognition is manually corrected, the correction information may be supplied to the engine for use in updating a user profile for the user who dictated the audio that was recognized. Particular tagging approaches are employed depending on the particular word processor being used.

U.S. Patent #5,960,447 includes 42 claims covering an extremely broad base of features applicable to existing ASR products and markets. We intend to take full advantage of our patent protection by licensing or otherwise.

 The U.S. Patent Office issued U.S. Patent # 7,558,730 titled, “Speech Recognition and Transcription Among Users Having Heterogeneous Protocols”, filed on November 27, 2001 and issued on July 7, 2009.  In accordance with 35 USC 154, the term for the above referenced patent began on July 7, 2009 and ends 20 years from the date on which the application for the patent was filed in the United States.  Therefore, the patent will expire on November 27, 2021.   The invention discloses a system for facilitating speech recognition and transcription among users employing incompatible protocols for generating, transcribing, and exchanging speech. The patent is expected to strengthen our position in voice recognition.
We are involved in a patent interference, in the U.S. Patent and Trademark Office, claiming our ownership of the subject matter of a third party’s patent.

Research and Development

During fiscal years 2009 and 2008, we did not incur any expense for research and development activities.
 
 
3
 

Employees

We currently do not have any employees. Walter Geldenhuys, our President, Chief Executive Officer and Chief Financial Officer, and Diana Jakowchuk, our Secretary, Treasurer and Principal Accounting Officer, have contributed services to us free of charge. We may engage consultants and other service providers in the future to help us carry out our business plan.

Available Information
 
We file the following reports with the SEC under Section 13(a) of the Securities Exchange Act of 1934 as a smaller reporting company: Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; and any amendments to these reports. You may request a copy of these filings at no cost. Please direct your requests to:

Diane Jakowchuk
Secretary, Treasurer, Principal Accounting Officer
AVRS, Inc.
7659 E. Wood Drive
Scottsdale, AZ 85260

Our website is located at www.avrsys.com. The Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and all amendments to these reports and other information that we file with or furnish to the Securities and Exchange Commission, or the SEC, are accessible free of charge on our website.  We make these documents available as soon as reasonably practicable after we file them with or furnish them to the SEC.  You can also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains our reports, proxy and information statements and other information that we file electronically with the SEC.

Item 2. Properties.

Our principal executive offices are located at 7659 E. Wood Drive, Scottsdale, Arizona and are provided to us free of charge by Diana Jakowchuk, our Secretary, Treasurer and Principal Accounting Officer.

Item 3. Legal Proceedings.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None
 
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Between April 16, 2007 and June 18, 2008, our common stock was quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “SMYD”. Commencing on June 19, 2008, our common stock has been quoted on the OTCBB under the symbol “AVOI”. The following table sets forth the high and low bid prices per share of our common stock for each full quarterly period in 2009 and 2008. These prices represent inter-dealer quotations without retail markup, markdown or commission and may not necessarily represent actual transactions.

 
High
 
Low
     
Three Months Ended December 31, 2009
 
0.19
 
0.13
Three Months Ended September 30, 2009
 
0.18
 
0.110
Three Months Ended June 30, 2009
 
0.29
 
0.15
Three Months Ended March 31, 2009
 
0.27
 
0.14
Three Months Ended December 31, 2008
 
0.35
 
0.15
Three Months Ended September 30, 2008
 
0.53
 
0.30
Three Months Ended June 30, 2008
 
0.71
 
0.17
Three Months Ended March 31, 2008
 
0.85
 
030
 
 
4
 

Holders

As of February 25, 2010, we have approximately 33 holders of record of our common stock and 165,400,008 shares issued and outstanding. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The transfer agent of our common stock is Holladay Stock Transfer, 2939 N. 67th Place, Scottsdale, AZ 85251.

Dividends

We have not declared any cash dividends, nor do we intend to do so. We are not subject to any legal restrictions respecting the payment of dividends, except that they may not be paid to render us insolvent. It is anticipated that all available cash will be needed for our operations in the foreseeable future. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future.

Unregistered Sales of Equity Securities

We have not sold any equity securities during the period covered by this Annual Report on Form 10-K that were not previously disclosed by us in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This document contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. When used in this document, the words “expects”, “anticipates”, “intends” and “plans” and similar expressions are intended to identify certain of these forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed in this document.

Results of Operation

We completed a stock exchange on May 19, 2008 and changed our business model. We have not generated any revenue since inception and do not have any cash generating product or licensing sales. We are a development stage enterprise that has incurred losses since inception.

At December 31, 2009, we had current assets of $20,961, and current liabilities of $394,090, as compared to $22,627 current assets and $297,559 in current liabilities at December 31, 2008. Our decrease in current assets is attributable to operating expenses. Our increase in current liabilities primarily is due to a promissory note to a related party and an increase in Accounts Payable.

We had a net loss of $456,568 for the year ended December 31, 2009, as compared to a net loss of $431,022 for the year ended December 31, 2008. The increase in net loss is attributable to increased contributed services and professional fees incurred in conjunction with the issuance of the second patent and our efforts to implement our business plan.

Liquidity and Capital Resources

During the year ended December 31, 2009, we used $123,461 of cash in operating activities and $4,635 of cash in investing activities, and received $128,430 of cash provided by financing activities. As a result, for the year ended December 31, 2009, we recognized a $334 net increase in cash on hand. For the year ended December 31, 2008, we used $278,692 of cash in operating activities and $10,634 cash in investing activities, and received $291,953 of cash provided by financing activities, resulting in a $2,627 increase in cash on hand for the year.

During the years ended December 31, 2009 and 2008, our president has loaned or advanced to us funds for working capital on an “as needed” basis. There is no assurance that these loans or advances will continue in the future. Because of our history of losses, net capital deficit and lack of assurance of additional financing, the audit report on our financial statements contains a “going concern” opinion regarding doubt about our ability to continue as a going concern.

In an attempt to address our financing needs, on September 24, 2008, we entered into a purchase agreement (the “Purchase Agreement”) with Lion Share Capital, LLC (“Lion Share”) for the sale to Lion Share of 16,000,000 shares of our common stock, and we received a $5,000,000 note (the “Note”) from Lion Share. If we receive payments on the Note, our liquidity may increase. However, there is no assurance that we will be successful in obtaining payments on the note from Lion Share.   Subsequently, on January 11, 2010, the Company terminated the Purchase Agreement and no payments were made by Lion Share on the Note.  The Company has foreclosed on the collateral and cancelled the Note.
 
 
5
 

U.S. Patent #5,960,447 includes 42 claims that we believe cover an extremely broad base of features applicable to existing ASR products and markets. We intend to use our patent protection to our advantage by licensing or otherwise. If our licensing and other efforts prove successful, our liquidity may increase.

U.S. Patent #7,558,730 expands an extremely broad base of features in speech recognition and transcription across heterogeneous protocols.  The deferred costs totaling $58,277 have been capitalized and amortized began in the third quarter 2009

We anticipate that our president will be responsible for our near-term working capital requirements. In addition, we anticipate conducting one or more financings to raise working capital, which may or may not be successful.

If we continue to pursue interference proceedings, or initiate or defend infringement actions, we would expect to incur substantial costs and legal fees that ultimately may not be recoverable.

We will require additional debt or equity financing or a combination of both in order to carry out our business plan. We plan to raise additional funds through future sales of our securities, until such time as our revenues are sufficient to meet our cost structure, and ultimately achieve profitable operations. There is no assurance we will be successful in raising additional capital or achieving profitable operations. Our board of directors may attempt to use non-cash consideration to satisfy obligations that may consist of restricted shares of our common stock. These actions would result in dilution of the ownership interests of existing shareholders and may further dilute our common stock book value.

To obtain sufficient funds to meet our future needs for capital, we will from time to time, evaluate opportunities to raise financing through some combination of the private sale of equity, or issuance of convertible debt securities. However, future equity or debt financing may not be available to us at all, or if available, may not be on terms acceptable to us. We do not intend to pay dividends to shareholders in the foreseeable future.

In order for our operations to continue, we will need to generate revenues from our intended operations sufficient to meet our anticipated cost structure. We may encounter difficulties in establishing these operations due to our inability to successfully prosecute any patent enforcement actions or our inability to effectively execute our business plan.

If we do not raise additional capital, or we are unable to obtain additional financing, or begin to generate revenues from our intended operations, we may have to scale back or postpone the development and marketing of our products or the enforcement of our patent rights until such financing is available.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable


6


Item 8. Financial Statements and Supplementary Data.
 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Advanced Voice Recognition Systems, Inc.

We have audited the accompanying consolidated balance sheets of Advanced Voice Recognition Systems, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years ended December 31, 2009 and 2008, and the period from March 15, 1994 (inception) through December 31, 2009.   These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Voice Recognition Systems, Inc. as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008, and the period from March 15, 1994 (inception) through December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company is a development stage enterprise that has incurred losses since inception and, at December 31, 2009, has a net capital deficit.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Further information and management’s plans in regard to this uncertainty are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Cordovano and Honeck LLP
Cordovano and Honeck LLP
Englewood, Colorado
February 17, 2010
 
 
7
 

ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(A Development Stage Company)
Consolidated Balance Sheets

 
DECEMBER 31,
 
DECEMBER 31,
 
 
2009
 
2008
 
ASSETS
           
Current Assets
           
  Cash
  $ 2,961     $ 2,627  
  Prepaid Expenses (Note 7)
    18,000       20,000  
                 
Total Current Assets
               
      20,961       22,627  
                 
Fixed Assets (Note 3)
               
  Computer Software and Equipment, net
    3,164       3,762  
                 
Intangible Assets (Note 3)
               
  Patent, net
    75,960       24,245  
  Deferred costs
          54,542  
                 
Total Assets
  $ 100,085     $ 105,176  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current Liabilities
               
  Accounts payable
  $ 84,509     $ 68,981  
  Accrued interest to related party (Note 4)
    7,238       2,234  
  Indebtedness to related parties (Note 4)
    302,344       226,344  
                 
Total Current Liabilities
    394,091       297,559  
                 
Stockholders' Deficit (Note 1)
               
  Common stock, $.001 par value;
               
     547,500,000 shares authorized, 181,400,008 and
               
     180,700,008 shares issued, respectively; 165,400,008
               
     and 164,700,008 shares outstanding, respectively
    165,400       164,700  
  Additional paid-in capital
    4,612,851       4,171,784  
  Deficit accumulated during development stage
    (5,009,257 )     (4,528,867 )
                 
Total Stockholders' Deficit
               
      (294,006 )     (192,383 )
                 
Total Liabilities and Stockholders' Deficit
  $ 100,085     $ 105,176  
                 


The accompanying notes are an integral part of these financial statements.

8

ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statements of Operations

 
FOR THE YEARS ENDED
DECEMBER 31,
 
MARCH 15, 1994
(INCEPTION)
THROUGH
DECEMBER 31,
 
 
2009
 
2008
 
2009
 
Sales
  $     $     $ 1,241,924  
Cost of goods sold
                379,378  
                         
Gross profit
                862,546  
Operating expenses:
                       
   Research and development
                1,189,531  
   Contributed services (Note 4)
    238,837       121,077       2,041,070  
   General and administrative:
                       
         Compensation
                570,000  
         Stock-based compensation expense
    87,500             87,500  
         Professional fees
    123,175       281,973       840,005  
         Office
    8,239       6,533       253,183  
         Rent
                157,356  
         Travel
    4,025       7,382       133,534  
         Advertising
                81,090  
         Bad debt expense
                67,217  
         Other
    8,747       8,364       385,946  
                         
Total operating expenses
    470,523       425,329       5,806,432  
             
Loss from operations
    (470,523 )     (425,329 )     (4,943,886 )
             
Other income and (expense):
                       
   Investment Income
                5,062  
   Interest expense
    (9,867 )     (5,693 )     (56,930 )
   Loss on sale of assets
                (13,503 )
                         
Net other expense
                       
      (9,867 )     (5,693 )     (65,371 )
             
Loss before income taxes
    (480,390 )     (431,022 )     (5,009,257 )
             
Provision for income taxes (Note 5)
                 
                         
Net Loss
  $ (480,390 )   $ (431,022 )   $ (5,009,257 )
                         
Basic and diluted loss per common share
  $ (0.00 )   $ (0.00 )        
                         
Weighted average number of common
                       
   shares outstanding
    164,999,186       161,054,526          
                         


The accompanying notes are an integral part of these financial statements.

9



ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit

                                           
     NCC, LLC Membership      Common Stock     Additional Paid-in     Deficit Accumulated During Development       Deferred        
     Interests     Shares      Amount      Capital      Stage      Compensation     Total  
Balance at March 15, 1994 (inception)
  $ -       750     $ 1,000     $ -     $ -     $ -     $ 1,000  
                                                         
Net Loss
    -       -       -       -       (3,976 )     -       (3,976 )
Balance at December 31, 1994
    -       750       1,000       -       (3,976 )             (2,976 )
                                                         
Net Loss
    -       -       -       -       (38,516 )     -       (38,516 )
Balance at December 31, 1995
    -       750       1,000       -       (42,492 )             (41,492 )
                                                         
Net Loss
    -       -       -       -       (144,843 )     -       (144,843 )
Balance at December 31, 1996
    -       750       1,000       -       (187,335 )             (186,335 )
                                                         
Net Loss
    -       -       -       -       (3,291 )     -       (3,291 )
Balance at December 31, 1997
    -       750       1,000       -       (190,626 )             (189,626 )
                                                         
Net Loss
    -       -       -       -       (537,561 )     -       (537,561 )
Balance at December 31, 1998
    -       750       1,000       -       (728,187 )             (727,187 )
                                                         
Net Loss
    -       -       -       -       (512,491 )     -       (512,491 )
Balance at December 31, 1999
    -       750       1,000       -       (1,240,678 )             (1,239,678 )
                                                         
May 19, 2000, obligations contributed to capital
    -       -       -       1,335,432       -       -       1,335,432  
May 19, 2000, paid-in capital of NCC, Inc. transferred to NCC, LLC membership interests.
    1,336,432       (750 )     (1,000 )     (1,335,432 )                        
                                                         
 
 
10
 
 

 
 
 
     
NCC, LLC
Membership 
      Common Stock        Additional Paid-in        Deficit Accumulated During Development      Deferred          
      Interests       Shares        Amount        Capital        Stage       Compensation        Total  
May 19, 2000, acquisition of NCC, Inc. by  NCC, LLC
    487,500       -       -       -       -       -       487,500  
Contributed services (Note 4)
    520,000       -       -       -       -       -       520,000  
Net Loss
    -       -       -       -       (1,125,348 )     -       (1,125,348 )
Balance at December 31, 2000
    2,343,932       -       -       -       (2,366,026 )     -       (22,094 )
                                                         
Contributed services (Note 4)
    720,500       -       -       -       -       -       720,500  
Net Loss
    -       -       -       -       (990,765 )     -       (990,765 )
Balance at December 31, 2001
    3,064,432       -       -       -       (3,356,791 )             (292,359 )
                                                         
Various dates, payment of expenses by member
    257       -       -       -       -       -       257  
Contributed services (Note 4)
    50,767       -       -       -       -       -       50,767  
Net Loss
    -       -       -       -       (191,542 )     -       (191,542 )
Balance at December 31, 2002
    3,115,456       -       -       -       (3,548,333 )             (432,877 )
                                                         
Various dates, payment of expenses by member
    600       -       -       -       -       -       600  
Contributed services (Note 4)
    18,749       -       -       -       -       -       18,749  
Net Loss
    -       -       -       -       (19,349 )     -       (19,349 )
Balance at December 31, 2003
    3,134,805       -       -       -       (3,567,682 )             (432,877 )
                                                         
December 31, 2004, obligation to member contributed to capital
    378,462       -       -       -       -       -       378,462  
Contributed services (Note 4)
    58,651       -       -       -       -       -       58,651  
Net Loss
    -       -       -       -       (58,651 )     -       (58,651 )
Balance at December 31, 2004
    3,571,918       -       -       -       (3,626,333 )     -       (54,415 )
 
 
11
 

 
 
                                                         
     
NCC, LLC 
Membership
      Common Stock       Additional Paid-in       Deficit Accumulated During Develoment       Deferred          
      Interests       Shares       Amount       Capital       Stage       Compensation       Total  
July 7, 2005,  Incorporation of AVRS from NCC LLC membership interests and subsequent merger with Samoyed Energy Corp (Note 1)
    (3,571,918 )     93,333,333       93,333       3,478,585       -       -       -  
                                                         
December 20, 2005 1.5 to 1 stock split
            46,666,667       46,667       (46,667 )             -          
Contributed services (Note 4)
    -       -       -       158,648       -       -       158,648  
Net Loss
    -       -       -       -       (241,957 )     -       (241,957 )
Balance at December 31, 2005
    -       140,000,000       140,000       3,590,566       (3,868,290 )             (137,724 )
                                                         
Contributed services (Note 4)
    -       -       -       70,189       -       -       70,189  
Net Loss
    -       -       -       -       (106,867 )     -       (106,867 )
Balance at December 31, 2006
    -       140,000,000       140,000       3,660,755       (3,975,157 )             (174,402 )
                                                         
Contributed services (Note 4)
    -       -       -       83,652       -       -       83,652  
Net Loss
    -       -       -       -       (122,688 )     -       (122,688 )
Balance at December 31, 2007
    -       140,000,000       140,000       3,744,407       (4,097,845 )             (213,438 )
                                                         
April 28, 2008, Stock issued in recapitalization with Samoyed (Note 1)
    -       24,700,008       24,700       (24,700 )     -       -       -  
May 27, 2008, Contributed cash (Note 1)
    -       -       -       250,000       -       -       250,000  
July 21, 2008, Contributed cash (Note 1)
    -       -       -       81,000       -       -       81,000  
Contributed services (Note 4)
    -       -       -       121,077       -       -       121,077  
Net Loss
    -       -       -       -       (431,022 )     -       (431,022 )
Balance at December 31, 2008
    -       164,700,008       164,700       4,171,784       (4,528,867 )     -       (192,383 )
 
 
12
 

 
                                                         
      NCC, LLC Membership       Common Stock       Additional Paid-in       Deficit Accumulated During Development       Deferred          
      Interests       Shares       Amount       Capital        Stage        Compensation       Total  
Contributed cash for 60,840 shares of common stock (Note 1)
    -       -       -       15,210       -       -       15,210  
March 18, 2009, 350,000 shares of common stock issued for future services and deferred compensation (Note 1)
            350,000       350       87,150       -       (81,181 )     6,319  
Contributed services (Note 4)
    -       -       -       238,837       -       -       238,837  
Contributed cash for 72,880 shares of common stock (Note 1)
    -       -       -       18,220       -       -       18,220  
Contributed cash for 76,000 shares of common stock (Note 1)
    -       -       -       19,000       -       -       19,000  
Deferred Compensation (Note 1)
    -       -       -       -       -       81,181       81,181  
December 8, 2009, 350,000 shares of common stock issued for future services and deferred compensation (Note 1)
            350,000       350       62,650               (63,000 )     -  
                                                         
Net Loss
    -       -       -       -       (480,390 )     -       (480,390 )
Balance at December 31, 2009
  $ -       165,400,008     $ 165,400     $ 4,612,851     $ (5,009,257 )   $ (63,000 )   $ (294,006 )
                                                         

The accompanying notes are an integral part of these financial statements.
 
13



ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows

 
FOR THE YEARS ENDED
DECEMBER 31,
 
MARCH 15, 1994
(INCEPTION)
THROUGH
DECEMBER 31,
 
 
2009
 
2008
 
2009
 
Cash Flows from Operating Activities:
                 
  Net loss
  $ (480,390 )   $ (431,022 )   $ (5,009,257 )
  Adjustments to reconcile net loss to net
                       
       cash (used in) operating activities:
                       
         Amortization
    8,060       4,844       47,690  
         Contributed services
    238,837       121,077       2,041,070  
         Expenses paid in exchange for shareholder debt
          34,047       34,047  
         Stock-based compensation expense
    87,500             87,500  
     Changes in operating assets:
                       
         Prepaid Expenses
    2,000       (20,000 )     (18,000 )
     Changes in operating liabilities:
                       
         Accounts payable
    15,528       10,128       84,509  
         Accrued interest related party
    5,004       2,234       7,238  
                         
Net cash used in operating activities
    (123,461 )     (278,692 )     (2,725,203 )
                         
Cash Flows from Investing Activities:
                       
   Purchases of computer equipment and software
    (900 )     (4,390 )     (5,290 )
   Payments for patents
                (63,247 )
   Payments for deferred costs
    (3,735 )     (6,244 )     (58,277 )
                         
Net cash used in investing activities
    (4,635 )     (10,634 )     (126,814 )
                         
Cash Flows from Financing Activities:
                       
   Proceeds from sale of common stock
    52,430       331,000       2,586,681  
   Payments on advances from shareholder
          (34,047 )     (34,047 )
   Payments on promissory note from shareholder
    (4,000 )     (5,000 )     (9,000 )
   Proceeds from promissory notes and advances
                 
      from shareholder
    80,000             311,344  
                         
Net cash provided by financing activities
    128,430       291,953       2,854,978  
                         
Net change in cash
    334       2,627       2,961  
                         
Cash at beginning of period
    2,627              
                         
CASH AT END OF PERIOD
  $ 2,961     $ 2,627     $ 2,961  
                         
Supplemental Disclosure of Cash Flow Information:
                       
   Cash paid during the period for:
                       
        Interest
  $ 4,409     $ 3,459     $ 7,868  
                         
        Income taxes
  $     $     $  
                         

The accompanying notes are an integral part of these financial statements.
 
14


ADVANCED VOICE RECOGNITION SYSTEMS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.     Nature of Operations
 
The operations of Advanced Voice Recognition Systems, Inc. (“AVRS” or the “Company”) 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 140,000,000 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 specializes in creating interface and application solutions for speech recognition technologies. AVRS has successfully obtained patent protection of its proprietary technology (refer to Note 3, Intangible Assets). The Company is focusing its technologies for the medical profession because of the profession’s present extensive use of dictation and its need for multiple applications of speech recognition technology in the generation of reports, documents and medical bills. Additionally the Company will focus the mobile search and voicemail to text market.

The Company is a development stage enterprise in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises” now referred to as ACS 915 “Development Stage Entities”. The Company has been in the development stage since inception.

Stock Exchange Agreement
 
On April 28, 2008, the Company entered into a Stock Exchange 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 140,000,000 shares of Samoyed’s common stock. 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.
 
On May 19, 2008, pursuant to the Stock Exchange Agreement, the Company’s shareholders exchanged with, and transferred to Samoyed, all of the issued and outstanding shares of their capital stock. In exchange, Samoyed exchanged with, and issued to, the Company’s shareholders 85% (140,000,000 shares) of Samoyed’s common stock. In connection with the closing of the Stock Exchange Agreement:
 
 
Samoyed delivered to AVRS fully executed documents sufficient to evidence the transfer to Stone Canyon Resources, Inc. (“Stone Canyon”) of all of Samoyed’s oil and gas assets, as well as all of the liabilities related to those oil and gas assets, in exchange for the 22,749,998 shares of Samoyed’s common stock then owned by Stone Canyon, which transfer was completed immediately following the closing of the Stock Exchange Agreement. This transfer resulted in the Samoyed shareholders owning 24,700,008 shares of AVRS common stock.

 
Certain shareholders of Samoyed holding an aggregate of 500,000 shares of Samoyed's common stock paid to Samoyed $250,000;
 
 
15
 

 
A shareholder of Samoyed holding an aggregate of 3,500,000 shares of Samoyed’s common stock agreed to pay to Samoyed an amount equal to $1,750,000 within 90 days of the closing of the Stock Exchange Agreement, or in the alternative, tender to Samoyed for cancellation two shares of Samoyed’s common stock for every $1 not paid. On September 29, 2008, the Company and the shareholder agreed to modify this arrangement to provide that the shareholder would deliver to the Company an aggregate of $1,400,000 on or before November 15, 2008, or in the alternative, tender to the Company for cancellation two and one-half shares (2 ½) of the Company’s common stock for every $1 not paid.  On January 13, 2009, the Company and the shareholder agreed to further modify this arrangement such that the shareholder is required to deliver to the Company an aggregate of $875,000 on or before March 31, 2009 or in the alternative tender to the Company for cancellation four shares of the Company’s stock for every $1 not paid. On May 26, 2009 the Company and the shareholder agreed to modify the agreement such that the shareholder is required to deliver to the Company an aggregate of $790,945 on or before August 31, 2009, or in the alternative tender to the Company for cancellation four (4) shares of Company’s common stock for every $1 not paid.  On November 18, 2009 the Company and the shareholder agreed to modify the agreement such that the shareholder is required to deliver to the Company an aggregate of $478,606 on or before April 30, 2010, or in the alternative, tender to Company for cancellation 6.45 shares of Company’s common stock for every $1 not paid.  In 2009 the shareholder made three payments which totaled $52,430 as of December 31, 2009.  The shareholder has not tendered any of the shares of the Company’s common stock held by him for cancellation.

 
Certain shareholders of Samoyed holding shares of Samoyed’s common stock agreed that, commencing on the date the Stock Exchange Agreement closed, and ending on a date one year later, the shareholders will not, without the written consent of Samoyed, (i) sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge, grant any option to purchase, make any short sale or otherwise dispose of or agree to dispose of, directly or indirectly, certain of their shares of Samoyed’s common stock owned directly by them, or with respect to which they have beneficial ownership within the rules and regulations of the U.S. Securities and Exchange Commission, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of  those shares of Samoyed’s common stock owned directly by them, or with respect to which they have beneficial ownership within the rules and regulations of the U.S. Securities and Exchange Commission.  On May 19, 2009, one year from the closing date of the Stock Exchange Agreement, the Company released the shares of those certain stock holders.

Stock Purchase Agreement

The Company entered into a Purchase Agreement dated September 24, 2008 with Lion Share Capital, LLC, a Kansas limited liability company, pursuant to which Lion Share issued to the Company a promissory note in the amount of $5,000,000 in exchange for 16,000,000 shares of the Company’s common stock. Pursuant to the Purchase Agreement, Lion Share is required to pay the principal amount of the promissory note, together with all interest thereon in three installments. Lion Share pledged the shares of common stock issued to it pursuant to the Purchase Agreement as collateral to secure Lion Share’s satisfaction of its obligations under the promissory note, and as such, we are holding the 16,000,000 shares in escrow in accordance with the Purchase Agreement. Portions of the shares of common stock pledged as collateral will be released to Lion Share Capital upon the Company’s receipt of the periodic principal and interest payments. As of December 31, 2009 no funds have been received from Lion Share, and the 16,000,000 shares remain held in escrow. The 16,000,000 shares are not considered outstanding at December 31, 2009.

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 Company’s 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.

Stock Based Compensation

On March 18, 2009, the Company issued 350,000 restricted shares of the Company’s common stock, par value $.001 per share to Equiti-Trend Advisors LLC as deferred compensation in exchange for public relations services for a period of six months.  Shares were valued at $.25 per share on the date as of March 18, 2009 for a total stock compensation of $87,500.  On December 8, 2009, the Company issued 350,000 restricted shares of the Company’s common stock, par value $.001 per share to OTC Navigation as deferred compensation in exchange for public relations services for a period of three months.  Shares were valued at $.18 per share on the date of issue, December 8, 2009.  Deferred compensation of $63,000 has been recorded.  Services are to begin January 6, 2010.
 
 
16
 

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. As shown in the accompanying financial statements, the Company is a development stage enterprise with losses since inception and a net capital deficit. These factors, among others, may indicate that the Company will be unable to continue as a going concern for 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 years ended December 31, 2009 and 2008, the Company’s president has 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.  As a condition to closing the Stock Exchange Agreement with Samoyed on May 19, 2008, the Company and one of its shareholders agreed that the shareholder would provide funds to the Company, or in the alternative tender certain of his shares of the Company’s common stock for cancellation.

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.

Basis of Consolidation
 
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, NCC, LLC. 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 and cash equivalents at December 31, 2009 of $2,961, and $2,627 cash or cash equivalents at December 31, 2008.

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.

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 adverst effect on the Company’s 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.


 17


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 an estimated useful life of twenty years. The carrying value of the first patent is $63,247 with $43,218 amortized and a balance at December 31, 2009 of $20,029. The carrying balance of the second patent is $58,277 with $2,346 amortized and a balance at December 31, 2009 of $ $55,931.  The weighted average arrives at a period of 13.75 years based on a period of 16.1 years for patent #1 and 12.4 years for patent #2, weighted for the total amount capitalized on each patent.  Amortization expense totaled $6,562 and $4,216 for years ended, December 31, 2009 and 2008, respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

Year ending December 31,
 
   
                2010
 
$
8,908
 
                2011
   
8,908
 
                2012
   
8,908
 
                2013
   
8,908
 
                2014
   
7,857
 
Thereafter
   
32,471
 
     
   
$
75,960
 
     

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.  During the years ended December 31, 2009 and 2008 and from March 15, 1994 (inception) through December 31, 2009, no impairment charges were recognized based on a review of the carrying amount of each asset to the future undiscounted cash flows.

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, 2009 and 2008, 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
Unless otherwise specified, the Company believes the carrying value of financial instruments approximates their fair value.


Subsequent Events
The Company has evaluated all subsequent events through January 26, 2010, the date the financial statements were issued, and no additional items were noted that need to be disclosed (see Note 8).

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”), now referred to as ASC 105-10, Generally Accepted Accounting Principles. This guidance establishes only two levels of GAAP, authoritative and non-authoritative.  This standard establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws remain sources of authoritative GAAP for SEC registrants. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the guidance did not have a material impact on our financial statements.
 
18

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), now referred to as ASC 855-10. ASC 855-10 incorporates accounting and disclosure requirements related to subsequent events into U.S. GAAP. The guidance establishes general standards of accounting for and disclosure of subsequent events that occur after the balance sheet date.  Entities are also required to disclose the date through which subsequent events have been evaluated and the basis for that date.  The adoption of the guidance did not have a material impact on the Company’s financial statements.  The Company has evaluated subsequent events through the date of issuance, January 18, 2010, the date these financial statements were available to be issued.  See Note 8 for more information.

In June 2008, the EITF ratified EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, now referred to as ASC 815-40-15. ASC 815-40-15 provides guidance in assessing whether derivative instruments meet the criteria in paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, now referred to as ASC 815, for being considered indexed to an entity’s own common stock, which mandates a two-step process for evaluating whether an equity –linked financial instrument or embedded feature is indexed to the entity’s own stock.. ASC 815-40-15 is effective for fiscal years beginning after December 15, 2008.  The adoption of the guidance did not have a material impact on the Company’s financial statements.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion, now referred to as ASC 470-20. ASC 470-20 requires companies to separately account for the liability (debt) and equity (conversion option) components of convertible debt instruments that require or permit settlement in cash upon conversion in a manner that reflects the issuers’ nonconvertible debt borrowing rate at the time of issuance. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and may not be adopted early. The adoption of the guidance did not have a material impact on the Company’s financial statement.

Note 3.     Intangible and Fixed Assets

Intangible Assets

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 patent #5,960,447, “Word Tagging and Editing system for Speech Recognition”. In accordance with 35 USC 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 will expire on November 13, 2015.

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, Patent No.: US 7,558,730 titled “Speech Recognition and Transcription Among Users Having Heterogeneous Protocols” was issued by the United States Patent and Trademark Office.  In accordance with 35 USC 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.  The patent will expire on November 27, 2021.  The deferred fees were capitalized during the quarter ended September 30, 2009 and the Company began amortization.

 
2009
 
2008
 
         
US Patent # 5,960,447
  $ 63,247     $ 63,247  
US Patent # 7,558,730
    58,277       54,543  
                 
      121,524       117,790  
    Less: Accumulated amortization
    (45,564 ))     (39,002 )
                 
    $ 75.960     $ 78,788  
                 

19

Fixed Assets

Fixed assets consist of the following:

 
2009
 
2008
 
         
Computer equipment
  $ 1,650     $ 750  
Computer software
    3,640       3,640  
                 
      5,290       4,390  
    Less: Accumulated depreciation
    (2,126 )     (628 )
                 
    $ 3,164     $ 3,762  
                 
 
Depreciation expense totaled $1,498 and $628, respectively, for the years ended December 31, 2009 and 2008.

Note 4.     Related Party Transactions

Contributed Services

During the years from 2000 through 2009 the Company’s officers and employees contributed management services and administrative services. The fair value of those services was recorded in the accompanying financial statements based on the prevailing rates for such services, with a corresponding credit to Additional paid-in capital. Contributed services recorded in the accompanying financial statements consisted of the following:

Year ended December 31,
 
   
2000
 
$
520,000
 
2001
   
720,500
 
2002
   
50,767
 
2003
   
18,749
 
2004
   
58,651
 
2005
   
158,648
 
2006
   
70,189
 
2007
   
83,652
 
2008
   
121,076
 
2009
   
238,837
 
     
   
$
2,041,069
 
     


Indebtedness to Related Parties

During the years from 2000 through 2009, certain officers advanced the Company working capital to maintain the Company’s operations. As of December 31, 2009 and 2008, the Company owed the officers $302,344 and $226,344, respectively. The majority of the balance is owed to the Company’s president and totaled $296,544 and $220,544, respectively, at December 31, 2009 and 2008. Of the amount owed to the Company’s president, $225,544 was converted into a promissory note in May 2008. On April 21, 2009 the Company repaid $2,500 to the Company’s president and on April 24, 2009 repaid $1,500 reducing the note to $216,544. The note carries a 4 percent annual interest rate and matured on July 6, 2009. On July 6, 2009 the Company issued an allonge to the promissory note that extended the maturity date to October 5, 2009.  On November 12, 2009 a second allonge to the promissory note extended the maturity date to April 9, 2010.  Interest expense related to the note totaled $8,685, of which $6,510 was accrued at December 31, 2009. 

Also during 2009, the Company’s president advanced the Company working capital of $80,000 which was converted into a second promissory note in October 2009. The note carries a 4 percent annual interest rate and matures on April 9, 2010.  Interest expense related to the note totaled $728 and was accrued at December 31, 2009.
 
 
20
 

Transactions with Related Parties

On April 6, 2009 AVRS purchased a Gateway E295 C convertible tablet to laptop for testing and demonstration of software.  The computer was purchased for $900 from Progressive Technologies, LLC which is owned by Mr. Geldenhuys our President and CEO.

Note 5.     Income Taxes

A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows:

 
December 31,
 
2009
 
2008
U.S. federal statutory graduated rate
   
31.31%
 
33.60%
State income tax rate, net of federal benefit
   
0.00%
 
0.00%
Contributed services
   
-16.38%
 
-9.44%
Costs capitalized under Section 195
   
-14.93%
 
-24.16%
       
                                   Effective rate
   
0.00%
 
0.00%
       

The Company is considered a start-up company for income tax purposes. As of December 31, 2009, 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, 2009.

Note 6 .    Concentration of Risk

On December 31, 2009, the Company had cash balances at one financial institution of $2,961, which amount does not exceed the related federal deposit insurance.

Note 7.     Prepaid Expenses

During 2009, the Company paid a $3,000 retainer to our auditors in connection with the 2009 audit.  During 2008, the Company paid a $15,000 retainer to a law firm in connection with the Company’s involvement in a patent interference. This interference involves the Company’s claim of ownership of the subject matter of a third party’s patent.

Note 8.     Subsequent Events

On January 11, 2010, the Company terminated the Purchase Agreement dated September 24, 2008 with Lion Share Capital LLC, a Kansas Limited liability company.  No payments were made by Lion Share.  On December 10, 2009 the Company delivered a notice of event of default to Lion Share.  On December 18, 2009, the Company delivered a notice of acceleration and an unconditional proposal for strict foreclosure of the Collateral to Lion Share.  On January 11, 2010, the Company foreclosed on the Collateral and cancelled the Promissory Note.
 
 
21

 

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T).   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer, who also is our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) and pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2009. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and that such information is accumulated and is 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. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer, who also is our chief financial officer, concluded that our disclosure controls and procedures are designed at a reasonable assurance level and were fully effective as of December 31, 2009 in providing reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting  

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:  

        (1)    pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;  

        (2)    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of its management and directors; and  

        (3)    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.   

Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this assessment, our management believes that, as of December 31, 2009, our internal control over financing reporting is effective based on those criteria. 

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
 
22
 

Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information.

None.
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance.

The following table and paragraphs provide the name and age of each of our current directors, executive officers and significant employees, the principal occupation of each during the past five years and, with respect to directors, the year in which the director was first elected as a member of our Board of Directors. Information as to the stock ownership of each of our directors and all of our current executive officers as a group is provided above under “Security Ownership of Certain Beneficial Owners and Management.” There are no family relationships between any director or executive officer. Our directors and officers serve until their respective successors are elected or appointed, as the case may be.

Name of Director(1)
 
Age
 
Month and Year
Elected as Director
 
Position with the Company
         
Walter Geldenhuys
   
54
 
May 2008
 
President, Chief Executive Officer, Chief Financial Officer and Director
               
Donald Getty
   
76
 
December 2007
 
Director
               
Diane Jakowchuk
   
56
 
 
Secretary, Treasurer and Principal Accounting Officer

Walter Geldenhuys, Director, President and Chief Executive Officer

Mr. Geldenhuys has served as a member of our Board of Directors since May 2008. Mr. Geldenhuys served as the President of Advanced Voice Recognition Systems, Inc., a Colorado corporation, also known as AVRS, from 2005 until AVRS was merged with and into us in June 2008. From 2000 to 2005, Mr. Geldenhuys was a member of NCC, LLC, which became AVRS’s wholly-owned subsidiary in 2005. In addition, Mr. Geldenhuys has owned Progressive Technologies LLC, a design and manufacturing concern, since 2002.

Donald Getty, Director

Mr. Getty has served as a member of our Board of Directors since December 2007. Mr. Getty has served as President of Sunnybank Investments, Ltd., a consulting firm, since 1992. From 1985 to 1992, Mr. Getty served two, four year terms as Premier of Alberta.  In addition to acting Premier of Alberta, he held the position of Energy Minister and the position of Minister of Federal and Intergovernmental Affairs during his two terms in office.

Mr. Getty has served as a director and Chairman of the Board of Capital Reserve Canada Limited, a Canadian company, which is a U.S. reporting issuer quoted on the OTCBB, since August 2005. Mr. Getty has served on the board of directors of Globetech Environmental Inc., a company publicly trading on the Pink Sheets, since 2005. Mr. Getty has served on the board of directors of West Isle Energy Inc., a company publicly trading on the Toronto Stock Exchange, since 1997. Mr. Getty has served on the board of directors of the Guyanor Resources SA, a company publicly trading on the Toronto Stock Exchange since 1995. Mr. Getty also serves as a director of Capital Reserve Canada Ltd., a company publicly trading on the OTCBB, and Euro Resources SA, a company publicly trading on the Toronto Stock Exchange. In 1954, Mr. Getty graduated, with honors, from the University of Western Ontario and earned a degree in business administration.

Diane Jakowchuk, Secretary, Treasurer and Principal Accounting Officer

Ms. Jakowchuk has served as our Secretary, Treasurer and Principal Accounting Officer since May 2008. Ms. Jakowchuk was a member of NCC, LLC, which became AVRS’s wholly-owned subsidiary in 2005. Ms. Jakowchuk has worked in the accounting and sales departments of ADCO Paint & Supply, a retail coating company, since July 2006. Between December 2004 and July 2006, Ms. Jakowchuk served as office manager for a retail hardware company. From December 2001 to December 2004, Ms. Jakowchuk served as the State Victim Assistance Coordinator for MADD Victim Services.
 
23 

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and designated officers to file reports of ownership and changes in ownership of our equity securities with the Securities and Exchange Commission. Based solely on our review of the copies of such forms that we have received and on written representations from reporting persons, we believe that during the fiscal year ended December 31, 2009, all reporting persons complied with all applicable filing requirements.

Corporate Governance, Code of Ethics

We are committed to maintaining sound corporate governance practices. These practices are essential to running our business efficiently and to maintaining our integrity in the marketplace. Our Board of Directors is responsible for providing effective governance oversight over our affairs. Our corporate governance practices are designed to promote honesty and integrity throughout our company.

We have adopted a Code of Ethics applicable to anyone who serves as our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller.  A copy of the Company’s Code of Ethics is incorporated by reference to this Form 10-K as Exhibit 14.1.

Audit Committee

The entire Board of Directors operates as the Audit Committee. We currently do not have a written audit committee charter or similar document. When the audit committee is formed, we intend to have a designated audit committee “financial expert” who will be responsible for reviewing the results and scope of the audit, and other services provided by the independent auditors, and review and evaluate the system of internal controls.

Item 11.   Executive Compensation.

Summary Compensation Table

The following table sets forth all compensation paid to our principal executive officer and those individuals who received compensation in excess of $100,000 per year (collectively, the “Named Executive Officers”) for our last two completed fiscal years. Walter Geldenhuys, our President, Chief Executive Officer and Chief Financial Officer, and Diane Jakowchuk, our Secretary, Treasury and Principal Accounting Officer, have contributed their services free of charge during our last two completed fiscal years, as reflected in the following table.

Summary Compensation Table

A
Name and Principal
Position with AVRS
 
B
Year
 
C
Salary
($)
   
D
Bonus
($)
   
E
Stock
Awards
   
F
Option
Awards
($)