-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W2jDG3JPGZcZMCT9WJhZfP+6E3QxEXbOUCPScy9bt8Y3fvknXToKY9F3yP+3UQKB vL2D6KI9cM8DvSxkEtYjPA== 0001072613-08-001588.txt : 20080813 0001072613-08-001588.hdr.sgml : 20080813 20080813111440 ACCESSION NUMBER: 0001072613-08-001588 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080813 DATE AS OF CHANGE: 20080813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVOICE, INC /NJ CENTRAL INDEX KEY: 0001105064 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521750786 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29341 FILM NUMBER: 081011976 BUSINESS ADDRESS: STREET 1: 750 HIGHWAY 34 STREET 2: 210 SOUTH FOURTH AVE CITY: MATAWAN STATE: NJ ZIP: 07747 BUSINESS PHONE: 7324417700 MAIL ADDRESS: STREET 1: 750 HIGHWAY 34 STREET 2: 210 SOUTH FOURTH AVE CITY: MATAWAN STATE: NJ ZIP: 07747 FORMER COMPANY: FORMER CONFORMED NAME: IVOICE, INC /DE DATE OF NAME CHANGE: 20060206 FORMER COMPANY: FORMER CONFORMED NAME: IVOICE COM INC /DE DATE OF NAME CHANGE: 20000426 FORMER COMPANY: FORMER CONFORMED NAME: THIRDCAI INC DATE OF NAME CHANGE: 20000202 10-Q 1 form10q_16020.txt FORM 10-Q DATED JUNE 30, 2008 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number: 000-29341 IVOICE, INC - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW JERSEY 51-0471976 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 750 HIGHWAY 34 MATAWAN, NJ 07747 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (732) 441-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated files, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the exchange act. Large Accelerated filer [_] Accelerated filer [_] Non-accelerated filer [_] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Number of shares of Class A, common stock, No par value, outstanding as of August 11, 2008: 2,324,837,194 ================================================================================ IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2008 AND 2007 TABLE OF CONTENTS -----------------
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet - June 30, 2008 (Unaudited) and December 31, 2007 (audited) 2 - 3 Condensed Consolidated Statements of Operations - For the six months and three months ended June 30, 2008 and 2007 (Unaudited) 4 Condensed Consolidated Statement of Accumulated Other Comprehensive Loss - For the six months ended June 30, 2008 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows - For the six months ended June 30, 2008 and 2007 (Unaudited) 6 - 8 Notes to Condensed Consolidated Financial Statements (Unaudited) 9 - 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 - 31 Item 4T. Controls and Procedures 31 - 32 PART II. OTHER INFORMATION Item 5. Other Information 33 Item 6. Exhibits 33
1 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31, 2008 2007 ------------ ------------ (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,263,917 $ 79,919 Marketable securities 7,688,401 10,814,954 Securities available for sale 698,165 676,272 Notes receivable - current portion 196,641 -- Accounts receivable, net of allowance for doubtful accounts $8,250 and $0, respectively 3,833 -- Prepaid expenses and other current assets 44,507 194,678 ------------ ------------ Total current assets 10,895,464 11,765,823 ------------ ------------ PROPERTY AND EQUIPMENT, net of accumulated depreciation of $219,193 and $214,721, respectively 9,154 11,285 ------------ ------------ OTHER ASSETS Convertible debentures receivable 891,417 852,447 Notes receivable 14,537 -- Intangible assets, net of accumulated amortization of $1,240 and and $871, respectively 212,142 170,975 Deposits and other assets 6,666 6,666 ------------ ------------ Total other assets 1,124,762 1,030,088 ------------ ------------ TOTAL ASSETS $ 12,029,380 $ 12,807,196 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 2,022,204 $ 1,127,695 Short term loans payable 4,583,001 -- Convertible debentures payable, net of discounts of $371,633 and $1,444,056, respectively 1,019,824 5,004,154 Derivative liability on convertible debentures 1,890,122 4,249,113 Due to related parties 554,924 176,293 Deferred revenues 6,780 -- ------------ ------------ Total current liabilities 10,076,855 10,557,255 ------------ ------------ COMMITMENTS AND CONTINGENCIES MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- --
See accompanying notes to condensed consolidated financial statements. 2 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
June 30, December 31, 2008 2007 ------------ ------------ (Unaudited) (Audited) STOCKHOLDERS' EQUITY Preferred stock, $1 par value; authorized 1,000,000 shares; no shares issued and outstanding -- -- Common stock, Class A, no par value; authorized 10,000,000,000 shares; 2008 - 2,015,951,305 shares issued; 2,015,948,305 shares outstanding 2007 - 420,674,318 shares issued; 420,671,318 shares outstanding 26,030,454 25,325,012 Common stock, Class B, $0.01 par value; authorized 50,000,000 shares; 2008 - 2,204,875 shares issued; 1,516,784 shares outstanding 2007 - 2,204,875 shares issued; 1,552,484 shares outstanding 15,168 15,525 Discount on investment in subsidiary (1,781,133) -- Additional paid-in capital 719,702 719,702 Accumulated other comprehensive loss (1,111,578) (1,096,000) Accumulated deficit (21,891,288) (22,685,498) Treasury stock, 3,000 Class A shares, at cost (28,800) (28,800) ------------ ------------ Total stockholders' equity 1,952,525 2,249,941 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,029,380 $ 12,807,196 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the six months For the three months Ended June 30, Ended June 30, -------------------------------------- -------------------------------------- 2008 2007 2008 2007 ---------------- ---------------- ---------------- ---------------- SALES $ 78,704 $ 915,777 $ 40,968 $ 597,826 COST OF SALES -- -- -- -- ---------------- ---------------- ---------------- ---------------- GROSS PROFIT 78,704 915,777 40,968 597,826 ---------------- ---------------- ---------------- ---------------- GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses 700,371 381,249 353,553 182,481 Amortization of financing costs 72,396 86,875 28,958 43,438 Depreciation and amortization 3,295 7,359 1,560 3,892 ---------------- ---------------- ---------------- ---------------- Total selling, general and administrative expenses 776,062 475,483 384,071 229,811 ---------------- ---------------- ---------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (697,358) 440,294 (343,103) 368,015 ---------------- ---------------- ---------------- ---------------- OTHER INCOME (EXPENSE) Other income 344,855 264,605 159,736 189,599 Gain on revaluation of derivatives 3,624,804 1,275,129 2,450,143 (70,058) Amortization of discount on debt (1,758,920) (1,992,410) (417,278) (1,080,174) Interest expense (707,980) (258,541) (301,076) (129,024) ---------------- ---------------- ---------------- ---------------- Total other income (expense) 1,502,759 (711,217) 1,891,525 (1,089,657) ---------------- ---------------- ---------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES 805,401 (270,923) 1,548,422 (721,642) PROVISION FOR INCOME TAXES -- -- -- -- ---------------- ---------------- ---------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 805,401 (270,923) 1,548,422 (721,642) LOSS FROM DISCONTINUED OPERATIONS -- (621,152) -- (245,196) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY NET INCOME (LOSS) (11,191) -- 5,158 -- ---------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 794,210 $ (892,075) $ 1,553,580 $ (966,838) ================ ================ ================ ================ NET INCOME (LOSS) PER COMMON SHARE Continuing Operations - Basic $ 0.00 $ (0.00) $ 0.00 $ (0.01) ================ ================ ================ ================ Continuing Operations - Diluted $ 0.00 $ -- $ 0.00 $ -- ================ ================ ================ ================ Discontinued Operations - Basic $ 0.00 $ (0.01) $ 0.00 $ (0.00) ================ ================ ================ ================ Discontinued Operations - Diluted $ 0.00 $ -- $ 0.00 $ -- ================ ================ ================ ================ WEIGHTED AVERAGE SHARES OUTSTANDING Basic 1,117,554,274 78,216,151 1,550,083,986 84,169,672 ================ ================ ================ ================ Diluted 10,000,000,000 -- 10,000,000,000 -- ================ ================ ================ ================
See accompanying notes to condensed consolidated financial statements. 4 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30,
2008 2007 ---------------- ---------------- Balance at beginning of the period $ (1,096,000) $ (376,559) Unrealized (loss) on securities available for sale: Unrealized (loss) arising during the period (9,340) (734,468) Less: reclassification adjustment for gains (losses) included in net income (loss) (6,238) 95,804 ---------------- ---------------- Net change for the period (15,578) (638,664) ---------------- ---------------- Balance at end of the period $ (1,111,578) $ (1,015,223) ================ ================
See accompanying notes to condensed consolidated financial statements. 5 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30,
2008 2007 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 794,210 $ (270,923) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of fixed assets and amortization of intangibles 3,061 7,359 Amortization of prepaid finance costs 72,396 86,875 Amortization of discount on debt conversion 1,203,780 1,992,410 Beneficial interest on issuance of stock 258,285 -- (Gain) loss on sales of securities available for sale (6,237) 85,234 Interest and dividends earned on investments (71,486) (65,778) Non-cash consulting revenues earned -- (840,000) Gain on revaluation of derivatives (2,550,822) (1,275,129) Minority interest in consolidated subsidiary net income 11,191 -- Changes in certain assets and liabilities: (Increase) in accounts and notes receivable (29,546) -- (Increase) decrease in prepaid expenses and other assets 16,896 (22,368) Increase in accounts payable and accrued liabilities 328,702 250,774 (Decrease) in deferred revenues -- (25,000) Increase in related party liabilities 52,450 34,468 ---------------- ---------------- Total cash provided by (used in) operating activities 82,880 (42,078) ---------------- ---------------- Net loss from discontinued operations -- (621,152) Net effect on cash flow from spin-off of discontinued operations -- 455,380 ---------------- ---------------- Total cash provided by (used in) operating activities of discontinued operations -- (165,772) ---------------- ---------------- Total cash provided by (used in) operating activities 82,880 (207,850) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment -- (4,708) Increase in costs of trademarks and other intangibles (2,020) (4,502) Net proceeds from sales of securities available for sale 12,191 136,787 Investment in securities and loans in unaffiliated companies (77,250) (25,000) Net redemption of principal and interest on marketable securities 3,126,553 298 Net effect on cash flow from consolidation of majority owned investment (744,847) -- ---------------- ---------------- Total cash provided by investing activities from continuing operations 2,314,627 102,875 ---------------- ---------------- Adjustments to reconcile total cash provided by (used in) investing activities from discontinued operations -- (6,272) ---------------- ---------------- Total cash provided by investing activities 2,314,627 96,603 ---------------- ----------------
See accompanying notes to condensed consolidated financial statements. 6 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30,
2008 2007 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short term borrowings 5,660,000 -- Repayment of short term borrowings (1,076,999) -- Repayment of convertible debentures (4,796,510) -- ------------ ------------ Total cash (used in) financing activities (213,509) -- ------------ ------------ Adjustments to reconcile total cash provided by financing activities from discontinued operations -- 154,000 ------------ ------------ Total cash provided by (used in) financing activities (213,509) 154,000 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 2,183,998 42,753 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 79,919 31,235 ------------ ------------ CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,263,917 $ 73,988 ============ ============ CASH PAID DURING THE PERIOD FOR: Interest expense $ 6,001 $ -- ============ ============ Income taxes $ -- $ -- ============ ============
See accompanying notes to condensed consolidated financial statements. 7 IVOICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 SUPPLEMENTAL CASH FLOW INFORMATION: a) On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology, Inc.'s Series A 10% Convertible Preferred Stock for $1,444,444. This transaction was eliminated in consolidation. b) The Company exchanged $75,535 of amounts due from iVoice Technology, Inc. and B Green Innovations, Inc. into Convertible Promissory Notes of the same amount. These transactions were eliminated in consolidation. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: For the six months ended June 30, 2008: - --------------------------------------- a) The Company issued 1,383,276,987 shares of Class A common stock to YA Global Investments, LP as repayment of principal on outstanding convertible debentures, valued at $705,085. b) The Company issued 212,000,000 shares of Class A Common upon the conversion of 35,700 shares of Class B Common Stock. c) The Company received 37,000,000 shares of Thomas Pharmaceuticals, Ltd. Class A common stock on conversion of $3,920 of convertible debentures receivable. d) The Company exchanged $67,535 of amounts due from SpeechSwitch, Inc. into a Convertible Promissory Note of the same amount. e) The Company received 151,000,000 shares of SpeechSwitch, Inc. Class A common stock on conversion of $12,080 of convertible notes receivable. f) The Company received 42,000,000 shares of iVoice Technology, Inc. Class A common stock on conversion of $13,440 of convertible notes receivable. This transaction was eliminated in consolidation. g) The Company exchanged $47,302 of amounts due from Thomas Pharmaceuticals, Ltd. into a Convertible Promissory Note of the same amount. For the six months ended June 30, 2007: - --------------------------------------- a) The Company issued 18,170,493 shares of Class A common stock to YA Global Investments, LP. (f/k/a Cornell Capital Partners) as repayment of principal on outstanding convertible debentures, valued at $177,500. b) The Company received 4,000,000 shares of Class A common stock of Deep Field Technologies as compensation for consulting services to be provided pursuant to the terms of the Consulting Agreement entered into on February 13, 2007. The value of the agreement was determined to be $1,120,000 and is being amortized over six months ending August 13, 2007. c) The Company issued 2,012,651 shares of Class A Common upon the conversion of 10,863 shares of Class B Common Stock See accompanying notes to condensed consolidated financial statements. 8 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements include the accounts of iVoice, Inc. (the "Company" or "iVoice") and its wholly owned subsidiary, iVoice Innovations, Inc. and its majority owned public company, iVoice Technology, Inc. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2007 audited financial statements and the accompanying notes thereto. Between February 11, 2004 and August 5, 2005, the Company completed the transfer of certain business segments and their related assets and liabilities to its four wholly owned subsidiaries Trey Resources, Inc, SpeechSwitch, Inc, iVoice Technology, Inc and Deep Field Technologies, Inc. These companies were then spun-off from iVoice as special dividends of the shares of Class A common Stock of the respective companies to the iVoice stockholders. Effective with the spin-off of the four subsidiaries, SpeechSwitch, iVoice Technology, Trey Resources and Deep Field Technologies now operate as independent publicly traded entities. On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology, Inc.'s Series A 10% Convertible Preferred Stock for $1,444,444. The holder of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, the holders of the Series A Preferred Stock shall not have in the aggregate more than seventy percent (70%) of the total votes of all classes of voting stock of the Corporation that would vote at a meeting of shareholders. Based on this voting formula, it was determined that iVoice, Inc. has voting rights equal to 70% of the voting stock of iVoice Technology and as such, according to APB Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK", iVoice, Inc. is required to consolidate the results of operations of iVoice Technology with those of iVoice and its other subsidiary. The Company is publicly traded and is currently traded on the Over The Counter Bulletin Board ("OTCBB") under the symbol "IVOI". 9 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 Principles of Consolidation --------------------------- The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, iVoice Innovations, Inc. and its majority owned public company, iVoice Technology, Inc. ("iVoice Technology"). All significant inter-company transactions and balances have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements are in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- The parent Company obtains its income primarily from the sales or licensing of its patents and patent applications. Revenues for the sales of our patents are recorded upon transfer of title. The patent revenues are reported net of any broker fees or commissions. The Company also is reporting revenues for iVoice Technology which derives its revenues from the licensing of its software product and optional customer support (maintenance) service. iVoice Technology's standard license agreement provides for a one-time fee for use of the company's product in perpetuity for each computer or CPU in which the software will reside. iVoice Technology's software application is fully functional upon delivery and implementation and does not require any significant modification or alteration. iVoice Technology also offers customers an optional annual software maintenance and support agreement for the subsequent one-year periods. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents at June 30, 2008 and December 31, 2007 of $2,263,917 and $79,919, respectively. Concentration of Credit Risk ---------------------------- The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $100,000. The cash equivalents are not insured. The Company has uninsured cash balances at June 30, 2008 and December 31, 2007 of $2,044,875 and $29,148, respectively. Marketable Securities --------------------- Marketable securities consist of auction rate securities with auction reset periods less than 12 months and are stated at fair value. The cost of securities sold is based on specific identification. The Company had marketable securities at June 30, 2008 and December 31, 2007 of $7,688,401 and $10,814,954, respectively. 10 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 Securities Available-for-sale ----------------------------- The Company has evaluated its investment policies consistent with FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption Accumulated Other Comprehensive Income (Loss). The Company had securities available for sale at June 30, 2008 and December 31, 2007 of $698,165 and $676,272, respectively. Fair Value of Financial Instruments ----------------------------------- The Company estimates that the fair value of all financial instruments at June 30, 2008 and December 31, 2007, as defined in FAS 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Earnings (Loss) Per Share ------------------------- FAS No. 128, "Earnings Per Share" requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). The computation of basic EPS is computed by dividing income available to common stockholders by the weighted average number of outstanding Common shares during the period. Diluted earnings per share gives effect to all dilutive potential Common shares outstanding during the period. The computation of diluted EPS for the six months ended June 30, 2008 does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. Common stock equivalents for the six months ended June 30, 007, were not included in the computation of diluted EPS when the Company reported a loss because to do so would be anti-dilutive. The shares used in the computations are as follows:
Six months ended June 30, ---------------------------------------- 2008 2007 ---------------- ---------------- Net income (loss) from continuing operations $ 805,401 $ (270,923) ================ ================ Net income (loss) from discontinued operations $ -- $ (616,152) ================ ================ Minority interest in net income $ (11,191) $ -- ================ ================ Net income (loss) applicable to common shares $ 794,210 $ (892,075) ================ ================ Weighted average shares outstanding - basic 1,117,554,274 78,216,151 ================ ================ Weighted average shares outstanding - diluted (see note) 10,000,000,000 -- ================ ================ Net income (loss) per common share outstanding: Continuing operations - basic $ 0.00 $ (0.00) ================ ================ Continuing operations - diluted $ 0.00 $ -- ================ ================ Discontinued operations - basic $ 0.00 $ (0.01) ================ ================ Discontinued operations - diluted $ 0.00 $ -- ================ ================
11 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 The Company had common stock equivalents in excess of its authorized capital at June 30, 2008, so the maximum authorized shares of 10,000,000,000 is shown for diluted earnings per common share calculations. The Company had common stock equivalents of 47,124,088,608 at June 30, 2008. Comprehensive Income -------------------- FAS No. 130, "Reporting Comprehensive Income", establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. As of June 30, 2008 and 2007, the Company has several items that represent comprehensive income, and thus, has included a statement of comprehensive income. Reclassification of accounts in the prior period financial statements --------------------------------------------------------------------- The Company has reclassified certain accounts in the statements of operations and statements of cash flows for the six months ended June 30, 2007 to reflect the Spin-off of Thomas Pharmaceuticals, Ltd. The statements reflect the reclassification of these operations to below the line as discontinued operations in accordance with the provisions of FAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets". There has been no effect on net loss for the six months ended June 30, 2007. The Company has also reclassified the auction rate securities of $10,822,055 from Cash equivalents to Marketable Securities at June 30, 2007. This reclassification has no effect on the Total assets of $13,312,806 at June 30, 207 or total cash (used in) operating activities of continuing operations of $42,078 for the six months ended June 30, 2007. Derivative Liabilities ---------------------- During April 2003, the Financial Accounting Standards Board issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after September 30, 2003, except in certain circumstances, and for hedging relationships designated after September 30, 2003. The financial statements for the six months ended June 30, 2008 include the recognition of the derivative liability on the underlying securities issuable upon conversion of the YA Global Convertible Debentures (f/k/a/ Cornell Convertible Debentures). Recent Accounting Pronouncements -------------------------------- In December 2007, the FASB issued SFAC No 141(R), "Business Combinations." This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008. 12 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This EITF Issue provides guidance and requires financial statement disclosures for collaborative arrangements. EITF Issue No. 07-1 is effect for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements, but it is not expected to be material. In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), which clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 does not expand the use of fair value to any new circumstances, and must be applied on a prospective basis except in certain cases. The standard also requires expanded financial statement disclosures about fair value measurements, including disclosure of the methods used and the effect on earnings. In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144. The partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the Company's financial statements. See Note 3 for the fair value measurement disclosures for these assets and liabilities. The Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned January 1, 2009 adoption of the remainder of the standard. On January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new standard did not impact the Company's Condensed Consolidated Financial Statements, as the Company did not elect the fair value option for any instruments existing as of the adoption date. However, the Company will evaluate the fair value measurement election with respect to financial instruments the Company enters into in the future. 13 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent's equity. It also requires once a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 will be effective beginning January 1, 2009. Management anticipates that the adoption of SFAS 160 will not have a material impact on the Company's financial statements. In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on our consolidated financial condition or results of operations. NOTE 2 - DISCONTINUED OPERATIONS On November 21, 2007, iVoice completed the distribution of Thomas Pharmaceuticals through the issuance of one share of Thomas Pharmaceuticals Class A common stock for every share of iVoice Class A common stock held on the record date of November 14, 2007. The summarized results of operations for the six months ended June 30, 2007 are as follows: Revenues $ 26,707 Cost of revenues 90,976 --------- Gross profit (64,269) Operating expenses 483,902 --------- Operating loss (548,171) Other expense 72,981 Provision for income taxes -- --------- Net loss $(621,152) ========= 14 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 NOTE 3 - FAIR VALUE MEASUREMENTS On January 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy: Level 1 Inputs - Quoted prices for identical instruments in active markets. Level 2 Inputs - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs- Instruments with primarily unobservable value drivers. The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2008.
Assets Level I Level II Level III Total ------------ ------------ ------------ ------------ Marketable securities $ 7,688,401 $ -- $ -- $ 7,688,401 Securites available for sal 698,165 -- -- 698,165 Notes receivable -- 211,178 -- 211,178 Convertible debentures -- 891,417 -- 891,417 ------------ ------------ ------------ ------------ Total Assets $ 8,386,566 $ 1,102,595 $ -- $ 9,489,161 ============ ============ ============ ============ Short term loans $ -- $ 4,583,001 $ -- $ 4,583,001 Convertible debentures -- 1,019,824 -- 1,019,824 Derivative liabilities -- 1,890,122 -- 1,890,122 ------------ ------------ ------------ ------------ Total Liabilities $ -- $ 7,492,947 $ -- $ 7,492,947 ============ ============ ============ ============
NOTE 4 - MARKETABLE SECURITIES At various times since 2004, the Company had deposited proceeds from debt financing into short-term securities with our Investment broker. During 2006 and 2007, these short-term securities were exchanged for auction rate preferred shares ("ARPS") which provided greater returns on our investments. ARPS have long-term maturity with the interest rate being reset through Dutch auctions that are typically held every 7, 28 or 35 days. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. Our auction rate securities are all AAA rated. The Company had marketable securities at June 30, 2008 and December 31, 2007 of $7,688,401 and $10,814,954, respectively. 15 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 NOTE 5 - SECURITIES AVAILABLE FOR SALE On January 6, 2006 and April 27, 2006, iVoice, Inc. purchased an aggregate of $550,000 of Thomas NJ Series B Convertible Preferred Stock. The initial value of each share is $1,000 and is subject to adjustment for stock dividends, combinations, splits, recapitalizations and the like. The holders of these shares are entitled to receive dividends at a rate of 10% per annum based on the initial value of the shares outstanding. Upon liquidation, the holders of these shares will receive up to 125% of the initial value of the shares plus accumulated and unpaid dividends, but following the distribution to any senior debt or senior equities. The holders of these shares may convert their shares into Class A Common Stock at the price per share equal to eighty percent (80%) of the lowest closing bid price of the Common Stock for the five (5) trading days immediately preceding the conversion date, but cannot be converted into more than 9.99% of the total Class A Common Stock at that time of conversion. The holders of these shares shall have one vote for each shares of Class A Common Stock into which each shares of Series B Preferred Shares could be converted assuming a conversion price of eighty percent (80%) of the lowest closing bid price of the Common Stock for the five (5) trading days immediately preceding the record date, but are limited to voting rights to no more than 9.99% of the total voting rights of the aggregate of the Series B Preferred Stock, Class A Common Stock and Class B Common Stock shareholders. The accounts are valued at the initial stated value plus earned dividends. At June 30, 2008 and December 31, 2007, the total balance is $679,689 and $652,264, respectively. On February 13, 2007, the Company received 4,000,000 shares for Deep Field Technologies Class A Common Stock as compensation pursuant to the Consulting Agreement with Deep Field Technologies, valued at $1,120,000. The Company provided "general corporate finance advisory and other similar consulting services" for a period of six (6) months from the date of the agreement. At June 30, 2008, the book value of these securities is $1,120,000 and the market value is $5,200. The cumulative unrealized loss of $1,114,800 is included in the Other Comprehensive Income (Loss). On January 15, 2008 and May 1, 2008, the Company received an aggregate of 37,000,000 shares of Thomas Pharmaceuticals, Ltd. Class A Common Stock upon conversion of $3,920 of 10% Secured Convertible Debentures receivable dated January 6, 2006. During the six months ended June 30, 2008, the Company sold 9,517,923 shares for a net proceeds of $4,367. The book value of the remaining shares is $3,158 and the market value is $5,496. The unrealized gain of $2,338 is included in the Other Comprehensive Income (Loss). On March 10, 2008 and May 21, 2008, the Company received an aggregate of 151,000,000 shares of SpeechSwitch, Inc. Class A Common Stock upon conversion of $12,080 of Convertible Promissory Note receivable dated March 5, 2008. During the six months ended June 30, 2008, the Company sold 64,805,823 shares for a net proceeds of $7,816. The book value of the remaining shares is $6,895 and the market value is $8,619 at June 30, 2008. The unrealized gain of $1,724 is included in the Other Comprehensive Income (Loss). On March 10, 2008 and March 18, 2008, the Company received an aggregate of 42,000,000 shares of iVoice Technology, Inc. Class A Common Stock upon conversion of $13,440 of Convertible Promissory Note receivable dated March 5, 2008. The market value is $12,600 at June 30, 2008. The unrealized loss of $840 is included in the Other Comprehensive Income (Loss). 16 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 Cash receipts from the sales of the securities are deposited in short term money market funds at our broker. Periodically these funds are transferred to our operating cash account. At June 30, 2008, the unremitted balance in the money market fund at our broker was $1. As of June 30, 2008, the aggregate book value of these securities was $1,823,184 before elimination, the market value was $698,165 and the cumulative unrealized loss was $1,111,578. At June 30, 2008, the balance of the iVoice Technology securities are eliminated in consolidation. NOTE 6 - PROMISSORY NOTES RECEIVABLE On February 4, 2008, iVoice Technology advanced $30,000 to Atire Technologies, Inc., an acquisition candidate, in the form of a Promissory Note, due February 4, 2010, at an interest of 8% per annum. The terms of the note provided deferred payments of interest only starting on July 4, 2008 and principal and interest payments starting on October 4, 2008. As of June 30, 2008, the balance due on the note is $30,000 plus accrued interest of $786. On March 5, 2008, the Company converted its outstanding accounts due from SpeechSwitch, Inc. for unpaid administrative services in the amount of $50,652 into a convertible promissory note at the rate of prime plus 1 percent per annum (6% at June 30, 2008). During the six months ended June 30, 2008, additional amounts were added to this note based on any unpaid administrative service fees and will accrue interest at the above specified rate from date of advance until paid. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand. On March 10, 2008 and May 21, 2008, the Company received an aggregate of 151,000,000 shares of SpeechSwitch, Inc. Class A Common Stock upon conversion of $12,080 of Promissory Notes Receivable. At June 30, 2008, the principal balance of the note is $56,410, which included accrued interest of $956. On June 12, 2008, the Company converted its outstanding accounts due from Thomas Pharmaceuticals, Ltd. for unpaid administrative services in the amount of $47,302 into a convertible promissory note at the rate of prime plus 1 percent per annum (6% at June 30, 2008). Additional amounts may be added to this note based on any unpaid administrative service fees and will accrue interest at the above specified rate from date of advance until paid. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand. At June 30, 2008, the principal balance of the note is $47,302. On June 13, 2008, the Company invested $77,500 in Small Cap Advisor, Inc, a wholly owned subsidiary of Thomas Pharmaceuticals, Ltd., in the form of a Promissory Note, at an interest of prime plus 1 percent per annum (6% at June 30, 2008). Additional amounts may be added to this note based on any unpaid administrative service fees and will accrue interest at the above specified rate from date of advance until paid. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand. As of June 30, 2008, the balance due on the note is $77,466, which included accrued interest of $216. 17 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 The amounts due at June 30, 2008 are as follows: Atire Technologies, Inc. $ 30,000 SpeechSwitch, Inc. 56,410 Thomas Pharmaceuticals, Ltd. 47,302 Small Cap Advisors, Inc. 77,466 --------- Total amounts due 211,178 Less long term portion (14,537) --------- Total current portion $ 196,641 ========= NOTE 7 - CONVERTIBLE DEBENTURES RECEIVABLE During 2006 and 2007, the Company purchased an aggregate of $710,000 of Thomas NJ Secured Convertible Debentures. The holders of these debentures are entitled to receive interest of 10%, compounded quarterly. Thomas NJ can redeem a portion or all amounts outstanding under the Convertible Debentures at any time upon thirty (30) business days advanced written notice. The redemption price shall be equal to one hundred twenty-five percent (125%) multiplied by the portion of the principal sum being redeemed, plus any accrued and unpaid interest. The Company may, at its discretion, convert the outstanding principal and accrued interest, in whole or in part, into a number of shares of Thomas Pharmaceuticals Class A Common Stock at the price per share equal to eighty percent (80%) of the lowest closing bid price of the Common Stock for the five (5) trading days immediately preceding the conversion date, but they cannot be converted into more than 9.99% of the total Class A Common Stock at that time of conversion. During the six months ended June 30, 2008, the Company converted $3,920 of principal into 37,000,000 shares of Thomas Pharmaceuticals Class A Common Stock at a conversion price of $.00008. The debentures are valued at the principal value plus accumulated interest. At June 30, 2008, the total balance is $891,417, which includes accrued interest. NOTE 8 - CONSOLIDATION OF MAJORITY OWNED SUBSIDIARY AND MINORITY INTEREST On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology's Series A 10% Convertible Preferred Stock for $1,444,444. The holder of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, the holders of the Series A Preferred Stock shall not have in the aggregate more than seventy percent (70%) of the total votes of all classes of voting stock of the Corporation that would vote at a meeting of shareholders. Based on this voting formula, it was determined that iVoice, Inc. has voting rights equal to 70% of the voting stock of iVoice Technology and as such, according to APB Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK", iVoice, Inc. is required to consolidate the results of 18 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 operations of iVoice Technology with those of iVoice and its other subsidiary. iVoice Technology had a deficit net worth prior to consolidation with iVoice and as such, iVoice was required to record a discount on investment in subsidiary in the amount of $1,792,324 in consolidation. iVoice is also required to recognize the minority shareholders' interest in net income equal to 30% of the net profit of iVoice Technology. For the six months ended June 30, 2008, the minority shareholders' interest in net income is $11,191 and at June 30, 2008, the discount on investment in subsidiary was $1,781,133. NOTE 9 - SHORT TERM LOANS PAYABLE On March 7, 2008 and May 8, 2008, the Company received an aggregate of $5,660,000 from two Express Creditline Loans from Smith Barney that are collateralized by the proceeds available from the sales of the auction rate preferred shares ("ARPS") discussed in Note 3. The interest rate charged on the loan is tied to the dividend rates earned on the ARPSs. When an ARPS is sold, a portion of the proceeds is applied to pay down the short term loan and the balance is forwarded to the Company. During the six months ended June 30, 2008, $3,500,000 of the ARPSs were sold of which approximately $1,083,000 was applied to the outstanding loan and accrued interest and the balance was remitted to the Company. As of June 30, 2008 the remaining balance of the loan is $4,583,001. NOTE 10 - CONVERTIBLE DEBENTURES PAYABLE On May 11, 2006 the Company issued to YA Global a $5,544,110 secured convertible debenture due on May 11, 2008 bearing interest of 7.5% (see Note 15). This debenture replaced a promissory note with a principal balance of $5,000,000 and $544,110 of accrued interest due to YA Global from June 15, 2005. During the six months ended June 30, 2008, we issued 882,165,877 shares of Class A common stock, with a value of $529,640, as repayment of $401,700 of principal. The difference of $127,940 is charged to the Statement of Operations as beneficial interest. On May 12, 2008, the remaining principal balance of $4,796,510 was repaid in cash from the proceeds of the Smith Barney short term loans and sales of the ARPSs discussed above. As of June 30, 2008, the unpaid balance of accrued interest was $799,139. On May 25, 2006, the Company issued to YA Global a $1,250,000 secured convertible debenture due on May 25, 2008 bearing interest of 7.5% per annum pursuant to a Securities Purchase Agreement entered into between us and YA Global. On February 21, 2008, this debenture was amended to extend the maturity date until May 25, 2010 and to raise the interest rate to 15% per annum. During the six months ended June 30, 2008, we issued 501,111,110 shares of Class A common stock, with a value of $175,444, as repayment of $45,100 of principal. The difference of $130,344 is charged to the Statement of Operations as beneficial interest. As of June 30, 2008, the unpaid principal balance on the secured convertible debenture is $1,204,900 plus accrued interest of $228,985. On October 31, 2007, the Company executed a waiver agreement with YA Global that provides that if the Company reduces the debt to $141,523 that YA Global will waive its rights to any future payments and will consider the account paid in full. This waiver agreement was executed to compensate the Company for losses incurred on the sales of the Corporate Strategies investments. 19 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 On April 16, 2007, iVoice Technology issued a Secured Convertible Debenture dated March 30, 2007 to YA Global Investments for the sum of $700,000 in exchange for a previously issued note payable for the same amount. The Debenture has a term of three years, and pays interest at the rate of 5% per annum. YA Global has the right to convert a portion or the entire outstanding principal into iVoice Technology's Class A Common Stock at a Conversion Price equal to eighty percent (80%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date. YA Global may not convert the Debenture into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.9% of the then issued and outstanding shares of Class A Common Stock. On March 14, 2008, iVoice Technology and YA Global Investments agreed that iVoice Technology would redeem all amounts outstanding under the Debenture, except for the $186,557 of the outstanding interest remaining on the original notes payable that were originally exchanged for the Debenture. The amount redeemed was $691,021, consisting of the remaining balance of the Debenture of $572,815, accrued interest of $32,284, and a redemption premium of $85,922. The Debenture was amended to change amount to $186,557 with a due date of March 14, 2009. The Debenture shall accrue interest at the rate of 15% per annum, and shall be convertible at a conversion price equal to 70% of the lowest closing bid price of iVoice Technology's common stock during the 30 trading days immediately preceding the conversion date. No conversions can be made prior to November 1, 2008. As of June 30, 2008, the outstanding balance on the Convertible Debenture was $186,557. The aggregate principal value of the remaining debentures at June 30, 2008 is $1,391,457. This amount is shown on the balance sheet net of the unamortized portion of the discount on conversion of $371,633. This discount is being amortized over the life of the debenture and is being amortized as debt discount on the statement of operations. NOTE 11 - DERIVATIVE LIABILITY In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the conversion feature associated with the YA Global Secured Convertible Debentures represents embedded derivatives. As such, the Company had recognized embedded derivatives in the amount of $6,908,078 as a derivative liability in the accompanying condensed consolidated balance sheet, and it is now measured at its estimated fair value of $1,698,291. The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions: At Issue At 6/30/08 --------------- ---------- Fair market value of stock $0.096 - $0.125 $ 0.00050 Exercise price $0.086 - $0.113 $ 0.00045 Dividend yield 0.00% 0.00% Risk free interest rate 5.47% 5.47% Expected volatility 195.36% - 196.54% 274.62% Expected life 2.00 years 3.00 years 20 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 On the iVoice Technology debentures, iVoice Technology determined that the conversion feature met the criteria of an embedded derivative, and therefore the conversion feature of their Debenture needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 3 years; and volatility: 383.29%. The conversion feature of the debenture was recorded as a derivative liability. As such, in March 2007 the Company recorded the conversion options as a liability, recorded a debt discount of $700,000, and charged Loss on Valuation of Derivative for $492,403, resulting primarily from calculation of the conversion price. On March 14, 2008, a substantial portion of this debenture was redeemed and as of June 30, 2008, the estimated fair value is $191,831. Changes in the fair value of the embedded derivatives are calculated at each reporting period and recorded in gain on revaluation of derivatives in the condensed consolidated statements of operations. During the six months ended June 30, 2008, there was a change in the fair value of the embedded derivatives, which resulted in a gain of $3,624,804. In accordance with SFAS 133, SFAS 150, "Accounting for Certain Financials Instruments With Characteristics of Both Liabilities and Equity" and EITF 00-19, the fair market value of the derivatives and warrants are bifurcated from the convertible debentures as a debt discount. The debt discount of is being amortized over the life of the convertible debentures. Amortization expense on the debt discount on the convertible debentures for the six months ended June 30, 2008 was $1,758,920, which includes the acceleration of the debt discount on the redeemed debenture in iVoice and iVoice Technology. NOTE 12 - RELATED PARTY ACCOUNTS From time to time, the Company has entered into various loan agreements and employment agreements with Jerome R. Mahoney, President and Chief Executive Officer of the Company. As of June 30, 2008, the balances due to Mr. Mahoney where: a) loan of $2,295; b) accrued interest of $5,136; and c) deferred compensation is $221,311. The loan accrues interest at 9.5% per year on the unpaid balance. Balances due to Mr. Mahoney are convertible into either (i) one Class B common stock share of iVoice, Inc., $.01 par value, for each dollar owed, or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, whichever the Note holder chooses, or (iii) payment of the principal of this Note, before any repayment of interest. The Board of Directors of the Company maintains control over the issuance of shares and may decline the request for conversion of the repayment into shares of the Company. In August 2005, iVoice Technology had assumed an outstanding promissory demand note in the amount of $190,000 payable to Jerome Mahoney, then, the Non-Executive Chairman of the Board of iVoice Technology. The note bears interest at the rate of prime plus 2.0% per annum (7% at June 30, 2008) on the unpaid balance until paid. Under the terms of the Promissory Note, at the option of the Note holder, principal and interest can be converted into either (i) one share of Class B Common 21 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 Stock of iVoice Technology, Inc., par value $.01, for each dollar owed, (ii) the number of shares of Class A Common Stock of iVoice Technology, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has requested to have prepaid by (y) eighty percent (80%) of the lowest issue price of Class A Common Stock since the first advance of funds under this Note, or (iii) payment of the principal of this Note, before any repayment of interest. The Board of Directors of iVoice Technology maintains control over the issuance of shares and may decline the request for conversion of the repayment into shares of the iVoice Technology. As of June 30, 2008, the outstanding balance was $141,708, plus accrued interest of $74,147. On August 1, 2004, iVoice Technology entered into a five-year employment agreement with Jerome Mahoney to serve as Non-Executive Chairman of the Board of Directors of iVoice Technology with a base salary of $85,000 for the first year with annual increases based on the Consumer Price Index. A portion of Mr. Mahoney's compensation shall be deferred until such time that the Board of Directors of iVoice Technology determines that it has sufficient financial resources to pay his compensation in cash. As of June 30, 2008, iVoice Technology has recorded $184,473 of deferred compensation due to Mr. Mahoney. The Board of iVoice Technology has the option to pay Mr. Mahoney's compensation in the form of Class B Common Stock. Pursuant to the terms of the Class B Common Stock, a holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of Class B Common Stock being converted by a 20% discount of the lowest price for which the Company had ever issued its Class A Common Stock. On August 30, 2006 Mr. Mahoney was elected to the position of President and Chief Executive Officer of iVoice Technology and no longer serves as Non-Executive Chairman of the Board of iVoice Technology. On March 5, 2008, the Company converted its outstanding accounts due from iVoice Technology, Inc. for unpaid administrative services in the amount of $50,652 into a convertible promissory note at the rate of prime plus 1 percent per annum (6% at June 30, 2008). During the six months ended June 30, 2008 an additional $16,884 was added to this note based on any unpaid administrative services, and will accrue interest at the above specified rate from date of advance until paid. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand. On March 10, 2008 and March 18, 2008, the Company received an aggregate of 42,000,000 shares of iVoice Technology, Inc. Class A Common Stock upon conversion of $13,440 of Promissory Notes Receivable. At June 30, 2008, the balance of the note is $54,957 which includes accrued interest of $861. This transaction is eliminated in consolidation. On March 11, 2008, the Company entered into a Stock Purchase Agreement with iVoice Technology, Inc. for the purchase of 1,444.44 shares of iVoice Technology's Series A 10% Secured Convertible Preferred Stock valued at $1,444,444. The holders of the stock are entitled to receive dividends at a rate 10% per annum and will have voting rights for each share of Common Stock that the Series A Preferred Stock would be converted into using the applicable conversion price. The holders of the Series A Preferred Stock shall not have in the aggregate more than 70% of the total votes of all classes of voting stock. The Company also received $144,444 in funding fees on the transaction. This transaction is eliminated in consolidation. 22 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 On March 11, 2008, the Company received a warrant to purchase common stock of iVoice Technology, Inc. pursuant to the terms of the Stock Purchase Agreement. The warrant provides that the Company can purchase shares of Class A common stock at a price calculated by dividing $144,444 by the lowest price that iVoice Technology has ever issued its Class A common stock, provided, that in no event shall the holder be entitled to exercise this Warrant for a number of shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 9.99% of the outstanding shares of the Common Stock following such exercise. NOTE 13 - COMMON STOCK Pursuant to the Company's certificate of incorporation, as amended, iVoice, Inc. is authorized to issue 1,000,000 shares of preferred stock, par value of $1.00 per share, 10,000,000,000 shares of Class A common stock, no par value per share, and 50,000,000 shares of Class B common stock, par value $.01 per share. a) Preferred Stock --------------- Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of June 30, 2008, no shares were issued or outstanding. b) Class A Common Stock -------------------- Class A common stock consists of 10,000,000,000 shares of authorized common stock with no par value. As of June 30, 2008, 2,015,951,305 shares were issued and 2,015,948,305 shares were outstanding. Each holder of Class A common stock is entitled to one vote for each share held of record. Holders of our Class A common stock have no preemptive, subscription, conversion, or redemption rights. Upon liquidation, dissolution or winding-up, the holders of Class A common stock are entitled to receive our net assets pro rata. Each holder of Class A common stock is entitled to receive ratably any dividends declared by our board of directors out of funds legally available for the payment of dividends. The Company has not paid any dividends on its common stock and management does not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance growth. For the six months ended June 30, 2008, the Company had the following transactions in its Class A Common Stock: 1) The Company issued 1,383,276,987 shares of Class A common stock to YA Global, valued at $705,085 as repayment of principal on an outstanding convertible debenture valued at $446,800. 2) The Company issued 212,000,000 shares of Class A common stock upon conversion of 35,700 shares of Class B common stock, pursuant to the provisions of Class B common stock. 23 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 c) Class B Common Stock -------------------- Class B Common Stock consists of 50,000,000 shares of authorized common stock with $.01 par value. Each share of Class B common stock is convertible into Class A common stock calculated by dividing the number of Class B shares being converted by fifty percent (50%) of the lowest price that the Company had previously issued its Class A common stock since the Class B shares were issued. Each holder of Class B common stock has voting rights equal to the number of Class A shares that would be issued upon the conversion of the Class B shares, had all of the outstanding Class B shares been converted on the record date used for purposes of determining which shareholders would vote. Holders of Class B common stock are entitled to receive dividends in the same proportion as the Class B common stock conversion and voting rights have to Class A common stock. Jerome R. Mahoney is the sole owner of the Class B common stock. As of June 30, 2008, there are 2,204,875 shares issued and 1,516,784 shares outstanding. Pursuant to the conversion terms of the Class B Common stock, on June 30, 2008, the 1,516,784 outstanding shares of Class B common stock are convertible into 33,706,310,910 shares of Class A common stock. d) Treasury Stock -------------- On February 11, 2002, the Company repurchased 600,000 shares of Class A common stock from a previous employee for $28,800. Following the reverse stock split on April 27, 2006, the shares were converted into 3,000 shares of Class A common stock. NOTE 14 - GOING CONCERN The Company has incurred substantial accumulated deficits, has an obligation to deliver an indeterminable amount of common stock due on derivative liabilities and has completed the process of spinning out the five operating subsidiaries. These issues raise 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. Since the spinoff of the three operating subsidiaries in 2005, the Company has transitioned itself into a company focused on the development and licensing of proprietary technologies. Following the sales of patents to Lamson Holdings LLC, the Company has 9 remaining patent applications, which have been awarded or are pending. These applications include various versions of the "Wirelessly Loaded Speaking Medicine Container", which is also filed internationally, the "Voice Activated Voice Operated Copier", the "Voice Activated Voice Operational Universal Remote Control", "Wireless Methodology for Talking Consumer Products" which is also filed internationally, "Product Identifier and Receive Spoken Instructions" and "Traffic Signal System with Countdown Signaling with Advertising and/or News Message". The Company also continues to search for potential merger candidates with or without compatible technology and products, which management feels may make financing more appealing to potential investors. 24 IVOICE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2008 AND 2007 The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. NOTE 15 - SUBSEQUENT EVENTS On July 15, 2008, July 24, 2008 and August 4, 2008, the Company issued an aggregate of 308,888,889 shares of Class A common stock to YA Global Investments, valued at $51,000, as repayment of principal on an outstanding convertible debenture. 25 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some information included in this Quarterly Report on Form 10-Q and other materials filed by us with the Securities and Exchange Commission, or the SEC, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of us. For a discussion of material risks and uncertainties that the Company faces, see the discussion in the Form 10-KSB for the fiscal year ended December 31, 2007 entitled "Risk Factors". This discussion and analysis of financial condition and plan of operations should be read in conjunction with our Condensed Consolidated Financial Statements included herein. OVERVIEW - -------- Since 2005, the Company has transitioned itself into a company focused on the development and licensing of proprietary technologies. As an example, in March 2006 we sold four of our voice activated product and item locator patents to Lamson Holdings LLC for net proceeds of $136,000 and on December 6, 2007 we were issued Patent 7,305,344 for a patent for Methodology for Talking Consumer Products with Voice Instructions via Wireless Technology. On January 8, 2008, the Company entered into a Technology Transfer Agreement with GlynnTech to market its recently issued patent. GlynnTech will provide assistance in developing a DVD of the patents capabilities. GlynnTech will also be obligated to solicit licensing opportunities and/or acquisition of the patent. The Company also continues to search for potential merger candidates with or without compatible technology and products, which management feels may make financing more appealing to potential investors. On March 12, 2008, the Company acquired 1,444.44 shares of iVoice Technology, Inc.'s Series A 10% Convertible Preferred Stock for $1,444,444. iVoice Technology, Inc. will use the proceeds from the sale of the stock to fund the repayment of convertible debt to YA Global Investments and to fund their acquisition programs. The holder of each share of iVoice Technology's Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, the holders of the Series A Preferred Stock shall not have in the aggregate more than seventy percent (70%) of the total votes of all classes of voting stock of the Corporation that would vote at a meeting of shareholders. Based on this voting formula, it was determined that iVoice, Inc. has voting rights equal to 70% of the voting stock of iVoice Technology and as such, according to APB Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON Stock", iVoice, Inc. is required to consolidate the results of operations of iVoice Technology with those of iVoice and its other subsidiary as of June 30, 2008. 26 RESULTS OF OPERATIONS - --------------------- SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007 Total sales for the six months ended June 30, 2008 and 2007 were $78,704 and $915,777, respectively. Sales in 2008 include $25,378 of maintenance revenues of iVoice Technology and $53,326 of administrative services agreements. Sales in 2007 include $840,000 of consulting revenues earned on the Deep Field agreement and revenues from the administrative services agreements of $75,777. Total operating expenses for the six months ended June 30, 2008 and 2007, were $776,062 and $475,483, respectively, for an increase of $300,579. Of these increases, $232,980 is attributable to the expenses of iVoice Technology and the remaining increase of $67,599 is primarily comprised of increase in professional fees of $73,446 and increases in overhead and office expenses of the parent of $12,696. These increases are offset by decreases in Amortization of finance costs and depreciation expense of $18,543. Total other income (expense) for the six months ended June 30, 2008 was an income of $1,502,759. This total was primarily comprised of $3,624,804 gain on revaluation of the derivatives and $344,855 of interest income and other income which is offset by $1,758,920 amortization of the discount on debt and $707,980 of accrued interest expense on the YA Global notes and other debt . Total other income (expense) for the six months ended June 30, 2007 was an expense of $711,217. This total was primarily comprised of $1,992,410 amortization of the discount on debt, $258,541 of accrued interest expense on the YA Global notes and other debt and $85,234 loss on sales of securities available for sale. These are offset by $1,275,129 gain on revaluation of the derivatives and $349,839 of interest income on the cash accounts and promissory notes receivable. Net income from continuing operations for the six months ending June 30, 2008 was $805,401. The net loss from continuing operations for the six months ending June 30, 2007 was $270,923. The increase in net income of $1,076,324 was primarily due to the increased gain on revaluation of derivatives, on the repayment of the underlying debt, and reduced amortization of the discount on debt offset by lower sales, increased operating expenses and increased interest expenses, as the result of the factors discussed above. Net loss from discontinued operations for the six months ended June 30, 2007 was $621,152. This operation had been experiencing reduced product sales and had curtailed spending to better manage their available resources. As required by APB Opinion No. 18, the Company recorded the minority shareholders' interest in net income of iVoice Technology for the six months ended June 30, 2008, of $11,191. The total net income for the six months ended June 30, 2008 was $794,210 as compared to the net loss of $892,075 for the six months ended June 30, 2007. The increase in net income of $1,686,285 was the result of the factors discussed above. THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007 Total sales for the three months ended June 30, 2008 and 2007 were $40,968 and $597,826, respectively. Sales in 2008 include $12,305 of maintenance revenues of iVoice Technology and $28,663 of administrative services agreements. Sales in 2007 include $560,000 of consulting revenues earned on the Deep Field agreement and revenues from the administrative services agreements of $37,826. 27 Total operating expenses for the three months ended June 30, 2008 and 2007, were $384,071 and $229,811, respectively, for an increase of $154,260. Of these increases, $151,286 is attributable to the expenses of iVoice Technology and the remaining increase of $2,974 is primarily comprised of increase in professional fees of $14,533 and increases in overhead and office expenses of the parent of $5,253. These increases are offset by decreases in Amortization of finance costs and depreciation expense of $16,812. Total other income (expense) for the three months ended June 30, 2008 was an income of $1,891,525. This total was primarily comprised of $2,450,143 gain on revaluation of the derivatives and $159,736 of interest and other income which is offset by $417,278 amortization of the discount on debt and $301,076 of accrued interest expense on the YA Global notes and other debt . Total other income (expense) for the three months ended June 30, 2007 was an expense of $1,089,657. This total was primarily comprised of $1,080,174 amortization of the discount on debt, $129,024 of accrued interest expense on the YA Global notes and other debt and $70,058 loss on revaluation of the derivatives. These are offset by and $179,030 of interest income on the cash accounts and convertible debentures receivable and $10,569 gain on sales of securities available for sale. Net income from continuing operations for the three months ending June 30, 2008 was $1,548,422. The net loss from continuing operations for the three months ending June 30, 2007 was $721,642. The increase in net income of $2,270,064 was primarily due to the increased gain on revaluation of derivatives, on the repayment of the underlying debt, and reduced amortization of the discount on debt offset by lower sales, increased operating expenses and increased interest expenses, as the result of the factors discussed above. Net loss from discontinued operations for the three months ended June 30, 2007 was $245,196. This operation had been experiencing reduced product sales and had curtailed spending to better manage their available resources. As required by APB Opinion No. 18, the Company recorded the minority shareholders' interest in net loss of iVoice Technology for the three months ended June 30, 2008, of $5,158. The total net income for the three months ended June 30, 2008 was $1,553,580 as compared to the net loss of $966,838 for the three months ended June 30, 2007. The increase in net income of $2,520,418 was the result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- We are currently seeking additional operating income opportunities through potential acquisitions or investments. Such acquisitions or investments may consume cash reserves or require additional cash or equity. Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or investments; (ii) an increase to current Company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors. During the year ended December 31, 2007, we had incurred net losses from continuing operations of $2,383,268 and we used $174,729 is cash for operations. These matters raise doubt about our ability to generate cash flows internally through our current operating activities sufficient enough that its existence can be sustained without the need for external financing. Our primary need for cash is to fund our ongoing operations until such time that we can identify sales opportunities for new products or identify strategic acquisitions that generate enough revenue to fund operations. There can be no assurance as to the receipt or timing of revenues from operations. We anticipate that our operations will require at least $700,000 for the next 12 months. These 28 expenses are anticipated to consist of the following: payroll and benefits of $400,000, occupancy costs of $135,000, professional fees of $60,000, business insurance of $70,000 and miscellaneous administrative expenses of $35,000. We expect to fund these obligations from cash on hand or otherwise from the sale of equity or debt securities. We believe that we have sufficient funds on-hand to fund our operations for at least 12 months. At various times since 2004, the Company had deposited proceeds from debt financing into short-term securities with our Investment broker. During 2006 and 2007, these short-term securities were exchanged for auction rate preferred shares ("ARPS") which provided greater returns on our investments. ARPS have long-term maturity with the interest rate being reset through Dutch auctions that are typically held every 7, 28 or 35 days. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. Our auction rate securities are all AAA rated. Until February 2008, the auction rate securities market was highly liquid. Starting the week of February 11, 2008, a substantial number of auctions "failed," meaning that there was not enough demand to sell the entire issue at auction. The immediate effect of a failed auction is that holders cannot sell the securities and the interest or dividend rate on the security generally resets to a "penalty" rate. In the case of a failed auction, the auction rate security is deemed not currently liquid and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless a future auction on these investments is successful. We do not intend to hold these securities to maturity, but rather to use the interest rate reset feature to provide the opportunity to maximize returns while preserving liquidity. Because of the failed Dutch auctions, the Company was unable to sell these securities to meet current operating obligations. With the assistance of Smith Barney, the Company was able to obtain an Express Creditline Loan which is collateralized by the proceeds available from the sales of the auction rate securities. On March 7, 2008 and May 8, 2008, the Company received $5,660,000 from the Express Creditline account and deposited the funds in our operating bank accounts to ensure current liquidity. During the six months ended June 30, 2008, $3,500,000 of the ARPSs were sold of which approximately $1,083,000 was applied to the outstanding loan and accrued interest and the balance was remitted to the Company. During the six months ended June 30, 2008, the Company had a net increase in cash of $2,183,998. The Company's principal sources and uses of funds in the six months ended June 30, 2008 were as follows: CASH FLOWS FROM OPERATING ACTIVITIES. The Company provided $82,880 in cash from continuing operations in the six months ended June 30, 2008, an increase of $124,958 compared to $42,078 in cash used for continuing operations in the six months ending June 30, 2007. The net effect on cash flows from operating activities by the discontinued operations for the six months ending June 30, 2007 was a decrease of $165,772 as the operations were struggling with their liquidity. CASH FLOWS FROM INVESTING ACTIVITIES. The Company had a net increase in funds from investing activities of $2,314,627 for the six months ended June 30, 2008. This was primarily due to the net redemption of marketable securities of $3,126,553. These proceeds are offset by the net effect of the consolidation of iVoice Technology of $744,847. The Company had invested $1.4 million in iVoice Technology's Series A Convertible Preferred Stock and iVoice Technology has used a portion of these proceeds to pay down a portion of the YA Global Convertible Debentures and their investment in B Green Innovations, a wholly owned subsidiary of iVoice Technology. CASH FLOWS FROM FINANCING ACTIVITIES. The Company used $213,509 in cash for financing activities in the six months ended June 30, 2008. The funds provided from the Smith Barney Credit Line of $5,660,000 was used 29 to pay down the YA Global convertible debentures of $4,796,510. In addition, a portion of the proceeds of the sales of the ARPSs was used to repay the Smith Barney Credit Line. The net effect on cash flows from financing activities from the discontinued operations was an increase in cash of $154,000 for the six months ending June 30, 2007. This represented the proceeds from the sale of a $160,000 Promissory note to Thomas Pharmaceuticals Acquisition, Inc. pursuant to the terms of the Extension Agreement with Thomas Pharmaceuticals and Thomas Pharmaceuticals Acquisition. Below is a description of iVoice's principal sources of funding: On May 11, 2006 we issued to YA Global a $5,544,110 secured convertible debenture due on May 11, 2008 with an interest of 7.5%. This debenture replaced a promissory note with a principal balance of $5,000,000 and $544,110 of accrued interest due to YA Global from June 15, 2005. On May 12, 2008, the remaining principal balance of $4,796,510 was repaid in cash from the proceeds of the Smith Barney short term loans. On May 25, 2006, we issued to YA Global a $1,250,000 secured convertible debenture due on May 25, 2008 with an interest of 7.5% per annum pursuant to a Securities Purchase Agreement entered into between us and YA Global. On February 21, 2008, this debenture was amended to extend the maturity date until May 25, 2010 and to raise the interest rate to 15% per annum. On March 7, 2008 and May 8, 2008, the Company received proceeds from an Express Creditline Loan from Smith Barney that is collateralized by the proceeds available from the sales of the auction rate preferred shares ("ARPS") discussed in Note 3. The interest rate charged on the loan is tied to the dividend rates earned on the ARPSs. When an ARPS is sold, a portion of the proceeds is applied to pay down the short term loan and the balance is wired to the Company's savings account. There is no assurance that the future funding, if any, offered by YA Global or from other sources will enable us to raise the requisite capital needed to implement our long-term growth strategy. Current economic and market conditions have made it very difficult to raise required capital for us to implement our business plan. OFF BALANCE SHEET ARRANGEMENTS - ------------------------------ During the six months ended June 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. CONTRACTUAL OBLIGATIONS - ----------------------- The Company has no material changes in its contractual obligations during the six months ended June 30, 2008. 30 FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS - ----------------------------------------------- Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral or written statements made by us or on our behalf), may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Information set forth in this discussion and analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. ITEM 4T - CONTROLS AND PROCEDURES Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2008 based on the criteria set forth in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control Over Financial Reporting - Guidance for Small Public Companies, our management concluded that our internal control over financial reporting was effective as of June 30, 2008, except for two deficiencies discussed herein. This Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 did not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Report. Our registered public accounting firm will be required to attest to our management's assessment of internal control over financial reporting beginning with our Annual Report for the year ended December 31, 2009. 31 MANAGEMENT'S ANNUAL 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) and 15d-15(e) under 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 effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that the information required to be disclosed in the reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure except for the following deficiencies: a) A deficiency in the Company's disclosure controls and procedures existed as of June 30, 2008. 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) A deficiency in the Company's disclosure controls and procedures existed as of June 30, 2008. 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 (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the period covered by this Interim Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 32 PART II - OTHER INFORMATION ITEM 5 OTHER INFORMATION (b) The Company does not have a standing nominating committee or a committee performing similar functions as the Company's Board of Directors consists of only two members and therefore there would be no benefit in having a separate nominating committee that would consist of the same number of members as the full board of directors. Both members of the Board of Directors participate in the consideration of director nominees. ITEM 6 EXHIBITS 10.1 Administrative Services Agreement by and between Small Cap Advisors, Inc. and iVoice, Inc. dated June 10, 2008. 10.2 Convertible Promissory Note dated June 10, 2008 by Small Cap Advisors, Inc. payable to iVoice, Inc. 10.3 Security Agreement by and between Small Cap Advisors, Inc. and iVoice, Inc. dated June 10, 2008. 10.4 Administrative Services Agreement Amendment No. 1 by and between Thomas Pharmaceuticals, Ltd. and iVoice, Inc. dated June 12, 2008. 10.5 Convertible Promissory Note dated June 12, 2008 by Thomas Pharmaceuticals, Ltd. payable to iVoice, Inc. 10.6 Security Agreement by and between Thomas Pharmaceuticals, Ltd. and iVoice, Inc. dated June 12, 2008. 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. iVoice, Inc. By: /s/ Jerome R. Mahoney Date: August 13, 2008 - ----------------------------- Jerome R. Mahoney, President, Chief Executive Officer and Principal Financial Officer INDEX OF EXHIBITS 10.1 Administrative Services Agreement by and between Small Cap Advisors, Inc. and iVoice, Inc. dated June 10, 2008. 10.2 Convertible Promissory Note dated June 10, 2008 by Small Cap Advisors, Inc. payable to iVoice, Inc. 10.3 Security Agreement by and between Small Cap Advisors, Inc. and iVoice, Inc. dated June 10, 2008. 10.4 Administrative Services Agreement Amendment No. 1 by and between Thomas Pharmaceuticals, Ltd. and iVoice, Inc. dated June 12, 2008. 10.5 Convertible Promissory Note dated June 12, 2008 by Thomas Pharmaceuticals, Ltd. payable to iVoice, Inc. 10.6 Security Agreement by and between Thomas Pharmaceuticals, Ltd. and iVoice, Inc. dated June 12, 2008. 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002. EX-10.1 2 exhibit10-1_16020.txt ADMIN SERVICES AGREEMENT EXHIBIT 10.1 ------------ ADMINISTRATIVE SERVICES AGREEMENT This Administrative Services Agreement (the "Agreement") is entered June 10, 2008 by and between iVoice, Inc., a New Jersey corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 ("iVoice"), and Small Cap Advisors, Inc., a New Jersey corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 (the "Company"). WHEREAS, the Company desires to engage iVoice to provide the Services, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, the parties hereto agree as follows: 1. Services -------- 1.1 During the term of this Agreement, iVoice shall provide the following Services to the Company: a. Contract review b. Issuing sales orders c. Invoicing d. Collections e. Review inventory records, warehousing reports, etc. f. Manage employee records g. Process payroll h. Manage insurance coverages (health, liability, etc) i. Accounts Payable j. Accounts Receivable k. Expense reimbursement l. Vendor payments m. Manage cash accounts n. Maintain accounting records o. Prepare periodic tax filings p. Manage quarterly review and year-end audit in con junction with outside auditors q. Office premises at the headquarters of iVoice. r. Public relations, sales and marketing services. 1.2 iVoice shall perform the Services in a timely and efficient manner, in accordance with all applicable laws, regulations and ordinances, and shall assign to each of the Services substantially the same priority as assigned to services of like category performed in its own operations. 2. Term ---- 2.1 The term of this Agreement shall commence on the date hereof and shall continue on a month to month basis, unless terminated by either party by providing thirty (30) advance written notice to the non-terminating party. 3. Fees ---- In consideration for the Services, the Company shall pay iVoice a fee of Four Thousand Dollars ($4,000) per month to be adjusted from time to time to reflect the prevailing rate for such services. Fees shall be billed monthly and are due thirty (30) days thereafter. Should the Company be unable to pay the Fees on a timely basis, the past due Fees shall be added to the Secured Convertible Promissory Note issued on the date hereof. 4. Obligations and Relationship ---------------------------- Both parties to this Agreement shall at all times act as independent contractors and, notwithstanding anything contained herein, the relationship established hereunder between the parties shall not be construed as a partnership, joint venture or other form of joint enterprise. Except as expressly authorized by a party hereto, no party shall be authorized to make any representations or to create or assume any obligation or liability in respect of or on behalf of the other party, and this Agreement shall not be construed or constituting either party or the agent of the other party. 5. Limited Liability; Indemnification ---------------------------------- 5.1 iVoice shall not be liable to the Company for any loss, claim, expense or damage, including indirect, special, consequential or exemplary damages, for any act or omission performed or omitted by it hereunder so long as its act or omission does not constitute fraud, bad faith or gross negligence. iVoice shall not be liable to the Company for the consequences of any failure or delay in performing any Services if the failure shall be caused by labor disputes, strikes or other events or circumstances beyond its control and it shall have provided prompt notice to the Company of its inability to perform Services and the reason therefor. 5.2 In any action, suit or proceeding (other than an action by or in the right of the Company) to which iVoice or any agent or employee of iVoice performing Services hereunder (an "Indemnitee") was or is a party by reason of his or its performance or non-performance of Services, the Company shall indemnify the Indemnitee and hold the Indemnitee harmless from and against expenses, judgments, fines and amounts paid (with the consent of the Company) in settlement actually and reasonably incurred by the Indemnitee in connection therewith if the Indemnitee acted in good faith and provided that the Indemnitee's conduct does not constitute negligence or misconduct. 2 6. Confidentiality --------------- Any and all information obtained by iVoice in connection with the Services contemplated by this Agreement shall be held in the strictest confidence and not disclosed to any other person without the prior written consent of the Company. 7. Notices ------- All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be considered as duly given on: (a) the date of delivery, if delivered in person against written receipt therefor, or by nationally recognized overnight delivery service or (b) five (5) days after mailing if mailed from within the continental United States by postage pre-paid certified mail, return receipt requested to the party entitled to receive the same: If to iVoice: iVoice, Inc. 750 Route 34 Matawan, NJ 07747 Attention: Jerome Mahoney Telephone: 732-441-7700 Facsimile: 732-441-9895 And if to the Company: Small Cap Advisors, Inc. c/o iVoice, Inc. 750 Route 34 Matawan, NJ 07747 Attention: Mark Meller Telephone: 732-441-7700 Facsimile: 732-441-9895 Any party may change its address by giving notice to the other party stating its new address. Commencing on the tenth (10th) day after the giving of such notice, such newly designated address shall be such party's address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. 8. Binding Effect -------------- This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors. 3 9. No Third Party Beneficiaries ---------------------------- This Agreement is solely for the benefit of the parties hereto and shall not confer upon third parties and remedy, claim, cause of action or other right in addition to those existing without reference to this Agreement. 10. Entire Agreement ---------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matters covered hereby and supersedes any prior agreement or understanding between the parties with respect to those matters. 11. Assignment; Amendment; Waiver ----------------------------- This Agreement may not be amended nor may any rights hereunder be waived except by an instrument in writing signed by the party sought to be charged with the amendment or waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 12. Governing Law ------------- This Agreement shall be construed in accordance with and governed by the laws of the State of New Jersey, without giving effect to the provisions, policies or principles thereof relating to choice or conflict of laws. 13. Headings -------- The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. {the remainder of this page has been intentionally left blank} 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. IVOICE, INC. By: ______________________________ Jerry Mahoney President SMALL CAP ADVISORS, INC. By: ______________________________ Mark Meller President 5 EX-10.2 3 exhibit10-2_16020.txt CONVERTIBLE PROMISSORY NOTE EXHIBIT 10.2 ------------ JUNE 10, 2008 SECURED CONVERTIBLE PROMISSORY NOTE THEREFORE, FOR VALUE RECEIVED the undersigned, promises to pay to iVoice, Inc., the sum of Seventy-seven Thousand and Two Hundred and Fifty Dollars ($77,250), receipt being acknowledged by the undersigned and any and all sums of money that are owed and unpaid to the iVoice pursuant to the Administrative Services Agreement by and between iVoice and Small Cap Advisors, Inc. (the "Company") at the rate of prime plus 1 percent per annum on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at iVoice, Inc. (the "iVoice") 750 Highway 34, Matawan, New Jersey 07747, or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments, if any, securing this Secured Convertible Promissory Note and such advances will be added to the principal of this Secured Convertible Promissory Note and will accrue interest at the above specified rate of interest from the date of advance until paid. Such advances may include Services Fees accrued pursuant to the Administrative Services Agreement by and between iVoice and Small Cap Advisors, Inc. 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. 1. Notwithstanding anything to the contrary herein, the Secured Convertible Promissory Note holder may elect payment of the principal and/or interest, at the holder's sole discretion, owed pursuant to this Note by requiring the parent company of the Company, Thomas Pharmaceuticals, Ltd. ("Thomas Pharmaceuticals") to issue to iVoice, or his assigns either: (i) one Class B common stock share of Thomas Pharmaceuticals no par value per share, for each dollar owed, (ii) the number of Class A common stock shares of Thomas Pharmaceuticals 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 trading price of Thomas Pharmaceuticals Class A common stock in the previous thirty (30) trading days, or (iii), payment of the principal of this Secured Convertible Promissory Note, before any repayment of interest. For purposes of determining the holding period of this Secured Convertible Promissory Note under Rule 144 of the regulations promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, Exhibit I attached herein shows the date that each monthly obligation pursuant to the Agreement became due and unpaid. This Exhibit I shall be amended from time to time to reflect additional monthly advances made pursuant to the Agreement referenced above. Notwithstanding anything to the contrary, Thomas Pharmaceuticals shall not issue iVoice either Class A and/or Class B Common Stock as required in the paragraph should the total aggregate beneficial holdings of Thomas Pharmaceuticals Class A Common Stock by iVoice exceed 9.99% of the total outstanding Class A Common Stock at the time of conversion of the monies owed under this Secured Convertible Promissory Note. 2. Unless otherwise provided, this Secured Convertible Promissory 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. 3. 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 Secured Convertible Promissory 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 Secured Convertible Promissory Note and any part thereof, accrued interest and all other sums due under this Secured Convertible Promissory Note shall bear interest at the rate of prime plus 2 percent per annum after default until paid. 4. All parties to this Secured Convertible Promissory Note, including maker and any sureties, endorsers, or guarantors, hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest, and all other sums due under this Secured Convertible Promissory Note, notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Secured Convertible Promissory Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. 5. Upon default, the holder of this Secured Convertible Promissory Note may employ an attorney to enforce the holder's rights and remedies and the maker, principal, surety, guarantor and endorsers of this Secured Convertible Promissory Note hereby agree to pay to the holder reasonable attorneys fees, plus all other reasonable expenses incurred by the holder in exercising any of the holder's right and remedies upon default. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. 6. This Secured Convertible Promissory Note is to be governed and construed in accordance with the laws of the State of New Jersey. 7. The monies owed under this Secured Convertible Promissory Note shall be secured by a security interest as set forth in a Security Agreement dated the date hereof. IN TESTIMONY WHEREOF, each corporate maker has caused this instrument to be executed in its corporate name by its President, and its corporate seal to be hereto affixed, all by order of its Board of Directors first duly given, the day and year first written above: SMALL CAP ADVISORS, INC. By: _________________________ Mark Meller President and Chief Executive Officer THOMAS PHARMACEUTICALS, LTD. [Limited to Section 1 of this Secured Convertible Promissory Note] By: _________________________ Mark Meller President and Chief Executive Officer EX-10.3 4 exhibit10-3_16020.txt SECURITY AGREEMENT EXHIBIT 10.3 ------------ SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT (the "Agreement"), is entered into and made effective as of June 10, 2008, by and between Small Cap Advisors, Inc., a New Jersey Corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 (the "Company"), and iVoice , Inc., a New Jersey corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 (the "Secured Party"). WHEREAS, the Company executed a Secured Convertible Promissory Note dated August 12, 2008 (the "Secured Convertible Promissory Note"); NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS AND INTERPRETATIONS ------------------------------- Section 1.1. Recitals. --------- The above recitals are true and correct and are incorporated herein, in their entirety, by this reference. Section 1.2. Interpretations. ---------------- Nothing herein expressed or implied is intended or shall be construed to confer upon any person other than the Secured Party any right, remedy or claim under or by reason hereof. Section 1.3. Obligations Secured. -------------------- In exchange and the consideration for the Secured Party purchasing the Secured Convertible Promissory Note dated the date hereof and thereby permitting the Secured Party to enter into the Administrative Services Agreement by and between iVoice and Small Cap Advisors, Inc. on the date hereof, the Company hereby agrees to permit the Secured Party to secure the obligations pursuant to: (i) this Security Agreement and (ii) the Secured Convertible Promissory Note dated the date hereof and any future advances made under the Secured Convertible Promissory Note that may include Services Fees accrued pursuant to the Administrative Services Agreement (collectively, the "Obligations"). ARTICLE 2. PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL ---------------------------------------------- AND TERMINATION OF SECURITY INTEREST ------------------------------------ Section 2.1. Pledged Property. ----------------- (a) Company hereby pledges to the Secured Party, and creates in the Secured Party for its benefit, a security interest in and to all of the property of the Company as set forth in Exhibit A attached hereto and the products thereof and the proceeds of all such items (collectively, the "Pledged Property") for such time until the Obligations are paid in full. (b) Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge, file, record and deliver to the Secured Party any documents reasonably requested by the Secured Party to perfect its security interest in the Pledged Property. Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge and deliver to the Secured Party such documents and instruments, including, without limitation, financing statements, certificates, affidavits and forms as may, in the Secured Party's reasonable judgment, be necessary to effectuate, complete or perfect, or to continue and preserve, the security interest of the Secured Party in the Pledged Property, and the Secured Party shall hold such documents and instruments as secured party, subject to the terms and conditions contained herein. Section 2.2. Rights; Interests; Etc. ----------------------- (a) So long as no Event of Default (as hereinafter defined) shall have occurred and be continuing: (i) the Company shall be entitled to exercise any and all rights pertaining to the Pledged Property or any part thereof for any purpose not inconsistent with the terms hereof; and (ii) the Company shall be entitled to receive and retain any and all payments paid or made in respect of the Pledged Property. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of the Company to exercise the rights which it would otherwise be entitled to exercise pursuant to Section 2.2(a)(i) hereof and to receive payments which it would otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise such rights and to receive and hold as Pledged Property such payments; PROVIDED, HOWEVER, that if the Secured Party shall become entitled and shall elect to exercise its right to realize on the Pledged Property pursuant to Article 5 hereof, then all cash sums received by the Secured Party, or held by Company for the benefit of the Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any outstanding Obligations; 2 (ii) All interest, dividends, income and other payments and distributions which are received by the Company contrary to the provisions of Section 2.2(b)(i) hereof shall be received in trust for the benefit of the Secured Party, shall be segregated from other property of the Company and shall be forthwith paid over to the Secured Party; and (iii) The Secured Party in its sole discretion shall be authorized to sell any or all of the Pledged Property at public or private sale in order to recoup all of the outstanding principal plus accrued interest owed pursuant to the Debenture as described herein (c) Each of the following events shall constitute a default under this Agreement (each an "Event of Default"): (i) any default, whether in whole or in part, shall occur in the payment to the Secured Party of principal, interest or other item comprising the Obligations as and when due or with respect to any other debt or obligation of the Company to a party other than the Secured Party; (ii) any default, whether in whole or in part, shall occur in the due observance or performance of any obligations or other covenants, terms or provisions to be performed under the Transaction Documents (as defined in the Merger Agreement); (iii) the Company shall: (1) make a general assignment for the benefit of its creditors; (2) apply for or consent to the appointment of a receiver, trustee, assignee, custodian, sequestrator, liquidator or similar official for itself or any of its assets and properties; (3) commence a voluntary case for relief as a debtor under the United States Bankruptcy Code; (4) file with or otherwise submit to any governmental authority any petition, answer or other document seeking: (A) reorganization, (B) an arrangement with creditors or (C) to take advantage of any other present or future applicable law respecting bankruptcy, reorganization, insolvency, readjustment of debts, relief of debtors, dissolution or liquidation; (5) file or otherwise submit any answer or other document admitting or failing to contest the material allegations of a petition or other document filed or otherwise submitted against it in any proceeding under any such applicable law; or (6) be adjudicated a bankrupt or insolvent by a court of competent jurisdiction; or (iv) any case, proceeding or other action shall be commenced against the Company for the purpose of effecting, or an order, judgment or decree shall be entered by any court of competent jurisdiction approving (in whole or in part) anything specified in Section 2.2(c)(iii) hereof, or any receiver, trustee, assignee, custodian, sequestrator, liquidator or other official shall be appointed with respect to the Company, or shall be appointed to take or shall otherwise acquire possession or control of all or a substantial part of the assets and properties of the Company, and any of the foregoing shall continue unstayed and in effect for any period of thirty (30) days. 3 ARTICLE 3. ATTORNEY-IN-FACT; PERFORMANCE ----------------------------- Section 3.1. Secured Party Appointed Attorney-In-Fact. ----------------------------------------- Upon the occurrence of an Event of Default, the Company hereby appoints the Secured Party as its attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company or otherwise, from time to time in the Secured Party's discretion to take any action and to execute any instrument which the Secured Party may reasonably deem necessary to accomplish the purposes of this Agreement, including, without limitation, to receive and collect all instruments made payable to the Company representing any payments in respect of the Pledged Property or any part thereof and to give full discharge for the same. The Secured Party may demand, collect, acknowledge, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Pledged Property as and when the Secured Party may determine. To facilitate collection, upon the occurrence of an Event of Default, the Secured Party may notify account debtors and obligors on any Pledged Property to make payments directly to the Secured Party. Section 3.2. Secured Party May Perform. -------------------------- If the Company fails to perform any agreement contained herein, the Secured Party, at its option, may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be included in the Obligations secured hereby. ARTICLE 4. REPRESENTATIONS AND WARRANTIES ------------------------------ Section 4.1. Authorization; Enforceability. ------------------------------ Each of the parties hereto represents and warrants that it has taken all action necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby; and upon execution and delivery, this Agreement shall constitute a valid and binding obligation of the respective party, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights or by the principles governing the availability of equitable remedies. Section 4.2. Ownership of Pledged Property. ------------------------------ The Company warrants and represents that it is the legal and beneficial owner of the Pledged Property. 4 ARTICLE 5. DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL ---------------------------------------- Section 5.1. Default and Remedies. --------------------- (a) If an Event of Default described in Section 2.2(c)(i) and (ii) occurs, then in each such case the Secured Party may declare the Obligations to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration, the Obligations shall become immediately due and payable. If an Event of Default described in Sections 2.2(c)(iii) or (iv) occurs and is continuing for the period set forth therein, then the Obligations shall automatically become immediately due and payable without declaration or other act on the part of the Secured Party. (b) Upon the occurrence of an Event of Default, the Secured Party shall: (i) be entitled to receive all distributions with respect to the Pledged Property, (ii) to cause the Pledged Property to be transferred into the name of the Secured Party or its nominee, (iii) to dispose of the Pledged Property, and (iv) to realize upon any and all rights in the Pledged Property then held by the Secured Party. Section 5.2. Method of Realizing Upon the Pledged Property: Other ---------------------------------------------------- Remedies. --------- Upon the occurrence of an Event of Default, in addition to any rights and remedies available at law or in equity, the following provisions shall govern the Secured Party's right to realize upon the Pledged Property: (a) Any item of the Pledged Property may be sold for cash or other value in any number of lots at brokers board, public auction or private sale and may be sold without demand, advertisement or notice (except that the Secured Party shall give the Company ten (10) days' prior written notice of the time and place or of the time after which a private sale may be made (the "Sale Notice")), which notice period is hereby agreed to be commercially reasonable. At any sale or sales of the Pledged Property, the Company may bid for and purchase the whole or any part of the Pledged Property and, upon compliance with the terms of such sale, may hold, exploit and dispose of the same without further accountability to the Secured Party. The Company will execute and deliver, or cause to be executed and delivered, such instruments, documents, assignments, waivers, certificates, and affidavits and supply or cause to be supplied such further information and take such further action as the Secured Party reasonably shall require in connection with any such sale. (b) Any cash being held by the Secured Party as Pledged Property and all cash proceeds received by the Secured Party in respect of, sale of, collection from, or other realization upon all or any part of the Pledged Property shall be applied as follows: (i) first, to the payment of all amounts due the Secured Party for the expenses reimbursable to it hereunder or owed to it pursuant to Section 8.3 hereof; (ii) second, to the payment of the Obligations then due and unpaid; and 5 (iii) the balance, if any, to the person or persons entitled thereto, including, without limitation, the Company. (c) In addition to all of the rights and remedies which the Secured Party may have pursuant to this Agreement, the Secured Party shall have all of the rights and remedies provided by law, including, without limitation, those under the Uniform Commercial Code. (i) If the Company fails to pay such amounts due upon the occurrence of an Event of Default which is continuing, then the Secured Party may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of Company, wherever situated. (ii) The Company agrees that it shall be liable for any reasonable fees, expenses and costs incurred by the Secured Party in connection with enforcement, collection and preservation of the Transaction Documents, including, without limitation, reasonable legal fees and expenses, and such amounts shall be deemed included as Obligations secured hereby and payable as set forth in Section 8.3 hereof. Section 5.3. Proofs of Claim. ---------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relating to the Company or the property of the Company or of such other obligor or its creditors, the Secured Party (irrespective of whether the Obligations shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Secured Party shall have made any demand on the Company for the payment of the Obligations) shall be entitled and empowered, by intervention in such proceeding or otherwise: (i) to file and prove a claim for the whole amount of the Obligations and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Secured Party (including any claim for the reasonable legal fees and expenses and other expenses paid or incurred by the Secured Party permitted hereunder and of the Secured Party allowed in such judicial proceeding), and (ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Secured Party to make such payments to the Secured Party and, in the event that the Secured Party shall consent to the making of such payments directed to the Secured Party, to pay to the Secured Party any amounts for expenses due it hereunder. Section 5.4. Duties Regarding Pledged Property. ---------------------------------- The Secured Party shall have no duty as to the collection or protection of the Pledged Property or any income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody and reasonable care of any of the Pledged Property actually in the Secured Party's possession. 6 ARTICLE 6. AFFIRMATIVE COVENANTS --------------------- The Company covenants and agrees that, from the date hereof and until the Obligations have been fully paid and satisfied, unless the Secured Party shall consent otherwise in writing (as provided in Section 8.4 hereof): Section 6.1. Existence, Properties, Etc. --------------------------- (a) The Company shall do, or cause to be done, all things, or proceed with due diligence with any actions or courses of action, that may be reasonably necessary (i) to maintain Company's due organization, valid existence and good standing under the laws of its state of incorporation, and (ii) to preserve and keep in full force and effect all qualifications, licenses and registrations in those jurisdictions in which the failure to do so could have a Material Adverse Effect (as defined below); and (b) the Company shall not do, or cause to be done, any act impairing the Company's corporate power or authority (i) to carry on the Company's business as now conducted, and (ii) to execute or deliver this Agreement or any other document delivered in connection herewith, including, without limitation, any UCC-1 Financing Statements required by the Secured Party to which it is or will be a party, or perform any of its obligations hereunder or thereunder. For purpose of this Agreement, the term "Material Adverse Effect" shall mean any material and adverse effect as determined by Secured Party in its sole good-faith discretion, whether individually or in the aggregate, upon (a) the Company's assets, business, operations, properties or condition, financial or otherwise; (b) the Company's ability to make payment as and when due of all or any part of the Obligations; or (c) the Pledged Property. Section 6.2. Financial Statements and Reports. --------------------------------- The Company shall furnish to the Secured Party such financial data as the Secured Party may reasonably request. Without limiting the foregoing, the Company shall furnish to the Secured Party (or cause to be furnished to the Secured Party) the following: (a) as soon as practicable and in any event within ninety (90) days after the end of each fiscal year of the Company, the balance sheet of the Company as of the close of such fiscal year, the statement of earnings and retained earnings of the Company as of the close of such fiscal year, and statement of cash flows for the Company for such fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct and accompanied by a certificate of the chief executive and chief financial officers of the Company, stating that the Company has kept, observed, performed and fulfilled each covenant, term and condition of this Agreement during such fiscal year and that no Event of Default hereunder has occurred and is continuing, or if an Event of Default has occurred and is continuing, specifying the nature of same, the period of existence of same and the action the Company proposes to take in connection therewith; 7 (b) within thirty (30) days of the end of each calendar month, a balance sheet of the Company as of the close of such month, and statement of earnings and retained earnings of the Company as of the close of such month, all in reasonable detail, and prepared substantially in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct; and (c) promptly upon receipt thereof, copies of all accountants' reports and accompanying financial reports submitted to the Company by independent accountants in connection with each annual examination of the Company. Section 6.3. Accounts and Reports. --------------------- The Company shall maintain a standard system of accounting in accordance with generally accepted accounting principles consistently applied and provide, at its sole expense, to the Secured Party the following: (a) as soon as available, a copy of any notice or other communication alleging any nonpayment or other material breach or default, or any foreclosure or other action respecting any material portion of its assets and properties, received respecting any of the indebtedness of the Company in excess of $15,000 (other than the Obligations), or any demand or other request for payment under any guaranty, assumption, purchase agreement or similar agreement or arrangement respecting the indebtedness or obligations of others in excess of $15,000, including any received from any person acting on behalf of the Secured Party or beneficiary thereof; and (b) within fifteen (15) days after the making of each submission or filing, a copy of any report, financial statement, notice or other document, whether periodic or otherwise, submitted to the shareholders of the Company, or submitted to or filed by the Company with any governmental authority involving or affecting (i) the Company that could have a Material Adverse Effect; (ii) the Obligations; (iii) any part of the Pledged Property; or (iv) any of the transactions contemplated in this Agreement or any other Transaction Document. Section 6.4. Maintenance of Books and Records; Inspection. --------------------------------------------- The Company shall maintain its books, accounts and records in accordance with generally accepted accounting principles consistently applied, and permit the Secured Party, its officers and employees and any professionals designated by the Secured Party in writing, at any time to visit and inspect any of its properties (including but not limited to the collateral security described in the Transaction Documents), corporate books and financial records, and to discuss its accounts, affairs and finances with any employee, officer or director thereof. Section 6.5. Maintenance and Insurance. -------------------------- (a) The Company shall maintain or cause to be maintained, at its own expense, all of its assets and properties in good working order and condition, making all necessary repairs thereto and renewals and replacements thereof. (b) The Company shall maintain or cause to be maintained, at its own expense, insurance in form, substance and amounts (including deductibles), which the Company 8 deems reasonably necessary to the Company's business, (i) adequate to insure all assets and properties of the Company, which assets and properties are of a character usually insured by persons engaged in the same or similar business against loss or damage resulting from fire or other risks included in an extended coverage policy; (ii) against public liability and other tort claims that may be incurred by the Company; (iii) as may be required by the Transaction Documents and/or applicable law and (iv) as may be reasonably requested by Secured Party, all with adequate, financially sound and reputable insurers. Section 6.6. Contracts and Other Collateral. ------------------------------- The Company shall perform all of its material obligations under or with respect to each instrument, receivable, contract and other intangible included in the Pledged Property to which the Company is now or hereafter will be party on a timely basis and in the manner therein required, including, without limitation, this Agreement. Section 6.7. Defense of Collateral, Etc. --------------------------- The Company shall defend and enforce its right, title and interest in and to any part of: (a) the Pledged Property; and (b) if not included within the Pledged Property, those assets and properties whose loss could have a Material Adverse Effect, the Company shall defend the Secured Party's right, title and interest in and to each and every part of the Pledged Property, each against all manner of claims and demands on a timely basis to the full extent permitted by applicable law. Section 6.8. Payment of Debts, Taxes, Etc. ----------------------------- The Company shall pay, or cause to be paid, all of its indebtedness and other liabilities and perform, or cause to be performed, all of its obligations in accordance with the respective terms thereof, and pay and discharge, or cause to be paid or discharged, all taxes, assessments and other governmental charges and levies imposed upon it, upon any of its assets and properties on or before the last day on which the same may be paid without penalty, as well as pay all other lawful claims (whether for services, labor, materials, supplies or otherwise) as and when due Section 6.9. Taxes and Assessments; Tax Indemnity. ------------------------------------- The Company shall (a) file all tax returns and appropriate schedules thereto that are required to be filed under applicable law, prior to the date of delinquency, (b) pay and discharge all taxes, assessments and governmental charges or levies imposed upon the Company, upon its income and profits or upon any properties belonging to it, prior to the date on which penalties attach thereto, and (c) pay all taxes, assessments and governmental charges or levies that, if unpaid, might become a lien or charge upon any of its properties; PROVIDED, HOWEVER, that the Company in good faith may contest any such tax, assessment, governmental charge or levy described in the foregoing clauses (b) and (c) so long as appropriate reserves are maintained with respect thereto. 9 Section 6.10. Compliance with Law and Other Agreements. ----------------------------------------- The Company shall maintain its business operations and property owned or used in connection therewith in compliance with (a) all applicable federal, state and local laws, regulations and ordinances governing such business operations and the use and ownership of such property, and (b) all agreements, licenses, franchises, indentures and mortgages to which the Company is a party or by which the Company or any of its properties is bound. Without limiting the foregoing, the Company shall pay all of its indebtedness promptly in accordance with the terms thereof. Section 6.11. Notice of Default. ------------------ The Company shall give written notice to the Secured Party of the occurrence of any default or Event of Default under this Agreement or any other Transaction Document or any other agreement of Company for the payment of money, promptly upon the occurrence thereof. Section 6.12. Notice of Litigation. --------------------- The Company shall give notice, in writing, to the Secured Party of (a) any actions, suits or proceedings wherein the amount at issue is in excess of $50,000, instituted by any persons against the Company, or affecting any of the assets of the Company, and (b) any dispute, not resolved within fifteen (15) days of the commencement thereof, between the Company on the one hand and any governmental or regulatory body on the other hand, which might reasonably be expected to have a Material Adverse Effect on the business operations or financial condition of the Company. ARTICLE 7. NEGATIVE COVENANTS ------------------ The Company covenants and agrees that, from the date hereof until the Obligations have been fully paid and satisfied, the Company shall not, unless the Secured Party shall consent otherwise in writing: Section 7.1. Indebtedness. ------------- The Company shall not directly or indirectly permit, create, incur, assume, permit to exist, increase, renew or extend on or after the date hereof any indebtedness on its part, including commitments, contingencies and credit availabilities, or apply for or offer or agree to do any of the foregoing, except in the ordinary course of business. Section 7.2. Liens and Encumbrances. ----------------------- Except in the ordinary course of business, the Company shall not directly or indirectly make, create, incur, assume or permit to exist any assignment, transfer, pledge, mortgage, security interest or other lien or encumbrance of any nature in, to or against any part of the Pledged Property or of the Company's capital stock, or offer or agree to do so, or own or acquire or agree to acquire any asset or property of any character subject to any of the 10 foregoing encumbrances (including any conditional sale contract or other title retention agreement), or assign, pledge or in any way transfer or encumber its right to receive any income or other distribution or proceeds from any part of the Pledged Property or the Company's capital stock; or enter into any sale-leaseback financing respecting any part of the Pledged Property as lessee, or cause or assist the inception or continuation of any of the foregoing. Section 7.3. Dividends, Etc. --------------- The Company shall not declare or pay any dividend of any kind, in cash or in property, on any class of its capital stock, nor purchase, redeem, retire or otherwise acquire for value any shares of such stock, nor make any distribution of any kind in respect thereof, nor make any return of capital to shareholders, nor make any payments in respect of any pension, profit sharing, retirement, stock option, stock bonus, incentive compensation or similar plan (except as required or permitted hereunder), without the prior written consent of the Secured Party. Section 7.4. Guaranties; Loans. ------------------ The Company shall not guarantee nor be liable in any manner, whether directly or indirectly, or become contingently liable after the date of this Agreement in connection with the obligations or indebtedness of any person or persons, except for (i) the indebtedness currently secured by the liens identified on the Pledged Property identified on Exhibit A hereto and (ii) the endorsement of negotiable instruments payable to the Company for deposit or collection in the ordinary course of business. The Company shall not make any loan, advance or extension of credit to any person other than in the normal course of its business. Section 7.5. Debt. ----- The Company shall not create, incur, assume or suffer to exist any additional indebtedness of any description whatsoever in an aggregate amount in excess of $25,000 (excluding any indebtedness of the Company to the Secured Party, trade accounts payable and accrued expenses incurred in the ordinary course of business and the endorsement of negotiable instruments payable to the Company, respectively for deposit or collection in the ordinary course of business). Section 7.6. Conduct of Business. -------------------- The Company will continue to engage, in an efficient and economical manner, in a business of the same general type as conducted by it on the date of this Agreement. Section 7.7. Places of Business. ------------------- The location of the Company's chief place of business is 750 Highway 34, Matawan, NJ 07747. The Company shall not change the location of its chief place of business, chief executive office or any place of business disclosed to the Secured Party or move any of the Pledged Property from its current location without thirty (30) days' prior written notice to the Secured Party in each instance. 11 ARTICLE 8. MISCELLANEOUS Section 8.1. Notices. -------- All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be considered as duly given on: (a) the date of delivery, if delivered in person against written receipt therefor, or by nationally recognized overnight delivery service or (b) five (5) days after mailing if mailed from within the continental United States by postage pre-paid certified mail, return receipt requested to the party entitled to receive the same: If to the Secured Party: iVoice , Inc. 750 Highway 34 Matawan, NJ 07747 Attention: Jerome Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Meritz & Muenz LLP 2021 O Street, NW Washington, DC 20036 Attention : Lawrence A. Muenz, Esquire Telephone: (202) 728-2909 Facsimile: (202) 728-2910 And if to the Company: Small Cap Advisors, Inc. 750 Highway 34 Matawan, NJ 07747 Attention: mark Meller Telephone: (732) 441-7700 Facsimile: (732) 441-9895 Any party may change its address by giving notice to the other party stating its new address. Commencing on the tenth (10th) day after the giving of such notice, such newly designated address shall be such party's address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. Section 8.2. Severability. ------------- If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. 12 Section 8.3. Expenses. --------- In the event of an Event of Default, the Company will pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which the Secured Party may incur in connection with: (i) the custody or preservation of, or the sale, collection from, or other realization upon, any of the Pledged Property; (ii) the exercise or enforcement of any of the rights of the Secured Party hereunder or (iii) the failure by the Company to perform or observe any of the provisions hereof. Section 8.4. Waivers, Amendments, Etc. -------------------------- The Secured Party's delay or failure at any time or times hereafter to require strict performance by Company of any undertakings, agreements or covenants shall not waiver, affect, or diminish any right of the Secured Party under this Agreement to demand strict compliance and performance herewith. Any waiver by the Secured Party of any Event of Default shall not waive or affect any other Event of Default, whether such Event of Default is prior or subsequent thereto and whether of the same or a different type. None of the undertakings, agreements and covenants of the Company contained in this Agreement, and no Event of Default, shall be deemed to have been waived by the Secured Party, nor may this Agreement be amended, changed or modified, unless such waiver, amendment, change or modification is evidenced by an instrument in writing specifying such waiver, amendment, change or modification and signed by the Secured Party. Section 8.5. Continuing Security Interest. ----------------------------- This Agreement shall create a continuing security interest in the Pledged Property and shall: (i) remain in full force and effect until payment in full of the Obligations; and (ii) be binding upon the Company and its successors and heirs and (iii) inure to the benefit of the Secured Party and its successors and assigns. Upon the payment or satisfaction in full of the Obligations, the Company shall be entitled to the return, at its expense, of such of the Pledged Property as shall not have been sold in accordance with Section 5.2 hereof or otherwise applied pursuant to the terms hereof and the Secured Party shall release the Pledged Property and execute such documents as the Company may, in its sole reasonable discretion, request to evidence such release and/ or termination of the Security Interests. Section 8.6. Independent Representation. --------------------------- Each party hereto acknowledges and agrees that it has received or has had the opportunity to receive independent legal counsel of its own choice and that it has been sufficiently apprised of its rights and responsibilities with regard to the substance of this Agreement. Section 8.7. Applicable Law: Jurisdiction. ------------------------------ This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard 13 in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County and the United States District Court for the District of New Jersey sitting in Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph. Section 8.8. Waiver of Jury Trial. --------------------- AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION. Section 8.9 [Intentionally omitted] Section 8.10 Entire Agreement. ------------------ This Agreement constitutes the entire agreement among the parties and supersedes any prior agreement or understanding among them with respect to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: SMALL CAP ADVISORS, INC. By: __________________________ Name: Mark Meller Title: President and Chief Executive Officer SECURED PARTY: IVOICE, INC. By: __________________________ Name: Jerome Mahoney Title: President and Chief Executive Officer 15 EXHIBIT A DEFINITION OF PLEDGED PROPERTY ------------------------------ For the purpose of securing prompt and complete payment and performance by the Company of all of the Obligations, the Company unconditionally and irrevocably hereby grants to the Secured Party a continuing security interest in and to, and lien upon, the following Pledged Property of the Company: (a) all goods of the Company, including, without limitation, machinery, equipment, furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles of every kind and description, now or hereafter owned by the Company or in which the Company may have or may hereafter acquire any interest, and all replacements, additions, accessions, substitutions and proceeds thereof, arising from the sale or disposition thereof, and where applicable, the proceeds of insurance and of any tort claims involving any of the foregoing; (b) all inventory of the Company, including, but not limited to, all goods, wares, merchandise, parts, supplies, finished products, other tangible personal property, including such inventory as is temporarily out of Company's custody or possession and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing; (c) all contract rights and general intangibles of the Company, including, without limitation, goodwill, trademarks, trade styles, trade names, leasehold interests, partnership or joint venture interests, patents and patent applications, copyrights, deposit accounts whether now owned or hereafter created; (d) all documents, warehouse receipts, instruments and chattel paper of the Company whether now owned or hereafter created; (e) all accounts and other receivables, instruments or other forms of obligations and rights to payment of the Company (herein collectively referred to as "Accounts"), together with the proceeds thereof, all goods represented by such Accounts and all such goods that may be returned by the Company's customers, and all proceeds of any insurance thereon, and all guarantees, securities and liens which the Company may hold for the payment of any such Accounts including, without limitation, all rights of stoppage in transit, replevin and reclamation and as an unpaid vendor and/or lienor, all of which the Company represents and warrants will be bona fide and existing obligations of its respective customers, arising out of the sale of goods by the Company in the ordinary course of business; (f) to the extent assignable, all of the Company's rights under all present and future authorizations, permits, licenses and franchises issued or granted in connection with the operations of any of its facilities; and (g) all products and proceeds (including, without limitation, insurance proceeds) from the above-described Pledged Property. (h) all cash, cash equivalents, certificate of deposits, depository accounts, marketable securities. A-1 EX-10.4 5 exhibit10-4_16020.txt ADMINISTRATIVE SERVICES AGREEMENT EXHIBIT 10.4 ------------ ADMINISTRATIVE SERVICES AGREEMENT AMENDMENT NO. 1 This Amendment dated June 12, 2008 to the Administrative Services Agreement (the "Agreement") originally dated March 1, 2007 by and between iVoice, Inc., a New Jersey corporation ("iVoice") and Thomas Pharmaceuticals, Ltd., a New Jersey corporation (the "Company"). WHEREAS, the parties have agreed to amend the Agreement. NOW THEREFORE, in consideration of the foregoing premises and the respective promises and agreements of the parties set forth herein, the parties hereto agree as follows: 1. The Fees as defined in Section 3 of this Agreement and that are earned, accrued and remain unpaid shall be aggregated and converted into a Secured Convertible Promissory Note in substantially the form as set forth in Exhibit A herein. 2. The monies owed and converted into the Secured Convertible Promissory Note shall be secured with all of the assets of the Company pursuant to the Security Agreement dated the date hereof. 3. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of date written below: IVOICE, INC. THOMAS PHARMACEUTICALS, LTD. By: ___________________ By: ___________________ Jerome Mahoney Mark Meller President and President and Chief Executive Officer Chief Executive Officer EX-10.5 6 exhibit10-5_16020.txt CONVERTIBLE PROMISSORY NOTE EXHIBIT 10.5 ------------ JUNE 12, 2008 SECURED CONVERTIBLE PROMISSORY NOTE THEREFORE, FOR VALUE RECEIVED the undersigned, promises to pay to iVoice, Inc., all of the Fees as defined in Section 3 of Administrative Services Agreement by and between Thomas Pharmaceuticals, Ltd. (the "Company") and iVoice, Inc. dated March 1, 2007, as amended, that have been earned, accrued and remain unpaid and have been converted into this Secured Convertible Promissory Note at the rate of Prime plus 1 percent per annum on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at iVoice, Inc. (the "iVoice") 750 Highway 34, Matawan, New Jersey 07747, or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments, if any, securing this Secured Convertible Promissory Note and such advances will be added to the principal of this Secured Convertible Promissory Note and will accrue interest at the above specified rate of interest from the date of advance until paid. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand. 1. Notwithstanding anything to the contrary herein, the Secured Convertible Promissory Note holder may elect payment of the principal and/or interest, at the holder's sole discretion, owed pursuant to this Note by the Company to issue to iVoice, or his assigns either: (i) one Class B common stock share of Thomas Pharmaceuticals no par value per share, for each dollar owed, (ii) the number of Class A common stock shares of Thomas Pharmaceuticals 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 trading price of Thomas Pharmaceuticals Class A common stock in the previous thirty (30) trading days, or (iii), payment of the principal of this Secured Convertible Promissory Note, before any repayment of interest. For purposes of determining the holding period of this Secured Convertible Promissory Note under Rule 144 of the regulations promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, Exhibit I attached herein shows the date that each monthly obligation pursuant to the Agreement became due and unpaid. This Exhibit I shall be amended from time to time to reflect additional monthly advances made pursuant to the Agreement referenced above. Notwithstanding anything to the contrary, The Company shall not issue iVoice either Class A and/or Class B Common Stock as required in the paragraph should the total aggregate beneficial holdings of Thomas Pharmaceuticals Class A Common Stock by iVoice exceeds 9.99% of the total outstanding Class A Common Stock at the time of conversion of the monies owed under this Secured Convertible Promissory Note. 2. Unless otherwise provided, this Secured Convertible Promissory 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. 3. 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 Secured Convertible Promissory 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 Secured Convertible Promissory Note and any part thereof, accrued interest and all other sums due under this Secured Convertible Promissory Note shall bear interest at the rate of prime plus 2 percent per annum after default until paid. 4. All parties to this Secured Convertible Promissory Note, including maker and any sureties, endorsers, or guarantors, hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest, and all other sums due under this Secured Convertible Promissory Note, notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Secured Convertible Promissory Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. 5. Upon default, the holder of this Secured Convertible Promissory Note may employ an attorney to enforce the holder's rights and remedies and the maker, principal, surety, guarantor and endorsers of this Secured Convertible Promissory Note hereby agree to pay to the holder reasonable attorneys fees, plus all other reasonable expenses incurred by the holder in exercising any of the holder's right and remedies upon default. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. 6. This Secured Convertible Promissory Note is to be governed and construed in accordance with the laws of the State of New Jersey. 7. The monies owed under this Secured Convertible Promissory Note shall be secured by a security interest as set forth in a Security Agreement dated the date hereof. IN TESTIMONY WHEREOF, each corporate maker has caused this instrument to be executed in its corporate name by its President, and its corporate seal to be hereto affixed, all by order of its Board of Directors first duly given, the day and year first written above: THOMAS PHARMACEUTICALS, LTD. By: ___________________________ Mark Meller President and Chief Executive Officer EX-10.6 7 exhibit10-6_16020.txt SECURITY AGREEMENT EXHIBIT 10.6 ------------ SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement"), is entered into and made effective as of June 12, 2008, by and between Thomas Pharmaceuticals, Ltd., a New Jersey Corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 (the "Company"), and iVoice , Inc., a New Jersey corporation, with its principal office at 750 Route 34, Matawan, NJ, 07747 (the "Secured Party"). WHEREAS, the Company executed a Secured Convertible Promissory Note dated August 12, 2008 (the "Secured Convertible Promissory Note"); NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS AND INTERPRETATIONS ------------------------------- Section 1.1. Recitals. --------- The above recitals are true and correct and are incorporated herein, in their entirety, by this reference. Section 1.2. Interpretations. ---------------- Nothing herein expressed or implied is intended or shall be construed to confer upon any person other than the Secured Party any right, remedy or claim under or by reason hereof. Section 1.3. Obligations Secured. -------------------- In exchange and the consideration for the Secured Party purchasing the Secured Convertible Promissory Note dated the date hereof and thereby permitting the Secured Party to enter into the Administrative Services Agreement by and between iVoice and Thomas Pharmaceuticals, Ltd. on the date hereof, the Company hereby agrees to permit the Secured Party to secure the obligations pursuant to: (i) this Security Agreement and (ii) the Secured Convertible Promissory Note dated the date hereof and any future advances made under the Secured Convertible Promissory Note that may include Services Fees accrued pursuant to the Administrative Services Agreement (collectively, the "Obligations"). ARTICLE 2. PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL ---------------------------------------------- AND TERMINATION OF SECURITY INTEREST ------------------------------------ Section 2.1. Pledged Property. ----------------- (a) Company hereby pledges to the Secured Party, and creates in the Secured Party for its benefit, a security interest in and to all of the property of the Company as set forth in Exhibit A attached hereto and the products thereof and the proceeds of all such items (collectively, the "Pledged Property") for such time until the Obligations are paid in full. (b) Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge, file, record and deliver to the Secured Party any documents reasonably requested by the Secured Party to perfect its security interest in the Pledged Property. Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge and deliver to the Secured Party such documents and instruments, including, without limitation, financing statements, certificates, affidavits and forms as may, in the Secured Party's reasonable judgment, be necessary to effectuate, complete or perfect, or to continue and preserve, the security interest of the Secured Party in the Pledged Property, and the Secured Party shall hold such documents and instruments as secured party, subject to the terms and conditions contained herein. Section 2.2. Rights; Interests; Etc. ----------------------- (a) So long as no Event of Default (as hereinafter defined) shall have occurred and be continuing: (i) the Company shall be entitled to exercise any and all rights pertaining to the Pledged Property or any part thereof for any purpose not inconsistent with the terms hereof; and (ii) the Company shall be entitled to receive and retain any and all payments paid or made in respect of the Pledged Property. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of the Company to exercise the rights which it would otherwise be entitled to exercise pursuant to Section 2.2(a)(i) hereof and to receive payments which it would otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise such rights and to receive and hold as Pledged Property such payments; PROVIDED, HOWEVER, that if the Secured Party shall become entitled and shall elect to exercise its right to realize on the Pledged Property pursuant to Article 5 hereof, then all cash sums received by the Secured Party, or held by Company for the benefit of the Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any outstanding Obligations; 2 (ii) All interest, dividends, income and other payments and distributions which are received by the Company contrary to the provisions of Section 2.2(b)(i) hereof shall be received in trust for the benefit of the Secured Party, shall be segregated from other property of the Company and shall be forthwith paid over to the Secured Party; and (iii) The Secured Party in its sole discretion shall be authorized to sell any or all of the Pledged Property at public or private sale in order to recoup all of the outstanding principal plus accrued interest owed pursuant to the Debenture as described herein (c) Each of the following events shall constitute a default under this Agreement (each an "Event of Default"): (i) any default, whether in whole or in part, shall occur in the payment to the Secured Party of principal, interest or other item comprising the Obligations as and when due or with respect to any other debt or obligation of the Company to a party other than the Secured Party; (ii) any default, whether in whole or in part, shall occur in the due observance or performance of any obligations or other covenants, terms or provisions to be performed under the Transaction Documents (as defined in the Merger Agreement); (iii) the Company shall: (1) make a general assignment for the benefit of its creditors; (2) apply for or consent to the appointment of a receiver, trustee, assignee, custodian, sequestrator, liquidator or similar official for itself or any of its assets and properties; (3) commence a voluntary case for relief as a debtor under the United States Bankruptcy Code; (4) file with or otherwise submit to any governmental authority any petition, answer or other document seeking: (A) reorganization, (B) an arrangement with creditors or (C) to take advantage of any other present or future applicable law respecting bankruptcy, reorganization, insolvency, readjustment of debts, relief of debtors, dissolution or liquidation; (5) file or otherwise submit any answer or other document admitting or failing to contest the material allegations of a petition or other document filed or otherwise submitted against it in any proceeding under any such applicable law; or (6) be adjudicated a bankrupt or insolvent by a court of competent jurisdiction; or (iv) any case, proceeding or other action shall be commenced against the Company for the purpose of effecting, or an order, judgment or decree shall be entered by any court of competent jurisdiction approving (in whole or in part) anything specified in Section 2.2(c)(iii) hereof, or any receiver, trustee, assignee, custodian, sequestrator, liquidator or other official shall be appointed with respect to the Company, or shall be appointed to take or shall otherwise acquire possession or control of all or a substantial part of the assets and properties of the Company, and any of the foregoing shall continue unstayed and in effect for any period of thirty (30) days. 3 ARTICLE 3. ATTORNEY-IN-FACT; PERFORMANCE ----------------------------- Section 3.1. Secured Party Appointed Attorney-In-Fact. ----------------------------------------- Upon the occurrence of an Event of Default, the Company hereby appoints the Secured Party as its attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company or otherwise, from time to time in the Secured Party's discretion to take any action and to execute any instrument which the Secured Party may reasonably deem necessary to accomplish the purposes of this Agreement, including, without limitation, to receive and collect all instruments made payable to the Company representing any payments in respect of the Pledged Property or any part thereof and to give full discharge for the same. The Secured Party may demand, collect, acknowledge, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Pledged Property as and when the Secured Party may determine. To facilitate collection, upon the occurrence of an Event of Default, the Secured Party may notify account debtors and obligors on any Pledged Property to make payments directly to the Secured Party. Section 3.2. Secured Party May Perform. -------------------------- If the Company fails to perform any agreement contained herein, the Secured Party, at its option, may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be included in the Obligations secured hereby. ARTICLE 4. REPRESENTATIONS AND WARRANTIES ------------------------------ Section 4.1. Authorization; Enforceability. ------------------------------ Each of the parties hereto represents and warrants that it has taken all action necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby; and upon execution and delivery, this Agreement shall constitute a valid and binding obligation of the respective party, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights or by the principles governing the availability of equitable remedies. Section 4.2. Ownership of Pledged Property. ------------------------------ The Company warrants and represents that it is the legal and beneficial owner of the Pledged Property. 4 ARTICLE 5. DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL ---------------------------------------- Section 5.1. Default and Remedies. --------------------- (a) If an Event of Default described in Section 2.2(c)(i) and (ii) occurs, then in each such case the Secured Party may declare the Obligations to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration, the Obligations shall become immediately due and payable. If an Event of Default described in Sections 2.2(c)(iii) or (iv) occurs and is continuing for the period set forth therein, then the Obligations shall automatically become immediately due and payable without declaration or other act on the part of the Secured Party. (b) Upon the occurrence of an Event of Default, the Secured Party shall: (i) be entitled to receive all distributions with respect to the Pledged Property, (ii) to cause the Pledged Property to be transferred into the name of the Secured Party or its nominee, (iii) to dispose of the Pledged Property, and (iv) to realize upon any and all rights in the Pledged Property then held by the Secured Party. Section 5.2. Method of Realizing Upon the Pledged Property: Other ---------------------------------------------------- Remedies. --------- Upon the occurrence of an Event of Default, in addition to any rights and remedies available at law or in equity, the following provisions shall govern the Secured Party's right to realize upon the Pledged Property: (a) Any item of the Pledged Property may be sold for cash or other value in any number of lots at brokers board, public auction or private sale and may be sold without demand, advertisement or notice (except that the Secured Party shall give the Company ten (10) days' prior written notice of the time and place or of the time after which a private sale may be made (the "Sale Notice")), which notice period is hereby agreed to be commercially reasonable. At any sale or sales of the Pledged Property, the Company may bid for and purchase the whole or any part of the Pledged Property and, upon compliance with the terms of such sale, may hold, exploit and dispose of the same without further accountability to the Secured Party. The Company will execute and deliver, or cause to be executed and delivered, such instruments, documents, assignments, waivers, certificates, and affidavits and supply or cause to be supplied such further information and take such further action as the Secured Party reasonably shall require in connection with any such sale. (b) Any cash being held by the Secured Party as Pledged Property and all cash proceeds received by the Secured Party in respect of, sale of, collection from, or other realization upon all or any part of the Pledged Property shall be applied as follows: (i) first, to the payment of all amounts due the Secured Party for the expenses reimbursable to it hereunder or owed to it pursuant to Section 8.3 hereof; (ii) second, to the payment of the Obligations then due and unpaid; and 5 (iii) the balance, if any, to the person or persons entitled thereto, including, without limitation, the Company. (c) In addition to all of the rights and remedies which the Secured Party may have pursuant to this Agreement, the Secured Party shall have all of the rights and remedies provided by law, including, without limitation, those under the Uniform Commercial Code. (i) If the Company fails to pay such amounts due upon the occurrence of an Event of Default which is continuing, then the Secured Party may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of Company, wherever situated. (ii) The Company agrees that it shall be liable for any reasonable fees, expenses and costs incurred by the Secured Party in connection with enforcement, collection and preservation of the Transaction Documents, including, without limitation, reasonable legal fees and expenses, and such amounts shall be deemed included as Obligations secured hereby and payable as set forth in Section 8.3 hereof. Section 5.3. Proofs of Claim. ---------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relating to the Company or the property of the Company or of such other obligor or its creditors, the Secured Party (irrespective of whether the Obligations shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Secured Party shall have made any demand on the Company for the payment of the Obligations) shall be entitled and empowered, by intervention in such proceeding or otherwise: (i) to file and prove a claim for the whole amount of the Obligations and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Secured Party (including any claim for the reasonable legal fees and expenses and other expenses paid or incurred by the Secured Party permitted hereunder and of the Secured Party allowed in such judicial proceeding), and (ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Secured Party to make such payments to the Secured Party and, in the event that the Secured Party shall consent to the making of such payments directed to the Secured Party, to pay to the Secured Party any amounts for expenses due it hereunder. Section 5.4. Duties Regarding Pledged Property. ---------------------------------- The Secured Party shall have no duty as to the collection or protection of the Pledged Property or any income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody and reasonable care of any of the Pledged Property actually in the Secured Party's possession. 6 ARTICLE 6. AFFIRMATIVE COVENANTS --------------------- The Company covenants and agrees that, from the date hereof and until the Obligations have been fully paid and satisfied, unless the Secured Party shall consent otherwise in writing (as provided in Section 8.4 hereof): Section 6.1. Existence, Properties, Etc. --------------------------- (a) The Company shall do, or cause to be done, all things, or proceed with due diligence with any actions or courses of action, that may be reasonably necessary (i) to maintain Company's due organization, valid existence and good standing under the laws of its state of incorporation, and (ii) to preserve and keep in full force and effect all qualifications, licenses and registrations in those jurisdictions in which the failure to do so could have a Material Adverse Effect (as defined below); and (b) the Company shall not do, or cause to be done, any act impairing the Company's corporate power or authority (i) to carry on the Company's business as now conducted, and (ii) to execute or deliver this Agreement or any other document delivered in connection herewith, including, without limitation, any UCC-1 Financing Statements required by the Secured Party to which it is or will be a party, or perform any of its obligations hereunder or thereunder. For purpose of this Agreement, the term "Material Adverse Effect" shall mean any material and adverse effect as determined by Secured Party in its sole good-faith discretion, whether individually or in the aggregate, upon (a) the Company's assets, business, operations, properties or condition, financial or otherwise; (b) the Company's ability to make payment as and when due of all or any part of the Obligations; or (c) the Pledged Property. Section 6.2. Financial Statements and Reports. --------------------------------- The Company shall furnish to the Secured Party such financial data as the Secured Party may reasonably request. Without limiting the foregoing, the Company shall furnish to the Secured Party (or cause to be furnished to the Secured Party) the following: (a) as soon as practicable and in any event within ninety (90) days after the end of each fiscal year of the Company, the balance sheet of the Company as of the close of such fiscal year, the statement of earnings and retained earnings of the Company as of the close of such fiscal year, and statement of cash flows for the Company for such fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct and accompanied by a certificate of the chief executive and chief financial officers of the Company, stating that the Company has kept, observed, performed and fulfilled each covenant, term and condition of this Agreement during such fiscal year and that no Event of Default hereunder has occurred and is continuing, or if an Event of Default has occurred and is continuing, specifying the nature of same, the period of existence of same and the action the Company proposes to take in connection therewith; 7 (b) within thirty (30) days of the end of each calendar month, a balance sheet of the Company as of the close of such month, and statement of earnings and retained earnings of the Company as of the close of such month, all in reasonable detail, and prepared substantially in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct; and (c) promptly upon receipt thereof, copies of all accountants' reports and accompanying financial reports submitted to the Company by independent accountants in connection with each annual examination of the Company. Section 6.3. Accounts and Reports. --------------------- The Company shall maintain a standard system of accounting in accordance with generally accepted accounting principles consistently applied and provide, at its sole expense, to the Secured Party the following: (a) as soon as available, a copy of any notice or other communication alleging any nonpayment or other material breach or default, or any foreclosure or other action respecting any material portion of its assets and properties, received respecting any of the indebtedness of the Company in excess of $15,000 (other than the Obligations), or any demand or other request for payment under any guaranty, assumption, purchase agreement or similar agreement or arrangement respecting the indebtedness or obligations of others in excess of $15,000, including any received from any person acting on behalf of the Secured Party or beneficiary thereof; and (b) within fifteen (15) days after the making of each submission or filing, a copy of any report, financial statement, notice or other document, whether periodic or otherwise, submitted to the shareholders of the Company, or submitted to or filed by the Company with any governmental authority involving or affecting (i) the Company that could have a Material Adverse Effect; (ii) the Obligations; (iii) any part of the Pledged Property; or (iv) any of the transactions contemplated in this Agreement or any other Transaction Document. Section 6.4. Maintenance of Books and Records; Inspection. --------------------------------------------- The Company shall maintain its books, accounts and records in accordance with generally accepted accounting principles consistently applied, and permit the Secured Party, its officers and employees and any professionals designated by the Secured Party in writing, at any time to visit and inspect any of its properties (including but not limited to the collateral security described in the Transaction Documents), corporate books and financial records, and to discuss its accounts, affairs and finances with any employee, officer or director thereof. Section 6.5. Maintenance and Insurance. -------------------------- (a) The Company shall maintain or cause to be maintained, at its own expense, all of its assets and properties in good working order and condition, making all necessary repairs thereto and renewals and replacements thereof. (b) The Company shall maintain or cause to be maintained, at its own expense, insurance in form, substance and amounts (including deductibles), which the Company 8 deems reasonably necessary to the Company's business, (i) adequate to insure all assets and properties of the Company, which assets and properties are of a character usually insured by persons engaged in the same or similar business against loss or damage resulting from fire or other risks included in an extended coverage policy; (ii) against public liability and other tort claims that may be incurred by the Company; (iii) as may be required by the Transaction Documents and/or applicable law and (iv) as may be reasonably requested by Secured Party, all with adequate, financially sound and reputable insurers. Section 6.6. Contracts and Other Collateral. ------------------------------ The Company shall perform all of its material obligations under or with respect to each instrument, receivable, contract and other intangible included in the Pledged Property to which the Company is now or hereafter will be party on a timely basis and in the manner therein required, including, without limitation, this Agreement. Section 6.7. Defense of Collateral, Etc. --------------------------- The Company shall defend and enforce its right, title and interest in and to any part of: (a) the Pledged Property; and (b) if not included within the Pledged Property, those assets and properties whose loss could have a Material Adverse Effect, the Company shall defend the Secured Party's right, title and interest in and to each and every part of the Pledged Property, each against all manner of claims and demands on a timely basis to the full extent permitted by applicable law. Section 6.8. Payment of Debts, Taxes, Etc. ----------------------------- The Company shall pay, or cause to be paid, all of its indebtedness and other liabilities and perform, or cause to be performed, all of its obligations in accordance with the respective terms thereof, and pay and discharge, or cause to be paid or discharged, all taxes, assessments and other governmental charges and levies imposed upon it, upon any of its assets and properties on or before the last day on which the same may be paid without penalty, as well as pay all other lawful claims (whether for services, labor, materials, supplies or otherwise) as and when due. Section 6.9. Taxes and Assessments; Tax Indemnity. ------------------------------------- The Company shall (a) file all tax returns and appropriate schedules thereto that are required to be filed under applicable law, prior to the date of delinquency, (b) pay and discharge all taxes, assessments and governmental charges or levies imposed upon the Company, upon its income and profits or upon any properties belonging to it, prior to the date on which penalties attach thereto, and (c) pay all taxes, assessments and governmental charges or levies that, if unpaid, might become a lien or charge upon any of its properties; PROVIDED, HOWEVER, that the Company in good faith may contest any such tax, assessment, governmental charge or levy described in the foregoing clauses (b) and (c) so long as appropriate reserves are maintained with respect thereto. 9 Section 6.10. Compliance with Law and Other Agreements. ---------------------------------------- The Company shall maintain its business operations and property owned or used in connection therewith in compliance with (a) all applicable federal, state and local laws, regulations and ordinances governing such business operations and the use and ownership of such property, and (b) all agreements, licenses, franchises, indentures and mortgages to which the Company is a party or by which the Company or any of its properties is bound. Without limiting the foregoing, the Company shall pay all of its indebtedness promptly in accordance with the terms thereof. Section 6.11. Notice of Default. ------------------ The Company shall give written notice to the Secured Party of the occurrence of any default or Event of Default under this Agreement or any other Transaction Document or any other agreement of Company for the payment of money, promptly upon the occurrence thereof. Section 6.12. Notice of Litigation. --------------------- The Company shall give notice, in writing, to the Secured Party of (a) any actions, suits or proceedings wherein the amount at issue is in excess of $50,000, instituted by any persons against the Company, or affecting any of the assets of the Company, and (b) any dispute, not resolved within fifteen (15) days of the commencement thereof, between the Company on the one hand and any governmental or regulatory body on the other hand, which might reasonably be expected to have a Material Adverse Effect on the business operations or financial condition of the Company. ARTICLE 7. NEGATIVE COVENANTS ------------------ The Company covenants and agrees that, from the date hereof until the Obligations have been fully paid and satisfied, the Company shall not, unless the Secured Party shall consent otherwise in writing: Section 7.1. Indebtedness. ------------- The Company shall not directly or indirectly permit, create, incur, assume, permit to exist, increase, renew or extend on or after the date hereof any indebtedness on its part, including commitments, contingencies and credit availabilities, or apply for or offer or agree to do any of the foregoing, except in the ordinary course of business. Section 7.2. Liens and Encumbrances. ----------------------- Except in the ordinary course of business, the Company shall not directly or indirectly make, create, incur, assume or permit to exist any assignment, transfer, pledge, mortgage, security interest or other lien or encumbrance of any nature in, to or against any part of the Pledged Property or of the Company's capital stock, or offer or agree to do so, or own or acquire or agree to acquire any asset or property of any character subject to any of the foregoing 10 encumbrances (including any conditional sale contract or other title retention agreement), or assign, pledge or in any way transfer or encumber its right to receive any income or other distribution or proceeds from any part of the Pledged Property or the Company's capital stock; or enter into any sale-leaseback financing respecting any part of the Pledged Property as lessee, or cause or assist the inception or continuation of any of the foregoing. Section 7.3. Dividends, Etc. --------------- The Company shall not declare or pay any dividend of any kind, in cash or in property, on any class of its capital stock, nor purchase, redeem, retire or otherwise acquire for value any shares of such stock, nor make any distribution of any kind in respect thereof, nor make any return of capital to shareholders, nor make any payments in respect of any pension, profit sharing, retirement, stock option, stock bonus, incentive compensation or similar plan (except as required or permitted hereunder), without the prior written consent of the Secured Party. Section 7.4. Guaranties; Loans. ------------------ The Company shall not guarantee nor be liable in any manner, whether directly or indirectly, or become contingently liable after the date of this Agreement in connection with the obligations or indebtedness of any person or persons, except for (i) the indebtedness currently secured by the liens identified on the Pledged Property identified on Exhibit A hereto and (ii) the endorsement of negotiable instruments payable to the Company for deposit or collection in the ordinary course of business. The Company shall not make any loan, advance or extension of credit to any person other than in the normal course of its business. Section 7.5. Debt. ----- The Company shall not create, incur, assume or suffer to exist any additional indebtedness of any description whatsoever in an aggregate amount in excess of $25,000 (excluding any indebtedness of the Company to the Secured Party, trade accounts payable and accrued expenses incurred in the ordinary course of business and the endorsement of negotiable instruments payable to the Company, respectively for deposit or collection in the ordinary course of business). Section 7.6. Conduct of Business. -------------------- The Company will continue to engage, in an efficient and economical manner, in a business of the same general type as conducted by it on the date of this Agreement. Section 7.7. Places of Business. ------------------- The location of the Company's chief place of business is 750 Highway 34, Matawan, NJ 07747. The Company shall not change the location of its chief place of business, chief executive office or any place of business disclosed to the Secured Party or move any of the Pledged Property from its current location without thirty (30) days' prior written notice to the Secured Party in each instance. 11 ARTICLE 8. MISCELLANEOUS ------------- Section 8.1. Notices. -------- All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be considered as duly given on: (a) the date of delivery, if delivered in person against written receipt therefor, or by nationally recognized overnight delivery service or (b) five (5) days after mailing if mailed from within the continental United States by postage pre-paid certified mail, return receipt requested to the party entitled to receive the same: If to the Secured Party: iVoice , Inc. 750 Highway 34 Matawan, NJ 07747 Attention: Jerome Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Meritz & Muenz LLP 2021 O Street, NW Washington, DC 20036 Attention : Lawrence A. Muenz, Esquire Telephone: (202) 728-2909 Facsimile: (202) 728-2910 And if to the Company: Thomas Pharmaceuticals, Ltd. 750 Highway 34 Matawan, NJ 07747 Attention: mark Meller Telephone: (732) 441-7700 Facsimile: (732) 441-9895 Any party may change its address by giving notice to the other party stating its new address. Commencing on the tenth (10th) day after the giving of such notice, such newly designated address shall be such party's address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. Section 8.2. Severability. ------------- If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. 12 Section 8.3. Expenses. --------- In the event of an Event of Default, the Company will pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which the Secured Party may incur in connection with: (i) the custody or preservation of, or the sale, collection from, or other realization upon, any of the Pledged Property; (ii) the exercise or enforcement of any of the rights of the Secured Party hereunder or (iii) the failure by the Company to perform or observe any of the provisions hereof. Section 8.4. Waivers, Amendments, Etc. ------------------------- The Secured Party's delay or failure at any time or times hereafter to require strict performance by Company of any undertakings, agreements or covenants shall not waiver, affect, or diminish any right of the Secured Party under this Agreement to demand strict compliance and performance herewith. Any waiver by the Secured Party of any Event of Default shall not waive or affect any other Event of Default, whether such Event of Default is prior or subsequent thereto and whether of the same or a different type. None of the undertakings, agreements and covenants of the Company contained in this Agreement, and no Event of Default, shall be deemed to have been waived by the Secured Party, nor may this Agreement be amended, changed or modified, unless such waiver, amendment, change or modification is evidenced by an instrument in writing specifying such waiver, amendment, change or modification and signed by the Secured Party. Section 8.5. Continuing Security Interest. ----------------------------- This Agreement shall create a continuing security interest in the Pledged Property and shall: (i) remain in full force and effect until payment in full of the Obligations; and (ii) be binding upon the Company and its successors and heirs and (iii) inure to the benefit of the Secured Party and its successors and assigns. Upon the payment or satisfaction in full of the Obligations, the Company shall be entitled to the return, at its expense, of such of the Pledged Property as shall not have been sold in accordance with Section 5.2 hereof or otherwise applied pursuant to the terms hereof and the Secured Party shall release the Pledged Property and execute such documents as the Company may, in its sole reasonable discretion, request to evidence such release and/ or termination of the Security Interests. Section 8.6. Independent Representation. --------------------------- Each party hereto acknowledges and agrees that it has received or has had the opportunity to receive independent legal counsel of its own choice and that it has been sufficiently apprised of its rights and responsibilities with regard to the substance of this Agreement. Section 8.7. Applicable Law: Jurisdiction. ------------------------------ This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson 13 County and theUnited States District Court for the District of New Jersey sitting in Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph. Section 8.8. Waiver of Jury Trial. -------------------- AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION. Section 8.9 [Intentionally omitted] Section 8.10 Entire Agreement. ----------------- This Agreement constitutes the entire agreement among the parties and supersedes any prior agreement or understanding among them with respect to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: THOMAS PHARMACEUTICALS, LTD. By: ________________________________ Name: Mark Meller Title: President and Chief Executive Officer SECURED PARTY: IVOICE, INC. By: ________________________________ Name: Jerome Mahoney Title: President and Chief Executive Officer 15 EXHIBIT A DEFINITION OF PLEDGED PROPERTY ------------------------------ For the purpose of securing prompt and complete payment and performance by the Company of all of the Obligations, the Company unconditionally and irrevocably hereby grants to the Secured Party a continuing security interest in and to, and lien upon, the following Pledged Property of the Company: (a) all goods of the Company, including, without limitation, machinery, equipment, furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles of every kind and description, now or hereafter owned by the Company or in which the Company may have or may hereafter acquire any interest, and all replacements, additions, accessions, substitutions and proceeds thereof, arising from the sale or disposition thereof, and where applicable, the proceeds of insurance and of any tort claims involving any of the foregoing; (b) all inventory of the Company, including, but not limited to, all goods, wares, merchandise, parts, supplies, finished products, other tangible personal property, including such inventory as is temporarily out of Company's custody or possession and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing; (c) all contract rights and general intangibles of the Company, including, without limitation, goodwill, trademarks, trade styles, trade names, leasehold interests, partnership or joint venture interests, patents and patent applications, copyrights, deposit accounts whether now owned or hereafter created; (d) all documents, warehouse receipts, instruments and chattel paper of the Company whether now owned or hereafter created; (e) all accounts and other receivables, instruments or other forms of obligations and rights to payment of the Company (herein collectively referred to as "Accounts"), together with the proceeds thereof, all goods represented by such Accounts and all such goods that may be returned by the Company's customers, and all proceeds of any insurance thereon, and all guarantees, securities and liens which the Company may hold for the payment of any such Accounts including, without limitation, all rights of stoppage in transit, replevin and reclamation and as an unpaid vendor and/or lienor, all of which the Company represents and warrants will be bona fide and existing obligations of its respective customers, arising out of the sale of goods by the Company in the ordinary course of business; (f) to the extent assignable, all of the Company's rights under all present and future authorizations, permits, licenses and franchises issued or granted in connection with the operations of any of its facilities; and (g) all products and proceeds (including, without limitation, insurance proceeds) from the above-described Pledged Property. (h) all cash, cash equivalents, certificate of deposits, depository accounts, marketable securities. A-1 EX-31.1 8 exhibit31-1_16020.txt 302 CERTIFICATIONS EXHIBIT 31.1 ------------ Rule 13a-14(a)/15d-14(a) Certifications. I, Jerome R. Mahoney, certify that: 1) I have reviewed this quarterly report on Form 10-Q of iVoice, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Intentionally omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5) I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Jerome R. Mahoney Date: August 13, 2008 ----------------------------- Jerome R. Mahoney, President, Chief Executive Officer and Principal Financial Officer EX-32.1 9 exhibit32-1_16020.txt 906 CERTIFICATIONS EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jerome R Mahoney, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects the financial condition and results of operations of the Company. Date: August 13, 2008 By /s/ Jerome R Mahoney --------------------- Jerome R Mahoney President, Chief Executive Officer and Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----