Memorandum of Compliance
Outlining Certain Changes Reflected in
Amendment No. 2 to Registration Statement on Form SB-2
of iVoice Technology, Inc.
Set forth below are the responses of iVoice Technology, Inc. to the comments
from the staff of the Division of Corporation Finance (the "Staff") of the
Securities and Exchange Commission (the "SEC") with respect to Amendment No.1 to
the Registration Statement on Form SB-2 of the Company, which was filed with the
SEC on January 11, 2005. For the Staff's convenience, the Staff's comments have
been stated below in their entirety, with the responses to a particular comment
set out immediately under the comment or comments. The responses described below
are contained in Amendment No. 2 to the Registration Statement on Form SB-2
("Amendment No. 2" or the "registration statement"), which is being filed
simultaneously herewith. Capitalized terms used herein are intended to have the
meanings ascribed to such terms in the Amendment No. 2.
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 reference 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.
In response to the Staff's comment, iVoice Technology and Cornell Capital
Partners LLP ("Cornell Capital") entered into a termination agreement dated as
of February 28, 2005 pursuant to which the equity line transaction was
terminated. On March 9, 2005, iVoice Technology obtained a non-binding
commitment from Cornell Capital whereby Cornell Capital has agreed, subject to
satisfaction of conditions, to enter into definitive documentation to purchase
up to $10 million of iVoice Technology's common stock upon the terms set forth
in the commitment letter and the definitive documentation to be executed after
satisfaction of stated closing conditions. Each of the termination agreement and
commitment letter is being filed as an exhibit to the registration statement
concurrently with this filing. In addition, disclosure throughout the filing has
been revised to reflect the above-mentioned termination and commitment.
Prospectus Summary
Overview, pp. 1-3
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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.
Disclosure had been added to p. 2 of the registration statement. Immediately
after the Distribution (and the distributions to the stockholders of Deep Field
Technology and SpeechSwitch), iVoice anticipates that its business will consist
primarily of licensing its current intellectual property assets. However, in the
future, iVoice may determine that it is the best interest of the iVoice
stockholders to develop new intellectual property or acquire additional
companies and/or businesses.
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.
Disclosure has been added to page 27 of the registration statement.
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 holders, pp. 14-15.
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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 stock price. Please revise or
otherwise explain to us why this is a risk.
We have revised our disclosure on page 15 of the registration statement.
iVoice Technology may depend on distribution by resellers and distributions
for a significant portion of revenues, p. 19
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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
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consent may need to be filed as exhibits to the registration statement.
Please see Item 601(b)(10) of Regulation S-K.
iVoice Technology does not have any material relationship with any distributor
or reseller. We do not derive 10% or more of our sales from any single
distributor or reseller. Although we do have contracts with a number of
distributors or resellers, those contracts are entered into in the ordinary
course of the Company's business and we do not consider any of such contracts to
be material under the standards set forth in Item 601(b)(10) of Regulation S-K
and, therefore, do not believe it is necessary to file any such contract as an
exhibit to the registration statement. Disclosure has been added on page 5 of
the registration statement.
The Distribution of iVoice Technology Class A Common Stock may result in tax
liability to you, p. 26
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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?
iVoice Technology does not necessarily believe that the financial accounting
results will vary substantially from the tax-based results and the disclosure,
in fact, provides that iVoice Technology does not have any accumulated earnings
and profits. However, it cannot accurately predict at this time whether it will
have any current earnings and profits (i.e., earnings and profits for the
current year). Moreover, please note that the Distribution itself may give rise
to current earnings and profits for iVoice.
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.
We respectfully submit that the disclosure clearly provides that the
distribution will only be taxable if there are current or accumulated earnings
and profits (or the Distribution exceeds the shareholder's basis in its iVoice
shares plus its share of any such earnings and profits). The statement that the
distribution is a taxable transaction indicates that iVoice shareholders may be
required to recognize income or gain. This is to distinguish the tax
consequences of this transaction from a tax-free distribution in which
shareholders do not recognize gain regardless of the extent of the company's
earnings and profits, the value of the shares received and the shareholders'
basis in their iVoice shares, all of which are relevant to the extent that an
iVoice shareholder is taxed with respect to the receipt of iVoice Technology
shares, as the disclosure indicates.
Please provide a tax opinion supporting the tax consequences you describe.
Our counsel informs us that to the best of their recollection, they have never
been required (or asked) to provide a tax opinion with respect to disclosure in
this type of transaction, and we do not believe that one is necessary here. That
a shareholder may be taxed upon the receipt of a corporate distribution is the
normative rule. Section 61(a) of the Internal Revenue Code of 1986,
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as amended (the "Code"), provides that "gross income means all income from
whatever source derived, including ... dividends." It is also black letter law
that the portion of the distribution that is treated as a dividend is limited to
the distributing corporation's current or accumulated earnings and profits. See
Code sections 301 (distribution to shareholders, including fair market value of
property distributed, includable in income to the extent treated as a dividend)
and 316 (dividend defined to include current or accumulated earnings and
profits). Section 301 also sets forth the rules described in the disclosure
relating to the treatment of distributions in excess of any earnings and
profits. If, on the other hand, the disclosure were to state that the
distribution would be governed by a tax-free section of the Code, then an
opinion supporting that result would be warranted, but that is not the case
here.
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.
We also do not believe that setting forth a specific example is necessary or
particularly helpful. The results are relatively straightforward. Moreover, each
shareholder's situation may differ and an example that may be relevant to one
shareholder may not be helpful to another and could cause confusion rather than
clarity. Nonetheless, we set forth below an example which we will include in the
disclosure if required.
"For example, assume that (i) the fair market value on the date of
the Distribution of an iVoice Technology share received is $1.00,
(ii) iVoice has no current or accumulated earnings and profits as of
the end of the year of the Distribution, and (iii) a shareholder has
a $0.60 basis in each of its iVoice shares. The shareholder would
not be treated as receiving a dividend, its basis in its iVoice
shares would be reduced to zero, it would recognize a capital gain
of $0.40 per iVoice Technology share received and its basis in each
share received would be $1.00."
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.
Disclosure has been added to page 60 of the registration statement.
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.
Disclosure has been added to page 60 of the registration statement.
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.
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We do not believe it is necessary to discuss the consequences to a shareholder
who sells its iVoice stock before iVoice provides its earnings and profits
information to its shareholders, since such a shareholder generally would not
need to compute its gain or loss from the sale until after the earnings and
profits information is provided. In any event, iVoice will not know the extent
of its earnings and profits until the end of its current taxable year.
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.
The response should have stated that the distribution is taxable as a dividend
to the extent of the lesser of (i) the fair market value of the shares received
and (ii) the current or accumulated earnings and profits of iVoice. That
formulation is the same as the statement in the disclosure that the distribution
will be treated as a dividend equal to the fair market value of the shares
received to the extent of iVoice's current or accumulated earnings and profits.
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.
Disclosure has been added to page 60 of the registration statement.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview, pp. 26-27
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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.
Disclosure has been clarified on page 29 of the registration statement.
Separation from iVoice, pp. 27-29
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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.
iVoice Technology has no current intention to terminate the administrative
services agreement, seek replacement services or provide services for itself in
the near future. Disclosure has been added on page 31 of the registration
statement.
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Results of Operations for the Nine Months Ended September 30, 2004 as Compared
with the Nine Months Ended September 30, 2003, pp. 29-30
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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.
The $61,822 decrease in revenue between the nine months ended September 30, 2004
and the nine months ended September 30, 2003 was the result of fewer units being
sold in 2004 as compared to 2003 reflecting a weaker demand for the product
offset by increases in Other Revenue. The decrease in revenue between the year
ended December 31, 2004 and the year ended December 31, 2003 resulted from the
same cause. Disclosure has been added to page 31 of the registration statement.
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 product 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.
Disclosure has been revised on page 31 of the registration statement. The change
in gross margin is attributed to changes in the product/service mix rather than
pricing changes. At times, we have contracts that require us to provide more
service in connection with a sale than is typical. In these cases, there is a
change in gross margin.
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 offsets the substantial increase in general and administrative
expenses 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.
Disclosure has been expanded on page 32 of the registration statement.
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.
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Interest expense shown on the financial statements includes the write off of
financing costs. This amounted to $794,554 for the nine months ended September
30, 2004 and $182,956 for the nine months ended September 30, 2003.
Results of Operations for the Year Ended December 31, 2003 as Compared with the
Year Ended December 31, 2002, pp. 30-31.
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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.
The reduction of $230,000 in general and administrative expense for twelve
months ended December 31, 2003 as compared to the twelve months ended December
31, 2002 was the result of reduced professional and consulting fees due to a
reduced requirement for professional and consulting services.
The write off of goodwill in 2002 reflects the write off certain intangible
assets, which was not required in 2003.
In 2002 the company recorded $40,007 in bad debt expenses, such write offs were
not required in 2003.
Liquidity and Capital Resources, pp. 31-34
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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 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?
Disclosure has been revised on page 33 of the registration statement. Mr.
Mahoney's agreement to accept Class B common stock in satisfaction of certain
employment agreement obligations is being filed as an exhibit to the
registration statement concurrently with this filing.
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.
Disclosure has been added on page 33 of the registration statement.
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.
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Disclosure has been added on page 34 of the registration statement.
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?
The change in the aggregate book value of the IVR business assets from $750,000
to $10,000 occurred when the preferred stock component of the contemplated
transactions was removed by management. The $10,000 represents the book value of
the assets being transferred to us by our parent, iVoice, Inc. The remaining
$740,000 had represented the value of the convertible preferred piece of the
transaction. No third-party valuation was made of the assets.
Business
Business Development, p. 40
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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.
Disclosure has been added on pages 42 and 44 of the registration statement.
iVoice Technology's Management
19. Please identify Mr. Seidler as a director in your table presentation.
Mr. Seidler has been identified as a director on the table on page 45 of the
registration statement.
Employment Agreements, pp 44-45
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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.
Disclosure has been added on page 46 of the registration statement.
Certain Relationships and Related Transactions
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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.
Disclosure with respect to the security agreement has been added on page 48 of
the registration statement. The requested risk factor has been included on page
22 of the registration statement.
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 executed promissory note is being filed as an exhibit to the registration
statement concurrently with the filing. The form of note does not differ from
the executed note other than that the executed note is signed and reflects the
2% interest rate.
The Distribution
Results of the Distribution, p. 55
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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?
As is indicated on the back and front cover pages of the prospectus, we have
increased the number of shares to be distributed in the Distribution to take
into account the possibility that in excess of 10 million share will be
necessary to accommodate holders holding less than the amount of shares
otherwise necessary to obtain one share of our Class A common stock. We will not
be changing the Distribution ratio after the effective date in a manner that
would require us to distribute share in excess of those registered pursuant to
the registration statement. At this time, we are not certain of the precise
number of iVoice, Inc. shares outstanding and accordingly, cannot disclose the
precise Distribution ratio. However, we do not anticipate that the Distribution
ratio will change after the effective date of the registration statement. At
such time as we are in a position to know when the effective date will be, we
will request a holder's list, determine how many record stockholders there are
and determine the precise number of shares to be distributed in the
Distribution, rounding upward as disclosed in the registration statement. We
will base the Distribution on a holder's list which will set forth nominee and
other record holders. As to our knowledge at least 35 % of iVoice's common
stock is held through the
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Depository Trust Company, we will assume that we will not be able to determine
the precise holdings of all beneficial holders.
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.
The reduction of the $63,256 as noted in the statements for the nine months
ended September 30, 2004 is the result of a reclassification of administrative
fees to the parent that were reclassified to other income. The reclassification
had no effect on the net loss or the accumulated deficit for the nine months
ended September 30, 2004. In the December 31, 2004 and 2003 financial statements
a reclassification footnote is included in the Summary of Significant Accounting
Policies on page F-12 as follows: "Certain amounts in the 2003 financial
statements were reclassified to conform to the 2004 presentation. The
reclassification in 2003 resulted in no changes to the net loss for that
period."
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.
Disclosure has been deleted on page 42 of the registration statement.
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.
The lack of an impairment charge in the historical financial statements is due
to the removal of a transaction which was to have resulted in issuance of
preferred stock in payment for the transfer of assets from the parent. Since
this preferred stock is no longer being issued, there is no need for an
impairment charge.
27. It appears that Note (e) on page F-37 should be eliminated.
Note(e) on page F-37 has been eliminated.
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