iVoice's CEO is selling billions of shares, turning stock to cash, but posting no profit
Sunday, August 21, 2005
BY GREG SAITZ
Star-Ledger Staff
By every measure, Bill Gates and his company, Microsoft, dwarfs Jerome Mahoney and his business, iVoice.
Microsoft, the software behemoth, had revenue approaching $37 billion last year. Sales at Matawan-based iVoice, which makes voice recognition software, did not break $360,000. Gates' company pulled in more than $8.1 billion in profit; Mahoney's lost $2.9 million.
But there's one area in which Mahoney far surpasses Gates and hundreds of other top executives at major public companies -- the amount of company stock he's sold.
Since 2003, according to regulatory filings, Mahoney has disposed of more than 2.5 billion shares of iVoice.
Welcome to the world of pinny stock trading on the over-the-counter bulletin board.
It's a place where hundreds of millions of shares are traded each day -- often for just fractions of a penny -- where legitimate businesses mingle with fraudulent operators, and where detailed information about companies can be hard to find.
It's also a place where unwitting investors have been scammed out of millions of dollars by swindlers promoting dreams of quick and easy profits. New Jersey's Robert Brennan, now serving a nine-year prison term, is one of the most notorious penny stock criminals.
No one has accused Mahoney or iVoice of any wrongdoing. But their case opens a window into a murky realm where public companies can have little or no income and yet make a few investors millions of dollars, where the fundamental laws of business and economics are turned on their head.
"You don't buy a penny stock for the same reason you buy your local utility," said Gregory Miller, an associate accounting professor at Harvard Business School. "The people on the other end are looking for a big payoff."
Mahoney, 45, has run iVoice since May 1999, when his private company, International Voice Technologies, merged with a publicly traded firm, Visual Telephone International. The resulting company eventually became known as iVoice.
The deal gave Mahoney 10 million shares of Class A stock and 1 million shares of Class B stock, each of which can be converted into thousands of shares of Class A stock.
A month later, Mahoney, a Colts Neck resident, predicted in a New Jersey business publication: "This will be a very profitable year."
It wasn't. And it never has been. iVoice has lost millions of dollars every year since 1999. Between then and 2004, the company has lost $19.4 million, regulatory filings show.
For years, iVoice's auditors have looked at the company's financial statements and concluded there was substantial doubt about its ability to continue operating as a viable business. The reasons are myriad: not enough cash on hand, negative working capital and a failure to generate enough revenue to cover costs.
Without actual cash to pay vendors, consultants and others for services, iVoice has turned its stock into currency. The practice is used frequently by companies, often small, bulletin-board stocks, that have limited cash flow.
Mahoney and a company attorney explained stock sales by noting Mahoney loaned iVoice significant sums of money by selling personal stock and putting the proceeds into the company. Regulatory filings show iVoice owed Mahoney about $2 million in September 2002, although it appears about half of that was for unpaid salary, income taxes, interest and other compensation.
"I didn't take a salary for five years to keep the company going," Mahoney said during a brief interview. "I could count on one finger the number of people who did what I did."
He is entitled to $705,000 in annual salary from iVoice and related companies. Lawrence Muenz, an attorney for iVoice, said Mahoney took only about 60 percent of the salary he was entitled to between 1999 and 2004. His stock sales in the past two and a half years have netted nearly $4.8 million.
iVoice has partially repaid the loans from Mahoney not in cash, but in more shares of stock. As of earlier this year, he essentially owned the rights to more than 37.8 billion shares. (Gates owns a little more than 1 billion shares of Microsoft.) The sale of some of Mahoney's iVoice stock has been an effort to recoup the loans and unpaid compensation, Mahoney said.
"He's just maintaining his own liquidity," Muenz said.
When Mahoney and iVoice needed to pay a bill, they generally issued shares of stock. The company has given Cornell Capital Partners, a hedge fund in Jersey City, billions of shares in exchange for millions of dollars in loans.
When iVoice needed more stock to hand out, it just increased the number of shares available. In 2000, there were about 101 million shares of common stock issued; last month the number stood at nearly 10 billion.
(The discrepancy between the number of outstanding shares and shares Mahoney technically owns -- 37.8 billion -- has to do with his rights to convert Class B shares into common stock.)
The result has been a continued dilution of iVoice's stock and its price. Since early 2000, when the price peaked at $5.94, the share price has plummeted to its current levels measured in hundredths of a penny. It closed Friday at six-thousandsth of a penny .
Mahoney has been selling shares during much of that time. Filings made with the Securities and Exchange Commission documenting his transactions only cover the period from March 2003 forward.
That year, he sold 623 million shares for $2.7 million. In 2004, Mahoney sold 1.3 billion shares for $1.7 million and so far this year, during trades almost exclusively in March, he sold nearly 606 million shares for $242,000.
In addition, Mahoney has been selling shares of Trey Resources, a one-time subsidiary of iVoice that was spun off to become its own public company last year. Since November 2004, Mahoney has sold 5.4 million shares for $157,639.
"People know he's in the market. It's not like it's a secret," attorney Muenz said of Mahoney's sales. "They know he has a ton of stock. They know he has shares he's received from these loans."
Mahoney, who is paid $180,000 to act as Trey's chairman, and Trey Chief Executive Mark Meller had nearly identical stock sales in 2004 and so far this year. Muenz said the two trade in tandem, but that their broker is the one who decides when to sell and how many shares.
Often, their trades accounted for large portions of the overall volume traded on a particular day. On some days, the combined number of shares Mahoney and Meller indicated they had sold exceeded the total volume. Muenz could not explain the discrepancy.
Regulatory filings indicate Trey has assumed a $250,000 debt from iVoice that is due to Mahoney. Filings also note both executives have deferred payment of their salaries, other compensation and a $350,000 bonus for the successful spinoff, but may take shares of stock as payment. Mahoney earns $270,000 a year from iVoice, holding the titles of chairman, CEO, president and chief financial officer.
"It's very common for executives increasingly compensated with stock to sell off and turn their stock into dollars," said Darren Roulstone, an associate accounting professor at the University of Chicago's Graduate School of Business who has studied trading of company insiders.
But who's buying is anybody's guess, said Brian Bushee, an accounting professor at the University of Pennsylvania's Wharton School.
"It's still the case with most large institutional investors, they're going to stay away from the market altogether," said Bushee, who has studied the over-the-counter marketplace. "It always has mystified me who trades in this market."
The buyers of iVoice may not be clear, but the stock always is changing hands by the cratefull. The company frequently is among the most heavily traded stocks on the OTC bulletin board, with tens of millions of shares in play. On occasion, more than 1 billion shares have traded in a single day.
Both Mahoney and Muenz said they didn't know why so many shares of iVoice are bought and sold each day.
It's unclear whether volume will decrease once trading commences on three new companies, which are subsidiaries iVoice created last year and recently spun off into publicly traded entities. iVoice investors received shares of the three companies -- iVoice Technology, Deep Field Technologies and SpeechSwitch.
Mahoney acts as non-executive chairman for the new firms and receives a base salary of $85,000 from each. Muenz said the purpose of the spinoffs, which will acquire certain business assets from iVoice, was "to maximize shareholder value." The changes leave iVoice with no remaining businesses.
Those companies, meanwhile, also will take on certain liabilities -namely $190,000 of indebtedness to Mahoney. He will have the right to convert that into at least 190,000 Class B shares of each company.
The Class B shares, in turn, are convertible into an unknown amount of Class A common shares. "There is no limitation on the number of shares of Class A common stock we may be required to issue to Mr. Mahoney," company filings state.
Stock, of course, which he can then sell on the open market.
Greg Saitz may be reached at gsaitz@starledger.com or (973) 392-7946.
