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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
OR
[ ] 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: 000-29341
IVOICE, INC
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 51-0471976
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 HIGHWAY 34
MATAWAN, NJ 07747
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (732) 441-7700
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. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated files, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the exchange act.
Large Accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of Class A, common stock,
No par value, outstanding as of November 13, 2008: 2,602,170,527
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IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 AND 2007
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet - September 30,
2008 (Unaudited) and December 31, 2007 (Audited) 2-3
Condensed Consolidated Statements of Income - For the
nine months and three months ended September 30, 2008
and 2007 (Unaudited) 4
Condensed Consolidated Statement of Accumulated Other
Comprehensive Loss - For the nine months ended September
30, 2008 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - For
the nine months ended September 30, 2008 and 2007
(Unaudited) 6-8
Notes to Condensed Consolidated Financial Statements (Unaudited) 9-26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27-32
Item 4T. Controls and Procedures 32-33
PART II. OTHER INFORMATION
Item 5. Other Information 34
Item 6. Exhibits 34
1
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
2008 2007
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,213,452 $ 79,919
Marketable securities 5,900,990 10,814,954
Securities available for sale 709,083 676,272
Notes receivable - current portion 241,858 --
Accounts receivable, net of allowance for doubtful accounts $8,250
and $0, respectively 15,745 --
Inventory 6,080 --
Prepaid expenses and other current assets 26,949 194,678
----------- -----------
Total current assets 10,114,157 11,765,823
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $220,569 and $214,721, respectively 7,778 11,285
----------- -----------
OTHER ASSETS
Convertible debentures receivable 908,813 852,447
Notes receivable, net of current maturities 7,179 --
Intangible assets, net of accumulated amortization of $1,424 and
and $871, respectively 217,988 170,975
Deposits and other assets 6,666 6,666
----------- -----------
Total other assets 1,140,646 1,030,088
----------- -----------
TOTAL ASSETS $11,262,581 $12,807,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,108,660 $ 1,127,695
Short term loans payable 3,913,032 --
Convertible debentures payable, net of discounts of $289,879 and
$1,444,056, respectively 1,063,581 5,004,154
Derivative liability on convertible debentures 1,824,195 4,249,113
Due to related parties 601,275 176,293
Deferred revenues 19,193 --
----------- -----------
Total current liabilities 9,529,936 10,557,255
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- --
See accompanying notes to condensed consolidated financial statements.
2
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
September 30, December 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 1,000,000 shares;
no shares issued and outstanding -- --
Common stock, Class A, no par value; authorized 10,000,000,000 shares;
2008 - 2,602,173,527 shares issued; 2,602,170,527 shares outstanding
2007 - 420,674,318 shares issued; 420,671,318 shares outstanding 26,110,167 25,325,012
Common stock, Class B, $0.01 par value; authorized 50,000,000 shares;
2008 - 2,204,875 shares issued; 1,512,104 shares outstanding
2007 - 2,204,875 shares issued; 1,552,484 shares outstanding 15,121 15,525
Discount on investment in subsidiary (1,792,325) --
Additional paid-in capital 719,702 719,702
Accumulated other comprehensive loss (1,114,987) (1,096,000)
Accumulated deficit (22,176,233) (22,685,498)
Treasury stock, 3,000 Class A shares, at cost (28,800) (28,800)
------------ ------------
Total stockholders' equity 1,732,645 2,249,941
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,262,581 $ 12,807,196
============ ============
See accompanying notes to condensed consolidated financial statements.
3
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the nine months For the three months
Ended September 30, Ended September 30,
2008 2007 2008 2007
---------------- ---------------- ---------------- ----------------
SALES $ 125,152 $ 1,233,602 $ 46,448 $ 317,825
COST OF SALES -- -- -- --
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 125,152 1,233,602 46,448 317,825
---------------- ---------------- ---------------- ----------------
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses 1,024,529 565,496 324,158 184,247
Amortization of financing costs 72,396 130,313 -- 43,438
Depreciation and amortization 4,738 6,822 1,443 (537)
---------------- ---------------- ---------------- ----------------
Total selling, general and administrative expenses 1,101,663 702,631 325,601 227,148
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (976,511) 530,971 (279,153) 90,677
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Other income 461,320 307,333 116,465 42,728
Gain on revaluation of derivatives 3,690,731 1,293,563 65,927 18,434
Amortization of discount on debt (1,840,677) (2,858,845) (81,757) (866,435)
Interest expense (825,598) (387,441) (117,618) (128,900)
---------------- ---------------- ---------------- ----------------
Total other income (expense) 1,485,776 (1,645,390) (16,983) (934,173)
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 509,265 (1,114,419) (296,136) (843,496)
PROVISION FOR INCOME TAXES -- -- -- --
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 509,265 (1,114,419) (296,136) (843,496)
LOSS FROM DISCONTINUED OPERATIONS -- (753,238) -- (132,086)
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY NET INCOME -- -- 11,191 --
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHARES $ 509,265 $ (1,867,657) $ (284,945) $ (975,582)
================ ================ ================ ================
NET INCOME (LOSS) PER COMMON SHARE
Continuing Operations - Basic $ 0.00 $ (0.01) $ (0.00) $ (0.01)
================ ================ ================ ================
Continuing Operations - Diluted $ 0.00 $ -- $ -- $ --
================ ================ ================ ================
Discontinued Operations - Basic $ 0.00 $ (0.01) $ (0.00) $ (0.01)
================ ================ ================ ================
Discontinued Operations - Diluted $ 0.00 $ -- $ -- $ --
================ ================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,528,962,327 93,101,624 2,342,834,778 124,387,175
================ ================ ================ ================
Diluted 10,000,000,000 -- -- --
================ ================ ================ ================
See accompanying notes to condensed consolidated financial statements.
4
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
------------ ------------
Balance at beginning of the period $ (1,096,000) $ (376,559)
Unrealized (loss) on securities available for sale:
Unrealized (loss) arising during the period (9,246) (996,350)
Less: reclassification adjustment for gains (losses)
included in net income (loss) (9,741) 225,113
------------ ------------
Net change for the period (18,987) (771,237)
------------ ------------
Balance at end of the period $ (1,114,987) $ (1,147,796)
============ ============
See accompanying notes to condensed consolidated financial statements.
5
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 509,265 $(1,114,419)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation of fixed assets and amortization of intangibles 4,504 6,822
Amortization of prepaid finance costs 72,396 130,313
Amortization of discount on debt conversion 1,238,514 2,858,845
Beneficial interest on issuance of stock 293,951 --
(Gain) loss on sales of securities available for sale (10,239) 225,113
Interest and dividends earned on investments (110,659) (100,076)
Non-cash consulting revenues earned -- (1,120,000)
Gain on revaluation of derivatives (2,591,292) (1,293,563)
Issuance of common stock for services 6,000 --
Changes in certain assets and liabilities:
(Increase) in accounts and notes receivable (84,588) --
(Increase) in prepaid expenses and other assets (2,397) (42,229)
Increase in accounts payable and accrued liabilities 379,085 332,910
(Decrease) in deferred revenues -- (37,500)
Increase in related party liabilities 86,331 57,153
----------- -----------
Total cash (used in) operating activities (209,129) (96,631)
----------- -----------
Net loss from discontinued operations -- (753,238)
Net effect on cash flow from spin-off of discontinued operations -- 584,166
----------- -----------
Total cash (used in) operating activities of discontinued operations -- (169,072)
----------- -----------
Total cash (used in) operating activities (209,129) (265,703)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (4,707)
Increase in costs of trademarks and other intangibles (9,160) (7,701)
Net proceeds from sales of securities available for sale 20,737 182,378
Investment in securities and loans in unaffiliated companies (77,250) (25,000)
Net redemption of principal and interest on marketable securities 4,913,964 (1,079)
Net effect on cash flow from consolidation of majority owned investment (622,151) --
----------- -----------
Total cash provided by investing activities from continuing operations 4,226,140 143,891
----------- -----------
Adjustments to reconcile total cash (used in) investing activities from
discontinued operations -- (6,272)
----------- -----------
Total cash provided by investing activities 4,226,140 137,619
----------- -----------
See accompanying notes to condensed consolidated financial statements.
6
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings 5,660,000 --
Repayment of short term borrowings (1,746,968) --
Repayment of convertible debentures (4,796,510) --
----------- -----------
Total cash (used in) financing activities (883,478) --
----------- -----------
Adjustments to reconcile total cash provided by financing activities from
discontinued operations -- 154,000
----------- -----------
Total cash provided by (used in) financing activities (883,478) 154,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,133,533 25,916
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 79,919 31,235
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,213,452 $ 57,151
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 36,825 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
a) On March 12, 2008, the Company acquired 1,444.44 shares of iVoice
Technology, Inc.'s Series A 10% Convertible Preferred Stock for
$1,444,444. This transaction was eliminated in consolidation.
b) The Company exchanged $75,535 of amounts due from iVoice Technology, Inc.
and B Green Innovations, Inc. into Convertible Promissory Notes of the
same amount. These transactions were eliminated in consolidation.
See accompanying notes to condensed consolidated financial statements.
7
IVOICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
For the nine months ended September 30, 2008:
- ---------------------------------------------
a) The Company issued 1,805,499,209 shares of Class A common stock to YA
Global Investments, LP as repayment of principal on outstanding convertible
debentures, valued at $778,751.
b) The Company issued 316,000,000 shares of Class A Common upon the conversion
of 40,380 shares of Class B Common Stock.
c) The Company received 99,600,000 shares of Thomas Pharmaceuticals, Ltd.
Class A common stock on conversion of $10,167 of convertible debentures
receivable.
d) The Company exchanged $80,198 of amounts due from SpeechSwitch, Inc. into a
Convertible Promissory Note of the same amount.
e) The Company received 151,000,000 shares of SpeechSwitch, Inc. Class A
common stock on conversion of $12,080 of convertible notes receivable.
f) The Company received 42,000,000 shares of iVoice Technology, Inc. Class A
common stock on conversion of $13,440 of convertible notes receivable. This
transaction was eliminated in consolidation.
g) The Company exchanged $59,302 of amounts due from Thomas Pharmaceuticals,
Ltd. into a Convertible Promissory Note of the same amount.
h) The Company issued 60,000,000 shares of Class A common stock to Kenneth
Glynn for legal services, valued at $6,000, related to continuation of work
on patent prosecution.
For the nine months ended September 30, 2007:
- ---------------------------------------------
a) The Company issued 94,127,258 shares of Class A common stock to YA Global
Investments, LP. (f/k/a Cornell Capital Partners) as repayment of principal
on outstanding convertible debentures, valued at $290,250.
b) The Company received 4,000,000 shares of Class A common stock of Deep Field
Technologies as compensation for consulting services to be provided
pursuant to the terms of the Consulting Agreement entered into on February
13, 2007. The value of the agreement was determined to be $1,120,000 and is
being amortized over six months ending August 13, 2007.
c) The Company issued 2,012,651 shares of Class A Common upon the conversion
of 10,863 shares of Class B Common Stock
See accompanying notes to condensed consolidated financial statements.
8
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements include
the accounts of iVoice, Inc. (the "Company" or "iVoice") and its wholly owned
subsidiary, iVoice Innovations, Inc. and its majority owned public company,
iVoice Technology, Inc. These condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. It is suggested that these condensed
consolidated financial statements be read in conjunction with the December 31,
2007 audited financial statements and the accompanying notes thereto.
Between February 11, 2004 and August 5, 2005, the Company completed the transfer
of certain business segments and their related assets and liabilities to its
four wholly owned subsidiaries Trey Resources, Inc, SpeechSwitch, Inc, iVoice
Technology, Inc and Deep Field Technologies, Inc. These companies were then
spun-off from iVoice as special dividends of the shares of Class A common Stock
of the respective companies to the iVoice stockholders. Effective with the
spin-off of the four subsidiaries, SpeechSwitch, iVoice Technology, Trey
Resources and Deep Field Technologies now operate as independent publicly traded
entities.
On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology,
Inc.'s Series A 10% Convertible Preferred Stock for $1,444,444. The holder of
each share of Series A Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Series A Preferred Stock could then be
converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. In addition, the holders of the
Series A Preferred Stock shall not have in the aggregate more than seventy
percent (70%) of the total votes of all classes of voting stock of the
Corporation that would vote at a meeting of shareholders. Based on this voting
formula, it was determined that iVoice, Inc. has voting rights equal to 70% of
the voting stock of iVoice Technology and as such, according to APB Opinion No.
18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK", iVoice,
Inc. is required to consolidate the results of operations of iVoice Technology
with those of iVoice and its other subsidiary.
The Company is publicly traded and is currently traded on the Over The Counter
Bulletin Board ("OTCBB") under the symbol "IVOI".
9
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Principles of Consolidation
- ---------------------------
The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
iVoice Innovations, Inc. and its majority owned public company, iVoice
Technology, Inc. ("iVoice Technology"). All significant inter-company
transactions and balances have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements are in conformity with accounting
principles generally accepted in the United States of America which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
- -------------------
The parent Company obtains its income primarily from the sales or licensing of
its patents and patent applications. Revenues for the sales of our patents are
recorded upon transfer of title. The patent revenues are reported net of any
broker fees or commissions.
The Company also is reporting revenues for iVoice Technology which derives its
revenues from the licensing of its software product and optional customer
support (maintenance) service. iVoice Technology's standard license agreement
provides for a one-time fee for use of the company's product in perpetuity for
each computer or CPU in which the software will reside. iVoice Technology's
software application is fully functional upon delivery and implementation and
does not require any significant modification or alteration. iVoice Technology
also offers customers an optional annual software maintenance and support
agreement for the subsequent one-year periods.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company had cash
and cash equivalents at September 30, 2008 and December 31, 2007 of $3,213,452
and $79,919, respectively.
Concentration of Credit Risk
- ----------------------------
The Company maintains cash balances at a financial institution that is insured
by the Federal Deposit Insurance Corporation up to $250,000. The cash
equivalents are not insured. The Company has uninsured cash balances at
September 30, 2008 and December 31, 2007 of $2,673,629 and $29,148,
respectively.
Marketable Securities
- ---------------------
Marketable securities consist of auction rate securities with auction reset
periods less than 12 months and are stated at fair value. The cost of securities
sold is based on specific identification. The Company had marketable securities
at September 30, 2008 and December 31, 2007 of $5,900,990 and $10,814,954,
respectively.
10
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Securities Available-for-sale
- -----------------------------
The Company has evaluated its investment policies consistent with FAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and determined
that all of its investment securities are to be classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption Accumulated Other Comprehensive Income (Loss). The Company had
securities available for sale at September 30, 2008 and December 31, 2007 of
$709,083 and $676,272, respectively.
Fair Value of Financial Instruments
- -----------------------------------
The Company estimates that the fair value of all financial instruments at
September 30, 2008 and December 31, 2007, as defined in FAS 107, does not differ
materially from the aggregate carrying values of its financial instruments
recorded in the accompanying condensed consolidated balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment is
required in interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
Earnings (Loss) Per Share
- -------------------------
FAS No. 128, "Earnings Per Share" requires presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS").
The computation of basic EPS is computed by dividing income available to common
stockholders by the weighted average number of outstanding Common shares during
the period. Diluted earnings per share gives effect to all dilutive potential
Common shares outstanding during the period. The computation of diluted EPS for
the nine months ended September 30, 2008 does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on
earnings. Common stock equivalents for the nine months ended September 30, 2007,
were not included in the computation of diluted EPS when the Company reported a
loss because to do so would be anti-dilutive.
The shares used in the computations are as follows:
Nine months ended September 30,
2008 2007
-------------- --------------
Net income (loss) from continuing operations $ 509,265 $ (1,114,419)
============== ==============
Net income (loss) from discontinued operations $ -- $ (753,238)
============== ==============
Minority interest in net income $ -- $ --
============== ==============
Net income (loss) applicable to common shares $ 509,265 $ (1,867,657)
============== ==============
Weighted average shares outstanding - basic 1,528,962,327 93,101,624
============== ==============
Weighted average shares outstanding - diluted (see note) 10,000,000,000 --
============== ==============
Net income (loss) per common share outstanding:
Continuing operations - basic $ 0.00 $ (0.01)
============== ==============
Continuing operations - diluted $ 0.00 $ --
============== ==============
Discontinued operations - basic $ 0.00 $ (0.01)
============== ==============
Discontinued operations - diluted $ 0.00 $ --
============== ==============
11
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
The Company had common stock equivalents in excess of its authorized capital at
September 30, 2008. As such, the maximum authorized shares of 10,000,000,000 is
shown for diluted earnings per common share calculations. The Company had common
stock equivalents of 50,302,311,111 at September 30, 2008.
Comprehensive Income (Loss)
- ---------------------------
FAS No. 130, "Reporting Comprehensive Income", establishes standards for the
reporting and display of comprehensive income (loss) and its components in the
financial statements. The items of other comprehensive income (loss) that are
typically required to be displayed are foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. As of September 30, 2008 and 2007, the Company has
several items that represent comprehensive loss, and thus, has included a
statement of comprehensive loss.
Reclassification of accounts in the prior period financial statements The
Company has reclassified certain accounts in the statements of operations and
statements of cash flows for the nine months ended September 30, 2007 to reflect
the Spin-off of Thomas Pharmaceuticals, Ltd. The statements reflect the
reclassification of these operations to below the line as discontinued
operations in accordance with the provisions of FAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets". There has been no effect on net
loss for the nine months ended September 30, 2007.
The Company has also reclassified the auction rate securities of $10,823,432
from Cash equivalents to Marketable Securities at September 30, 2007. This
reclassification has no effect on the total assets of $12,978,830 at September
30, 2007 or total cash (used in) operating activities of continuing operations
of $96,631 for the nine months ended September 30, 2007.
Derivative Liabilities
- ----------------------
During April 2003, the Financial Accounting Standards Board issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS 149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement requires that contracts with comparable
characteristics be accounted for similarly and clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS 149 is effective for contracts entered into or modified
after September 30, 2003, except in certain circumstances, and for hedging
relationships designated after September 30, 2003. The financial statements for
the nine months ended September 30, 2008 include the recognition of the
derivative liability on the underlying securities issuable upon conversion of
the YA Global Convertible Debentures (f/k/a/ Cornell Convertible Debentures).
Recent Accounting Pronouncements
- --------------------------------
In December 2007, the FASB issued SFAC No 141(R), "Business Combinations." This
statement provides new accounting guidance and disclosure requirements for
business combinations. SFAS No 141(R) is effective for business combinations
which occur in the first fiscal year beginning on or after December 15, 2008.
12
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
In December 2007, the FASB finalized the provisions of the Emerging Issues Task
Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This
EITF Issue provides guidance and requires financial statement disclosures for
collaborative arrangements. EITF Issue No. 07-1 is effect for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company is currently assessing the effect of EITF Issue No. 07-1 on its
financial statements, but it is not expected to be material.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" ("SFAS No. 157"), which clarifies the
definition of fair value whenever another standard requires or permits assets or
liabilities to be measured at fair value. Specifically, the standard clarifies
that fair value should be based on the assumptions market participants would use
when pricing the asset or liability, and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS No. 157 does
not expand the use of fair value to any new circumstances, and must be applied
on a prospective basis except in certain cases. The standard also requires
expanded financial statement disclosures about fair value measurements,
including disclosure of the methods used and the effect on earnings.
In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of
FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the
effective date of SFAS No. 157 to fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, for all nonfinancial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Examples of
items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial
liabilities initially measured at fair value in a business combination (but not
measured at fair value in subsequent periods), and long-lived assets, such as
property, plant and equipment and intangible assets measured at fair value for
an impairment assessment under SFAS No. 144.
The partial adoption of SFAS No. 157 on January 1, 2008 with respect to
financial assets and financial liabilities recognized or disclosed at fair value
in the financial statements on a recurring basis did not have a material impact
on the Company's financial statements. See Note 3 for the fair value measurement
disclosures for these assets and liabilities. The Company is in the process of
analyzing the potential impact of SFAS No. 157 relating to its planned January
1, 2009 adoption of the remainder of the standard.
On January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value, which
are not otherwise currently required to be measured at fair value. Under SFAS
No. 159, the decision to measure items at fair value is made at specified
election dates on an instrument-by-instrument basis and is irrevocable. Entities
electing the fair value option are required to recognize changes in fair value
in earnings and to expense upfront costs and fees associated with the item for
which the fair value option is elected. The new standard did not impact the
Company's Condensed Consolidated Financial Statements, as the Company did not
elect the fair value option for any instruments existing as of the adoption
date. However, the Company will evaluate the fair value measurement election
with respect to financial instruments the Company enters into in the future.
13
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160").
SFAS 160 requires that ownership interests in subsidiaries held by parties other
than the parent, and the amount of consolidated net income, be clearly
identified, labeled, and presented in the consolidated financial statements
within equity, but separate from the parent's equity. It also requires once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 will be effective beginning January 1, 2009. Management anticipates that the
adoption of SFAS 160 will not have a material impact on the Company's financial
statements.
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements
for derivative instruments and hedging activities. SFAS 161 requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation and requires quantitative disclosures about fair
value amounts and gains and losses on derivative instruments. It also requires
disclosures about credit-related contingent features in derivative agreements.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. SFAS 161 encourages, but does not require, comparative disclosures
for earlier periods at initial adoption. The adoption of SFAS 161 is not
expected to have a material impact on our consolidated financial condition or
results of operations.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life
of Intangible Assets. FSP 142-3 amends the factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets under SFAS 142, Goodwill and Other Intangible
Assets, and adds certain disclosures for an entity's accounting policy of the
treatment of the costs, period of extension, and total costs incurred. FSP 143-3
must be applied prospectively to intangible assets acquired after January 1,
2009. The Company is currently evaluating the impact that FSP 142-3 will have on
its financial position or results of operations.
In May 2008, the Financial Accounting Standards Board (the "FASB") issued FAS
No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("FAS
162"). This statement identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in accordance with
GAAP. With the issuance of this statement, the FASB concluded that the GAAP
hierarchy should be directed toward the entity and not its auditor, and reside
in the accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." This statement is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The adoption of FAS 162 is not expected to have
a material impact on the Company's results from operations or financial
position.
14
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
NOTE 2 - DISCONTINUED OPERATIONS
On November 21, 2007, iVoice completed the distribution of Thomas
Pharmaceuticals through the issuance of one share of Thomas Pharmaceuticals
Class A common stock for every share of iVoice Class A common stock held on the
record date of November 14, 2007.
The summarized results of operations for the nine months ended September 30,
2007 are as follows:
Revenues $ 26,707
Cost of revenues 90,976
-----------
Gross profit (64,269)
Operating expenses 577,464
-----------
Operating loss (641,733)
Other expense 111,505
Provision for income taxes --
-----------
Net loss $ (753,238)
===========
NOTE 3 - FAIR VALUE MEASUREMENTS
On January 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for
measuring fair value under Generally Accepted Accounting Principles and expands
fair value financial statement disclosure requirements. SFAS 157's valuation
techniques are based on observable and unobservable inputs. Observable inputs
reflect readily obtainable data from independent sources, while unobservable
inputs reflect our market assumptions. SFAS 157 classifies these inputs into the
following hierarchy:
Level 1 Inputs- Quoted prices for identical instruments in active markets.
Level 2 Inputs- Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 Inputs- Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial
assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008.
15
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Assets Level I Level II Level III Total
---------- ---------- ---------- ----------
Marketable securities $5,900,990 $ -- $ -- $5,900,990
Securites available for sale 709,083 -- -- 709,083
Notes receivable -- 249,037 -- 249,037
Convertible debentures -- 908,813 -- 908,813
---------- ---------- ---------- ----------
Total Assets $6,610,073 $1,157,850 $ -- $7,767,923
========== ========== ========== ==========
Short term loans $ -- $3,913,032 $ -- $3,913,032
Convertible debentures -- 1,063,581 -- 1,063,581
Derivative liabilities -- 1,824,195 -- 1,824,195
---------- ---------- ---------- ----------
Total Liabilities $ -- $6,800,808 $ -- $6,800,808
========== ========== ========== ==========
NOTE 4 - MARKETABLE SECURITIES
At various times since 2004, the Company had deposited proceeds from debt
financing into short-term securities with our Investment broker. During 2006 and
2007, these short-term securities were exchanged for auction rate preferred
shares ("ARPS") which provided greater returns on our investments. ARPS have
long-term maturity with the interest rate being reset through Dutch auctions
that are typically held every 7, 28 or 35 days. The securities trade at par and
are callable at par on any interest payment date at the option of the issuer.
Interest is paid at the end of each auction period. Our auction rate securities
are all AAA rated. The Company had marketable securities at September 30, 2008
and December 31, 2007 of $5,900,990 and $10,814,954, respectively.
NOTE 5 - SECURITIES AVAILABLE FOR SALE
On January 6, 2006 and April 27, 2006, iVoice, Inc. purchased an aggregate of
$550,000 of Thomas NJ Series B Convertible Preferred Stock. The initial value of
each share is $1,000 and is subject to adjustment for stock dividends,
combinations, splits, recapitalizations and the like. The holders of these
shares are entitled to receive dividends at a rate of 10% per annum based on the
initial value of the shares outstanding. Upon liquidation, the holders of these
shares will receive up to 125% of the initial value of the shares plus
accumulated and unpaid dividends, but following the distribution to any senior
debt or senior equities. The holders of these shares may convert their shares
into Class A Common Stock at the price per share equal to eighty percent (80%)
of the lowest closing bid price of the Common Stock for the five (5) trading
days immediately preceding the conversion date, but cannot be converted into
more than 9.99% of the total Class A Common Stock at that time of conversion.
The holders of these shares shall have one vote for each shares of Class A
Common Stock into which each shares of Series B Preferred Shares could be
converted assuming a conversion price of eighty percent (80%) of the lowest
closing bid price of the Common Stock for the five (5) trading days immediately
preceding the record date, but are limited to voting rights to no more than
9.99% of the total voting rights of the aggregate of the Series B Preferred
Stock, Class A Common Stock and Class B Common Stock shareholders. The accounts
are valued at the initial stated value
16
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
plus earned dividends. At September 30, 2008 and December 31, 2007, the total
balance is $693,552 and $652,264, respectively.
On February 13, 2007, the Company received 4,000,000 shares for Deep Field
Technologies Class A Common Stock as compensation pursuant to the Consulting
Agreement with Deep Field Technologies, valued at $1,120,000. The Company
provided "general corporate finance advisory and other similar consulting
services" for a period of six (6) months from the date of the agreement. At
September 30, 2008, the book value of these securities is $1,120,000 and the
market value is $3,600. The cumulative unrealized loss of $1,116,400 is included
in the Other Comprehensive Income (Loss).
During the nine months ended September 30, 2008, the Company received an
aggregate of 99,600,000 shares of Thomas Pharmaceuticals, Ltd. Class A Common
Stock upon conversion of $8,928 of 10% Secured Convertible Debentures receivable
dated January 6, 2006. During the nine months ended September 30, 2008, the
Company sold 71,240,000 shares for a net proceeds of $13,304. The book value of
the remaining shares is $2,269 and the market value is $2,836. The unrealized
gain of $567 is included in the Other Comprehensive Income (Loss).
On March 10, 2008 and May 21, 2008, the Company received an aggregate of
151,000,000 shares of SpeechSwitch, Inc. Class A Common Stock upon conversion of
$12,080 of Convertible Promissory Note receivable dated March 5, 2008. During
the nine months ended September 30, 2008, the Company sold 68,304,970 shares for
a net proceeds of $8,149. The book value of the remaining shares is $6,615 and
the market value is $8,270 at September 30, 2008. The unrealized gain of $1,655
is included in the Other Comprehensive Income (Loss).
On March 10, 2008 and March 18, 2008, the Company received an aggregate of
42,000,000 shares of iVoice Technology, Inc. Class A Common Stock upon
conversion of $13,440 of Convertible Promissory Note receivable dated March 5,
2008. During the nine months ended September 30, 2008, the Company sold
1,556,700 shares for a net proceeds of $910. The book value of the remaining
shares is $12,942 and the market value is $12,133 at September 30, 2008. The
unrealized loss of $809 is included in the Other Comprehensive Income (Loss).
Cash receipts from the sales of the securities are deposited in short term money
market funds at our broker. Periodically these funds are transferred to our
operating cash account. At September 30, 2008, the unremitted balance in the
money market fund at our broker was $1,634.
As of September 30, 2008, the aggregate book value of these securities was
$1,837,012 before elimination, the market value was $709,083 and the cumulative
unrealized loss was $1,114,987. At September 30, 2008, the balance of the iVoice
Technology securities are eliminated in consolidation.
NOTE 6 -PROMISSORY NOTES RECEIVABLE
On February 4, 2008, iVoice Technology advanced $30,000 to Atire Technologies,
Inc., an acquisition candidate, in the form of a Promissory Note, due February
4, 2010, at an interest of 8% per annum. The terms of the note provided deferred
payments of interest only starting on July 4,
17
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
2008 and principal and interest payments starting on October 4, 2008. As of
September 30, 2008, the remaining principal balance due on the note is $28,290
plus accrued interest of $592.
On March 5, 2008, the Company converted its outstanding accounts due from
SpeechSwitch, Inc. for unpaid administrative services in the amount of $50,652
into a convertible promissory note at the rate of prime plus 1 percent per annum
(6% at September 30, 2008). During the nine months ended September 30, 2008,
additional amounts were added to this note based on any unpaid administrative
service fees and will accrue interest at the above specified rate from date of
advance until paid. The principal and interest shall be due and payable as
follows: (a) interest shall accrue monthly on the unpaid balance and shall be
paid annually, and (b) principal shall be payable on demand. On March 10, 2008
and May 21, 2008, the Company received an aggregate of 151,000,000 shares of
SpeechSwitch, Inc. Class A Common Stock upon conversion of $12,080 of Promissory
Notes Receivable. At September 30, 2008, the balance of the note is $69,976,
which included accrued interest of $1,857.
On June 12, 2008, the Company converted its outstanding accounts due from Thomas
Pharmaceuticals, Ltd. for unpaid administrative services in the amount of
$47,302 into a convertible promissory note at the rate of prime plus 1 percent
per annum (6% at September 30, 2008). Additional amounts may be added to this
note based on any unpaid administrative service fees and will accrue interest at
the above specified rate from date of advance until paid. The principal and
interest shall be due and payable as follows: (a) interest shall accrue monthly
on the unpaid balance and shall be paid annually, and (b) principal shall be
payable on demand. At September 30, 2008, the balance of the note is $60,077,
which included accrued interest of $775.
On June 13, 2008, the Company invested $77,250 in Small Cap Advisor, Inc, a
wholly owned subsidiary of Thomas Pharmaceuticals, Ltd., in the form of a
Promissory Note, at an interest of prime plus 1 percent per annum (6% at
September 30, 2008). Additional amounts may be added to this note based on any
unpaid administrative service fees and will accrue interest at the above
specified rate from date of advance until paid. The principal and interest shall
be due and payable as follows: (a) interest shall accrue monthly on the unpaid
balance and shall be paid annually, and (b) principal shall be payable on
demand. As of September 30, 2008, the balance due on the note is $90,694, which
included accrued interest of $1,444.
The amounts due at September 30, 2008 are as follows:
Atire Technologies, Inc. $ 28,290
SpeechSwitch, Inc. 69,976
Thomas Pharmaceuticals, Ltd. 60,077
Small Cap Advisors, Inc. 90,694
---------
Total amounts due 249,037
Less long term portion (7,179)
---------
Total current portion $ 241,858
=========
18
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
NOTE 7 - CONVERTIBLE DEBENTURES RECEIVABLE
During 2006 and 2007, the Company purchased an aggregate of $710,000 of Thomas
NJ Secured Convertible Debentures. The holders of these debentures are entitled
to receive interest of 10%, compounded quarterly. Thomas NJ can redeem a portion
or all amounts outstanding under the Convertible Debentures at any time upon
thirty (30) business days advanced written notice. The redemption price shall be
equal to one hundred twenty-five percent (125%) multiplied by the portion of the
principal sum being redeemed, plus any accrued and unpaid interest. The Company
may, at its discretion, convert the outstanding principal and accrued interest,
in whole or in part, into a number of shares of Thomas Pharmaceuticals Class A
Common Stock at the price per share equal to eighty percent (80%) of the lowest
closing bid price of the Common Stock for the five (5) trading days immediately
preceding the conversion date, but they cannot be converted into more than 9.99%
of the total Class A Common Stock at that time of conversion. During the nine
months ended September 30, 2008, the Company converted $8,928 of principal into
99,600,000 shares of Thomas Pharmaceuticals Class A Common Stock at a conversion
price of $.00008. The debentures are valued at the principal value plus
accumulated interest. At September 30, 2008, the total balance is $908,813,
which includes accrued interest.
NOTE 8 - CONSOLIDATION OF MAJORITY OWNED SUBSIDIARY AND MINORITY INTEREST
On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology's
Series A 10% Convertible Preferred Stock for $1,444,444. The holder of each
share of Series A Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Series A Preferred Stock could then be
converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. In addition, the holders of the
Series A Preferred Stock shall not have in the aggregate more than seventy
percent (70%) of the total votes of all classes of voting stock of the
Corporation that would vote at a meeting of shareholders. Based on this voting
formula, it was determined that iVoice, Inc. has voting rights equal to 70% of
the voting stock of iVoice Technology and as such, according to APB Opinion No.
18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK", iVoice,
Inc. is required to consolidate the results of operations of iVoice Technology
with those of iVoice and its other subsidiary. iVoice Technology had a deficit
net worth prior to consolidation with iVoice and as such, iVoice was required to
record a discount on investment in subsidiary in the amount of $1,792,325 in
consolidation. iVoice is also required to recognize the minority shareholders'
interest in net income equal to 30% of the net profit of iVoice Technology. For
the nine months ended September 30, 2008, iVoice Technology reported an
accumulated net loss of $145,759 and as such, there is no minority shareholders'
interest in net income for the period.
NOTE 9 - SHORT TERM LOANS PAYABLE
On March 7, 2008 and May 8, 2008, the Company received an aggregate of
$5,660,000 from two Express Creditline Loans from Smith Barney that are
collateralized by the proceeds available from the
19
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
sales of the auction rate preferred shares ("ARPS") discussed in Note 3. The
interest rate charged on the loan is tied to the dividend rates earned on the
ARPSs. When an ARPS is sold, a portion of the proceeds is applied to pay down
the short term loan and the balance is forwarded to the Company. During the nine
months ended September 30, 2008, $5,275,000 of the ARPSs were sold of which
approximately $1,752,000 was applied to the outstanding loan and accrued
interest and the balance was remitted to the Company. As of September 30, 2008
the remaining balance of the loan is $3,913,032.
NOTE 10 - CONVERTIBLE DEBENTURES PAYABLE
On May 11, 2006 the Company issued to YA Global a $5,544,110 secured convertible
debenture due on May 11, 2008 bearing interest of 7.5% (see Note 15). This
debenture replaced a promissory note with a principal balance of $5,000,000 and
$544,110 of accrued interest due to YA Global from June 15, 2005. During the
period of January 1, 2008 until May 12, 2008, we issued 882,165,877 shares of
Class A common stock, with a value of $529,640, as repayment of $401,700 of
principal. The difference of $127,940 is charged to the Statement of Operations
as beneficial interest. On May 12, 2008, the remaining principal balance of
$4,796,510 was repaid in cash from the proceeds of the Smith Barney short term
loans and sales of the ARPSs discussed above. As of September 30, 2008, the
unpaid balance of accrued interest was $799,139.
On May 25, 2006, the Company issued to YA Global a $1,250,000 secured
convertible debenture due on May 25, 2008 bearing interest of 7.5% per annum
pursuant to a Securities Purchase Agreement entered into between us and YA
Global. On February 21, 2008, this debenture was amended to extend the maturity
date until May 25, 2010 and to raise the interest rate to 15% per annum. During
the nine months ended September 30, 2008, we issued 923,333,332 shares of Class
A common stock, with a value of $249,111, as repayment of $83,100 of principal.
The difference of $166,011 is charged to the Statement of Operations as
beneficial interest. As of September 30, 2008, the unpaid principal balance on
the secured convertible debenture is $1,166,900 plus accrued interest of
$274,185.
On October 31, 2007, the Company executed a waiver agreement with YA Global that
provides that if the Company reduces the debt to $141,523 that YA Global will
waive its rights to any future payments and will consider the account paid in
full. This waiver agreement was executed to compensate the Company for losses
incurred on the sales of the Corporate Strategies investments.
On April 16, 2007, iVoice Technology issued a Secured Convertible Debenture
dated March 30, 2007 to YA Global Investments for the sum of $700,000 in
exchange for a previously issued note payable for the same amount. The Debenture
has a term of three years, and pays interest at the rate of 5% per annum. YA
Global has the right to convert a portion or the entire outstanding principal
into iVoice Technology's Class A Common Stock at a Conversion Price equal to
eighty percent (80%) of the lowest closing Bid Price of the Common Stock during
the five (5) trading days immediately preceding the Conversion Date. YA Global
may not convert the Debenture into shares of Class A Common Stock if such
conversion would result in YA Global beneficially owning in excess of 4.9% of
the then issued and outstanding shares of Class A Common Stock. On March 14,
2008, iVoice Technology and YA Global Investments agreed that iVoice Technology
would redeem all amounts outstanding under the Debenture, except for the
$186,557 of the outstanding interest remaining on the original notes payable
that were originally exchanged for the Debenture. The amount redeemed was
20
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
$691,021, consisting of the remaining balance of the Debenture of $572,815,
accrued interest of $32,284, and a redemption premium of $85,922. The Debenture
was amended to change amount to $186,557 with a due date of March 14, 2009. The
Debenture shall accrue interest at the rate of 15% per annum, and shall be
convertible at a conversion price equal to 70% of the lowest closing bid price
of iVoice Technology's common stock during the 30 trading days immediately
preceding the conversion date. No conversions can be made prior to November 1,
2008. As of September 30, 2008, the outstanding balance on the Convertible
Debenture was $186,557, plus accrued interest of $15,333.
The aggregate principal value of the remaining debentures at September 30, 2008
is $1,353,457. This amount is shown on the balance sheet net of the unamortized
portion of the discount on conversion of $289,876. This discount is being
amortized over the life of the debenture and is being amortized as debt discount
on the statement of operations.
NOTE 11 - DERIVATIVE LIABILITY
In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" and EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", the conversion
feature associated with the YA Global Secured Convertible Debentures represents
embedded derivatives. As such, the Company had recognized embedded derivatives
in the amount of $6,908,078 as a derivative liability in the accompanying
condensed consolidated balance sheet, and it is now measured at its estimated
fair value of $1,657,821.
The estimated fair value of the embedded derivative has been calculated based on
a Black-Scholes pricing model using the following assumptions:
At Issue At 9/30/08
-------- ----------
Fair market value of stock $0.096 - $0.125 $ 0.00010
Exercise price $0.086 - $0.113 $ 0.00007
Dividend yield 0.00% 0.00%
Risk free interest rate 5.47% 5.47%
Expected volatility 195.36% - 196.54% 310.52%
Expected life 2.00 years 3.00 years
On the iVoice Technology debentures, iVoice Technology determined that the
conversion feature met the criteria of an embedded derivative, and therefore the
conversion feature of their Debenture needed to be bifurcated and accounted for
as a derivative. The fair value of the embedded conversion was estimated at the
date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 3
years; and volatility: 383.29%. The conversion feature of the debenture was
recorded as a derivative liability. As such, in March 2007 the Company recorded
the conversion options as a liability, recorded a debt discount of $700,000, and
charged Loss on Valuation of Derivative for $492,403, resulting primarily from
calculation of the conversion price. On March 14, 2008, a substantial portion of
this debenture was redeemed and as of September 30, 2008, the estimated fair
value is $166,374.
21
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Changes in the fair value of the embedded derivatives are calculated at each
reporting period and recorded in gain on revaluation of derivatives in the
condensed consolidated statements of operations. During the nine months ended
September 30, 2008, there was a change in the fair value of the embedded
derivatives, which resulted in a gain of $3,690,731.
In accordance with SFAS 133, SFAS 150, "Accounting for Certain Financials
Instruments With Characteristics of Both Liabilities and Equity" and EITF 00-19,
the fair market value of the derivatives and warrants are bifurcated from the
convertible debentures as a debt discount. The debt discount of is being
amortized over the life of the convertible debentures. Amortization expense on
the debt discount on the convertible debentures for the nine months ended
September 30, 2008 was $1,840,677, which includes the acceleration of the debt
discount on the redeemed debenture in iVoice and iVoice Technology.
NOTE 12 - RELATED PARTY ACCOUNTS
From time to time, the Company has entered into various loan agreements and
employment agreements with Jerome R. Mahoney, President and Chief Executive
Officer of the Company. As of September 30, 2008, the balances due to Mr.
Mahoney where: a) loan of $2,295; b) accrued interest of $5,191; and c) deferred
compensation is $255,138. The loan accrues interest at 9.5% per year on the
unpaid balance. Balances due to Mr. Mahoney are convertible into either (i) one
Class B common stock share of iVoice, Inc., $.01 par value, for each dollar
owed, or (ii) the number of Class A common stock shares of iVoice, Inc.
calculated by dividing (x) the sum of the principal and interest that the Note
holder has decided to prepay by (y) fifty percent (50%) of the lowest issue
price of Series A common stock since the first advance of funds under this Note,
whichever the Note holder chooses, or (iii) payment of the principal of this
Note, before any repayment of interest. The Board of Directors of the Company
maintains control over the issuance of shares and may decline the request for
conversion of the repayment into shares of the Company.
In August 2005, iVoice Technology had assumed an outstanding promissory demand
note in the amount of $190,000 payable to Jerome Mahoney, then, the
Non-Executive Chairman of the Board of iVoice Technology. The note bears
interest at the rate of prime plus 2.0% per annum (7% at September 30, 2008) on
the unpaid balance until paid. Under the terms of the Promissory Note, at the
option of the Note holder, principal and interest can be converted into either
(i) one share of Class B Common Stock of iVoice Technology, Inc., par value
$.01, for each dollar owed, (ii) the number of shares of Class A Common Stock of
iVoice Technology, Inc. calculated by dividing (x) the sum of the principal and
interest that the Note holder has requested to have prepaid by (y) eighty
percent (80%) of the lowest issue price of Class A Common Stock since the first
advance of funds under this Note, or (iii) payment of the principal of this
Note, before any repayment of interest. The Board of Directors of iVoice
Technology maintains control over the issuance of shares and may decline the
request for conversion of the repayment into shares of the iVoice Technology. As
of September 30, 2008, the outstanding balance was $141,708, plus accrued
interest of $79,867.
22
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
On August 1, 2004, iVoice Technology entered into a five-year employment
agreement with Jerome Mahoney to serve as Non-Executive Chairman of the Board of
Directors of iVoice Technology with a base salary of $85,000 for the first year
with annual increases based on the Consumer Price Index. A portion of Mr.
Mahoney's compensation shall be deferred until such time that the Board of
Directors of iVoice Technology determines that it has sufficient financial
resources to pay his compensation in cash. As of September 30, 2008, iVoice
Technology has recorded $186,943 of deferred compensation due to Mr. Mahoney.
The Board of iVoice Technology has the option to pay Mr. Mahoney's compensation
in the form of Class B Common Stock. Pursuant to the terms of the Class B Common
Stock, a holder of Class B Common Stock has the right to convert each share of
Class B Common Stock into the number of shares of Class A Common Stock
determined by dividing the number of Class B Common Stock being converted by a
20% discount of the lowest price for which the Company had ever issued its Class
A Common Stock. On August 30, 2006 Mr. Mahoney was elected to the position of
President and Chief Executive Officer of iVoice Technology and no longer serves
as Non-Executive Chairman of the Board of iVoice Technology.
On March 5, 2008, the Company converted its outstanding accounts due from iVoice
Technology, Inc. for unpaid administrative services in the amount of $50,652
into a convertible promissory note at the rate of prime plus 1 percent per annum
(6% at September 30, 2008). During the nine months ended September 30, 2008 an
additional $29,547 was added to this note based on any unpaid administrative
services, and will accrue interest at the above specified rate from date of
advance until paid. The principal and interest shall be due and payable as
follows: (a) interest shall accrue monthly on the unpaid balance and shall be
paid annually, and (b) principal shall be payable on demand. On March 10, 2008
and March 18, 2008, the Company received an aggregate of 42,000,000 shares of
iVoice Technology, Inc. Class A Common Stock upon conversion of $13,440 of
Promissory Notes Receivable. At September 30, 2008, the balance of the note is
$68,501 which includes accrued interest of $1,742. This transaction is
eliminated in consolidation.
On March 11, 2008, the Company entered into a Stock Purchase Agreement with
iVoice Technology, Inc. for the purchase of 1,444.44 shares of iVoice
Technology's Series A 10% Secured Convertible Preferred Stock valued at
$1,444,444. The holders of the stock are entitled to receive dividends at a rate
10% per annum and will have voting rights for each share of Common Stock that
the Series A Preferred Stock would be converted into using the applicable
conversion price. The holders of the Series A Preferred Stock shall not have in
the aggregate more than 70% of the total votes of all classes of voting stock.
The Company also received $144,444 in funding fees on the transaction. This
transaction is eliminated in consolidation.
On March 11, 2008, the Company received a warrant to purchase common stock of
iVoice Technology, Inc. pursuant to the terms of the Stock Purchase Agreement.
The warrant provides that the Company can purchase shares of Class A common
stock at a price calculated by dividing $144,444 by the lowest price that iVoice
Technology has ever issued its Class A common stock, provided, that in no event
shall the holder be entitled to exercise this Warrant for a number of shares
which, upon giving effect to such exercise, would cause the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 9.99% of the outstanding shares of the Common Stock following such
exercise.
23
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Mr. Mahoney has a consulting agreement with B Green Innovations for annual
compensation of $24,000 and upon every annual anniversary thereafter, at the
rate based on the increase in the Consumer Price Index for All Urban Consumers
(New York-Northern N.J.-Long Island). Mr. Mahoney agreed to accept compensation
pursuant to this Consulting Agreement in the form of Class B Common Stock, par
value $.01 per share, in lieu of cash, for as long as the Board of Directors
decides in its sole discretion that the Company does not have the financial
resources to pay the Consultant in cash. The number of Class B Common Stock
shares to be issued to the Consultant pursuant to this Paragraph 2 shall be
equal to one share of Class B common stock for every dollar of compensation due
and owing the Consultant. As of September 30, 2008, Mr. Mahoney is due $10,000,
and no shares have been issued.
NOTE 13 - COMMON STOCK
Pursuant to the Company's certificate of incorporation, as amended, iVoice, Inc.
is authorized to issue 1,000,000 shares of preferred stock, par value of $1.00
per share, 10,000,000,000 shares of Class A common stock, no par value per
share, and 50,000,000 shares of Class B common stock, par value $.01 per share.
a) Preferred Stock
- ------------------
Preferred Stock consists of 1,000,000 shares of authorized preferred stock with
$1.00 par value. As of September 30, 2008, no shares were issued or outstanding.
b) Class A Common Stock
- -----------------------
Class A common stock consists of 10,000,000,000 shares of authorized common
stock with no par value. As of September 30, 2008, 2,602,173,527 shares were
issued and 2,602,170,527 shares were outstanding.
Each holder of Class A common stock is entitled to one vote for each share held
of record. Holders of our Class A common stock have no preemptive, subscription,
conversion, or redemption rights. Upon liquidation, dissolution or winding-up,
the holders of Class A common stock are entitled to receive our net assets pro
rata. Each holder of Class A common stock is entitled to receive ratably any
dividends declared by our board of directors out of funds legally available for
the payment of dividends. The Company has not paid any dividends on its common
stock and management does not contemplate doing so in the foreseeable future.
The Company anticipates that any earnings generated from operations will be used
to finance growth.
For the nine months ended September 30, 2008, the Company had the following
transactions in its Class A Common Stock:
1) The Company issued 1,805,499,209 shares of Class A common stock to YA
Global, valued at $778,751 as repayment of principal on an outstanding
convertible debenture valued at $484,800.
2) The Company issued 316,000,000 shares of Class A common stock upon
conversion of 40,380 shares of Class B common stock, pursuant to the
provisions of Class B common stock.
24
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
3) The Company issued 60,000,000 shares of Class A common stock to Kenneth
Glynn, valued at $6,000 for legal services related to the prosecution of
the portfolio of patents.
c) Class B Common Stock
- -----------------------
Class B Common Stock consists of 50,000,000 shares of authorized common stock
with $.01 par value. Each share of Class B common stock is convertible into
Class A common stock calculated by dividing the number of Class B shares being
converted by fifty percent (50%) of the lowest price that the Company had
previously issued its Class A common stock since the Class B shares were issued.
Each holder of Class B common stock has voting rights equal to the number of
Class A shares that would be issued upon the conversion of the Class B shares,
had all of the outstanding Class B shares been converted on the record date used
for purposes of determining which shareholders would vote. Holders of Class B
common stock are entitled to receive dividends in the same proportion as the
Class B common stock conversion and voting rights have to Class A common stock.
Jerome R. Mahoney is the sole owner of the Class B common stock. As of September
30, 2008, there are 2,204,875 shares issued and 1,512,104 shares outstanding.
Pursuant to the conversion terms of the Class B Common stock, on September 30,
2008, the 1,512,104 outstanding shares of Class B common stock are convertible
into 33,602,311,111 shares of Class A common stock.
d) Treasury Stock
- -----------------
On February 11, 2002, the Company repurchased 600,000 shares of Class A common
stock from a previous employee for $28,800. Following the reverse stock split on
April 27, 2006, the shares were converted into 3,000 shares of Class A common
stock.
NOTE 14 - GOING CONCERN
The Company has incurred substantial accumulated deficits, has an obligation to
deliver an indeterminable amount of common stock due on derivative liabilities
and has completed the process of spinning out the five operating subsidiaries.
These issues raise substantial doubt about the Company's ability to continue as
a going concern. Therefore, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheets is dependent upon
continued operations of the Company, which in turn, is dependent upon the
Company's ability to raise capital and/or generate positive cash flow from
operations.
25
IVOICE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2008 AND 2007
Since the spinoff of the three operating subsidiaries in 2005, the
Company has transitioned itself into a company focused on the development and
licensing of proprietary technologies. Following the sales of patents to Lamson
Holdings LLC, the Company has 9 remaining patent applications, which have been
awarded or are pending. These applications include various versions of the
"Wirelessly Loaded Speaking Medicine Container", which is also filed
internationally, the "Voice Activated Voice Operated Copier", the "Voice
Activated Voice Operational Universal Remote Control", "Wireless Methodology for
Talking Consumer Products" which is also filed internationally, "Product
Identifier and Receive Spoken Instructions" and "Traffic Signal System with
Countdown Signaling with Advertising and/or News Message".
The Company also continues to search for potential merger candidates with or
without compatible technology and products, which management feels may make
financing more appealing to potential investors.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
NOTE 15 - SUBSEQUENT EVENTS
During October 2008, the balance ($5.9 million) of the Auction Rate Securities
were converted into cash and the proceeds were used to pay down the $3.9 million
of short term debt and the balance of the proceeds were transferred into
interest bearing accounts at the Company's bank. Management is in discussions
with the Company's bank to move the funds into accounts that are highly liquid
and that can provide the Company's with a reasonable rate of return.
26
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some information included in this Quarterly Report on Form 10-Q and other
materials filed by us with the Securities and Exchange Commission, or the SEC,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ materially from those expressed in any forward-looking
statements made by or on behalf of us. For a discussion of material risks and
uncertainties that the Company faces, see the discussion in the Form 10-KSB for
the fiscal year ended December 31, 2007 entitled "Risk Factors". This discussion
and analysis of financial condition and plan of operations should be read in
conjunction with our Condensed Consolidated Financial Statements included
herein.
OVERVIEW
- --------
Since 2005, the Company has transitioned itself into a company focused on the
development and licensing of proprietary technologies. As an example, in March
2006 we sold four of our voice activated product and item locator patents to
Lamson Holdings LLC for net proceeds of $136,000 and on December 6, 2007 we were
issued Patent 7,305,344 for a patent for Methodology for Talking Consumer
Products with Voice Instructions via Wireless Technology. On January 8, 2008,
the Company entered into a Technology Transfer Agreement with GlynnTech to
market its recently issued patent. GlynnTech will provide assistance in
developing a DVD of the patents capabilities. GlynnTech will also be obligated
to solicit licensing opportunities and/or acquisition of the patent.
The Company also continues to search for potential merger candidates with or
without compatible technology and products, which management feels may make
financing more appealing to potential investors.
On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology,
Inc.'s Series A 10% Convertible Preferred Stock for $1,444,444. iVoice
Technology, Inc. will use the proceeds from the sale of the stock to fund the
repayment of convertible debt to YA Global Investments and to fund their
acquisition programs. The holder of each share of iVoice Technology's Series A
Preferred Stock shall have the right to one vote for each share of Common Stock
into which such Series A Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled to notice of any shareholders' meeting in accordance with the bylaws of
the Corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote. In addition, the holders of the Series A Preferred Stock shall
not have in the aggregate more than seventy percent (70%) of the total votes of
all classes of voting stock of the Corporation that would vote at a meeting of
shareholders. Based on this voting formula, it was determined that iVoice, Inc.
has voting rights equal to 70% of the voting stock of iVoice Technology and as
such, according to APB Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR
INVESTMENTS IN COMMON STOCK", iVoice, Inc. is required to consolidate the
results of operations of iVoice Technology with those of iVoice and its other
subsidiary as of September 30, 2008.
27
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2007
Total sales for the nine months ended September 30, 2008 and 2007 were $125,152
and $1,233,602, respectively. Sales in 2008 include $35,164 of maintenance
revenues of iVoice Technology and $89,988 of administrative services agreements.
Sales in 2007 include $1,120,000 of consulting revenues earned on the Deep Field
agreement and revenues from the administrative services agreements of $113,602.
Total operating expenses for the nine months ended September 30, 2008 and 2007,
were $1,101,663 and $702,631, respectively, for an increase of $399,032. Of
these increases, $361,385 is attributable to the expenses of iVoice Technology
and the remaining increase of $37,647 is primarily comprised of increase in
professional fees of $89,299 and increases in overhead and office expenses of
the parent of $8,349. These increases are offset by decreases in Amortization of
finance costs and depreciation expense of $60,001.
Total other income (expense) for the nine months ended September 30, 2008 was an
income of $1,485,776. This total was primarily comprised of $3,690,731 gain on
revaluation of the derivatives and $461,320 of interest income and other income
which is offset by $1,840,677 amortization of the discount on debt and $825,598
of accrued interest expense on the YA Global notes and other debt . Total other
income (expense) for the nine months ended September 30, 2007 was an expense of
$1,645,390. This total was primarily comprised of $2,858,845 amortization of the
discount on debt, $387,441 of accrued interest expense on the YA Global notes
and other debt and $225,113 loss on sales of securities available for sale.
These are offset by $1,293,563 gain on revaluation of the derivatives and
$532,446 of interest income on the cash accounts and promissory notes
receivable.
Net income from continuing operations for the nine months ending September 30,
2008 was $509,265. The net loss from continuing operations for the nine months
ending September 30, 2007 was $1,114,419. The increase in net income of
$1,623,684 was primarily due to the increased gain on revaluation of
derivatives, on the repayment of the underlying debt, and the reduced
amortization of the discount on debt offset by lower sales, increased operating
expenses and increased interest expenses, as the result of the factors discussed
above.
Net loss from discontinued operations for the nine months ended September 30,
2007 was $753,238. This operation had been experiencing reduced product sales
and had curtailed spending to better manage their available resources.
As required by APB Opinion No. 18, the Company is required to record minority
shareholders' interest in net income of iVoice Technology. For the nine months
ended September 30, 2008, iVoice Technology reported a net loss of $145,759 and
as such, the Company recorded no minority shareholders' interest for the period.
The total net income for the nine months ended September 30, 2008 was $509,265
as compared to the net loss of $1,867,657 for the nine months ended September
30, 2007. The increase in net income of $2,376,922 was the result of the factors
discussed above.
28
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2007
Total sales for the three months ended September 30, 2008 and 2007 were $46,448
and $317,825, respectively. Sales in 2008 include $9,786 of maintenance revenues
of iVoice Technology and $36,662 of administrative services agreements. Sales in
2007 include $280,000 of consulting revenues earned on the Deep Field agreement
and revenues from the administrative services agreements of $37,825.
Total operating expenses for the three months ended September 30, 2008 and 2007,
were $325,601 and $227,148, respectively, for an increase of $98,453. Of these
increases, $128,405 is attributable to the expenses of iVoice Technology and an
increase in professional fees of $15,853. These increases are offset by net
decreases in Amortization of finance costs and depreciation expense of $41,458
and decreases in overhead and office expenses of the parent of $4,347.
Total other income (expense) for the three months ended September 30, 2008 was
an expense of $16,983. This total was primarily comprised of $117,618 of accrued
interest expense on the YA Global notes and other debt and $81,757 amortization
of the discount on debt which are offset by $65,927 gain on revaluation of the
derivatives and $116,465 of interest and other income. Total other income
(expense) for the three months ended September 30, 2007 was an expense of
$934,173. This total was primarily comprised of $866,435 amortization of the
discount on debt, $128,900 of accrued interest expense on the YA Global notes
and other debt and $139,879 loss on sales of securities available for sale.
These are offset by and $182,607 of interest income on the cash accounts and
convertible debentures receivable and.$18,434 gain on revaluation of the
derivatives.
Net loss from continuing operations for the three months ending September 30,
2008 and 2007 was $296,136 and $843,496, respectively. The decrease in net loss
of $547,360 was primarily due to the decrease in amortization of the discount on
debt and increased gain on revaluation of derivatives, on the repayment of the
underlying debt, and offset by lower sales and increased operating expenses, as
the result of the factors discussed above.
Net loss from discontinued operations for the three months ended September 30,
2007 was $132,086. This operation had been experiencing reduced product sales
and had curtailed spending to better manage their available resources.
As required by APB Opinion No. 18, the Company is required to record minority
shareholders' interest in net income of iVoice Technology. For the three months
ended September 30, 2008, iVoice Technology reported a net loss of $182,062 and
as such, the Company recorded a reversal of prior period minority shareholders'
interest income for the current period.
The total net loss for the three months ended September 30, 2008 and 2007, was
$284,945 and $975,582, respectively. The decrease in net loss of $690,637 was
the result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We are currently seeking additional operating income opportunities through
potential acquisitions or investments. Such acquisitions or investments may
consume cash reserves or require additional cash or equity. Our working capital
and additional funding requirements will depend upon numerous factors,
including: (i) strategic acquisitions or investments; (ii) an increase to
current Company personnel; (iii) the level of resources that we devote to sales
and marketing capabilities; (iv) technological advances; and (v) the activities
of competitors.
29
During the year ended December 31, 2007, we had incurred net losses from
continuing operations of $2,383,268 and we used $174,729 is cash for operations.
These matters raise doubt about our ability to generate cash flows internally
through our current operating activities sufficient enough that its existence
can be sustained without the need for external financing. Our primary need for
cash is to fund our ongoing operations until such time that we can identify
sales opportunities for new products or identify strategic acquisitions that
generate enough revenue to fund operations. There can be no assurance as to the
receipt or timing of revenues from operations. We anticipate that our operations
will require at least $700,000 for the next 12 months. These expenses are
anticipated to consist of the following: payroll and benefits of $400,000,
occupancy costs of $135,000, professional fees of $60,000, business insurance of
$70,000 and miscellaneous administrative expenses of $35,000. We expect to fund
these obligations from cash on hand or otherwise from the sale of equity or debt
securities. We believe that we have sufficient funds on-hand to fund our
operations for at least 12 months.
At various times since 2004, the Company had deposited proceeds from debt
financing into short-term securities with our Investment broker. During 2006 and
2007, these short-term securities were exchanged for auction rate preferred
shares ("ARPS") which provided greater returns on our investments. ARPS have
long-term maturity with the interest rate being reset through Dutch auctions
that are typically held every 7, 28 or 35 days. The securities trade at par and
are callable at par on any interest payment date at the option of the issuer.
Interest is paid at the end of each auction period. Our auction rate securities
are all AAA rated. Until February 2008, the auction rate securities market was
highly liquid. Starting the week of February 11, 2008, a substantial number of
auctions "failed," meaning that there was not enough demand to sell the entire
issue at auction. The immediate effect of a failed auction is that holders
cannot sell the securities and the interest or dividend rate on the security
generally resets to a "penalty" rate. In the case of a failed auction, the
auction rate security is deemed not currently liquid and in the event we need to
access these funds, we will not be able to do so without a loss of principal,
unless a future auction on these investments is successful. We do not intend to
hold these securities to maturity, but rather to use the interest rate reset
feature to provide the opportunity to maximize returns while preserving
liquidity. Because of the failed Dutch auctions, the Company was unable to sell
these securities to meet current operating obligations. With the assistance of
Smith Barney, the Company was able to obtain an Express Creditline Loan which is
collateralized by the proceeds available from the sales of the auction rate
securities. On March 7, 2008 and May 8, 2008, the Company received $5,660,000
from the Express Creditline account and deposited the funds in our operating
bank accounts to ensure current liquidity. During the nine months ended
September 30, 2008, $5,275,000 of the ARPSs were sold of which approximately
$1,752,000 was applied to the outstanding loan and accrued interest and the
balance was remitted to the Company.
During the nine months ended September 30, 2008, the Company had a net increase
in cash of $3,133,533. The Company's principal sources and uses of funds in the
nine months ended September 30, 2008 were as follows:
CASH FLOWS FROM OPERATING ACTIVITIES. The Company used $209,129 in cash from
continuing operations in the nine months ended September 30, 2008, an increase
of $112,498 compared to $96,631 in cash used for continuing operations in the
nine months ending September 30, 2007. This increase was primarily attributed to
the increase in cash operating expenses offset by favorable changes in accounts
payable, deferred revenues and related party accounts.
The net effect on cash flows from operating activities by the discontinued
operations for the nine months ending September 30, 2007 was a decrease of
$169,072 as the operations were struggling with their liquidity.
30
CASH FLOWS FROM INVESTING ACTIVITIES. The Company had a net increase in funds
from investing activities of $4,226,140 for the nine months ended September 30,
2008. This was primarily due to the net redemption of marketable securities of
$4,913,964. These proceeds are offset by the net effect of the consolidation of
iVoice Technology of $622,151. The Company had invested $1.4 million in iVoice
Technology's Series A Convertible Preferred Stock and iVoice Technology has used
a portion of these proceeds to pay down a portion of the YA Global Convertible
Debentures and their investment in B Green Innovations, a wholly owned
subsidiary of iVoice Technology.
CASH FLOWS FROM FINANCING ACTIVITIES. The Company used $883,478 in cash for
financing activities in the nine months ended September 30, 2008. The funds
provided from the Smith Barney Credit Line of $5,660,000 were used to pay down
the YA Global convertible debentures of $4,796,510. In addition, $1,746,968 of
the proceeds of the sales of the ARPSs was used to repay the Smith Barney Credit
Line.
The net effect on cash flows from financing activities from the discontinued
operations was an increase in cash of $154,000 for the nine months ending
September 30, 2007. This represented the proceeds from the sale of a $160,000
Promissory note to Thomas Pharmaceuticals Acquisition, Inc. pursuant to the
terms of the Extension Agreement with Thomas Pharmaceuticals and Thomas
Pharmaceuticals Acquisition.
Below is a description of iVoice's principal sources of funding:
On May 11, 2006 we issued to YA Global a $5,544,110 secured convertible
debenture due on May 11, 2008 with an interest of 7.5%. This debenture replaced
a promissory note with a principal balance of $5,000,000 and $544,110 of accrued
interest due to YA Global from June 15, 2005. On May 12, 2008, the remaining
principal balance of $4,796,510 was repaid in cash from the proceeds of the
Smith Barney short term loans.
On May 25, 2006, we issued to YA Global a $1,250,000 secured convertible
debenture due on May 25, 2008 with an interest of 7.5% per annum pursuant to a
Securities Purchase Agreement entered into between us and YA Global. On February
21, 2008, this debenture was amended to extend the maturity date until May 25,
2010 and to raise the interest rate to 15% per annum.
On March 7, 2008 and May 8, 2008, the Company received proceeds from an Express
Creditline Loan from Smith Barney that is collateralized by the proceeds
available from the sales of the auction rate preferred shares ("ARPS") discussed
in Note 3. The interest rate charged on the loan is tied to the dividend rates
earned on the ARPSs. When an ARPS is sold, a portion of the proceeds is applied
to pay down the short term loan and the balance is wired to the Company's
savings account.
There is no assurance that the future funding, if any, offered by YA Global or
from other sources will enable us to raise the requisite capital needed to
implement our long-term growth strategy. Current economic and market conditions
have made it very difficult to raise required capital for us to implement our
business plan.
OFF BALANCE SHEET ARRANGEMENTS
- ------------------------------
During the nine months ended September 30, 2008, we did not engage in any
material off-balance sheet activities nor have any relationships or arrangements
with unconsolidated entities established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Further, we have not guaranteed any obligations of unconsolidated
entities nor do we have any commitment or intent to provide additional funding
to any such entities.
31
CONTRACTUAL OBLIGATIONS
- -----------------------
The Company has no material changes in its contractual obligations during the
nine months ended September 30, 2008.
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
- -----------------------------------------------
Certain information included in this Form 10-Q and other materials filed or to
be filed by us with the Securities and Exchange Commission (as well as
information included in oral or written statements made by us or on our behalf),
may contain forward-looking statements about our current and expected
performance trends, growth plans, business goals and other matters. These
statements may be contained in our filings with the Securities and Exchange
Commission, in our press releases, in other written communications, and in oral
statements made by or with the approval of one of our authorized officers.
Information set forth in this discussion and analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. The reader is cautioned that
such forward-looking statements are based on information available at the time
and/or management's good faith belief with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Forward-looking statements speak only as of the date the statement was made. We
assume no obligation to update forward-looking information to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information. Forward-looking statements are typically identified
by the use of terms such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "might," "plan," "predict," "project," "should,"
"will," and similar words, although some forward-looking statements are
expressed differently. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct.
ITEM 4T - CONTROLS AND PROCEDURES
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Management of the Company has evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer of the Company, the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer of the Company had concluded that the Company's disclosure controls and
procedures as of the period covered by this Quarterly Report on Form 10-Q were
not effective for the following reasons:
a) The deficiency was identified as the Company's limited segregation of
duties amongst the Company's employees with respect to the Company's control
activities. This deficiency is the result of the Company's limited number of
employees. This deficiency may affect management's ability to determine if
errors or inappropriate actions have taken place. Management is required to
apply its judgment in evaluating the cost-benefit relationship of possible
changes in our disclosure controls and procedures.
b) The deficiency was identified in respect to the Company's Board of
Directors. This deficiency is the result of the Company's limited number of
external board members. This deficiency may give the impression
32
to the investors that the board is not independent from management. Management
and the Board of Directors are required to apply their judgment in evaluating
the cost-benefit relationship of possible changes in the organization of the
Board of Directors.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
Management of the Company has also evaluated, with the participation of the
Chief Executive Officer of the Company, any change in the Company's internal
control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q and determined that there was no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
33
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
(b) The Company does not have a standing nominating committee or a committee
performing similar functions as the Company's Board of Directors consists
of only two members and therefore there would be no benefit in having a
separate nominating committee that would consist of the same number of
members as the full board of directors. Both members of the Board of
Directors participate in the consideration of director nominees.
ITEM 6 EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act Of 2002.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
iVoice, Inc.
By: /s/ Jerome R. Mahoney Date: November 19, 2008
---------------------------
Jerome R. Mahoney, President,
Chief Executive Officer and
Principal Financial Officer
INDEX OF EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act Of 2002.