Mail Stop 4-6
February 10, 2005
Mr. Jerome R. Mahoney
Chairman of the Board
iVoice Technology, Inc.
750 Highway 34
Matawan, New Jersey 07747
Re: iVoice Technology, Inc.
Amendment No. 1 to Registration Statement on Form SB-2 filed
January 10, 2005
File No. 333-120490
Dear Mr. Mahoney:
Where indicated, we think you should revise your document in
response to these comments. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We note your response to our prior comment no. 1. We
acknowledge
that you have entered into an agreement. The structure of your
`equity line` transaction, however, does not fit the necessary
parameters for a valid equity line financing with respect to our
guidance concerning such financings. As a result, the agreement
you
have entered into is not a valid equity line by which you could
obtain financing according to its terms. The fundamental basis in
our guidance on equity line financings is that a market already
exists for the underlying securities. As noted previously, your
stock is not listed and a public market does not exist.
Therefore,
your reference to an `equity line` arrangement is in a manner that
suggest it is or will become a source of funding on which you and
investors may rely is not appropriate. Please revise the
disclosure
throughout the filing to remove any implication that the agreement
you refer to as an `equity line` provides you with a viable
mechanism
to obtain needed financing. In this regard, your summary, risk
factors and management`s discussion and analysis should all be
thoroughly revised.
Prospectus Summary
Overview, pp. 1-3
2. We note your revised disclosure in response to our prior
comment
no. 10. Please disclose the cash balance iVoice will be retaining
in
your discussion of what iVoice`s management and board considered
in
establishing your initial capitalization. Please also
supplementally
inform us why iVoice will need to expand its research and
development
efforts in light of your disclosure in the first paragraph which
seems to suggest that iVoice`s business will merely consist of
licensing its current intellectual property assets.
Risk Factors
3. Please include a risk factor discussing the penny stock rules
and
the additional risks classification of the securities as a "penny
stock" poses to shareholders.
iVoice Technology has in the past and may in the future sell
additional unregistered convertible securities, possibly without
limitations on the number of shares of common stock the securities
are convertible into, which could dilute the value of the holdings
of
current stockholders and have other detrimental effects on your
holdings, pp. 14-15
4. We note your new risk factor in response to our prior comment
no.
8. Your statement in the second bullet of the risk factor
discussing
a risk of "increasing the potential profits to the holder when the
price per share later increases" does not appear to be a risk to
investors. Your current investors would share proportionately in
an
increasing share price. It appears that the accurate risk is a
further depressed stock price as the shares are issued in greater
numbers and at a discount to the market price. A sale of such
shares
in the market would likely result in a depressed the stock price.
Please revise or otherwise explain to us why this is a risk.
iVoice Technology may depend on distribution by resellers and
distributors for a significant portion of revenues, p. 19
5. Please disclose whether you have a material relationship, if
any,
with a distributor or reseller. Do you derive a significant
amount
of your sales from a single distributor or reseller?
Additionally,
such material agreements, if any, and any related assignment and
consent may need to be filed as exhibits to the registration
statement. Please see Item 601(b)(10) of Regulation S-K.
The Distribution of iVoice Technology Class A Common Stock may
result
in tax liability to you, p. 26
6. We note your response to our prior comment no. 37. The
business
appears to have historically generated book-basis losses and would
appear to do so again in the current fiscal year. Why do you
believe
these financial accounting results will vary substantially from
the
tax-basis results? Notwithstanding your assertion that the
transaction is a taxable transaction, the transaction appears to
effectively be tax-free and would likely be understood as such by
investors in accordance with the tax formulation you present.
Please
provide a tax opinion supporting the tax consequences you
describe.
Please also consider setting forth in your later tax section an
example of how a sample stockholder determines their tax liability
based on your earnings and profit.
In light of the fact that your current earnings and profit cannot
be
determined until year-end and that the determination of such
earnings
and profit for tax purposes may differ from such determinations
for
financial reporting purposes, please discuss whether you or iVoice
intends to provide such earnings and profit information to your
distributee-shareholders when available or otherwise how they may
obtain such information. Please also clarify your disclosure to
indicate whether the earnings and profit for each shareholder are
calculated on a pro rata basis as of the date of the distribution.
Please also discuss in your later tax section the tax implications
of
a shareholder who sells your stock during the year having not yet
received their current earnings and profits information.
Further, your response states that the governing rule is that the
distribution is taxable to the extent of the lesser of (1) the
fair
market value of the shares and (2) the earnings and profit. Your
disclosure, however, seems to suggest that a distributee-
shareholder
will be taxed on the fair market value of the shares to the extent
of
any earnings and profit with any excess treated as a tax-free
return
of capital and thereafter as capital gain. Please explain.
We note your revised disclosure in your later tax section. Please
revise to specify the date upon which the fair market value of the
shares received in the distribution will be determined for
purposes
of determining their basis.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Overview, pp. 26-27
7. We note your disclosure in your prospectus summary discussing
the
board`s balancing of iVoice`s prospective capital requirements
with
the more likely ability of obtaining financing for the IVR
business.
Your disclosure in this section starting with the sixth sentence
of
the last paragraph on page 26 suggests otherwise. Please clarify
your disclosure in this paragraph starting from the sixth
paragraph.
Separation from iVoice, pp. 27-29
8. With respect to your disclosure regarding the administrative
services agreement, do you plan to seek replacement services or
provide the services for yourself in the near future? We note
your
response to our prior comment no. 32 stating your intent to
maintain
the agreement for the foreseeable future as well as your lack of
any
current plans to expand personnel.
Results of Operations for the Nine Months Ended September 30, 2004
as
Compared with the Nine Months Ended September 30, 2003, pp. 29-30
9. Please discuss the cause for the $61,822 decrease in revenue
between the nine months ended September 30, 2004 and the nine
months
ended September 30, 2003.
10. The discussion of gross margin for the years ended December
31,
2002 and 2003 and the nine months ended September 30, 2003 and
2004
mentions a change in the products and services mix being sold, by
providing more consulting and maintenance services. However, the
section on critical accounting policies for revenue recognition
discloses that the company derives 100% of its revenues from
licensing of the company`s product and none from optional support
services. We note that the financial statements do not disclose
that
the company has generated revenues from services, or is engaged in
consulting. Please revise so as to be consistent. Further, please
provide disclosure in your business section with respect to the
consulting and maintenance services that you provide. Please also
explain to us the basis for attributing the change in gross margin
to
product/service mix as opposed to price changes. Did price change
no
longer play a role in your change in gross margin for the nine-
month
and fiscal year periods? Please also disclose the nature of the
change in product mix and why such change occurred.
11. We note that your statement of operations for the nine months
ended September 30, 2004 and 2003 reflect a decrease in your
research
and development expense of approximately $56,000 which in turn
contributed to the period-to-period change in total operating
expenses. This decrease offset the substantial increase in
general
and administrative expense of approximately $116,000 which you
appear
to attribute to professional and consulting fees incurred in
connection with financing the operation of the business and the
anticipated registration of shares. Please expand your disclosure
to
discuss the nature of the change that resulted in the decrease in
your research and development expense.
12. Please explain to us how a $616,836 increase in interest
expense
for the nine-month period can be attributed to $280,000 in
convertible debentures.
Results of Operations for the Year Ended December 31, 2003 as
Compared with the Year Ended December 31, 2002, pp. 30-31
13. Please discuss the cause for the reduction in professional and
consulting fees that resulted in a decrease of $230,000 in general
and administrative expense. It also appears that a goodwill
write-
off and bad debt expense contributed to the higher total operating
expense in fiscal year 2002. Please discuss.
Liquidity and Capital Resources, pp. 31-34
14. Please revise your disclosure in the second paragraph of this
section. It does not appear that you are raising any proceeds in
this public offering. Further, please file the agreement whereby
Mr.
Mahoney has agreed to accept Class B common stock in satisfaction
of
your obligations under the employment agreement. If an oral
agreement, please file an a written description of the material
terms
of such agreement. Please also revise your disclosure to discuss
the
material terms of this agreement. At what price will the Class B
common stock be exchanged for your obligations under the
employment
agreement?
15. We note your revised disclosure regarding the fee to be paid
to
Cornell Capital Partners in connection with the convertible
debentures. Please disclose whether this fee has and how it will
be
paid.
16. We note your revised disclosure in the second paragraph on
page
32. Please disclose the period for which you expect the going-
forward expenses of $431,000 to encompass. Please elaborate on
the
minimum period of planned operations you expect you will be able
to
fund with the proceeds from the sale of the secured convertible
debentures.
17. Please supplementally explain to us the basis for the change
in
aggregate book value of the IVR business assets from $750,000 to
$10,000 and when such a change was determined necessary. Was a
third-party valuation made of the assets which resulted in the
revaluation?
Business
Business Development, p. 40
18. In your revised disclosure you state that you have no material
strategic alliances other than the existing relationships that are
being transferred to you by iVoice. Are these relationships
material
as your statement appears to suggest? If so, please discuss the
nature and significance of these material relationships. Further,
please reconcile your statement that you have sold primarily on a
direct basis with your later statement that you have yet to hire a
sales team. How have you sold directly without previously having
a
sales team? We also note your revised disclosure indicating that
you
do not plan to hire any additional personnel. How will the lack
of a
sales team affect you given that you rely primarily on direct
sales
and yet do not plan to hire any additional personnel? Please
clarify
and disclose the portion of your revenue that you derive from
primary
sales.
iVoice Technology`s Management
19. Please identify Mr. Seidler as a director in your table
presentation.
Employment Agreements, pp. 44-45
20. In your revised disclosure with respect to Mr. Mahoney`s
employment agreement, please elaborate on the fact that there are
only two directors, one of which is Mr. Mahoney, and explain how
this
affects the board`s ability to determine that a future termination
is
for cause.
Certain Relationships and Related Transactions
21. Please provide disclosure with respect to the security
agreement
with Cornell Capital. Please also include a risk factor
discussing
the risk to shareholders related to Cornell Capital`s security
interest in substantially all of your assets.
22. We note your disclosure with respect to Mr. Mahoney`s
promissory
note for $190,000 bearing interest at the prime rate plus 2
percent
per annum. The form of promissory note filed as an exhibit,
however,
states that the interest rate is the prime rate plus 1 percent.
Please clarify. Further, please file the executed note as an
exhibit
and supplementally inform us how the form of note differs from the
executed note, if at all.
The Distribution
Results of the Distribution, p. 55
23. Please supplementally respond to our inquiries in our prior
comment no. 62. Do you intend to adjust the distribution ratio so
that the 10 million shares will be allocated among the holders?
Is
this why you have removed the reference to the 1-for-874 share
distribution? Please explain how and when you will compute
Distribution ratio to achieve the issuance of the desired 10
million
shares. Will the shares held in aggregate by nominee holders or
will
each beneficial owner`s shareholdings be used to determine the
shares
issuable as well as serve as the basis for any rounding
determinations.
Further, please supplementally provide us with an analysis of what
you would do in terms of updating your disclosure, if you were to
change the Distribution ratio after the effective date. Would you
be
able to make this change by prospectus supplement and, if so, what
is
the basis for such belief?
Financial Statements
24. Please advise us supplementally of the reasons that general
and
administrative expenses and other income have been reduced by
$63,256
during the nine months ended September 30, 2004.
25. Your revised disclosure on page 40 states that you have
experienced significant post-release errors and bugs in your
products, yet Note 4(e) to the financial statements indicates that
you have determined that warranty claims have been immaterial
based
upon its limited sales to date. Please reconcile these
disclosures
so as to be consistent.
Pro Forma Financial Information
26. Please refer to our prior comment no. 69. It appears that no
revision to the historical financial statements has been made to
reflect the $740,000 impairment charge previously reported as a
pro
forma adjustment. Please revise or advise us supplementally of
the
reasons why such revision should not be made.
27. It appears that Note (e) on page F-37 should be eliminated.
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We will consider a written request for acceleration of the
effective date of your registration statement as a confirmation of
the fact that those requesting acceleration are aware of their
respective responsibilities under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as
they
relate to the proposed public offering of the securities specified
in
the above registration statement. We will act on the request and,
pursuant to delegated authority, grant acceleration of the
effective
date.
We direct your attention to Rule 461 regarding requesting
acceleration of a registration statement. Please allow adequate
time
after the filing of any amendment for further review before
submitting a request for acceleration. Please provide this
request
at least two business days in advance of the requested effective
date.
You may contact Maureen Bauer at (202) 942-1824, or Tia
Jenkins
at (202) 942-1902, if you have questions or comments on the
financial
statements and related matters. Please contact Daniel Lee at
(202)
942-1871 with any other questions. If you need further
assistance,
you may contact me at (202) 942-1818 or Barbara Jacobs, Assistant
Director, at or (202) 942-1800.
Sincerely,
Mark P. Shuman
Branch Chief - Legal
cc: Via Facsimile
Scott Rosenblum, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 715-9100
Facsimile: (212) 715-8000