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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-120490
IVOICE TECHNOLOGY, INC.
(Exact name of the Registrant as specified in Charter)
NEW JERSEY 20-1862731
(State of Incorporation) (I.R.S. Employer ID Number)
750 HIGHWAY 34, MATAWAN, NEW JERSEY 07747
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NO. INCLUDING AREA CODE: 732-441-7700
Securities registered under 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
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 checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a
smaller reporting company)
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date: 486,835,870 shares of Class A Common stock, no par
value as of November 14, 2008.
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IVOICE TECHNOLOGY, INC
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2008 (Unaudited) and December 31, 2007 (Audited) 1
Condensed Consolidated Statements of Operation -
Three and Nine Months Ended September 30, 2008 and
2007 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2008 and 2007 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4-23
Item 2. Management's Discussion and Analysis or Plan of Operation 24-30
Item 4T. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 5. Other Information 32
Item 6. Exhibits 32
IVOICE TECHNOLOGY, INC.
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 647,902 $ 182,577
Accounts receivable, net of allowance for doubtful accounts of $8,250
at September 30, 2008 and December 31, 2007 15,745 9,905
Inventories 6,080 --
Note receivable - current portion 21,111 --
Prepaid expenses and other current assets 11,391 4,407
------------ ------------
Total current assets 702,229 196,889
------------ ------------
Other assets 38,405 --
Note receivable - long-term 7,179 --
Property, plant and equipment, net 445 797
------------ ------------
Total assets $ 748,258 $ 197,686
============ ============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 550,303 $ 694,783
Accrued dividends 80,648 --
Due to related parties 250,803 220,619
Deferred maintenance contracts 19,193 14,097
Notes payable to related parties 141,708 161,388
Convertible promissory note, net of unamortized debt discount of $59,117 7,641 --
Convertible debenture, net of unamortized debt discount of $84,337 and
$499,940 at September 30, 2008 and December 31, 2007, respectively 103,029 169,375
Derivative liabilities 267,946 1,079,256
------------ ------------
Total current liabilities 1,421,271 2,339,518
------------ ------------
Stockholders' deficit:
Preferred stock, par value $1.00; authorized 1,000,000 shares; 10,000 shares
designated as follows; 990,000 shares available for further designation -- --
Series A 10% Secured Convertible Preferred Stock; $1,000 stated value;
authorized 10,000 shares; 1,444.44 shares issued and outstanding 1,444,444 --
Common stock:
Class A Common Stock- no par value; authorized 10,000,000,000 shares;
486,835,870 shares issued and 485,641,387 outstanding and
1,194,483 in escrow at September 30, 2008; 170,042,361 shares
issued and 168,847,878 outstanding, and 1,194,483 in escrow
at December 31, 2007; 915,166 506,286
Class B Common Stock - $.01 par value; authorized 50,000,000
shares; no shares issued and outstanding -- --
Class C Common Stock - $.01 par value; authorized 20,000,000
shares; no shares issued and outstanding -- --
Additional paid-in capital 6,899,510 7,057,606
Additional paid-in capital - beneficial conversion 1,444,444 --
Accumulated deficit (11,376,577) (9,705,724)
------------ ------------
Total stockholders' deficit (673,013) (2,141,832)
------------ ------------
Total liabilities and stockholders' deficit $ 748,258 $ 197,686
============ ============
See accompanying notes to condensed consolidated financial statements
1
IVOICE TECHNOLOGY, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
------------ ------------ ------------ ------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net sales $ 9,786 $ 21,622 $ 35,164 $ 56,042
Cost of sales -- 2,272 -- 2,272
------------ ------------ ------------ ------------
Gross margin 9,786 19,350 35,164 53,770
------------ ------------ ------------ ------------
Operating expenses:
General and administrative expenses 153,068 91,780 419,374 285,618
Engineering, research, & development -- -- 9,455
------------ ------------ ------------ ------------
Total operating expenses 153,068 91,780 419,374 295,073
------------ ------------ ------------ ------------
Loss from operations (143,282) (72,430) (384,210) (241,303)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 3,304 780 10,488 2,527
Interest expense (12,322) (17,142) (156,132) (48,305)
Amortization of debt discount (52,005) (58,759) (624,051) (117,518)
Redemption premium -- -- (85,922) --
Gain (loss) on valuation of derivative 21,241 171,366 1,094,066 (365,873)
------------ ------------ ------------ ------------
Total other income (expense) (39,782) 96,245 238,449 (529,169)
------------ ------------ ------------ ------------
Income (loss) from operations before
provision for income taxes (183,064) 23,815 (145,761) (770,472)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) (183,064) 23,815 (145,761) (770,472)
Preferred stock accretion -- -- (1,444,444) --
Preferred stock dividends (36,913) -- (80,648) --
------------ ------------ ------------ ------------
Net income (loss) attributable to common $ (219,977) $ 23,815 $ (1,670,853) $ (770,472)
============ ============ ============ ============
shareholders
Basic and diluted loss per common share $ (0.00) $ 0.00 $ (0.00) $ (0.02)
============ ============ ============ ============
Weighted average shares outstanding
Basic 485,641,387 50,955,039 425,116,755 36,307,500
Diluted 485,641,387 204,133,986 425,116,755 36,307,500
See accompanying notes to condensed consolidated financial statements
2
IVOICE TECHNOLOGY, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2008 2007
------------ ------------
Cash flows from operating activities:
Net loss $ (145,761) $ (770,472)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 352 351
(Gain) loss on valuation of derivative (1,094,066) 365,873
Amortization of discount on debt 624,051 117,518
Beneficial conversion incurred in debt reduction 62,470 --
Beneficial conversion incurred in conversion of debenture 21,783 --
Beneficial conversion incurred in conversion of
promissory note 32,280 --
Common stock issued for investor relations 24,192 --
Common stock issued for consulting fees 35,700 --
Changes in assets and liabilities:
Increase in accounts receivable (5,840) (3,000)
(Increase) decrease in inventories (6,080) --
(Increase) decrease in prepaid expenses (6,985) 943
Increase in accounts payable and accrued liabilities 138,276 164,941
Increase in amounts due to related parties 30,184 27,112
Increase in deferred maintenance contracts 5,096 4,273
------------ ------------
Net cash (used in) operating activities (284,348) (92,461)
------------ ------------
Cash flows from investing activities:
Increase in note receivable, net (28,290) --
Increase in other assets (38,405) --
------------ ------------
Net cash (used in) investing activities (66,695) --
------------ ------------
Cash flows from financing activities:
Issuance of common stock through equity financing 102,835 49,536
Cost of issuance of common stock through equity financing (13,652) (10,080)
Net proceeds from sale of Series A Preferred Stock 1,300,000 --
Payment of convertible debenture (572,815) --
------------ ------------
Net cash provided by financing activities 816,368 39,456
------------ ------------
Net increase (decrease) in cash and cash equivalents 465,325 (53,005)
Cash and cash equivalents at beginning of period 182,577 179,081
------------ ------------
Cash and cash equivalents at end of period $ 647,902 $ 126,076
============ ============
During the period, cash was paid for the following:
Taxes paid $ -- $ --
============ ============
Interest paid $ 32,284 $ --
============ ============
Supplemental Cash Flow Information:
Non-cash Transactions
Accounts payable converted into convertible promissory note $ 96,199 $ --
============ ============
Accrued expenses converted into convertible debenture $ 186,557 $ --
============ ============
Note payable converted into convertible debenture $ -- $ 700,000
============ ============
Convertible debenture converted into common stock $ 109,940 $ 17,285
============ ============
Promissory note converted into common stock $ 19,680 $ --
============ ============
See accompanying notes to condensed consolidated financial statements
3
IVOICE TECHNOLOGY, INC.
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CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008:
- ---------------------------------------------
a) The Company issued 46,500,000 shares of Class A common stock with a fair
value of $82,150 to an individual to reduce a promissory note in the amount of
$19,680. The difference in the market value and the promissory note reduction
was charged to beneficial interest in the amount of $62,470.
b) The Company issued 87,653,565 shares of Class A common stock with a fair
value of $118,283 to reduce a convertible debenture in the amount of $96,500.
The difference in the market value and the reduction in the convertible
debenture was charged to beneficial interest in the amount of $21,783.
c) The Company issued 89,039,944 shares of Class A common stock pursuant to the
Equity Line of Credit with YA Global Investments (f/k/a/ Cornell Capital
Partners) valued at $102,835. Issuance costs of $13,652 were incurred and
charged to additional paid-in capital for net proceeds of $89,183.
d) The Company issued 42,000,000 shares of Class A common stock with a fair
value of $45,720 to reduce a convertible promissory note in the amount of
$13,440. The difference in the market value and the convertible promissory note
reduction was charged to beneficial interest in the amount of $32,280.
e) The Company converted accounts payable to a convertible promissory note in
the amount of $96,199.
f) The Company converted accrued expenses related to accrued interest due to YA
Global to a convertible debenture in the amount of $186,557. In March 2008, the
Company and YA Global agreed that the Company would redeem all amounts
outstanding under the Debenture, except for $186,557 of interest. The amount
redeemed was $691,021, consisting of the remaining balance of the Debenture
equal to $572,815, accrued interest of $32,284, and a redemption premium equal
to $85,922.
g) The Company accrued $80,648 of preferred stock dividends.
h) The Company recognized $1,444,444 of preferred stock accretion in the
condensed statements of operations and as a credit in the balance sheet to
Additional Paid-in Capital - Beneficial Conversion.
i) The Company issued 21,600,000 shares of Class A common stock with a fair
value of $24,192 to an individual for repayment of investor relations expenses.
j) The Company issued 30,000,000 shares of Class A common stock with a fair
value of $35,700 to two individuals for repayment of consulting fees.
See accompanying notes to condensed consolidated financial statements
4
IVOICE TECHNOLOGY, INC.
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CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
----------------------------------------------
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (CONTINUED):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007:
a) The Company converted $700,000 of note payable into a convertible debenture.
b) The Company issued 21,006,836 shares of Class A common stock pursuant to the
Equity Line of Credit with YA Global Investments (f/k/a/ Cornell Capital
Partners) valued at $49,536. Issuance costs of $10,080 were incurred and charged
to additional paid-in capital for net proceeds of $29,456.
C) The Company issued 13,107,015 shares of Class A common stock with a fair
value of $21,662 to reduce a convertible debenture in the amount of $17,285. The
difference in the market value and the reduction in the convertible debenture
was charged to additional paid-in capital in the amount of $4,377.
See accompanying notes to condensed consolidated financial statements
5
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
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Note 1 Background
- ------ ----------
In May 2008, the Company formed B Green Innovations, Inc. ("B Green"), a
wholly-owned subsidiary, and has agreed to invest up to $500,000 in B Green, to
commercialize its "green" technology platforms. The Company has made its initial
investment by purchasing 55 shares of Series B Secured 10% Convertible Preferred
Stock for net proceeds of $49,500 to B Green.
On January 24, 2008, iVoice Technology, Inc. (the "Company") entered into a
non-binding Letter of Intent with Atire Technologies, Inc. ("Atire") for the
purpose of discussing and negotiating a merger of Atire into a wholly owned
subsidiary of the Company. Since that time the Company has been conducting due
diligence and negotiating a Merger Agreement with Atire. On April 22, 2008, the
Company notified Atire that is was terminating discussions with Atire. The
Company and Atire both executed a Mutual General Release. However, we are still
continuing with our evaluation of this Company and its technology.
As of August 4th the Company uses the alternative name of "iGreen Innovations,
Inc." The Company also plans to change its trading symbol. The Company is a
"green" technology company, focused on acquiring and identifying promising
technologies that address environmental issues.
Note 2 Business Operations
- ------ -------------------
B Green Innovations, Inc. (B Green) a Matawan, New Jersey-based corporation and
wholly owned subsidiary of iVoice Technology (OTC Bulletin Board: IVOT) is
dedicated to becoming a "green" technology company, focused on acquiring and
identifying promising technologies that address environmental issues.
The Company has agreed to invest up to $500,000 in B Green to develop and
commercialize its "green" technology platforms. The Company believes that this
investment will allow B Green to further develop additional technologies.
The first technology will be used to create new products from recycled tire
rubber. EcoPod and Green Sleeve address important environmental concerns and
problems facing the planet today. EcoPod and Green Sleeve are 100% recycled
rubber-based products that can be utilized as support pads under any units that
vibrate and make noise, including washing machines, dryers, compressors,
commercial condensers, and many other units that advantageously benefit from
sound and vibration control. In addition, we announced that we had filed a new
patent application for a process it described as "Recycled Tire Pod with
Appliance Recess Guide."
The Company will also continue to service the Interactive Voice Response
("IVR"), software which was developed by iVoice. The Company's Interactive Voice
Response line is designed to read information from and write information to,
databases, as well as to query databases and return information.
IVR is an application generator that allows full connectivity to many databases,
including Microsoft Access, Microsoft Excel, Microsoft Fox Pro, and Paradox, or
to standard text files. The IVR software is sold as an application generator
that gives the end user the ability to develop its own customized IVR
applications or as a customized turnkey system. IVR performs over 40 different
customizable commands. Examples of IVR range from simply selecting announcements
from a list of options stored in the computer (also known as audio text) to more
complex interactive exchanges such as querying a database for information.
6
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 3 Going Concern
- ------ -------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. The Company relies
on iVoice, Inc. for administrative, management, research and other services.
As of September 30, 2008, the Company had negative cash flow from operations,
negative working capital and a substantial accumulated deficit. These matters
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.
Management plans on developing and selling products from its subsidiary, B Green
Innovations, Inc., and pursuing opportunities for its IVR technology to achieve
profitability and to generate a positive cash flow. However, these plans are
dependent upon obtaining additional capital. 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 4 Summary of Significant Accounting Policies
- ------ ------------------------------------------
a) Basis of Presentation
The accompanying condensed unaudited interim consolidated financial statements
included herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The condensed
consolidated financial statements and notes are presented as permitted on Form
10-Q and do not contain information included in the Company's annual statements
and notes. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. 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. While management believes the procedures followed in
preparing these condensed consolidated financial statements are reasonable, the
accuracy of the amounts are in some respects dependent upon the facts that will
exist, and procedures that will be accomplished by the Company later in the
year. These results are not necessarily indicative of the results to be expected
for the full year. These condensed consolidated unaudited financial statements
reflect all adjustments, including normal recurring adjustments, which, in the
opinion of management, are necessary to present fairly the operations and cash
flows for the periods presented.
b) Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the
7
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 4 Summary of Significant Accounting Policies (continued)
- ------ ------------------------------------------------------
b) Use of Estimates (continued)
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.
c) Revenue Recognition
The Company derives its revenues from the licensing of its software product and
optional customer support (maintenance) service. The Company'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. The
Company's software application is fully functional upon delivery and
implementation and does not require any significant modification or alteration.
The Company also offers customers an optional annual software maintenance and
support agreement for the subsequent one-year periods. Such maintenance and
support services are free for the first year the product is licensed and is
considered the warranty period. The software maintenance and support agreement
provides free software updates, if any, and technical support the customer may
need in deploying or changing the configuration of the software. Generally, the
Company does not license its software in multiple element arrangements whereby
the customer purchases a combination of software and maintenance. In a typical
arrangement, software maintenance services are sold separately from the software
product; are not considered essential to the functionality of the software and
are purchased at the customer's option upon the completion of the first year
licensed.
The Company does not offer any special payment terms or significant discount
pricing. Normal and customary payment terms require payment for the software
license fees when the product is shipped. Payment for software maintenance is
due prior to the commencement of the maintenance period. It is also the
Company's policy to not provide customers the right to refund any portion of its
license fees. With respect to the sale of software license fees, the Company
recognizes revenue in accordance with Statement of Position 97-2, software
Revenue Recognition (SOP 97-2), as amended, and generally recognizes revenue
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists generally evidenced by a signed, written purchase order from
the customer, (2) delivery of the software product on Compact Disk (CD) or other
means to the customer has occurred, (3) the perpetual license fee is fixed or
determinable and (4) collectability, which is assessed on a customer-by-customer
basis, is probable.
With respect to customer support services, upon the completion of one year from
the date of sale, considered to be the warranty period, the Company offers
customers an optional annual software maintenance and support agreement for
subsequent one-year periods. Sales of purchased maintenance and support
agreements are recorded as deferred revenue and recognized over the respective
terms of the agreements.
For B Green Innovations, Inc. revenues are recognized at the time of shipment
to, or acceptance by customer, provided title and risk of loss is transferred to
the customer. Provisions, when appropriate, are made where the right to return
exists.
8
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 4 Summary of Significant Accounting Policies (continued)
- ------ ------------------------------------------------------
d) Product Warranties
The Company estimates its warranty costs based on historical warranty claims
experience in estimating potential warranty claims. Due to the limited sales of
the Company's products, management has determined that warranty costs are
immaterial and has not included an accrual for potential warranty claims.
Presently, costs related to warranty coverage are expensed as incurred. Warranty
claims are reviewed quarterly to verify that warranty liabilities properly
reflect any remaining obligation based on the anticipated expenditures over the
balance of the obligation period.
e) Research and Development Costs
Research and development costs are charged to expense as incurred.
f) Advertising Costs
Advertising costs are expensed as incurred and are included in selling expenses.
For the three and nine months ended September 30, 2008 and 2007 advertising
costs amounted to $625 and $-0-, respectively.
g) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. There were no cash
equivalents at September 30, 2008 and December 31, 2007.
The Company maintains cash and cash equivalent balances at a financial
institution that is insured by the Federal Deposit Insurance Corporation up to
$250,000. The uninsured cash balances at September 30, 2008 and December 31,
2007 were $358,533 and $82,577, respectively.
h) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives of the assets,
generally five to seven years. Maintenance and repairs are charged to expense as
incurred.
9
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 4 Summary of Significant Accounting Policies (continued)
- ------ ------------------------------------------------------
i) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards
Board ("FASB") of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes" ("Statement 109"). Under Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
j) Derivative Liabilities
The Company accounts for its embedded conversion features in its convertible
debentures in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires a periodic valuation of
their fair value and a corresponding recognition of liabilities associated with
such derivatives, and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. The
recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at
the date of issuance, and the excess of derivative liabilities over the proceeds
is recognized as "Gain (loss) on Valuation of Derivative" in other expense in
the accompanying financial statements. Any subsequent increase or decrease in
the fair value of the derivative liabilities is recognized as "Other expense" or
"Other income", respectively.
k) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifications have had no effect on the results of
operations or cash flows for the period ended September 30, 2007.
l) Fair Value of Instruments
The carrying amount reported in the condensed consolidated balance sheet for
cash and cash equivalents, deposits, prepaid expenses, accounts payable, and
accrued expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
10
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIODATED FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 5 Earnings (Loss) Per Share
- ------ -------------------------
SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS").
The Company's basic loss per common share is based on net loss for the relevant
period, divided by the weighted average number of common shares outstanding
during the period. Diluted loss per common share is based on net loss, divided
by the weighted average number of common shares outstanding during the period,
including common share equivalents, such as outstanding stock options.
Diluted loss per share does not include common stock equivalents, as these
shares would have no effect. The computation of diluted loss per share also does
not assume conversion, exercise or contingent exercise of securities due to the
beneficial conversion of related party accounts as this would be anti-dilutive.
THREE MONTHS ENDED THREE MONTHS ENDED
------------------ ------------------
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
------------------ ------------------
BASIC NET INCOME (LOSS) PER SHARE COMPUTATION:
Net income (loss) attributable to common stockholders $ (219,977) $ 23,815
Weighted-average common shares outstanding 485,641,387 50,955,039
Basic net income (loss) per share attributable to common stockholders $ 0.00 $ 0.00
DILUTED NET INCOME (LOSS) PER SHARE COMPUTATION
Net income (loss) attributable to common stockholders $ (219,977) $ 23,815
Weighted-average common shares outstanding 485,641,387 50,955,039
Incremental shares attributable to the assumed conversion of
convertible debenture and convertible promissory note -- 153,178,947
Total adjusted weighted-average shares 485,641,387 204,133,986
Diluted net income (loss) per share attributable to common
Stockholders $ 0.00 $ 0.00
NINE MONTHS ENDED NINE MONTHS ENDED
----------------- -----------------
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
------------------ ------------------
BASIC NET LOSS PER SHARE COMPUTATION:
Net loss attributable to common stockholders $ (1,670,853) $ (770,472)
Weighted-average common shares outstanding 425,116,755 36,307,500
Basic net loss per share attributable to common stockholders $ 0.00 $ (0.02)
DILUTED NET LOSS PER SHARE COMPUTATION
Net loss attributable to common stockholders $ (1,670,853) $ (770,472)
Weighted-average common shares outstanding 425,116,755 36,307,500
Incremental shares attributable to the assumed conversion of
convertible debenture and convertible promissory note -- --
Total adjusted weighted-average shares 425,116,755 36,307,500
Diluted net loss per share attributable to common stockholders $ 0.00 $ (0.02)
11
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIODATED FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 6 Related Party Transactions
- ------ --------------------------
In conjunction with the spin-off, iVoice Technology has entered into a temporary
administrative services agreement with iVoice. The administrative services
agreement will continue on a month-to-month basis until iVoice Technology has
found replacement services for those services being provided by iVoice or can
provide these services for itself.
The Company has assumed an outstanding promissory demand note in the amount of
$190,000 payable to Jerry Mahoney, President and Chief Executive Officer of
iVoice and President and Chief Executive Officer of iVoice Technology. This
amount is related to funds loaned to iVoice and is unrelated to the operations
of iVoice Technology. The note will bear interest at the rate of prime plus 2.0%
per annum (7.0% at September 30, 2008) on the unpaid balance until paid.
Interest payments are due and payable annually. 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 the Company maintains control over the issuance of shares and may
decline the request for conversion of the repayment into shares of the Company.
As of September 30, 2008, the outstanding balance was $141,708, plus accrued
interest of $79,867. On May 8, 2007, the Company executed a Security Agreement
providing Jerome Mahoney, President and Chief Executive Officer of the Company,
with a security interest in all of the assets of the Company to secure the
promissory note dated August 5, 2005 and all future advances including, but not
limited to, additional cash advances: deferred compensation, deferred expense
reimbursement, deferred commissions and income tax reimbursement for the
recognition of income upon the sale of common stock for the purpose of the
holder advancing additional funds to the Company.
The Company entered into a five-year employment agreement with Jerome Mahoney to
serve as Non-Executive Chairman of the Board of Directors, effective August 1,
2004. On September 26, 2006, the employment agreement was amended to include the
position of President and Chief Executive Officer effective August 31, 2006. The
Company compensated Mr. Mahoney 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 determines that the Company has sufficient financial resources to pay
his compensation in cash. As of September 30, 2008, the Company has recorded
$186,943 of deferred compensation due to Mr. Mahoney.
The Board has the option to pay Mr. Mahoney's compensation in the form of Class
B Common Stock. Mr. Mahoney will also be entitled to certain bonuses based on
mergers and acquisitions completed by the Company. 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 from the lowest price for which the Company had ever issued
its Class A Common Stock.
12
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 6 Related Party Transactions (continued)
- ------ --------------------------------------
On August 29, 2005, the Company entered into an employment agreement with Mark
Meller. Mr. Meller served as the Company's President, Chief Executive Officer
and Chief Financial Officer until August 29, 2006. As compensation, the Company
paid Mr. Meller a base salary of $85,000 the first year with an annual increase
based on the Consumer Price Index every year thereafter. Mr. Meller has agreed
to defer all but $20,000 of his compensation until such time that the Board of
Directors determines, in its sole discretion, that the Company has sufficient
financial resources to pay his compensation. The Board of Directors may also
elect to pay Mr. Meller the balance of his compensation in the form of Company
Class A or Class B Common Stock. As of September 30, 2008, total deferred
compensation due to Mr. Meller was $53,860.
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 7 Convertible Promissory Note and Derivative Liability
- ------ ----------------------------------------------------
iVoice Technology has entered into a temporary administrative services agreement
with iVoice. The administrative services agreement will continue on a
month-to-month basis until iVoice Technology has found replacement services for
those services being provided by iVoice or can provide these services for
itself. In March 2008, the administrative services agreement was amended to
provide that accrued and unpaid administrative services shall be aggregated and
converted into a Convertible Promissory Note. 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 5, 2008, the Company converted its outstanding accounts payable to
iVoice, 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.
Additional amounts may be 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. In the quarter ended September 30, 2008, unpaid
administrative services in the amount of $12,663 were added to the convertible
promissory note. For the nine months ended September 30, 2008 total unpaid
administrative services in the amount of $29,547 was added to the original
convertible promissory note of $50,652.
iVoice, Inc. may elect payment of the principal and/or interest, at the its sole
discretion, owed pursuant to this Note by requiring the Company to issue to
iVoice, or its assigns either: (i) one Class B common stock share of the Company
par value $.01 per share, for each dollar owed, (ii) the number of Class A
common stock shares of the Company calculated by dividing (x) the sum of the
principal and interest that the Note holder has decided to have paid 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.
13
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 7 Convertible Promissory Note and Derivative Liability (continued)
- ------ ----------------------------------------------------------------
During the nine months ended September 30, 2008, the Company issued 42,000,000
shares of Class A common stock with a fair value of $45,720 to reduce the
convertible promissory note in the amount of $13,440. The difference in the
market value and the convertible promissory note reduction was charged to
beneficial interest in the amount of $32,280.
As of September 30, 2008, the outstanding balance on the Convertible Promissory
Note was $66,758.
Unless otherwise provided, this Note may be prepaid in full or in part at any
time without penalty or premium. Partial prepayments shall be applied to
installments due in reverse order of their maturity.
In the event of (a) default in payment of any installment of principal or
interest hereof as the same becomes due and such default is not cured within ten
(10) days from the due date, or (b) default under the terms of any instrument
securing this Note, and such default is not cured within fifteen (15) days after
written notice to maker, then in either such event the holder may, without
further notice, declare the remainder of the principal sum, together with all
interest accrued thereon, and the prepayment premium, if any, at once due and
payable. Failure to exercise this option shall not constitute a waiver of the
right to exercise the same at any other time. The unpaid principal of this Note
and any part thereof, accrued interest and all other sums due under this Note
shall bear interest at the rate of prime plus 2 percent per annum after default
until paid.
The promissory note holders have a security interest in substantially all of the
assets of the Company. However, the Company's interests are second to that of YA
Global Investments (f/k/a/ Cornell Capital Partners) (see Notes 8 and 9).
In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("FASB 133"),
the Company determined that the conversion feature of the Debenture met the
criteria of an embedded derivative, and therefore the conversion feature of this
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: 5 years; and volatility:
250.92%. The accounting guidance instructs that the conversion options are a
derivative liability. At March 5, 2008 the Company recorded the conversion
options as a liability, recorded a debt discount of $50,652, and charged Other
Expense - Loss on Valuation of Derivative for $16,366, resulting primarily from
calculation of the conversion price. For the three months ended September 30,
2008, the Company recorded a Loss on Valuation of Derivative in the amount of
$2,420. For the nine months ended September 30, 2008, the Company recorded a
Loss on Valuation of Derivative in the amount of $27,491.
14
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 7 Convertible Promissory Note and Derivative Liability (continued)
- ------ ----------------------------------------------------------------
B Green Innovations, Inc., a subsidiary of iVoice Technology, has entered into a
temporary administrative services agreement with iVoice. The administrative
services agreement continues on a month-to-month basis until B Green
Innovations, Inc. has found replacement services for those services being
provided by iVoice or can provide these services for itself. The administrative
services agreement provides that accrued and unpaid administrative services
shall be aggregated and converted into a Convertible Promissory Note. 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. The terms of this agreement are to similar
to the terms of the agreement between iVoice Technology, Inc. and iVoice, Inc.
as described above in this footnote.
On June 30, 2008, the Company converted its outstanding B Green accounts payable
to iVoice, Inc., for unpaid administrative services, in the amount of $8,000
into a convertible promissory note at the rate of prime plus 1 percent per
annum. Additional amounts may be 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. In the quarter ended September 30, 2008, unpaid
administrative services in the amount of $8,000 were added to the convertible
promissory note. For the nine months ended September 30, 2008 total unpaid
administrative services in the amount of $16,000 was added to the convertible
promissory note.
As of September 30, 2008, the outstanding balance on the B Green Convertible
Promissory Note was $16,000.
In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("FASB 133"),
the Company determined that the conversion feature of the Debenture met the
criteria of an embedded derivative, and therefore the conversion feature of this
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, the same as used for iVoice
Technology as B Green as there is no market for B Green's stock: risk free
interest rate: 2.25%; expected dividend yield: 0%: expected life: 5 years; and
volatility: 226.33%. The accounting guidance instructs that the conversion
options are a derivative liability. At June 30, 2008 the Company recorded the
conversion options as a liability, recorded a debt discount of $8,000, and
charged Other Expense - Loss on Valuation of Derivative for $16,366, resulting
primarily from calculation of the conversion price. For the three months ended
September 30, 2008, the Company recorded a Loss on Valuation of Derivative in
the amount of $1,796. For the nine months ended September 30, 2008, the Company
recorded a Loss on Valuation of Derivative in the amount of $3,700.
15
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 8 Note Payable
- ------ ------------
On August 12 and November 19, 2004, iVoice Technology issued an aggregate of
$560,000 in secured convertible debentures, with interest payable at 5% per
annum, to Cornell Capital Partners L.P. The debentures were convertible at the
option of the holder only after our Class A Common Stock has commenced trading
on the Over-the-Counter Bulletin Board. On February 28, 2005, iVoice, Inc., on
behalf of the Company, renegotiated the terms and conditions with the holders of
its convertible debentures. The holders of the convertible debentures agreed to
exchange the convertible debentures for various promissory notes. The promissory
note is in the aggregate amount of $700,000, of which $560,000 was loaned
through the previously issued and exchanged convertible debentures in 2004 and
$140,000 was advanced on February 28, 2005. A commitment fee of 10% of the face
amount of the previously issued convertible debentures and recently issued
promissory note was paid at the time of each advance. The previously paid
commitment fees were credited against commitment fees due and owing against the
promissory note. The balance of the commitment fee owed from the recently issued
promissory note was paid on February 28, 2005, at the time that such $140,000
was advanced to the Company.
The note payable bears an interest at the rate of 12% per annum. Weekly
principal installments of $10,000, plus interest, were to commence on September
1, 2005 and continue on the first day of each calendar month thereafter until
the principal is paid in full. The promissory note matured on September 1, 2006
with a lump sum payment due of any remaining principal and/or interest. Payment
had not been made and the Company was in default. The Company's obligations
under the promissory note issued to YA Global Investements (f/k/a/ Cornell
Capital Partners) are secured by a first priority interest in substanially all
of our assets.
On April 16, 2007, iVoice Technology, Inc. issued a Secured Convertible
Debenture dated March 30, 2007 (the "Debenture") to YA Global Investments
(f/k/a/ Cornell Capital Partners, LP) for the sum of $700,000 in exchange for
this note payable for the same amount (see Note 9).
Note 9 Convertible Debenture and Derivative Liability
- ------ ----------------------------------------------
On April 16, 2007, iVoice Technology, Inc. issued a Secured Convertible
Debenture dated March 30, 2007 (the "Debenture") to YA Global Investments
(f/k/a/ Cornell Capital Partners, LP) 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. Cornell has the
right to convert a portion or the entire outstanding principal into the
Company'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. Cornell may not convert
the Debenture into shares of Class A Common Stock if such conversion would
result in Cornell beneficially owning in excess of 4.9% of the then issued and
outstanding shares of Class A Common Stock. The Conversion Price and number of
shares of Class A Common Stock issuable upon conversion of the Debenture are
subject to certain exceptions and adjustment for stock splits and combinations
and other dilutive events. Subject to the terms and conditions of the Debenture,
the Company has the right at any time provided that as of the date of the
Holder's receipt of a Redemption Notice (i) the Closing Bid Price of the of the
Common Stock, as reported by Bloomberg, LP, is less than the Conversion Price
and (ii) no Event of Default has occurred. The Company shall pay an amount equal
to the principal amount being redeemed plus a redemption premium ("Redemption
Premium") equal to twenty percent (20%) of the principal amount being redeemed,
and accrued interest, (collectively referred to as the "Redemption Amount").
During the time that any portion of this Debenture is outstanding, if any Event
of Default has occurred, the full principal amount of this Debenture, together
with interest and other amounts
16
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 9 Convertible Debenture and Derivative Liability (continued)
- ------ ----------------------------------------------------------
owing in respect thereof, to the date of acceleration shall become at the
Holder's election, immediately due and payable in cash, provided however, the
Holder may request (but shall have no obligation to request) payment of such
amounts in Common Stock of the Company. Furthermore, in addition to any other
remedies, the Holder shall have the right (but not the obligation) to convert
this Debenture at any time after (x) an Event of Default or (y) the Maturity
Date at the Conversion Price then in-effect.
On March 14, 2008, the Company and YA Global Investments agreed that the Company
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
$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 the 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 the Company's common stock during the 30 trading days immediately proceeding
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.
In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("FASB 133"),
the Company determined that the conversion feature of the Debenture met the
criteria of an embedded derivative, and therefore the conversion feature of this
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. At March 2007 the Company recorded the conversion options as a
liability, recorded a debt discount of $700,000, and charged Other Expense -
Loss on Valuation of Derivative for $492,403, resulting primarily from
calculation of the conversion price.
For the three months ended September 30, 2008, the Company recorded a Gain on
Valuation of Derivative in the amount of $25,457 and amortized the debt discount
for a charge of $47,023. For the nine months ended September 30, 2008, the
Company recorded a Gain on Valuation of Derivative in the amount of $1,125,257
and amortized the debt discount for a charge of $602,163.
17
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 10 Subscription Agreement
- ------- ----------------------
On September 22, 2005, iVoice Technology entered into a Standby Equity
Distribution Agreement (the "SEDA") with YA Global Investments (f/k/a/ Cornell
Capital Partners) (which was amended and restated on December 12, 2005) whereby
Cornell agrees to purchase up to $10 million of the Company's Class A Common
Stock over a two-year period. The shares issued under the SEDA must be first
registered under the Securities Act of 1933, as amended. The purchase price of
the Common Stock shall be at ninety-five percent (95%) of the lowest trading
price of the Company's Common Stock during the five consecutive trading day
period following the notification by the Company of its request for an advance
from Cornell under the SEDA. In connection with the SEDA, the Company entered
into an Escrow Agreement, Registration Rights Agreement and Placement Agent
Agreement. On April 16, 2007, the Company and Cornell entered into an Amendment
to the Amended and Restated Standby Equity Distribution Agreement dated as of
the 12th day of December 2005, which revised the restrictions upon the Company's
ability to sell equity.
The Standby Equity Distribution Agreement expired on February 5, 2008.
Note 11 Income taxes
- ------- ------------
Deferred income taxes will be determined using the liability method for the
temporary differences between the financial reporting basis and income tax basis
of the Company's assets and liabilities. Deferred income taxes will be measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company's tax return. Deferred tax assets and liabilities
are recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
At September 30, 2008 and December 31, 2007 deferred tax assets consist of the
following:
September 30, 2008 December 31, 2007
------------ -----------
Deferred tax assets $ 657,000 $ 554,000
Less: Valuation Allowance (657,000) (554,000)
------------ -----------
Net deferred tax assets $ -0- $ -0-
============ ===========
At September 30, 2008 and December 31, 2007, the Company had federal net
operating loss carry forwards in the approximate amounts of $1,644,000 and
$1,165,000, respectively, available to offset future taxable income. The Company
established valuation allowances equal to the full amount of the deferred tax
assets due to the uncertainty of the utilization of the operating losses in
future periods.
18
IVOICE TECHNOLOGY, INC.
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 12 Capital Stock
- ------- -------------
Pursuant to iVoice Technology's certificate of incorporation, as amended, the
Company 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, 50,000,000 shares of Class B Common Stock, par value $0.01 per share, and
20,000,000 shares of Class C Common Stock, par value $0.01 per share. Below is a
description of iVoice Technology's outstanding securities, including Preferred
Stock, Class A Common Stock, Class B Common Stock and Class C Common Stock.
a) Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred Stock,
par value $1.00 per share.
Of the 1,000,000 shares of Preferred Stock, 10,000 shares are designated Series
A 10% Convertible Preferred Stock, par value $1.00 per share, with a stated
value of $1,000. The stated value is used for calculation of dividends and
liquidation preferences. On March 12, 2008, the Company sold 1,444.44 shares of
Series A 10% Convertible Preferred Stock to iVoice, Inc. for $1,444,444.
As of September 30, 2008, 1,444.44 shares of Series A 10% Convertible Preferred
Stock are issued and outstanding.
The Series A 10% Convertible Preferred Stock has a feature that grants holders
the right to convert this stock into common shares based upon 80% of the lowest
price the Company has ever issued its Class A Common Stock. 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:
5.47%; expected dividend yield: 0%: expected life: 5 years; and volatility:
265.44%. Due to this conversion feature the entire investment is deemed a
dividend. During the nine months ended September 30, 2008, $1,444,444 of
preferred stock accretion was recognized in the condensed consolidated
statements of operations.
b) Class A Common Stock
As of September 30, 2008, there are 10,000,000,000 shares of Class A Common
Stock authorized, no par value, and 486,835,870 shares were issued, and
485,641,387 shares were outstanding, and 1,194,483 shares are in escrow that
were issued pending conversion by YA Global Investments.
Each holder of Class A Common Stock is entitled to receive ratably dividends, if
any, as may be declared by the Board of Directors out of funds legally available
for payment of dividends. The Company has never paid any dividends on its common
stock and does not contemplate doing so in the foreseeable future.
The Company anticipates that any earnings generated from operations will be used
to finance its growth objectives.
19
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 12 Capital Stock (continued)
- ------- -------------------------
c) Class B Common Stock
As of September 30, 2008, there are 50,000,000 shares of Class B Common Stock
authorized, par value $.01 per share. Each holder of Class B Common Stock has
voting rights equal to 100 shares of Class A 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
that iVoice Technology, Inc. had ever issued its Class A Common Stock. Upon our
liquidation, dissolution, or winding-up, holders of Class B Common Stock will be
entitled to receive distributions. As of September 30, 2008, no shares were
issued or outstanding.
d) Class C Common Stock
As of September 30, 2008, there are 20,000,000 shares of Class C Common Stock
authorized, par value $.01 per share. Each holder of Class C Common Stock is
entitled to 1,000 votes for each share held of record. Shares of Class C Common
Stock are not convertible into Class A Common Stock. Upon liquidation,
dissolution or wind-up, the holders of Class C Common Stock are not entitled to
receive our net assets pro rata. As of September 30, 2008, no shares were issued
or outstanding.
Note 13 Stock Options
- ------- -------------
During 2005, the Company adopted the 2005 Stock Incentive Plan and the 2005
Directors' and Officers' Stock Incentive Plan ("Plan") in order to attract and
retain qualified personnel. Under the Plan, the Board of Directors, in its
discretion may grant stock options (either incentive or non-qualified stock
options) to officers, directors and employees. The Company has not issued any
stock options as of September 30, 2008.
Note 14 New Accounting Pronouncements
- ------- -----------------------------
In September 2006, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurement" ("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
disclosures of the methods used and the effect on earnings.
20
IVOICE TECHNOLOGY, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 14 New Accounting Pronouncements (continued)
- ------- -----------------------------------------
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 15 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.
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 June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting
for Nonrefundable Payments for Goods and Services to be Used in Future Research
and Development Activities" (ETIF 07-04), requiring that nonrefundable advance
payments for future research and development activities be deferred and
capitalized. Such amounts should be expensed as the related goods are delivered
or the related services performed. The statement is effective for fiscal years
beginning after December 15, 2007. The adoption of EITF Issue No. 07-3 did not
have a material impact on the Company's financial position or results of
operations.
In June 2007, the FASB ratified Issue No. 06-11 "Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards (ETIF 06-11), which requires
entities to record tax benefits on dividends or dividend equivalents that are
charged to retained earnings for certain share-based awards to additional
paid-in capital. In a share-based payment arrangement, employees may receive
dividends or dividend equivalents on awards of non-vested equity shares,
non-vested equity share units during the vesting period, and share options until
the exercise date. Generally, the payment of such dividends can be treated as
deductible compensation for tax purposes. The amount of tax benefits recognized
in additional paid-in capital should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based payment awards.
EITF-06-11 is effective for fiscal years beginning after December 15, 2007, and
interim periods within those years. The adoption of EITF Issue No. 06-11 did not
have a material impact on the Company's financial statements.
21
IVOICE TECHNOLOGY, INC.
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 14 New Accounting Pronouncements (continued)
- ------- -----------------------------------------
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.
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 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 December15, 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 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.
22
IVOICE TECHNOLOGY, INC.
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
SEPTEMBER 30, 2008 AND 2007
---------------------------
Note 14 New Accounting Pronouncements (continued)
- ------- -----------------------------------------
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.
Note 15 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.
Assets Level I Level II Level III Total
------------ ------------ ------------ ------------
Note Receivable $ -- $ 28,290 $ -- $ 28,290
------------ ------------ ------------ ------------
Total Assets $ -- $ 28,290 $ -- $ 28,290
============ ============ ============ ============
Convertible promissory notes $ -- $ 7,641 $ -- $ 7,641
Note payable to related parties -- 141,708 -- 141,708
Convertible debentures -- 103,029 -- 103,029
Derivative liabilities -- 267,946 -- 267,946
------------ ------------ ------------ ------------
Total Liabilities $ -- $ 520,324 $ -- $ 520,324
============ ============ ============ ============
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- ---------------------------------------------------------
FORWARD LOOKING STATEMENTS
- --------------------------
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the cost and availability of its raw materials;
the actions of its competitors; the success of our customers; technological
change; changes in employee relations; government regulations; litigation,
including its inherent uncertainty; difficulties in plant operations and
materials; transportation, environmental matters; and other unforeseen
circumstances. 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".
OVERVIEW AND PLAN OF OPERATION
- ------------------------------
iVoice Technology seeks to leverage the value of underutilized developed
technology and believes that the transition to an independent company will
provide iVoice Technology with greater access to capital. This should provide
needed financial resources to potentially penetrate the market and distribute
the product. As such, iVoice Technology's business is formed from the
contribution by iVoice of certain assets and related liabilities on August 5,
2005. In connection with this Spin-off by iVoice, iVoice assigned and conveyed
to iVoice Technology its IVR software business and related liabilities,
including all intellectual property of iVoice relating to the IVR software
business. The board and management of iVoice elected not to transfer any part of
its working cash balance to iVoice Technology. Based upon the current intention
of iVoice Technology not to conduct any research and development or hire
additional employees and instead focus on the sale of the existing IVR
technology, the board has determined that, on balance, iVoice Technology has the
ability to satisfy its working capital needs as a whole. The board and
management of iVoice also determined that iVoice Technology has the ability to
obtain financing to satisfy any addition working capital needs as a stand-alone
company.
The emerging nature of the interactive voice response industry, makes it
difficult to assess the future growth of iVoice Technology. As such, iVoice
Technology has formed B Green Innovations, Inc., a wholly-owned subsidiary, and
has agreed to invest up to $500,000 to commercialize its "green" technology
platforms. The new subsidiary will contain the Company's green technology and
will pursue associated developmental activities. The first technology will use
recycle tires. Recently, the Company announced that it had filed, a new Patent
Application for a process it describes as Recycled Tire Pod with Appliance
Recess Guide. B Green Innovations, Inc. also has a new patent application filed
on paver blocks and patio blocks made from recycled tire crumb rubber. In May
2008, the Company has made its initial investment by purchasing 55 shares of
Series B Secured 10% Convertible Preferred Stock for net proceeds of $49,500 to
B Green Innovations. In September 2008 the Company has made an additional
initial investment by purchasing 55 shares of Series B Secured 10% Convertible
Preferred Stock for net proceeds of $49,500 to
24
B Green Innovations. The Company has invested proceeds of $99,000 into B Green
Innovations. The Company believes that this investment will allow B Green to
further develop additional technologies.
The Company has operated at a loss in the past for iVoice, and as an independent
company such losses may continue or increase. Additionally, iVoice Technology's
business has relied on iVoice for financial, administrative and managerial
expertise in conducting its operations. Following the Spin-off, iVoice
Technology has developed and maintained its own credit and banking relationships
and performs its own financial and investor relations functions. However, iVoice
Technology may not be able to successfully maintain the financial,
administrative and managerial structure necessary to operate as an independent
public company, and the development of such structure will require a significant
amount of management's time and other resources.
iVoice Technology has received a going concern opinion from its auditors. Its
continuation as a going concern is dependent upon obtaining the financing
necessary to operate its business. The financing of our working capital needs
was expected to be provided, in large part, from the sale of Class A Common
Stock to YA Global Investments (f/k/a/Cornell Capital Partners) pursuant to the
terms of the Standby Equity Distribution Agreement. The Standby Equity
Distribution Agreement expired on February 5, 2008. If the Company cannot find
sources of additional financing to fund its working capital needs, the Company
will be unable to obtain sufficient capital resources to operate our business.
On March 12, 2008, the Company sold 1,444.44 shares of Series A 10% Convertible
Preferred Stock to iVoice, Inc. for net proceeds of $1,300,000. These funds were
used to repay the Convertible Debenture and to continue to fund operations and
the new venture in B Green Technologies discussed above.
We cannot assure you that we will be able to access any financing in sufficient
amounts or at all when needed. Our inability to obtain sufficient working
capital funding will have an immediate material adverse effect upon our
financial condition and our business. See "Liquidity and Capital Resources."
iVoice Technology's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, and reflect the
historical financial position, results of operations, and cash flows of the
business transferred to iVoice Technology by iVoice as part of the Spin-off. The
financial information included in this report, however, is not necessarily
indicative of what iVoice Technology's results of operations or financial
position would have been had it operated as an independent company during the
periods presented, nor is it necessarily indicative of its future performance as
an independent company.
iVoice Technology also operates the IVR software business. It is unclear whether
such efforts will result in a reasonably successful operating business due to
iVoice's previous lack of sales and marketing efforts on IVR, iVoice
Technology's lack of operating history, the current economic environment and,
more specifically, the uncertainty of the telecommunications market. As of
August 5, 2005, iVoice assigned, contributed and conveyed to iVoice Technology
the iVoice corporate assets, liabilities and expenses related to the IVR
software business, including the IVR software and all intellectual property of
iVoice relating to the IVR software business and the assignment of iVoice's
existing agreements and arrangements with dealers and resellers. This
assignment, contribution and conveyance of assets, liabilities and expenses was
based on an estimate of the proportion of such amounts allocable to iVoice
Technology, utilizing such factors as total revenues, employee headcount and
other relevant factors. iVoice Technology believes that these allocations have
been made on a reasonable basis. iVoice Technology believes that all costs
allocated to iVoice Technology are a reasonable representation of the costs that
iVoice Technology would have incurred if iVoice Technology had performed these
functions as a stand-alone company.
In conjunction with the separation of the IVR software business from iVoice,
iVoice Technology entered into an administrative services agreement with iVoice
for the provision of certain services by iVoice to iVoice Technology following
the Spin-off. This agreement will continue on a month to month basis until
25
iVoice Technology has found replacement services for those services being
provided by iVoice or can provide these services itself. Following termination
of the administrative services agreement, we expect that iVoice Technology will
operate on a completely stand-alone basis from iVoice and there will be no
business or operating relationship between iVoice and iVoice Technology. iVoice
Technology has no current intention to terminate the administrative services
agreement, seek replacement services, or provide services for itself in the near
future.
RESULTS OF OPERATIONS
- ---------------------
All of our revenues were derived from the sale or license of our interactive
voice response software products, which enable a caller to obtain requested
information in voice form from a local or non-local database, and maintenance
contracts. Total revenues decreased $11,836 (54.7%) for the three months ended
September 30, 2008 to $9,786, and $20,878 (37.3%) for the nine months ended
September 30, 2008 to $35,164 as compared to the same periods in the prior year
as a result of a decrease in installations. The low sales volume of the IVR
business is attributable to the minimal resources made available for the sales
and marketing of the interactive voice response software products. Management
feels that the sales of the interactive voice response software products may
increase if greater financial and operational resources were made available for
the sales and marketing of the products
Gross margin decreased $9,564 (49.4%) to $9,786 for the three months ended
September 30, 2008 as compared to the same period in the prior year, and $18,606
(34.6%) to $35,164 for the nine months ended September 30, 2008 as compared to
the nine months ended September 30, 2007, as a result of the decrease in
revenues. Total operating expenses increased $61,288 (66.8%) to $153,068 and
$124,301 (42.1%) to $419,374 for the three and nine months ended September 30,
2008, respectively, as compared to the three and nine months ended September 30,
2007, as a result of an increase in investor relations expenses and expenses
associated with the operations of B Green Innovations, Inc. offset partially by
lower professional fees.
Total other expense was $39,782 for the three months ended September 30, 2008 as
compared to income of $96,245 for the three months ended September 30, 2007.
This increase of $136,027 in other expense is mostly attributed to a smaller
gain on valuation of derivative of only $21,241 for the three months ended
September 30, 2008 as compared to a gain on valuation of derivative of $171,366
for the three months ended September 30, 2007. For the nine months ended
September 30, 2008, total other income was $238,449 as compared to an expense of
$529,169 for the nine months ended September 30, 2007. This increase of $767,618
in other income is mostly attributed to the gain on valuation of derivative of
$1,094,066 for the nine months ended September 30, 2008 as compared to a loss on
valuation of derivative of $365,873 for the nine months ended September 30,
2007. This increase was partially offset by the increase in the amortization of
debt discount from $117,518 for the nine months ended September 30, 2007 to
$624,051 for the nine months ended September 30, 2008.
Net loss for the quarter ended September 30, 2008 was $183,062 as compared to
net income of $23,815 for the quarter ended September 30, 2007. Net loss for the
nine months ended September 30, 2008 was $145,761 as compared to a loss of
$770,472 for the nine months ended September 30, 2007. The change in net loss of
was the result of the factors discussed above.
The accretion related to the Series A 10% Convertible Preferred Stock issued on
March 12, 2008 is primarily related to the effect of the low conversion price of
its preferred stock to its common stock relative to the fair value of the common
stock at the initiation of the transaction.
As of September 30, 2008, iVoice Technology had one part-time employee in
headquarters and two part-time consultants and one part-time employee for its B
Green Innovations, Inc. operations.
26
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
To date, iVoice Technology has incurred substantial losses, and will require
financing for working capital to meet its operating obligations. We anticipate
that we will require financing on an ongoing basis for the foreseeable future.
On August 12 and November 19, 2004, iVoice Technology issued an aggregate of
$560,000 in secured convertible debentures, with interest payable at 5% per
annum, to YA Global Investments (f/k/a/ Cornell Capital Partners). On February
28, 2005, iVoice Technology's obligations under the secured convertible
debentures were terminated and replaced with a secured promissory note of the
same principal amount, with an additional loan of $140,000 bringing the
promissory note to an aggregate principal of $700,000. The loans evidenced by
the promissory note have not yet been repaid, and are potentially in default.
This promissory note accrues interest at rate of 12% per annum. This promissory
note is not convertible into any equity security of iVoice Technology. In
connection with the issuances of the secured convertible debentures, iVoice
Technology paid a fee to YA Global Investments (f/k/a/ Cornell Capital Partners)
equal to 10% of the aggregate principal amount of the debentures. When the
secured convertible debentures were terminated, iVoice Technology received a
credit for fees that would otherwise have been payable upon the issuance of the
$560,000 in replacement notes. iVoice Technology paid YA Global Investments
(f/k/a/ Cornell Capital Partners) a fee of $14,000 in connection with its
$140,000 additional borrowing. The Company's obligations under the secured
promissory note issued to YA Global Investments (f/k/a/ Cornell Capital
Partners) are secured by a first priority security interest in substantially all
of our assets. iVoice had also guaranteed the payment of all amounts payable by
iVoice Technology pursuant to the secured promissory note. This guaranty
terminated on August 5, 2005.
On March 30, 2007, iVoice Technology, Inc. issued a Secured Convertible
Debenture (the "Debenture") to YA Global Investments (f/k/a/ Cornell Capital
Partners) for the sum of $700,000 in exchange for the previously issued note
payable for the same amount (see Notes 8 and 9 to the Condensed Financial
Statements). On March 14, 2008, the Company and YA Global Investments agreed
that the Company 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 $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 the Company's common stock during the 30 trading days immediately
proceeding 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.
On August 5, 2005, iVoice Technology assumed an aggregate of $190,000 in
liabilities from iVoice and iVoice assigned to iVoice Technology assets having
an aggregate book value of $10,000. iVoice Technology believes that the fair
value of these assets may be greater than the book value, although it has not
undertaken an appraisal. The assumed obligations are described below.
iVoice Technology assumed from iVoice outstanding indebtedness in the amount of
$190,000 payable to Jerry Mahoney. This amount is related to funds that had been
loaned to iVoice in July 2000 that were used to develop the IVR software
business. The amount of $190,000 includes approximately $32,110 for interest on
the original loan from Jerry Mahoney to iVoice. Pursuant to the terms of the
promissory note representing such obligation, iVoice Technology, for value
received, will pay to Mr. Mahoney the principal sum of $190,000 that will bear
interest at the prime rate plus 2% per annum on the unpaid balance until paid or
until default. Interest payments will be due annually. All accrued interest
becomes due on the date of any payment of the promissory note. At the time of
default (if any) the interest rate shall increase to 20%
27
until the principal balance has been 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, par
value $0.01, for each dollar owed, (ii) the number of shares of Class A Common
Stock of iVoice Technology 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 the Company
maintains control over the issuance of shares and may decline the request for
conversion of the repayment into shares of the Company.
On September 22, 2005, iVoice Technology entered into a Standby Equity
Distribution Agreement with YA Global Investments (f/k/a/ Cornell Capital
Partners), pursuant to which iVoice Technology may, from time to time, issue and
sell to YA Global Investments (f/k/a/ Cornell Capital Partners) our Class A
Common Stock for a total purchase price of up to $10 million. As of September
30, 2008, the Company has sold in the aggregate 190,365,518 shares of Class A
Common Stock to YA Global for net proceeds of $324,520, which are net of fees
and discounts of $59,377, which was used to fund the operations of the Company.
The Standby Equity Distribution Agreement expired on February 5, 2008.
On March 12, 2008, the Company sold 1,444.44 shares of Series A 10% Convertible
Preferred Stock to iVoice, Inc. for net proceeds of $1,300,000. These funds will
be used to repay the Convertible Debenture and to fund operations and the new
venture in B Green Technologies discussed above.
If the Company cannot find sources of additional financing to fund its working
capital needs, the Company will be unable to obtain sufficient capital resources
to operate our business. We cannot assure you that we will be able to access any
financing in sufficient amounts or at all when needed. Our inability to obtain
sufficient working capital funding will have an immediate material adverse
effect upon our financial condition and our business.
The Company currently has no other significant sources of working capital or
cash commitments. However, no assurance can be given that iVoice Technology will
raise sufficient funds from such financing arrangements, or that iVoice
Technology will ever produce sufficient revenues to sustain its operations, or
that a market will develop for its common stock for which a significant amount
of iVoice Technology's financing is dependent upon.
For the nine months ended September 30, 2008, the Company had a net increase in
cash of $465,325. The Company's principal sources and uses of funds were as
follows:
CASH USED BY OPERATING ACTIVITIES. The Company used $284,348 in cash for
operating activities for the nine months ended September 30, 2008 as compared to
$92,461 in the prior year. The increase in cash used for operating activities is
primarily attributed to the payment of accrued interest and the redemption fee
associated with the paydown of the convertible debenture.
NET CASH USED IN INVESTING ACTIVITIES. The Company used $66,695 in
investing activities for the nine months ended September 30, 2008 for deferred
patent costs and to provide funding of $30,000 to a potential merger candidate.
The Company had no investing activities in the prior year.
NET CASH PROVIDED BY FINANCING ACTIVITIES. The Company generated $816,368
from financing activities for the nine months ended September 30, 2008 primarily
as a result of net proceeds from the sales of Series A Convertible Preferred
Stock, partially offset by the payment of the convertible debenture in the
amount of $572,815.
28
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates, including those
related to bad debts, inventory obsolescence, intangible assets, payroll tax
obligations, and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of certain assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions.
We have identified below the accounting policies, revenue recognition and
software costs, related to what we believe are most critical to our business
operations and are discussed throughout Management's Discussion and Analysis of
Financial Condition or Plan of Operation where such policies affect our reported
and expected financial results.
REVENUE RECOGNITION
With respect to the sale of software license fees, the Company recognizes
revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists
generally evidenced by a signed, written purchase order from the customer, (2)
delivery of the software product on Compact Disc (CD) or other means to the
customer has occurred, (3) the perpetual license fee is fixed or determinable
and (4) collectability, which is assessed on a customer-by-customer basis, is
probable.
With respect to customer support services, upon the completion of one year from
the date of sale, the Company offers customers an optional annual software
maintenance and support agreement for subsequent one-year periods. Sales of
purchased maintenance and support agreements are recorded as deferred revenues
and recognized over the respective terms of the agreements.
The Company derives its revenues from the licensing of its software product and
optional customer support (maintenance) services. Presently, 100% of the
revenues reported by the Company are derived from the licensing of the Company's
IVR software. No revenues have been derived from the sale of optional customer
support services. The Company'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. The Company's software application is
fully functional upon delivery and implementation and does not require any
significant modification or alteration. The Company also offers customers an
optional annual software maintenance and support agreement for the subsequent
one-year periods. Such maintenance and support services are free for the first
year the product is licensed. The software maintenance and support agreement
provides free software updates, if any, and technical support the customer may
need in deploying or changing the configuration of the software. Generally, the
Company does not license its software in multiple element arrangements whereby
the customer purchases a combination of software and maintenance. In a typical
arrangement, software maintenance services are sold separately from the software
product; are not considered essential to the functionality of the software and
are purchased at the customer's option upon the completion of the first year
licensed.
The Company does not offer any special payment terms or significant discount
pricing. Normal and customary payment terms require payment for the software
license fees when the product is shipped. Payment for software maintenance is
due prior to the commencement of the maintenance period. It is also the
Company's policy not to provide direct customers (as opposed to resellers and
dealers) the right to
29
refund any portion of its license fees. The Company accepts Visa and MasterCard
as well as company checks.
Customers may license the Company's products through our telesales organization
and through promotions or reseller agreements with independent third parties.
iVoice Technology only permits returns from authorized dealers and resellers of
unused inventory, subject to the consent of the Company and a twenty-five
percent restocking fee. End users who purchaser products directly from iVoice
Technology may not return such products to iVoice Technology under any
circumstances. Accordingly, the Company records a provision for product returns
and allowances against product revenue in the same period the revenue is
recorded. The estimates are based on historical sales returns and other known
data as well as market and economic conditions.
Our current products are not sold through retail distribution channels. Current
reseller agreements provide for a limited contractual right of return and do not
provide for future price concessions, minimum inventory commitments nor is
payment contingent upon the reseller's future sales or our products. Revenues
generated from products licensed through marketing channels where the right of
return exists, explicitly or implicitly, is reduced by reserves for estimated
product returns. Such reserves are estimates based on returns history and
current economic and market trends.
For B Green Innovations, Inc. revenues are recognized at the time of shipment
to, or acceptance by customer, provided title and risk of loss is transferred to
the customer. Provisions, when appropriate, are made where the right to return
exists.
DERIVATIVE LIABILITIES
The Company accounts for its embedded conversion features in its convertible
debentures in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires a periodic valuation of
their fair value and a corresponding recognition of liabilities associated with
such derivatives, and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The
recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at
the date of issuance, and the excess of derivative liabilities over the proceeds
is recognized as "Loss on Valuation of Derivative" in other expense in the
accompanying financial statements. Any subsequent increase or decrease in the
fair value of the derivative liabilities is recognized as "Other expense" or
"Other income", respectively.
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.
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ITEM 4T. CONTROLS AND PROCEDURES
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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 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.
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PART II. OTHER INFORMATION
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ITEM 5. OTHER INFORMATION.
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(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
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31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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In accordance with the requirements of the Exchange Act, the Registrant caused
this report on Form 10-Q to be signed on its behalf by the undersigned,
thereunto duly authorized.
iVOICE TECHNOLOGY, INC.
Date: November 19, 2008 By: /s/ Jerome Mahoney
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Jerome Mahoney
President, Chief Executive Officer and
Chief Financial Officer
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INDEX OF EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.